ADM's Ethanol Enthusiasm

With another fiscal year concluded, it's time to check out Archer Daniels Midland's (NYSE: ADM  ) latest volley of results.

The agricultural processing powerhouse turned in a very strong year; the reported numbers don't really do it justice. After backing out both years' gains on asset sales, and adjusting for non-cash inventory charges and other muddling items, full-year earnings soared 30%, or 32% on a per-share basis.

The fourth quarter was also strong on this adjusted basis, with an 18% improvement over last year. The oilseeds business (read: soybeans) was strong, particularly in the realm of crushing and refining. The segment results only look weak because last year's number included gains on some Asian investments. Corn processing earnings also improved a healthy 14% -- impressive, given the very tough year for ethanol.

Speaking of ethanol, management made a few interesting comments on its conference call regarding the market for the much-debated fuel additive. For what it's worth, ADM management stated their optimism that Texas' request for a waiver on the federal ethanol mandate would not be granted. But even if the super-sized state, whose request is backed by companies like Kraft Foods (NYSE: KFT  ) , PepsiCo (NYSE: PEP  ) , and margin-tight Tyson Foods (NYSE: TSN  ) , is granted a waiver, Archer still foresees strong demand. The blending economics are just that attractive, with ethanol providing cheap octane for gasoline. Archer actually cited blending in excess of the mandate.

Elsewhere on the ethanol front, Archer is plugging away on its bio-crude joint venture with ConocoPhillips (NYSE: COP  ) , but it had nothing specific to report. Also, despite local media reports about the company's recent Brazilian foray, ADM had nothing to say about that, either. This ethanol development's worth watching closely, since everyone from Petrobras (NYSE: PBR  ) to BP (NYSE: BP  ) is competing in this arena.

Finally, no matter what happens with the current U.S. tariff on Brazilian ethanol imports, ADM points out that the latter country has no additional export capacity. Until Petrobras and other local players build out those pipelines and terminals, there's no threat of an import flood wreaking havoc on domestic producers' already strained margins. This buys ADM time to structure its operations in anticipation of any longer-term shift toward Brazilian biofuels.

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Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 06, 2008, at 3:33 PM, pondee619 wrote:

    ethanol: The process of turning food into oil, inefficiently, while portions of this planet starve.

    And Nero fiddled while Rome burned.

  • Report this Comment On August 06, 2008, at 3:43 PM, Lfcastro wrote:

    Brazilian ethanol is not made from food and it is working from more than 30 years now.

  • Report this Comment On August 07, 2008, at 1:32 PM, DwntwnDL wrote:

    Pondee619 - If the US tariff of $0.53 a gallon on Brazillian ethanol were done away with production would shift away from corn to the much cheaper sugar cane.

    Use of ethanol keeps gas prices lower than they would otherwise be. If it never occurred to us before what the effects of higher gas prices are, we certainly are aware of their effects on the economy now, no?

    While sugar may be nice it is not an element in the "world hunger" equation.

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