Archer Daniels Midland Rethinking Its Bet On Ethanol
Shrinking profits in ethanol are the culprit behind a downturn at Archer Daniels Midland, beginning shortly after CEO Juan Luciano took charge of the giant agricultural processor in January 2015. Revenue and net income are falling, and ADM missed Wall Street's earnings estimates in the last two quarters. Its stock price plummeted seven percent on November 3 when third-quarter profit came in ten cents a share short of forecasts.
Call it poor timing, but ADM appointed Luciano just as trends were turning south in key sectors. Plunging oil prices laid waste to ethanol margins. A strong U.S. dollar and rising grain supplies dampened ADM's agricultural trading business. Now the new CEO faces some tough decisions. Former CEO Patricia Woertz, a former oil industry executive, bet big on ethanol at a time of high oil prices and strong political support for alternative fuels. ADM is the biggest ethanol processor, churning out about eleven percent of total U.S. volume.
Ethanol is a volatile business. Its price moves in tandem with oil, but it costs more to produce than gasoline. When oil prices fall, margins on the corn-derived fuel collapse. That's playing out at ADM this year. Ethanol accounts for only about ten percent of its sales but chopped $217 million from third-quarter operating profit in its corn-processing operations, more than half the company-wide decline.
Luciano foresees no short-term rebound. "We continue to confront very weak industry ethanol margins," he told analysts on a conference call.
More troubling than the predictable volatility associated with short-term oil price fluctuations are longer-term changes likely to slow ethanol demand. Increasingly efficient automobiles mean drivers need less fuel to travel the same distances. At the same time, shifting political winds are undermining political backing for ethanol, which always has depended on government support. Congress allowed an ethanol subsidy to lapse in 2012, and the U.S. Environmental Protection Agency recently proposed reducing the minimum amount of ethanol that oil refiners are required to blend into gasoline.
Against that backdrop, some think ADM should pull back in ethanol. On the earnings call, Bank of America Merrill Lynch's analyst asked Luciano if it's time to "reduce your exposure" to the volatile market. Luciano pointed out potential growth opportunities in ethanol and outlining cost-cutting efforts at ethanol plants. But he acknowledged, "It's something that obviously we think about very frequently." He added that ADM will "look at the various alternatives to maximize shareholder value" if results don't improve.