Ethanol Fuels ADM's Profits

Investors bid the shares higher Thursday after the corn processor reported a 20% jump in quarterly profit

Archer-Daniels-Midland's (ADM) efforts to move into the ethanol business are paying off so far. The Decatur, Ill. company posted surprisingly strong earnings on Feb. 1.

ADM's net income during the three months ended Dec. 31 rose to $441 million, up 20% compared to the same period of 2005. "We are particularly pleased with the strong performance from all segments," said CEO Patricia A. Woertz in a press release Feb. 1. "And, we continue to make progress along our strategic path."

ADM still gets most of its revenue from turning food products like soybeans, corn, and wheat into animal feeds that farmers use. But now, as the world searches more urgently for alternative fuel, ADM is trying to also sell things like corn-based fuel. In September, 2005, for example, ADM announced plans to build two new dry corn milling facilities next to its existing ethanol plants; the company hopes to expand its ethanol capacity by 500 million gallons by 2008. In April, 2006, ADM also named as CEO the 53-year-old Woertz, who had previously marketed, refined and distributed oil as a senior executive at the energy giant Chevron (CVX).

So far Woertz has managed to boost ADM's sales by 18% year over year to nearly $11 billion during the December quarter.

She's done so in spite of challenges. U.S. ethanol plants already consumed nearly one-fifth of the corn crop; if all the factories under construction go into operation, they'll eat up no less than half the harvest by 2008 (see BusinessWeek, 2/5/07, "Food vs. Fuel"). But even as surging demand pushes up the price of corn and ADM's costs, the company has been able to increase the prices it charges on products processed from corn like starch, sweetener, and ethanol. ADM's profit from such business rose 41.8% year over year to $335 million during the quarter.

ADM's other businesses fared decently too. Agricultural services, for example, gained 31.2% year over year to $123 million during the quarter, helped by improvements in ADM's merchandising and transportation operations.

The company's overall results came out better than analysts had expected. ADM earned 67 cents per share during the quarter, while the mean analyst forecast had been for 60 cents per share, according to the San Francisco research firm StarMine, which aggregates data from Thomson Financial. Investors bid up ADM's stock 9.3% to $34.98 per share in early New York Stock Exchange trading Feb. 1.

Woertz still has more issues to face ahead. For example, new rivals have been cropping up as the hype on ethanol crescendoes. To name just a couple, the smaller ethanol outfits VeraSun Energy (VSE) and Aventine Renewable Energy (AVR) have gone public in the past year. ADM's market share has recently shrunk to 25% from its dominant 60%, Morningstar said Dec. 11. "We worry that the influx of ethanol producers will lead to overcapacity," Morningstar analyst Ann Gilpin said in a research note.

The 2005 Energy Policy Act mandates an increase in the country's ethanol production to 7.5 billion gallons by 2012. But the country is already making more than 4 billion gallons each year. If the supply ever outpaces demand, that could spell trouble for ADM.

Even so, the company's new CEO wasn't afraid to hint at more good news in the coming years. "Our future opportunities are great," she said in the press release Feb. 1.

Alex Halperin, a reporter for in New York, contributed to this report

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