Green Plains sues ADM over alleged ethanol market manipulation

By Erin Voegele | July 15, 2020

Green Plains Inc. on July 14 filed a proposed class-action lawsuit against Archer Daniels Midland Co. in the U.S. District Court for the District of Nebraska accusing ADM of manipulating the price of ethanol to profit from its positions in the derivatives market.

In its court filing, Green Plains said ADM sells ethanol produced at its various production facilities into cash markets, including the cash spot market at the Kinder Morgan Argo Terminal in Argo, Illinois. The filing explains that the Argo terminal is unique among cash markets because it serves as the price reference point for nearly all physical and financial ethanol transactions across the world. “As a producer and seller of ethanol, ADM should want pricing mechanisms that reflect actual market prices at the Argo terminal and any other locations they sell ethanol,” Green Plains explained in the court documents.

Green Plains claims, however, that starting in November 2017 ADM has routinely acquired financial derivative contracts that went up in value if the price for ethanol at the Argo terminal went down.

“As a physical producer of ethanol, ADM should want stable or rising prices so that its physical sales would earn a profit,” Green Plains continued. “However, because of the disproportionate size of its derivative financial position, ADM manipulated prices to fall so that its financial derivatives would earn a profit. Instead, ADM sacrificed its profits on physical sales in order to leverage even larger profits on its derivatives contracts.”

The court filing describes a three-step strategy Green Plains alleges ADM executes to succeed in this strategy. First, ADM would flood the terminal with ethanol and hurriedly lower offers or accept low priced bids as the dominant seller in the MOC pricing window rather than asking or waiting for a higher price. This would cause physical prices at the Argo terminal to decline. Second, Green Plains claims that by selling an average of 1 million gallons of ethanol daily in the MOC window, ADM was able to adversely impact the pricing of over 32 million gallons of physical ethanol produced industry-wide per day. Finally, ADM would gain enough leverage to turn its own physical ethanol losses at the Argo terminal, and associated losses on its plant production, into financial wins at NYMEX and CBOT by acquiring short-sided speculative derivative contracts at an unprecedented scale and then targeting the terminal and pricing mechanism used to determine the price of those derivative contracts.

“ADM’s foregoing manipulation of the derivative contracts market is illegal; it is forbidden by the Commodities Exchange Act,” said Green Plains in the lawsuit.

“In executing its strategy beginning in November 2017, ADM was a buyer in the MOC window only once for 210,000 gallons, but was a seller at all other times for a total of approximately 821 million gallons—a sea change from their pre-November 2017 trading behavior in which ADM was consistently a buyer,” Green Plains continued. “While selling in the MOC window, ADM was simultaneously purchasing physical gallons with the Argo terminal at prices above which it was selling in the window, which is completely uneconomic behavior for an ethanol producer that would be seeking to maximize the sell price of its physical sales.”

Green Plains alleges that ADM used its size, proximity and relationships to exploit and overwhelm the Argo terminal and force a self-serving pricing outcome. Green Plains explains that ADM’s depression of prices at the Argo terminal also hurts other ethanol producers and imposes downstream pain on corn farmers and cooperatives.

Green Plains has asked the court to declare its lawsuit as a proper class action and has requested a jury trial.

An ADM spokesperson told Ethanol Producer Magazine in an email that the company does not comment on pending litigation. A similar lawsuit was filed against ADM by Switzerland-based AOT Holding Ag in September 2019. That case is currently ongoing.

According to the Ethanol Producer Magazine online plant map, ADM owns eight U.S. ethanol plants with a combined capacity of approximately 1.674 billion gallons per year. Green Plains currently owns 13 ethanol plants with a combined capacity of approximately 1.111 billion gallons. Data published by the U.S. Energy Information Administration shows there is currently approximately 16.87 billion gallons of ethanol production capacity in the U.S.