November 5, 2008
Archer Daniels Midland Co. revealed plans to enter the Brazilian ethanol market, just as the economics of bio-fuel production in the US is deteriorating.
ADM also leveraged its position as the world's largest grain processor by revenue to deliver sharply higher fiscal first quarter earnings, blowing past analysts' expectations.
The US company already has a global footprint in bio-fuels, producing corn-based ethanol in the US, soy-derived biodiesel in Europe and Latin America and fuel made from palm oil in Asia.
Rising bio-fuel demand has driven earnings over the past two years, and ADM has been seeking ways to enter Brazil's sugarcane-based ethanol market. It will invest US$370 million over 7 years, with partner Grupo Cabrera adding US$130 million.
Pat Woertz, ADM's chairman and CEO, said the joint venture aimed to produce 70 million to 90 million gallons of ethanol a year, with the company exploring other opportunities in Brazil.
While Brazil is the world's largest exporter of ethanol, ADM said it remained uneconomic to import the fuel to the US because of tariffs and transport costs.
The economics of corn-based ethanol in the US have deteriorated in recent months as companies struggled with the mix of high corn costs and weak ethanol prices. Construction of new plants has ended following a 3-year construction boom, and several operators including VeraSun Energy Inc.,have sought bankruptcy protection.
Ms. Woertz said ADM would complete its existing ethanol plants in the US and remained interested in "distressed assets."
For the quarter ended September 30, ADM's net profit rose to US$1.05 billion, or US$1.63 a share, up from US$441 million or US$0.68 a year earlier.
Revenue rose 65 percent to US$21.16 billion, even though volume was little changed. Higher selling prices, as well as currency exchange-rate fluctuations, fuelled the increase, ADM said.
Analysts polled by Thomson Reuters expected earnings of US$0.69 a share on revenue of US$15.98 billion and operating margin rose to 8.8 percent from 7.2 percent.
Profit more than doubled at ADM's oilseeds-processing arm and nearly did so at agricultural services, which includes the merchandising and transportation of grains. But earnings at the company's corn-processing division, which includes ethanol production, fell sharply as corn and energy costs surged early in the year.
Share prices in the agribusiness sector have slumped over the past six months amid slowing growth for protein-based feed for animal and human consumption, but ADM has insisted underlying demand remains strong despite the slowdown.