The Downside of ADM's Focus On Biofuels

With ethanol a political football, ADM's chief executive, Patricia Woertz, and its stock are getting hit

Even before oil prices collapsed, Patricia A. Woertz had one of the most delicate balancing acts in business. Now things are getting downright precarious.

As chief executive officer of Archer Daniels Midland (ADM), the world's largest grain processor, Woertz has watched various parts of her $70 billion-a-year empire gyrate wildly during the past year. Her continued passion for corn-based ethanol angers many corporate customers at a time when enthusiasm for the controversial fuel additive is waning. Ethanol's profitability has eroded as oil has slipped, and social critics complain that it harms the environment and diverts corn supplies, raising food prices.

Woertz, a composed and deliberate leader, occasionally reveals the strain she's under. When skeptical company interns peppered her with questions about ADM's focus on ethanol during a discussion at headquarters in Decatur, Ill., she responded sharply: "We are not just an ethanol company. I'll say that again. Everybody hear that? We are not just an ethanol company."

She's right. While ethanol was the largest single contributor to ADM's profits last year, driving a unit that accounted for 19% of company profits on 7% of sales, it's dwarfed by the business of processing wheat, cocoa, soy, seeds for vegetable oil, and other staples.

But Woertz committed to an ethanol-heavy strategy when oil was on the way up and alternative "biofuels" looked smart. Now she's sticking with that bet. She plans to build two more plants by early 2010 that could increase production to 1.9 billion gallons a year, up from the current 1.1 billion. Although using corn for ethanol wins ADM few fans these days, alternatives are slow in coming. ADM has talked up a new joint venture in Brazil to produce the additive from sugar, but that production will meet only local needs.


The overall ethanol market, meanwhile, is imploding. Popularized in the early 1900s when it was used in the Model T Ford, the additive is blended with fossil fuel to cut costs. Demand soared as crude oil prices rose, prompting increased production, and dropped dramatically when oil prices fell.

With the bankruptcy of leading distributor VeraSun Energy (VSE) two months ago, ADM has cemented its dubious position as industry titan. That dominance will probably make Woertz and her 27,000-employee company an even more inviting target for environmental groups and other ethanol opponents in industries ranging from food to oil. As if this weren't enough to worry about, Woertz, 55, will also have to deal with fallout from a Hollywood movie starring Matt Damon due in theaters in September that focuses on ADM's past price-fixing. Woertz shrugs off the challenges, arguing that she remains focused on "the things we can control."

For decades, ADM, a lobbying virtuoso, has benefited from lavish financial and regulatory support from Washington. Even with recent increases in federal ethanol subsidies, falling ethanol prices have made it tough for ADM and its rivals to cover their costs for the additive. The Renewable Fuels Assn., which represents ethanol makers, says it has suggested to the transition team that President-elect Barack Obama provide government guarantees for $1 billion in short-term bank loans for struggling producers and up to $50 billion more to develop ethanol technology and new biofuels. Woertz is doing her part. In 2008, ADM paid more than $1 million to lobby federal politicians on energy, trade, and environmental legislation, up from $900,000 for 2007 and $300,000 in 2006.

Reaction in Washington is apt to be cool. Political attention is fixated on crises on Wall Street and in Detroit. Obama has said he supports ethanol subsidies in general, but he is more interested in propping up the production of biofuels from sources other than corn. In addition, he favors more research on wind and solar energy.

Woertz says she plans to continue to press her case, despite ADM's historic reputation for trying to throw its weight around in Washington—a bipartisan approach that former CEO Dwayne Andreas called "slopping both hogs." What's important, says Woertz, is for "our effort in Washington to be clear and aboveboard."

Regardless of what happens on the political front, she says she will stick with fuel from corn. Her stance is at odds with several scientific studies that suggest that ethanol contributes to higher greenhouse gas emissions as farmers worldwide clear untouched forest land to feed biofuel demand. She rejects arguments that it's too costly and inefficient to produce. To the contrary, she says, "mitigating energy prices is...what biofuels do" by enabling fuel distributors to put a lower percentage of crude in gas at the pump. Crude oil may now look relatively cheap, but its volatility underscores the need for alternatives, she argues. As for food shortages, Woertz says that biofuel production has been unfairly blamed: "Longer-term, the abundance of agriculture will be able to fulfill [both food and fuel] needs."


While the potential benefits of ethanol in decades to come remain subject to debate, the short-term impact of falling prices is clear to investors. ADM stock is trading at around 28, down from a record high of almost 49 in April—though much improved from early October, when it fell below 14. At the company's annual meeting on Nov. 6, Woertz talked about widespread economic anxiety, noting "some of that has set in even for us."

Her worries are warranted. Citigroup (C) analyst David Driscoll predicts that softening global economies will take a further toll on profit margins in 2009. The company earned $1.8 billion on $69.8 billion in fiscal 2008, down from $2.1 billion on $44 billion a year earlier. Driscoll poses the reasonable question: "Why is one compelled to make an investment in ADM today, with the world in a financial crisis and emerging-market GDP growth questionable?"

Woertz acknowledges that she is increasing ethanol capacity against the wishes of some key customers. Kraft Foods (KFT) Chief Executive Irene B. Rosenfeld blames the biofuel for "soaring global food prices, heightened risk of environmental damage, and tightening supplies of food aid for the poor." Expert opinion on these issues is mixed. The U.S. Agriculture Dept. estimates that ethanol accounted for nearly one-third of the sharp rise in U.S. corn prices in the past two years. Even the Grocery Manufacturers Assn., to which ADM belongs, rails in Congress against the additive. Woertz hasn't commented on the friction, but an ADM spokesman says the company doesn't always agree with its customers or association partners.

One counterintuitive strategy that she has pursued is reaching out to longtime ADM critics, who fault the company for practices they say range from industrial pollution to rainforest destruction. In these circles, Woertz's support for next-generation biofuels has partly paid off. She has found common cause with the Natural Resources Defense Council, the Wilderness Society, the Sierra Club, and Audubon on efforts to develop advanced biofuels. Last March, ADM joined those groups to send a letter to the U.S. Senate that pressed for environmental safeguards when new fuels are developed. At least on this narrow issue, says the Wilderness Society's national forest program director, Michael A. Francis, ADM was "responsive to concerns we had about protecting the environment."

"My mom says we have two ears and one mouth for a reason," notes Woertz. "We should be listening twice as much as we speak." But listening doesn't necessarily mean a shift in direction. Woertz says she's not only confident about where ADM is headed but is also "proud of the team and the way we have positioned this company." For now, that means maintaining her wager on corn.

    Before it's here, it's on the Bloomberg Terminal.