FEATURE--U.S. ethanol giant ADM sees bright prospects
By Sue Schwendener
DECATUR, Ill., July 17 (Reuters) - Twenty-three years after President Jimmy Carter asked Archer Daniels Midland Co. (NYSE:ADM - news) to produce fuel-grade ethanol to fight the energy crisis, the giant Decatur, Illinois-based agribusiness is counting the alternative fuel among its brightest growth prospects.
``This may be ADM Energy Company one of these days,'' joked Larry H. Cunningham, senior vice president of corporate affairs, in an interview at ADM's sprawling, 600-acre grain processing complex here.
Buoyed by a U.S. Environmental Protection Agency denial of California's request to waive provisions of the 1990 Clean Air Act requiring additives to make gasoline burn more cleanly, top U.S. ethanol producer ADM finds itself center stage in a burgeoning industry.
``I think even before the California waiver denial became effective, the demand for ethanol was growing,'' Cunningham said of the motor fuel additive made from corn.
``It's a wonderful way to meet the oxygenate requirement under the Clean Air Act and it's also a wonderful way to get the octane that's needed in making gasoline, too. So, even without the California waiver, we've gone ahead with expansion plans at ADM.''
In the United States, the EPA decision means California will need about 580 million gallons of ethanol for reformulated gasoline (RFG) oxygenates by January, 2003. Oxygenates are oxygen boosters that are added to reformulated gasoline, which help the fuel burn more cleanly.
PRODUCER TO GET BIGGER
ADM, the largest U.S. processor or grains and oilseeds, produced 797 million gallons of fuel-grade ethanol in 2000, mainly from corn. Ethanol production uses only the starch portion of the corn kernel, with the remaining vitamins, minerals, protein and fiber sold as livestock feed.
ADM yields about 2-1/2 gallons of ethanol per 56-pound bushel of corn, said ADM vice president Marty Lyons.
Within 60 days, ADM expects to boost its annual production capacity to 900 million gallons, ADM officials said. That would account for about 50 percent of an expected 1.8 billion gallons of ethanol to be produced in the United States this year.
``The most logical thing for us to do is to incrementally expand existing facilities where we can,'' Cunningham said.
ADM has four main ethanol producing facilities: at its Decatur complex; at a beverage and ethanol plant in Peoria, Illinois; and at wet corn processing plants in Cedar Rapids and Clinton, Iowa. The company also recently restarted some ethanol production at its Walhalla, North Dakota, facility.
Nationwide, ethanol producers have announced plans to expand 34 existing ethanol plants. Eight new plants are under construction, according to the Renewable Fuels Association.
``By the end of 2003, U.S. annual ethanol production capacity is expected to increase by 1.5 billion gallons per year to reach 3.5 billion gallons,'' said RFA spokesman Monte Shaw.
But the costs are steep.
``The rule of thumb is probably in the neighborhood for every daily bushel of capacity you grind, it's going to cost you about $3,500 to build the facility,'' ADM's Cunningham said. ``So if you had a plant that runs 100,000 bushels a day, it's going to cost you $350 million to build the plant.''
ETHANOL SUBSIDY DEFENDED
To aid ethanol's economics, ADM for years has been a leading voice in promoting ethanol to lawmakers. One result has been a zealously defended U.S. government subsidy -- an excise tax exemption on ethanol fuels, established in 1979, currently worth 5.3 cents a gallon at the pump.
ADM and the ethanol lobby argue that the tax credit returns more revenue to the U.S. Treasury than it costs due to increased wages and taxes, reduced unemployment benefits and reduced farm price supports and other benefits to American farmers. It also lowers the pump price of gasoline.
``We take exception to the statement 'subsidy,' because what happens is there are taxes that are not charged on ethanol but the person who benefits from those is the person who markets the gasoline, not the person who produces the ethanol,'' Cunningham said.
``You know the oil industry has its own set of allowances and depletion credits and that sort of thing. You'd have to look at that if you wanted to make any sort of comparison with what goes on with ethanol,'' Cunningham said.
The U.S. General Accounting Office reported in October 2000 that the oil industry has received over $130 billion in tax incentives during the past 30 years, compared to the $11 billion provided for renewable fuels, according to the RFA.
TRANSPORT AND STORAGE
Corn is the favored feedstock for fuel ethanol, explaining the Midwestern location of most current ethanol plants.
``Right now the economics favor building the ethanol facilities near the source of the raw materials,'' Cunningham said. ``There are studies under way in California about converting straw and other agricultural waste products into ethanol, and I think it's feasible that some of those may come to fruition. But I doubt Californians are going to grow corn out there for ethanol much, because they can grow things that have greater returns on them.''
Lyons said some U.S. ethanol producers, notably No. 2 producer Williams Cos. (NYSE:WMB - news), were aggressively seeking to build marketing networks with new, smaller ethanol producers.
Tulsa, Oklahoma-based Williams supplies 320 million gallons of ethanol per year.
``Building an ethanol plant is half the story,'' Lyons said. ``Getting it to the market is the rest of the story.'' And having the infrastructure and the logistics to be able to contribute to a new ethanol production facility is what people like ADM and Williams bring to the table.
CLEAN AIR RULES
While companies expand ethanol output to meet California's needs, demand will also rise when use of the most popular oxygenate, methyl tertiary butyl ether (MTBE), is banned in New York and Connecticut by 2004.
ADM says more federal clean-air proposals point to even bigger demand in the future.
``EPA has put out some requirements that over the next three or four years that will require diesel fuel emissions, sulfur emissions, to be down 95 percent,'' said Roger J. Listenberger, vice president of ADM's ethanol division. ``Sulfur provides octane into diesel, so something has to happen to change diesel formulations to get sulfur down and maintain octane. We think ethanol has a tremendous opportunity to do that.''
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