ADM's Ag Services, ethanol issues may improve in fourth quarter

by Jeff Gelski
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In ethanol, high industry inventory levels in the third quarter kept industry margins considerably lower than last year.

CHICAGO — Third-quarter results in Agricultural Services and ethanol were not pleasing for Archer Daniels Midland Co. Juan Luciano, president and chief executive officer, pointed to potential bright spots in those areas heading into the fourth quarter.

Operating profit for Agricultural Services in the quarter ended Sept. 30 was $149 million, down 52% from $310 million in the previous year’s third quarter. Ample global supplies of grain, a weak Brazilian real and a strong U.S. dollar reduced the competitiveness of the company’s North American exports, ADM said.

U.S. farmers, not liking the low prices offered for their grain, are holding onto their grain, Mr. Luciano said in a Nov. 3 earnings call.

Juan Luciano, ADM
Juan Luciano, president and c.e.o. of ADM

“If we look at their normal pattern of commercialization of before the harvest, during the harvest and post-harvest, this year we have seen that in corn, they probably sold about 30% of the new crop while normally they would be about 45% by this time of the year,” he said. “If we look at beans, they probably sold about 35% of the new crop, and normally they would have averaged about 60%. We still believe that our Q4 earnings in Ag Services will grow versus Q3.”

Chicago-based ADM in the fourth quarter expects to see more commercialization in grain, possibly through rallies or a weather event, Mr. Luciano said. The company expects results in the fourth quarter will be better than those in the third quarter but short of those in the fourth quarter of last year.

In ethanol, high industry inventory levels in the third quarter kept industry margins considerably lower than last year, according to ADM. That situation played a role in operating profit of ADM’s Bioproducts unit falling to $40 million in this year’s third quarter, which compared with $183 million in the previous year’s third quarter.

Mr. Luciano said he saw some bright spots in ethanol, such as China getting on the export destination roster and the ethanol market growing quickly in Brazil.

“And now with the increasing gasoline prices in Brazil, ethanol has become a little more expensive,” he said.

One analyst asked Mr. Luciano whether ADM has considered changing its wet mill/dry mill balance in ethanol, such as shifting away from ethanol in wet mill. The analyst also asked why ADM needed to be in the ethanol business in such size and capacity.

“Our focus is to improve the competitiveness of our two dry mills,” Mr. Luciano said. “You understand there (are) very distinct dynamics between dry mills and wet mills. So, obviously, that’s what we’re looking at, improving the competitiveness.

“Naturally, if we get to a point in which we cannot improve our cost position to the point of differentiation, if you will, for whatever reason, and if we believe that they cannot compete in a more challenging U.S. ethanol environment, we will naturally look at the various alternatives to maximize shareholder value. At this point in time, we haven't found the end of that, and we continue to find opportunities.”

Companywide in the third quarter ended Sept. 30, ADM posted net earnings of $252 million, or 41c per share on the common stock, which was down 66% from $747 million, or $1.14 per share, in the previous year’s third quarter.
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