ADM Studies Options for Corn Dry Mills as Ethanol Margins Slump

Source: By Shruti Singh, Bloomberg News • Posted: Wednesday, February 3, 2016

Archer-Daniels-Midland Co., the largest U.S. ethanol producer, is looking at strategic options for its corn dry mills as its efforts to boost returns are held back by lower profit margins and an oversupply.

ADM is assessing the future of its dry mills, which make products including ethanol, given concerns about their long-term fundamentals, Juan Luciano, chairman and chief executive officer of the Chicago-based company, said during a conference call Tuesday with analysts. While the ethanol operations including the dry mills have positive cash flow, the company is working with an adviser to examine profitability against a backdrop of lower crude oil prices, he said. The review doesn’t include ADM’s corn wet mills.

ADM’s review comes at a time when politicians are debating the future of renewable fuels policy on the campaign trail and in Washington. Margins for ethanol, a biofuel that’s blended with gasoline, have slumped through the second half of 2015 amid higher industry production and lower crude oil and gasoline prices. There’s no timeline for the review, Luciano said.

The review of the dry mills comes as ADM takes a “fresh look” at its capital use to boost returns and earnings, Luciano said. The company has set a preliminary target of cutting invested capital in its businesses by at least $1 billion over an unspecified period of time and aims to improve earnings by $1 to $1.50 a share over the medium term.

Maximize Returns

“There’s no need to panic,” Luciano said. “We just want to be prepared to look at the industry long-term and see can this industry present the returns that we expect and what are the options to maximize our return for ADM.”

ADM’s current ethanol production capacity is about 1.7 billion gallons across three dry mills and five wet mills in Nebraska, Iowa, Illinois and Minnesota. Dry mills grind, crush and roll corn to make ethanol fuel and other products. Wet mills steep grain in a water mixture and separate its fiber, gluten and germ for products including ethanol, animal feed, sweeteners, starches and thickeners.

While ADM has produced ethanol since 1978, like many others in the industry it expanded production after a 2005 U.S. energy law set mandates for renewable fuel use. It invested $1.3 billion since 2006 to build two new dry mills.

Phasing Out

Senator Ted Cruz, the winner of the Iowa Republican caucuses on Monday, has said he supports growing the biofuels market while also calling for an end to subsidies for all forms of energy and phasing out the renewable fuel standard. The U.S. Senate also may consider measures that would eliminate the ethanol mandate or sunset the entire renewable fuel standard in 2022 as part of a broad energy bill now being debated by the chamber.

ADM’s review doesn’t reflect any concerns connected to the campaigns or Senate, spokesman Steve Schrier said in an e-mail.

The uncertain outlook for the ethanol industry amid ample supply affects dry mills more than wet mills, which make a broader array of products such as specialty starches that have seen “very strong” demand, Farha Aslam, a New York-based analyst for Stephens Inc., said in an telephone interview Tuesday.

In the fourth quarter, corn processing operating profit decreased largely because of lower ethanol results even though earnings from sweeteners and starches rose, ADM said in a statement Tuesday. Along with lower U.S. grain exports and soybean crush margins, that pushed down ADM’s fourth-quarter adjusted earnings to 61 cents a share from $1 a year ago, missing analysts’ average estimate of 64 cents.