ADM: Profiting More From Food than Fuel

Archer Daniels Midland (ADM) turned in a fantastic quarter this morning. Highlights..

— Net sales and other operating income increased 64% to $18.7 billion for the quarter ended March 31, 2008 and 51% or $16.2 billion for the nine months.
— Third quarter segment operating profit increased 54% to $913 million from $593 million last year.
— Oilseeds Processing operating profit increased $52 million for the quarter and $119 million for the nine months as global demand for protein and oil improved.
— Corn Processing operating profit decreased $79 million for the quarter and $177 million for the nine months due principally to higher net corn costs.
— Agricultural Services operating profit increased $320 million for the quarter and $618 million for the nine months as highly volatile market conditions provided exceptional merchandising opportunities.
— Other segment operating profit increased due to improved margins and increased financial services income.

CEO Patricia Woertz said about proposed changes to the energy bill, “I actually find it sad and even a little ironic that this attack on biofuels is directed to the one alternative we have today. Biofuels are a real solution to a real problem. To retreat from biofuels is wrong. It’s foolish. It’s dangerous. It’s an empty gesture. It won’t fill anyone’s stomach. It won’t fill anyone’s gas tank,” she added.

She is right. Food price rises are due to demand and weather worldwide, not biofuels. Wheat prices are soaring not because of biofuels but because of demand in China and India for the commodity and poor harvests in Australia and Europe. Woertz, when she took over at ADM predicted the situation we are in.

She laid out the scenario then that as nations developed, the demand for protein based products would increase exponentially. Here excitement for taking the ADM job at the time was due to its position in the food chain for those products. She has been 100% accurate. A decrease in the use of corn in the US by eliminating the biofuel requirement would do nothing the quell demand for wheat or soy worldwide. Let’s be honest, America is still a net exported of corn and wheat. We can’t even use all of what we have.

All commodities are pegged to the dollar and this is the basis for the rise. As the dollar continues to decline in value, the cost of those commodities (corm ,wheat, soy, oil etc) rises. Should the dollar increase in value, the prices of them will drop. Both of these scenario’s have nothing to due with biofuels. The suddenly staggering cost of transporting food to markets due to high oil prices has more to do with increased food costs than biofuels.

Should we get rid of the 51 cent subsidy for ethanol? Don’t ask ADM, they do not receive it. Ask Exxon (XOM) and the refiners. They are the recipients of the tariff, not ethanol producers. It is technically a “blending credit” given to refiners for mixing ethanol in gas.

Why keep it? consider this, the ethanol blenders credit cost taxpayers about $3 billion last year. However, it reduced crop price supports by about $6 billion and our oil import bill by another $15 billion. In short, giving refiners an economic incentive to use more ethanol has a positive economic effect on our economy.

We also have to note that the $15 billion we save on our oil bill is $15 billion that stayed in the US and did not find it way to the Middle East.

As an investment, ADM’s fortunes have turned not on biofuels (Corn processing, which includes HFCS and ethanol was only 20% of profits in the most recent quarter), but from the world’s demand for food. That, will not change anytime soon and a very real argument can be made that the increases we have seen are only the beginning of what is to come.