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WIKI ANALYSIS
Archer Daniels Midland Company (NYSE: ADM) is one of the largest processors of oilseeds, corn, wheat and cocoa in the world, posting revenues of $62.9 billion. It processes crops and makes them into food and Biofuels. A 2007-2008 investment the company made in corn-based ethanol has impacted earnings in 2009 because of the collapsing demand for ethanol driven by lower gas prices, leading to a 1% drop in revenue growth and a 5% drop in net income growth.[1] Soybean and soy-based biodiesel sales kept the company afloat, but the company still missed analyst earnings expectations by over 50% in Q4 2009.[2] If corn based Ethanol does not become a major fuel, ADM will suffer tremendously. Watch Ethanol Futures to keep track of this.
Investors should also be aware that ADM's 2009 financials were substantially buffered by a Last In, First Out (LIFO) credit 1.3 times the size of the company's gross profit. It was a paper-gain that does not actually reflect the performance of ADM's operations.[3] This credit will not be there to help 2010 earnings.
Because ADM sells crops, anything that increases demand for crops without damaging the supply tends to help the company. Some examples include increasing world population, consumption of meat, and the production of Biofuels and other crop based products (soy-based foam etc). The OECD-FAO Agricultural Outlook 2009-2018 predicts that crop demand will increase substantially in the next decade, even surpassing 2008 highs. [4] Much of the demand will be driven by emerging economies, especially China, which are already accounting for much of Archer-Daniels-Midland (ADM)'s growth (especially in the soy-bean sector).
It is important to note that semi-drought conditions, and crop supply shortages that benefit agricultural fertilizer companies like Bunge (BG), Monsanto Company (MON), Potash Corporation of Saskatchewan (POT), and Agrium (AGU) do not benefit ADM nearly as much. Agricultural fertilizer companies sell more yield-enhancers when crops are hard to grow, but ADM actually grows crops so it faces higher expenses during bad times. Crop shortages only benefit ADM from a competitive standpoint- they drive smaller farms out of business and make them easy acquisition targets for agricultural giants like ADM and Cargill. Start shortly after the first quarter in 2010, ADM stocks rose after praise from analysts and media sources citing larger than market average growth and speculation of whether or not ADM will acquire Bunge (BG).[5]
Business Financials
Business Segments
ADM is a world leader in agribusiness segmented into four categories: oilseed processing, corn processing, agricultural services, and other. It also has a Corporate segment which accounts for some rather interesting accounting profits.
The following pie chart of ADM's operating profits shows the company's business composition combining the years 2008 and 2009 to reconcile the company's negative 2009 corn profits which will be more clearly demonstrated in the following graphs. Notice that in 2008-2009, ADM made most of its money processing oil-seeds. Its oil-seed and corn segment used to yield roughly the same amount of profits. [3]
Looking more closely at the company's business lines, several things become apparent about ADM's changing financial breakdown.
- Corn The company's corn business all but collapsed from 2008-2009. Falling corn prices driven by the decline of ethanol drove these losses.
- Other ADM's processing and credit branch have collapsed. Loan defaults from buyers, and credit adjustments, drove the financial losses.
- Corporate It is very clear that the company is using accounting policies to smooth its earnings. It recorded a massive LIFO (accounting/paper) loss in 2008 which it partially recouped in 2009.
To understand the specific nature of ADM's unexpectedly large 2009 losses, it helps to look at the specific segment breakdown. On the following graph you will notice 2 exclamation points.
The first exclamation point is the extremely large LIFO accounting gain ADM recorded in 2009. At $517 million, that makes it 8 times the company's annual earnings for 2009, and 1.3 times the company's 2009 gross profit. These numbers should shoot up red flags for investors, because such LIFO gains are non-recurring events and are purely paper reflections of inventory changes. The second exclamation point is the bio-products sector, which completely reversed from 2008 to 2009 due to plummeting ethanol demand.
It is also worth noting the reversal of the company's investment income in 2009, and the substantial growth of its soybean sales in Asia.[3]
The following are more in depth descriptions of ADM's business lines.
Oilseed Processing
ADM is involved in processing soybeans, cottonseed, sunflower seed, canola, peanuts, and flaxseed primarily for the food and feed industries. Crude oil is sold “as is” or is further processed into salad oils, margarine, shortening, etc. ADM also markets partially processed oil for use in industrial products such as chemicals, paints, and Biodiesel. ADM also sells oilseed meals to commercial Livestock and Poultry businesses, cottonseed flour to the Pharmaceutical Industry, and cotton cellulose pulp to chemical, paper, and filter companies.
Corn Processing
ADM operates both wet and dry mills for the production of syrup, starch, glucose, dextrose, sweeteners, ethyl alcohol (both for beverages and fuel), among other products, for sale to the food and beverage industry. It also markets amino acids (for use by the pork and poultry industry), citric and lactic acid, sorbitol, and xantham gum.
The company recently announced that it would consider expanding into ethanol; now that market prices are down, the company may considering purchasing ethanol-refining plants and may even attempt to acquire ethanol companies.
