How To Make Biodiesel

Executives at Archer Daniels Midlands, the Decatur, Ill.-based food processing giant that has about a one-fifth share of the ethanol market, believes that ethanol prices will rise over the next couple of months for the same reasons gasoline prices are expected to edge higher. “The price of unleaded gas has really been going a lot higher just because of the gasoline stocks are below a 5-year historical average right now, and that’s really leading the ethanol prices higher,” said John Rice, the company’s head of Global Marketing and Risk Management. “That is always correlated to ethanol pricing,” added chief executive Patricia Woertz, “Demand [for gasoline] is looking to be strong throughout the summer on all the looks we see, so that should also have a pickup in terms of pricing.” ADM was speaking to analysts today following the release of its disappointing third-quarter financial performance. As the cost of corn rose, the company’s Agricultural Services business suffered. To be sure, the company’s net earnings still increased 4% year over year to $363 million during the three months ended March 31. The results include a $33 million gain related to the sale of the company’s Arkady food ingredient business. But ADM’s earnings, which amounted to 56 cents per share during the March quarter, were significantly off analysts surveyed by Thomson Financial, which had forecast 62 cents. ADM said lower operating costs and increased starch, sweetener and ethanol selling prices boosted results, but were partially offset by an increase in corn costs during the quarter. As for current market conditions, sweetener selling prices will be up during the calendar year, Chief Financial Officer Douglas Schmalz said. “Ethanol prices during the fourth quarter of April through June should increase from the price levels that were seen during the third quarter”, he said. Oilseeds processing operating profit fell 4.6% to $168.5 million, hurt by reduced softseed and biodiesel processing margins. Those declines were partially offset by better fertilizer improved fertilizer margins in South America, Schmalz said. Currently, crop availability in the segment looks good, Schmalz said. North American industry levels are high, and the expected growing biodiesel demand is supporting price levels, he said. At the Ag Services division, which contains the company’s ethanol marketing BioProducts group, operating profit fell 48% to $40.5 million, which ADM attributed to a decline in global merchandising and handling results. The results also show the effect of weather, inventory handling costs and logistics, said Woertz. “We did have some logistical and weather challenges related to frozen rivers and the like,” Woertz said. Douglas Schmalz, the company’s CFO, clarified: “Last year, we had an unusual situation and we didn’t have a lot of frozen rivers, so we were able to move more. When that happens, you tend to have build-ups within the Gulf, you have a lot of back-up of materials and so forth,” Schmalz said. “That affects your cost of carrying the inventories you carry more inventories,” Schmalz added. “There’s just a lot of logistic things that happen.” Rice, the head of risk management, added that Ag Services’ lackluster earnings were not impacted by the high cost of corn because its marketing group had been able to raise prices to keep margins at about the same level. In the earnings call today, ADM’s officers highlighted more than a few times their confidence in all of the company’s business segments, but nearly all of the analysts who participated saw fit to return the discussion back to the company’s biofuels projects. The focus on ADM’s ethanol and biodiesel ventures was to be expected, however. Eric Katzman, an analyst at Deutsche Bank, said that one of the things he’s noticed an 85% correlation between the company’s share price and the price of oil. As to whether the company can compete with all of the new ethanol capacity coming online, Woertz, at least, does not appear to be worried. “Having spent some time in Washington last week there are several bills and a lot of discussion about expanding the Renewable Fuel Standard,” Woertz said. Alluding to standards testing conducted by Underwriters Laboratory, Woertz said “there’s also a lot of discussion about expanding the opportunity to have a greater than 10% blend, not only permitted, but allowed and warranted under the current auto manufacturers,” Woertz added. “There’s discussions from the 12 to 15%, again, to get out past the ‘cliff expectation’ once we get to the 10%, [then] to get well beyond that.”

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