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Archer Daniels Midland Company (NYSE: ADM) is one of the largest processors of oilseeds, corn, wheat and cocoa in the world. Through its Oilseeds Processing and Corn Processing Segments, ADM transforms these raw materials into food ingredients, animal feed, corn sweeteners and organic fuels, such as Biodiesel and Ethanol. ADM is an international business, with firm footholds in both Brazil and China. ADM also faces several risks as a result of the nature of its operations. Because of the ADM's reliance on Government Agricultural Subsidies, the company's performance is closely tied to political policy and Environmental Regulations. Additionally, factors that are out of the company's control, like weather conditions and health trends, also play a roll in determining the success of the company.
ADM has spent approximately $5.3 billion on the construction, expansion and acquisition of facilities over the past five years; the company has approved an additional $2.5 billion in capital spending over the next five years.[1]
Despite the company's past growth and planned future growth, the 2008 Financial Crisis and global economic slowdown in early 2009 have effected ADM's financial performance. For the three months ending on March 31st, sales decreased from $18.7 billion in 2008 to $14.8 billion in 2009; net income decreased from $517 million to $8 million.[2]
[edit] Corporate Overview
ADM is a world leader in agribusiness segmented into four categories: oilseed processing, corn processing, agricultural services, and other.
[edit] 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.
[edit] 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.
[edit] 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.
[edit] 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.
[edit] Expansion
During the last five years, ADM has invested $4 billion in building new plants, expanded current plants, and acquiring new plants and transportation equipment. In 2006 it announced plans to expand ethanol production by 550 million gallons and announced plans for the construction of two dry plants for corn milling. It also plans to construct a polyhydroxy alkanoate (PHA) natural plastics factory (with bioplastics firm Metabolix), a U.S. cocoa processing factory, and plans to increase U.S. Biodiesel production. These changes will come at an estimated cost of $3.1 billion over the next 4 years.
ADM is presently producing biodiesel in Brazil and is looking into Renewable Energy in the form of Ethanol. ADM currently holds partial ownership of the Brazilian company Cosan SA and there is speculation of larger buyouts. This would allow ADM to more fervently enter the sugar-cane ethanol market. Sugar-cane ethanol can be produced for $.90 per gallon, 30% less than the $1.20 that it costs to manufacture ethanol from corn.
[edit] Trends and Forces
[edit] Oil prices can impact ADM in a number of ways
ADM's processing plants use a lot of petroleum
ADM relies heavily on coal, natural gas, and oil products, to power its processing plants and transport its products. Fluctuations in the prices of any of these energy sources can have a dramatic impact on ADM's operating expenses. Rising prices imply higher operating costs, while falling prices can save the company a ton of money.
Rising Oil Prices lead to higher ethanol prices
As oil prices rise, the demand (and prices) for alternative energy sources increases as well. Though higher oil prices can cause ADM's operating expenses to increase, it also stimulates demand for the company's products, some of which are used to produce ethanol and other biofuels. In recent years, the overall trend for oil prices has been upward, and this shows no sign of changing in the near future. Since oil is a nonrenewable resource (meaning that once our current supplies are gone, that's it), prices are likely to continue their upward hike as we draw closer to the inevitable end of the global petroleum supply.
[edit] Agriculture Subject to Weather Conditions
Large-scale agribusiness is vulnerable Temperature and Precipitation Fluctuations, and Agricultural Diseases. Because of the fluctuations in production quantities, it is very difficult to gauge capacity when building a new processing plant. Mistakes in calculations could lead to a surplus or a scarcity of commodity, both of which would negatively effect profitability until the imbalance has been corrected. These uncertainties make an investment in agribusiness inherently high-risk.
[edit] With Such a Global Presence in Such a Politicized Industry, ADM is at the Mercy of Government Subsidies and Regulations
As an agricultural major with operations in over 80 countries, ADM is at the mercy of international politics. Government Agricultural Subsidies and trade laws plague the agricultural industry, leaving ADM subject to increased government interference, higher tariffs, tax regulation, political instability and trade barriers. ADM is subject to a wide array of environmental laws. ADM also faces laws effecting the labeling, storage, and disposal of hazardous wastes.
Archer Daniels Midland Co. (ADM), the nation’s largest ethanol producer, could begin shifting much of its biofuels operation to Brazil, as corn-based ethanol attracts continued political scrutiny in the United States. The price of corn soared from about $3.50 a bushel to $7 in the last two years, driving up the price of cattle and poultry feed - and causing the prices of many meat and dairy products to skyrocket.
Part of the reason for ADM’s interest growing interest Brazil is the large flow of cash pouring into the country’s thriving ethanol industry. The Inter-American Development Bank, Latin America’s largest development bank, recently provided a $260 million loan to Santa Elisa Vale do Rosario to build three ethanol plants - a project that’s expected to cost more than $1 billion. The Brazilian ethanol industry also enjoys the total support of the government. Brazilian officials have made its ethanol exports a key issue in global trade talks, where they have pressed the United States and Europe to open their markets.
[edit] Consumer Trends Impact the Food Industry
Health concerns ranging from trans-fats to organic foods to Genetically Modified Foods constantly change the demand patterns of consumers. Genetically Modified Foods are currently a hot topic, especially in the European Union and Brazil where consumers oppose their usage. The delivery of GMF products to customers requesting GMF-free products could tarnish ADM's reputation and result in a loss of customers. Consumption of organic foods has been on the rise of late. Outbreaks of diseases such as Avian Flu and Mad Cow Disease in the poultry and livestock market lead to great losses for Bunge.
[edit] 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.
Recently U.S. corn production has skyrocketed, eclipsing all estimates. Most of this increase has been due to Ethanol demand. This increased corn production has lowered Corn Prices and led to a decrease in the plantings of other crops such as soybeans and wheat. Unlike small agribusiness companies, larger companies such as Bunge and Archer-Daniels-Midland Company (ADM) have invested overseas in Brazilian agriculture. This Brazilian presence has allowed them to produce the needed soybeans and import them into the US thereby giving them an advantage over companies who rely on the U.S. corn belt. ADM also holds a great deal of influence in China, one of the world’s largest importers of soybeans.
China has stated that it will not use food products to produce ethanol and some U.S. companies have taken the lead in researching cellulosic ethanol as an alternative to corn-produced ethanol. These companies would gain an advantage over ADM if they succeed.
[edit] References
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