Agricultural Services
This segment utilizes the company’s elevators and transportation network to transport, store, buy, and clean commodities and then resells them to the agricultural processing industry. This in turn provides reliable services to its own processing operation.
Other
ADM is involved in various other operations including: milling wheat, corn, and milo into flour; processing cocoa beans into liquor, butter, powder, chocolate, and other compounds; producing wheat starch, gluten, and lecithin; producing soy flour, soy grits, soy protein, and soy isolates; producing vitamin E; raising fish; processing and distributing edible beans; producing and distributing formula feeds and animal health and nutrition products.
Annual and Quarterly Financial Earnings
Q2 FY 2010 Earnings Summary
Archer Daniels Midland posted earnings of $567 million and net sales of $15.9 billion for the second quarter of 2010.[6] Net earnings reflected a 2% drop from year-ago earnings and a 5% drop from last quarter's earnings.[6] Driving these drops were the offsetting of higher sales by lower prices and lower commodity costs.[6] Segment operating profit, however, was up 19% to $970 million for the quarter.[6] Segment operating profit for the year, though, was down 12%.[6]
Archer Daniels Midland saw gains in its oilseeds processing and corn processing segments for the quarter, with gains of $33 million and $261 million respectively.[6] Agricultural services for Q2 FY 2010, however, fell by $312 million.[6] Six months ended results also show mixed results: corn processing and other production saw gains of $331 million and $180 million respectively; oilseeds processing and agricultural services, however, posted $193 million and $565 million losses.[6]
Q1 FY 2010 Earnings Summary
ADM announced net sales of $14.9 billion and earnings of $496 million for Q1 FY2009[7] Compared to Q1 FY2008, ADM saw a 53% decline in net earnings as well as a 29% decrease in net sales.[7] Driving these losses was a 34% decrease in segment operating profit, which totaled $774 million.[7] Segment operating profit fell across the board with Oilseeds Processing, Corn Processing, and Agricultural Services all falling in comparison to last year's profits.[7]
In terms of net sales, Oilseeds Processing and Agricultural Services fell by $226 million and $253 million respectively.[7] Corn Processing increased by $70 million, however. Corporate results were also grim, indicating a $367 million dollar loss over the course of the year from last year's first quarter reports to this years.[7] Corporate sales also feel by $57 million for this quarter alone.[7]
Trends and Forces
Lower Gas Prices, Demand for Biofuels
Archer-Daniels-Midland (ADM) is betting on ethanol by maintaining its corn operations and ethanol production plants. If ethanol does not become a major fuel alternative to gasoline then the company will lose a large portion of its business. Archer-Daniels-Midland (ADM) is lucky that it is simultaneously invested in soybean oil processing which has not seen the same declines as ethanol in 2009, and remains a core part of the company's revenue generation.
Ethanol in the U.S. is produced from corn, which ADM grows and processes. From 2007-2008, corn prices jumped 125% due to heightened demand for biofuels, food, and livestock feed. [8]
The demand for Ethanol and biofuels peaked in 2008 along with gas prices, only to falter in 2009. People only consume biofuels, it seems, when gas prices are extremely high. For instance in 2009, the Midwest saw a 52% drop in ethanol consumption, with only a 3% drop in gasoline consumption. Ethanol is about 15-20% less efficient than gasoline, and studies have shown it needs to be about 40 cents cheaper per gallon to compete. [9]
There is also evidence that ethanol is extremely fuel inefficient, requiring 70% more energy to produce than it actually yields. Soy-based fuel is somewhat more promising Soy biodiesel is significantly more powerful than ethanol, yielding 120,000 BTUs per gallon versus 80,000 BTUs. [10] [11]
New research done at UC Merced and published in the journal Science in May 2009 presents evidence that crops yield 81% more energy per unit area of land when they are burned to make electricity to power cars than when they are refined into ethanol.[12] Furthermore, greenhouse gas emissions from this "bioelectricity" are 100% lower per unit area of land than cellulosic ethanol.[13] The growth of agri-power may not provide a major windfall to Archer-Daniels-Midland (ADM) because it would simply not require as much corn as ethanol.
It is also possible that biofuels will not include Archer-Daniels-Midland (ADM) crops. In July, 2009, Exxon Mobil (XOM) entered a five-year, $600 million partnership with Synthetic Genomics Incorporated, to develop algae-based biofuels.[14] There is also a movement to turn certain grasses into bio-fuel. If either algae or grass becomes the preferred medium for bio-fuel creation, Archer-Daniels-Midland (ADM) will lose massive amounts of money due to its heavy bets on corn and soy.
But assuming corn and soy biofuels remain the primary alternative energy prospect, if petroleum prices go up, demand for both corn and soy biofuel will increase. Archer-Daniels-Midland (ADM) is hoping the government will favor ethanol by mandating that cars use a 15% ethanol blend by 2010. [15]
The World Food Crisis and Temperature and Precipitation Fluctuations
The late 2000's have seen crop killing droughts affecting large farming regions within the United States, India, and China. On one hand, higher demand for food helps ADM's pricing. On the other hand, bad conditions damage ADM's food supply. [16]
Despite drought conditions in California, however, the American Midwest is expected to yield a record corn and soybean crop in 2009. Good weather and favorable pollination conditions have driven crop prices down, anticipating record supply surpluses. [17], [18]
Even with supply surpluses, the world food crisis will place some upward pressure on food prices. A 2008 FAO report pegged the number of undernourished people in the world at 963 million, nearly 15 percent of the world's population. [19]
Overall, good crop growing weather helps the Archer Daniel Midlands company. Global Climate Change could prove disruptive to the company's production.
