ADM's ethanol exit strategy
What does Archer Daniels Midland know that the rest of the U.S. ethanol industry doesn't?
The Wall Street Journal reports that ADM is looking to get in on the ethanol action in Brazil:
Archer-Daniels-Midland Co., the U.S.'s largest ethanol producer, is preparing to enter the sugar-cane-ethanol business in Brazil, company executives say. Such a move by the grain and ethanol giant would mark an endorsement of a gasoline substitute that competes directly with the corn-based approach used by U.S. ethanol companies.
ADM is exploring a variety of strategies to enter Brazil's sugar-cane-ethanol market, ranging from building sugar-cane mills and ethanol plants from the ground up to acquiring sugar-cane companies. In an interview, ADM's senior vice president of strategy, Steve Mills, said the company hasn't ruled out an outright purchase of Cosan SA, Brazil's largest ethanol producer, in which ADM owns a small stake it declined to specify. A Cosan spokeswoman declined to comment.
Is it dawning on ADM executives that corn-based ethanol is a non-starter, even with the generous boost of corporate welfare from Washington, D.C. that has proven so lucrative for them? As usual, one must read lower down in the story, and between the lines:
The U.S. ethanol market has grown increasingly competitive as the price of corn cuts into ethanol producers' profits even as dozens more plants are scheduled to come on line in coming years. A recent report by Lehman Brothers predicts that U.S. corn-based ethanol production might soon outstrip demand, which could force prices down and squeeze profits further.
Brazil is among the world's lowest-cost producers of ethanol, at a cost of about 90 cents a gallon, roughly two-thirds that of corn ethanol, according to the Institute for Studies of Commerce and International Negotiations, a think tank in Sao Paulo.
Relying solely on corn puts ADM at the mercy of weather and political factors that could drive up grain prices. Livestock and poultry producers have been complaining on Capitol Hill about the rising price of corn, which has hurt farmers who rely on corn to feed animals.
I love it — politicians getting squeezed on the one side by the faction of the farm lobby that produces corn, and on the other side by the faction of the farm lobby that consumes corn. Couldn't happen to a bunch of nicer people.
Oh, and if you're new to the argument that corn-based ethanol is a dumb idea, check out this free DR White Paper from Byron King of Outstanding Investments.