Archer Daniels Midland will squeeze out competition, says Fortune
Record corn prices aren’t just squeezing consumers. They’re also hurting the ethanol industry — yes, the very folks whose ravenous appetite for corn drove up prices in the first place.
From Fortune Magazine:
Cargill announces it’s scrapping plans for a $200 million ethanol plant near Topeka, Kan. A judge approves the bankruptcy sale of an unfinished ethanol plant in Canton, Ill.. And that was just Tuesday. Indeed, plans for as many as 50 new ethanol plants have been shelved in recent months, as Wall Street pulls back from the sector.
What’s up? Didn’t the government recently bail out the industry with fat mandates in the 2007 Energy Act? Well, yes, but evidently corn prices have gotten so high that profits for ethanol makers remain in the dumps. Fortune again:
Spurred by an ethanol plant construction binge, corn prices have gone stratospheric, soaring from below $2 a bushel in 2006 to over $5.25 a bushel today. As a result, it’s become difficult for ethanol plants to make a healthy profit, even with oil at $100 a barrel.
Don’t shed any tears over Archer Daniels Midland — the company whose political engineering created the ethanol craze.
The ethanol industry isn’t going away, of course. The 2007 Energy Act ensures that demand will rise steadily over the next 15 years. But with corn prices high, profit margins will be tight. And that means only the biggest players — like ADM — will profit.
Fortune reports that as recently as summer 2006, corn was $2 per bushel, oil prices were high, and gasoline mixers were scrambling to buy ethanol to meet government mandates. At that time, ethanol makers were making more than $1 in profit for every gallon they churned out.
At that time, investors were rushing in to build new plants to cash in on the bonanza. But they brought so much new ethanol production capacity online that they simultaneously drove up corn prices and drove down ethanol prices. That means profits margins plunged.
Advantage: ADM. Here is Fortune:
[T]he industry’s new, lower profit margins clearly favor ethanol leader Archer Daniels Midland (ADM, Fortune 500) over all the smaller producers like Verasun, privately-held Poet Energy and the many, many farmer-owned ethanol cooperatives.
The bit about farmer-owned cooperatives is enormously depressing. Starting about 2002, farmers in the midwest got tired of selling their corn for pennies a pound to ADM and watching that company turn it into profitable ethanol with government subsidies.
So they banded together, formed cooperatives and — using both their own and borrowed money — started building their own ethanol plants. Because they’re so small and underfunded compared to ADM, they’re faring much worse in the current climate.
Not only do ADM’s massive ethanol plants give it better economies of scale than it’s rival, but also get this:
[T]he fact some of ADM’s big plants run on coal instead of natural gas makes ADM’s cost advantage that much greater.
The Fortune writer notes that since the Energy Act’s passage last fall, ADM’s stock has jumped 10 percent and smaller rivals Verasun and Pacific Ethanol have dropped nearly 40 percent.
I don’t like saying it, but I will, just to show that it was always so obvious: I’ve been predicting an ethanol shakeout — with ADM picking up the pieces and running to the bank — for years. See here, here, and here.