Increasing demand for food in emerging markets
Emerging Market indices have outperformed the US markets by over 40% on a dollar adjusted basis from 2005-2009. [20] Prosperity in the developing world has resulted in a demand for more agriculture intensive food. For example the average Chinese citizen now eats twice as much meat as he/she did in 1990.[21] Each pound of meat produced requires about 16 pounds of grain for feed, which increases demand for Archer-Daniels-Midland (ADM)'s products. [22]Not only does the growth of emerging markets benefit agricultural production, but it also increases aggregate oil demand, which in turn encourages bio-fuel production.
Thus, a stronger developing world means a better business for Archer-Daniels-Midland (ADM), assuming it can displace local competition. Chinese soy consumption was one of the company's few growth areas from 2008-2009.
Reduction in Arable Land, Increasing Populations
The amount of arable land worldwide is dwindling. The population boom has cut the amount of arable land per person in half over the past 50 years.[23] As population and personal incomes in developing regions of the world increase, the worldwide demand for food also has increased. Worldwide population has grown 12% in the past ten years, while farm acreage has grown only 2%.[24]
Brazil, China, and India are three of the five most populous countries and are trying to meet the growing demand for food, fuel, and feed for livestock. [25] With their respective populations on the rise, these countries need to make the most of the arable land they have. In addition, weather factors such as temperature, rain, floods, droughts, and hurricanes destroy arable land for a particular crop season and render land unusable for a few seasons.
Reduction in arable land encourages yield increases, which favors large conglomerates like the Archer Daniel Midlands companies. Think about a private farmer. He does not have the same irrigation contracts, expertise, and seed distribution networks that a major corporation enjoys due to Economies of scale. Increased need for world production in the context of less land will benefit major corporations like Archer-Daniels-Midland (ADM) (though they will benefit irrigation and fertilizer companies like Monsanto Company (MON) and Valmont Industries (VMI) more).
Competition
While ADM competes with many different companies across all of its operating segments, it does not have a competitor with which it competes across all of its segments. Its primary competitor is Cargill, the world’s second largest privately held business. Bunge (BG) also competes with ADM. As the graphs show, Cargill dwarfs both ADM and Bunge in terms of net revenue. Archer Daniels, however, unlike Bunge, has nearly caught up to Cargill in net earnings. Showing that ADM efficiency allows it to turn a great profit without having such large revenues.
With the world's population expected to rise to 9.1 Billion by the year 2050, feeding humanity, --according to a recent Food and Agriculture Organization of the United Nations report-- will require a 70 percent increase in global food production. Look for a marked increase in corn and soybean production in by mid-century.[1]
References
- ↑ | ADM 2009 10K Report, Selected Financial Data p. 2-5
- ↑ | ADM profit misses Street view,shares at 2-year low
- ↑ 3.0 3.1 3.2 | ADM 2009 Annual Report, p. 2-5
- ↑ [ http://www.agri-outlook.org/pages/0,2987,en_36774715_36775671_1_1_1_1_1,00.html|OECD Food Outlook]
- ↑ Up With Bunge?
- ↑ 6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7 Archer Daniels Midland Company Reports Second Quarter Earnings of $.88 Per Share
- ↑ 7.0 7.1 7.2 7.3 7.4 7.5 7.6 Archer Daniels Midland Company Reports First Quarter Earnings of $.77 Per Share
- ↑ | www.wikinvest.com: Corn Prices
- ↑ [http://news.yahoo.com/s/ap/20090714/ap_on_re_ca/us_farm_scene_e85_outlook | Yahoo News: Massive Ethanol Decrease in 2009]
- ↑ Soy biodiesel gives bigger bang than ethanol
- ↑ The Viability of Biodiesel in Kansas
- ↑ CNET: "Study: Bioelectricity bests biofuels on miles per acre"
- ↑ CNET: "Study: Bioelectricity bests biofuels on miles per acre"
- ↑ http://seekingalpha.com/article/149477-exxon-s-biofuel-bet?source=email SeekingAlpha: Exxon's Biofuel Bet]
- ↑ |ADM hopes for higher ethanol production
- ↑ | Map of International Drought, Global Researcher
- ↑ | UNL's Drought Monitor
- ↑ | Good corn pollination in the 2009 season so far
- ↑ UN News Centre
- ↑ | Vanguard Emerging Market Returns
- ↑ Chinese meat consumption, ABC
- ↑ Meat production details
- ↑
- ↑ Delta Farm Press, "World population trends favor farmers," December 5, 2007
- ↑ | C.I.A. World Factbook: Brazil, China, India
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