As ethanol boom fades, ADM sees bright future for corn in grocery aisle
Source: BY KARL PLUME, Reuters • Posted: Tuesday, May 26, 2015
“Coming up with new products is really what keeps us up at night,” said Chris Cuddy, president of corn processing.
Critics associate HFCS with obesity, and companies including Panera Bread Co and Kraft Foods Group Inc are cutting it from their goods.
ADM’s corn business profit dropped 39 percent in the first quarter due to poor ethanol margins. Demand is flattening as government targets for ethanol use in gasoline have been reached and increasingly efficient vehicles consume less fuel. (Graphic:link.reuters.com/myr64w)
But its ingredients business, currently just a tiny revenue generator for the $31.6 billion company, posted a 17 percent profit jump in the same period.
It invested $3 billion in that business last summer with the purchase of natural flavorings company Wild Flavors, ADM’s largest-ever acquisition.
Analysts say it is too early to tell if the strategy will be successful.
“They did deliver a higher return on invested capital in their business last year. Now, it’s hard to tell if that’s just low corn prices for the ethanol side or whether it’s a combination of lower input cost plus better strategy, so it remains to be seen if those returns are sustainable,” said JP Morgan analyst Ann Duignan.
FLEXIBILITY EQUALS PROFITABILITY
ADM has three domestic corn wet mills with the flexibility to make more of what is in demand and profitable and less of what is not.
It grinds about 3 million bushels of corn a day worldwide and produces about 11 percent of U.S. ethanol, so even a tiny change can resonate in the commodity supply chain.
The mills break corn into the oil-rich germ, high-protein gluten, fiber and the versatile starch which can be processed further with enzymes, yeast or bacteria.
At ADM’s Decatur, Illinois, plant, the world’s largest, computer operators in a tiny, air conditioned control room tucked among towering grain tanks, can tweak output in a couple of key strokes.
“Every day we have to figure out new homes for that starch capacity,” Cuddy said, holding up for scrutiny one of nine jars, each filled with a different corn byproduct.
He said ethanol and corn syrup currently account for over half of the starch but declined to elaborate.
Competitors like Cargill Inc and Bunge Ltd are also aiming for higher-margin businesses in corn and other crops. Cargill last August opened an expanded food and beverage ingredient research and development facility in Minnesota.
THE HUNT FOR RARE SUGAR
Today, half of ADM’s research dollars go into finding ways to make food and drinks taste better. Some of its initial forays – such as Fibersol, an odorless, tasteless soluble fiber that helps dieters feel fuller – are slowly gaining traction among the food industry.
But it is still seeking the next killer application to transform the market, as ethanol or HFCS did. It hopes to find “Rare Sugar,” the proposed name for “the holy grail of sweeteners” with all the taste and baking ability of sugar but without the calories.
ADM said is has increased research in low-calorie sweeteners since 2010 when it hired a sweetener development expert to lead the effort but would not provide details.
More niche products would help ADM deliver more consistent returns by reducing exposure to oil markets through reliance on a gasoline-blending component.
In 2008, ADM posted a record quarterly profit after oil roared to an all-time high but turned in its worst performance in five years two quarters later after oil plummeted.
Whether the strategy is working is unclear. Analysts say the corn unit’s 46-percent profit surge last year was at least partly due to plentiful cheap grain.
Either way, Cuddy is confident.
“Our customers rely on us so we can’t pull in and out of markets to huge degrees. But with the amount of flex we have, given our size, it doesn’t take much to influence our bottom line.”