ADM predicts improved ethanol supply-demand balance

By Erin Voegele | January 26, 2021

Archer Daniels Midland Co. discussed the current status of its ethanol operations during a fourth quarter earnings call held Jan. 26. While ethanol margins are currently low, the company expects the supply-demand balance to improve through increased exports to China and industry reconfiguration.

Ray Young, chief financial officer at ADM, said results for the company’s carbohydrates solutions division during the first quarter of 2021 are expected to be higher than last year, but below the fourth quarter of 2020 due to challenging industry ethanol margins. He noted ethanol margins actually hit a low of -45 cents per gallon in March 2019.

While ethanol margins are currently challenged, Young indicated last spring's low margins are not expected to be repeated. “We’re going to start off on a challenged basis, but we do expect the…supply-demand balances in the ethanol industry to get better balance as we move through the year, for several reasons,” he said.  Number one, Young said China is actually buying U.S. ethanol. “We believe that they’ve already made commitments already in the first half of the year for U.S. ethanol equal to the previous all-time high for the calendar year—roughly 200 million gallons,” he said. Second, Young said various competitors in the industry have announced reconfigurations and are focusing their production away from transportation fuel towards the production of other products. “That’s going to have an impact on industry supply and demand,” he said. Third, Young noted that approximately 10-15 percent of U.S. ethanol production capacity remains idle. He said ADM plans to remain very disciplined regarding the restart of its idle dry mills, noting that the company wants to see sustainable margins before those plants restart. “Hopefully, sometime in the first half [of the year] we are going to see that,” he said. Finally, Young said the U.S. Supreme Court’s ruling on small refinery exemptions (SREs) will impact the industry in terms of ethanol demand.

ADM reported $208 million in fourth quarter segment operating profit for its carbohydrates solutions division, up from $174 million during the fourth quarter of 2019. Starches and sweeteners achieved significantly higher results, driven by lower net corn costs and intra-company insurance settlements. Earnings were partially offset by lower results from corn oil and wet mill ethanol margins. Results for Vantage Corn Processors were also improved, through they continued to reflect the challenged ethanol industry environment. The business delivered higher year-over-year margins as it met increased demand for USP-grade alcohol, partially offset by fixes costs from the two temporarily idled dry mills.

Overall, ADM reported segment operating project of $1.139 billion for the fourth quarter, up from $934 million during the same period of 2019. Adjusted segment operating profit was at $1.152 billion, up from $1.028 billion. Earnings per share reached $1.22 for the fourth quarter, up from 90 cents during the same period of last year. Adjusted earnings per share reached $1.21, down from $1.42.