ADM's Rice considers ethanol 'most competitive fuel in the world'

By Holly Jessen | May 11, 2011

Archer Daniels Midland Co. executives painted a good-news/bad-news situation for ethanol during a May 3 conference call on the company’s third quarter results. First, the good news. “We still feel very strong about the ethanol business and it’s probably the most competitive fuel in the world right now,” said John Rice, vice chairman of ADM.

Spot market prices for wholesale ethanol are 60 to 90 cents cheaper than unleaded gasoline, pointed out Ray Young, senior vice president and chief financial officer. In addition, the 45-cent Volumetric Ethanol Excise Tax Credit provides another incentive to those blending the fuel. “With these attractive economics, customers generally will blend ethanol at the maximum level allowed,” he said.

Still, due to overcapacity, until the market opens up for more ethanol the industry is facing close to break-even margins. U.S. ethanol producers are churning out between 13.5 and 13.8 billion gallons, Rice estimated.

Although the U.S. EPA approved E15 for passenger vehicles, including cars, SUVs, and light pickup trucks, it limited that approval to model years 2001 through newer vehicles. CEO Patricia Woertz reasserted a belief that until all cars are approved for E15 there won’t be widespread acceptance for the fuel. “There’s still some hurdles to overcome,” she said.

Typically, gas prices increase in the summer, along with miles driven. However, with gas prices as high as they are currently, it’s not known yet if drivers will drive less, Rice said. On the ethanol production side he guessed that most ethanol producers would continue to make ethanol even if margins are close to breakeven because it will provide cash flow. “It seems like once every other week we see another company bankrupt and then they get new financing,” he said, adding that it will take a while for the ethanol industry to “grow through” the current market situation.

On the financial side, ADM had a good third quarter overall, with earnings up 37 percent. The company reported net earnings of $578 million and quarterly segment operating profit of $1 billion for the quarter ended March 31. That’s up from $157 million and $310 million respectively, compared to the same time period last year. “The ADM team performed very well,” Woertz said. “Against a backdrop of volatile commodity prices, a challenging margin environment and  geopolitical instability in the Middle East, North Africa and Côte d'Ivoire, our team worked smart and hard and delivered strong results.”

Things looked good overall on the corn processing side. Profit in this segment increased $100 million, to a profit of $204 million. The company increased production by 13 percent in volume, due in part to the addition of dry mill plants in Cedar Rapids, Iowa, and Columbus, Neb., in the past year.