Food, Not Ethanol, Fuels ADM's Big Quarter
Despite all the money pouring into renewable fuels, the big story for the agricultural giant remains its grains biz.
Archer-Daniels-Midland's ( ADM ) stock got a lot of mileage out of its big ethanol investments, but lately the fuel biz hasn't been performing up to snuff. Still, the company is profiting from its long-standing role as a worldwideagricultural middleman, processing and distributing food to an ever more populous and prosperous world.
A year ago, Ethanol processors rushed to build new plants, and, with corn prices high, farmers planted as much as they could.
A year later, supply is catching up to demand. While corn prices remain high, ethanol prices have fallen and are expected to continue to fall.
ADM says it willkeep focusing on fuels and other new products, particularly the next generation of bio-fuels. "We'll never get to some of these second and third generation opportunities if we ... abandon our corn ethanol base".
The strength of ADM's other, traditional businesses could give the firm the breathing room to stick with this strategy.
Despite the weakness of ethanol profits, ADM has been able tomake hay from rising crop prices. Revenues were $12.8 billion, up from 36% the previous quarter and ADM shares surged 6.5% by midafternoon on Nov. 6.
Growing middle classes in emerging countries like China and India are hungry for more meats and higher-end food. "Huge populations are becoming wealthier, and, as they become wealthier, their diets change," a journalist says. "That's a trend that'sgoing to persist for a while," she adds.
Also, ADM has benefited from a few short-term developments. It is the handler of a lot of crops from North America, which saw huge crop harvests this year. By contrast, Australia has been suffering from a drought, giving American crops less competition globally.
Still, there are concerns about ADM's long-term strategy. ADM, as a middleman in the foodbusiness, can get squeezed the same way it did on ethanol. For many products, ADM's profit margins are subject to the whims of commodity markets.
So far ADM has been able to pass on food price increases on to customers as it meets growing global demand.ADM is expected to use its substantial clout in Washington to revive its alternative fuels business. New mandates from the federal governmentcould be what ADM needs to again rake in big profits on ethanol.
Adapted from Business Week, November 6, 2007.
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