Image source: Phil Roeder/Flickr.
Much-welcomed sunshine in the next week is expected to help the United States thaw out from the season's first blizzard, but the sound of ice cracking may not be coming from the icicles hanging from your rooftop. It could be Archer Daniels Midland (ADM 1.72%) shareholders, which are on thin ice heading into the company's announcement of fourth-quarter and full-year 2014 earnings next week. Worse yet, it's all because of a single product -- and it could have a major impact on implications for earnings for 2015 and beyond.
Sorry, kids. The good times might be over.
Archer Daniels Midland is the nation's largest bioethanol producer, with over 1.7 billion gallons of annual production. When demand is strong and selling prices are healthy, the company generates an exceptional amount of revenue and earnings, which makes bioethanol a top contributor to the bottom line. For instance, the agricultural raw-materials processor made a mint off bioethanol sales in the first nine months of 2014, especially when compared with 2013.
|
Bioproducts Division Metric |
First Nine Months, 2014 |
First Nine Months, 2013 |
|---|---|---|
|
Revenue |
$5,918 million |
$6,374 million |
|
Operating Income |
$492 million |
$233 million |
|
Operating Margin |
8.3% |
3.7% |
|
% of Total Revenue |
9.8% |
9.7% |
|
% of Total Operating Income |
18.6% |
12.4% |
Note: Bioproducts income statement category includes sales of amino acids, which is overwhelmingly driven by products created from bioethanol production. Source: SEC filings.
Despite accounting for roughly the same percentage of companywide sales in both 2013 and 2014, the division performed significantly better last year. Why? Three simple metrics are largely responsible for the profitability of bioethanol production every year: demand, selling prices, and corn prices. In 2013, uncertainty in federal mandates subdued demand and prices, while the record drought during the 2012 corn harvest pushed prices for corn (the dominating input) to all-time highs. Bioethanol production costs weren't far behind.
By contrast, producers headed into 2014 with strong demand (thanks to a long-awaited update from the U.S. Environmental Protection Agency), which supported strong selling prices. When coupled with a precipitous drop in corn prices early last year, bioethanol producers enjoyed record margins. Unfortunately, those same three indicators -- demand, selling prices, and corn prices -- are pointing in a much less favorable direction in early 2015.
U.S. Corn Farm Price Received data by YCharts.
Corn prices began to push off four-year lows in the fourth quarter of 2014, while a simultaneous cliff dive in crude oil prices tanked bioethanol demand (but not for the reasons you might expect). Selling prices today sit at eight-year lows, while input costs are heading in the opposite direction. In other words, investors have good reason to doubt that Archer Daniels Midland achieved the same stellar results from its bioethanol production in the fourth quarter of 2014 as it did in prior quarters. It's also unlikely that the company will come close to matching its record performance in the year ahead.
A pinch of good news
Bioethanol probably won't be a strong performer for Archer Daniels Midland in 2015, but investors will sure be happy about recent and ongoing initiatives to increase companywide operating efficiency. Archer Daniels Midland continues to invest wisely, expand into high value markets, and leverage long-term trends rather than react to short-term market conditions. Consider that the company's operating margin increased from 2.1% in the first nine months of 2013 to 3.5% in the same period of 2014. More impressive, operating profits increased 52% despite an 8% drop in revenue.
More robust operations will at least help insulate shareholders from a "sky is falling" scenario. After all, the company is still comfortably profitable without bioethanol. Investors just won't be able to count on an encore performance from the Bioproducts division, which means Archer Daniels Midland will probably have less cash to reinvest in growth opportunities. Be on the lookout for an update from management during the fourth-quarter earnings conference call next week.
