ADM issues bullish outlook for ethanol
Financial Times
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Archer Daniels Midland on Tuesday predicted that US ethanol demand could rise to 15m gallons by 2012, well above existing industry estimates and double the level set by new energy legislation.
The US agribusiness group accounts for a quarter of domestic ethanol production and is adding capacity to meet demand for use as a gasoline additive to replace MTBE, a compound known to contaminate water tables.
Demand is expected to reach 4.8m gallons this year, and new capacity is expected to surpass the 7.5m-gallon target set by last year's energy bill in 2008, four years ahead of target.
However, producers and users remain divided over the sustainable level of demand once MTBE is completely phased out, and ADM's forecast is the most bullish to date.
"It looks like it has room to grow to 14m or 15m gallons [a year]," said Pat Woertz, the company's new president chief executive as she unveiled a doubling of fourth-quarter profits, boosted in part by rising ethanol prices.
Ms Woertz, who joined the group in May from Chevron, said demand would hinge in part on legislative efforts to require usage of ethanol and other alternative fuels such as biodiesel. "But I think there's room to move [production up], even without a mandate."
ADM derives the bulk of its earnings from processing commodities such as oilseed, cocoa and wheat, but the expansion of its alternative fuels business has lifted earnings – and its share price – in recent months. The company plans to lift its production of ethanol from corn to about 1.5bn gallons over the next two years.
While ADM shares have climbed 77 per cent this year, largely on the back of the buzz surrounding ethanol, many analysts remain cautious about the sustainability of current margins if supply bottlenecks ease and crude oil-prices drop. However, current ethanol plants are said to be profitable with crude prices of around $40 a barrel, helped by 51-cent a gallon state subsidy.
"There's an opportunity to grow the market, to grow volumes," said Ms Woertz on a call with analysts. While ethanol prices have continued to rise – most deals are on six-month forward contracts – she said "the nature of the discussions have changed", with a greater focus on the reliability of supply and infrastructure.
Ms Woertz was also bullish about the outlook for oil seed-derived biodiesel, notably in Europe where government mandates for increased use are expected to boost demand. However, she remained more cautious about its application in the US – where demand is fraction of that in Europe amid a myriad of federal and state efforts to mandate increased use.
Higher prices for oil seed products – its largest segment – starches, sweeteners and ethanol lifted net profits in the quarter to June 30 from $195.5m to $410.3m, with full-year profits up 26 per cent at $1.31bn.
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