ADM’s struggle reflects deepening industry woes

NEW YORK/CHICAGO - When Archer Daniels Midland opened two of the country's largest ethanol plants in Cedar Rapids and Columbus, Neb., six years ago, the biofuels market was on the cusp of a boom with prices and profits on the rise.

Now, the plants are more of a headache for the Chicago-based company, considered an industry pioneer, amid crushed margins and weak prices as the financial success of its almost 40-year- old business fades.

In the industry's first major capitulation to depressed market conditions, ADM's chief executive, Juan Luciano, on Tuesday said he would consider options, including a sale, for those two plants as well as another in Peoria, Ill.

The three dry-mill ethanol plants, some of the largest in the country, represent just under half of ADM's 1.8-billion-gallon-per-year U.S. ethanol capacity.

The news came as ADM blamed weaker-than-expected quarterly profits on poor ethanol margins and depressed U.S. grain exports, sending its shares tumbling almost 9 percent for their worst day in 6-1/2 years.

The review also comes as the 114-year-old company continues to shift its focus on developing new food ingredients as domestic demand for gasoline additive ethanol is forecast to remain flat over the next decade.

Still, the fact that the country's biggest ethanol producer and a mainstay of the U.S. industry is considering options like a partnership or sale of some of its previously prized assets caught many industry experts by surprise, because ethanol prices have been withstanding the broader commodities rout in recent days.

But it may point to a gloomy long-term outlook for energy prices.

'Maybe they see it as a boom time that's ending,” said Scott Irwin, an economist with the University of Illinois.

ADM is not alone as sinking ethanol prices and relatively stable corn prices squeeze margins and as crude oil prices tumbled to their lowest level in over a decade.

Last week, Valero Energy Corp, one of the largest U.S. producers, reported a 76 percent plunge in income from its ethanol business in the final four months of last year.

Ethanol margins have been under pressure, below break-even, as prices hold around $1.43 per gallon.

Divesting from the dry mills would leave the company with five wet mills - including one in Cedar Rapids - which experts say are more flexible and potentially a savvy way of navigating the torrid market conditions.

The five wet mills are able to churn out multiple products, including higher margin ones, such as corn syrup, made from the same cornstarch that produces ethanol.

Most of the country's production comes from dry mills, which crush corn into ethanol and distillers' grains for animal feed. They tend to be more efficient ethanol producers than wet mills, but do not offer as much flexibility.

The industry has undergone multiple busts in just over a decade, plagued by controversy over the country's Renewable Fuel Standard, which requires use of ethanol in gasoline.

Selling or finding partners for the plants would be a major overhaul of ADM's ethanol business since it started production at its first mill in Decatur, Ill.

Suitors may not have an appetite for such a major investment given the bleak outlook for energy prices and while Abengoa SA seeks a buyer for some assets, sources said.

Smaller rivals CHS Inc. and Green Plains Inc. have scooped up smaller, struggling plants in Illinois, Texas and Virginia in the past eight months.

But one industry executive familiar with the business estimated the Cedar Rapids and Columbus plants together could be worth as much as half a billion dollars.

'Who could write a check for a quarter of a billion dollars?” said one source familiar with ADM's operations.

The most likely investors may be oil refiners, which have moved into the renewable fuels business in recent years, positioning themselves around policy, sources said.

Oil companies such as Valero and Flint Hills Resources, owned by the Koch brothers, have become industry heavyweights through acquisitions in recent years.

ADM'S ethanol footprint

These are ADM's corn mills, with capacities estimates from the Renewable Fuels Association.

' Cedar Rapids: ADM began producing ethanol at a wet mill in Cedar Rapids in 1981. In 2010, the company built a dry mill nearby and can now churn out 420 million gallons at the facilities annually.

' Clinton: ADM scooped up the wet mill in Clinton in 1982, and has expanded its capacity since to nearly 240 million gallons annually.

' Decatur, Ill.: ADM began production at its Decatur wet mill in 1978, making it among the first major entrants in the fledgling biofuels business. The site now can produce about 400 million gallons of ethanol annually.

' Peoria, Ill.: ADM scooped up the Peoria dry mill, estimated at about 200 million gallons of capacity, in 1980.

' Walhalla, N.D.: The company bought the dry mill in Walhalla in 1991. It closed the 45-million-gallon-per-year plant in 2012.

' Marshall, Minn.: ADM acquired Minnesota Corn Processors LLC in 2002, bringing into the fold a 40-million-gallon wet mill in Marshall. The plant now can produce 45 million gallons per year.

' Columbus, Neb.: A Columbus wet mill was the second plant ADM scooped up with its acquisition of Minnesota Corn Processors in 2002. The plant can pump out 100 million gallons of ethanol each year. ADM opened a dry mill nearby in 2010, with a capacity of about 300 million gallons.