Ethanol Slows Archer Daniels
Ethanol Slows Archer Daniels
February 3, 2009
Ethanol, once prized for its alternative energy prospects, is becoming a thorn in Archer Daniels Midland‘s side. The agricultural processor’s most recent quarter benefited from contracts that were inked when commodities prices were high, but the evaporating ethanol market is worrying investors.
On Tuesday, Archer Daniels Midland posted better-than-expected earnings in its second quarter despite softening prices of crops and commodities in the global market.
But a sharp profit fall in its corn processing division, attributed to weakness in the ethanol market, sent shares down early in the day before they rebounded to close at $27.58, up 8 cents, or 0.3%, in trading in New York.
Decatur, Ill.-based Archer, a diversified agricultural commodities manufacturer and processor, saw weakening global demand for its commodities and crop-based fuels like ethanol during its fiscal second quarter, even while food prices have remained historically high. The firm’s agricultural services division helped lift profits on heftier profit margins on transactions made during volatile commodity and freight market conditions.
Soft demand for ethanol, however, sent profits in its corn processing division tumbling to $29.0 million, from $275.0 million in the year-earlier quarter.
The results showed how one of the nation’s largest grain exporters and ethanol makers can turn a profit by playing several sides of the agribusiness game. It made money from higher shipping costs, for example, even as demand sank for the grains it was shipping.
The U.S. ethanol sector contracted toward the end of the year with demand falling in a weakening economy, a selloff in oil and gas prices, and the global credit crunch. (See “Rebuilding Global Markets.”) In July, crude oil hit a record high, peaking at over $147 per barrel and making alternatives like ethanol attractive. Since then, oil has tumbled below $40 a barrel as demand in the United States and other big consumer nations eased amid a global economic slowdown.
Archer Chief Executive Patricia Woertz said the near collapse in the market for ethanol said the market for ethanol reduced profits at the company’s broad network of new biofuels refineries. “The ethanol business is still a challenge,” Woertz told analysts during a conference call Tuesday morning. “While we did foresee the overbuilding of some [ethanol] supply a while ago, we did not foresee the depth of this economic crisis.”
In Nov., ethanol producer VeraSun Energy filed for bankruptcy amid the economic slowdown. (See “VeraSun Stalls Plant Opening; Could Have Been Worse.”) Similarly, agriculture and fertilizer stocks have been hit hard by the credit crisis on investor fears that the U.S. recession will reduce demand for raw materials like grain and oilseeds.
Shares of Archer have fallen 39.4% from its year-ago trading price of $45.50, and shares of its agricultural competitor Bunge Limited have lost 66.5% in the trailing 12 months, to $41.89, from $125.19, on Tuesday in New York.
Bunge Limited, which is expected to report quarterly earnings on Thursday, warned recently that its 2008 profit will widely miss analysts’ expectations.
For the three months ended Dec. 31, Archer posted a 23.7% jump in quarterly profits to $585.0 million, or 91 cents per share, ahead of analyst expectations for earnings per share of just 68 cents, compared with year-earlier earnings of $473.0 million, or 73 cents per share. Revenues increased 1.2% to $16.7 billion, from $16.5 billion.
The Associated Press and Reuters contributed to this article.
Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita. Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol. Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally. On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program. Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice. On April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector. On January 20, 2009, Florida Energy & Climate Commission amended RET Grant Agreement S0386 to increase Renergie’s funding from $1,500,483 to $2,500,000. By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is renewable, more economical, cleaner, and more efficient than unleaded gasoline. Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops.