ADM conducts strategic review on the future of its ethanol mills

Archer Daniels Midland Co. (ADM), a US-based food processing and commodities trading company, is conducting a strategic review on its ethanol mills, as its ethanol arm continues to be hit by falling oil prices.

The firm announced, last week, that two of its dry ethanol mills, based in Nebraska and Iowa, will be reviewed for "strategic options" — an analysis that could lead to a sale. ADM is also reviewing an older mill based in Illinois.

Dry mills are simple factories that grind corn kernels and send the starch to a refinery for distillation into ethanol. ADM's "wet mills", which can make a range of products including ethanol and high-fructose corn syrup, are not part of the study.

ADM spent $1.3bn (€1.15m) to build the plants in Nebraska and Iowa in 2006 so they could boost the production of ethanol to 1.7bn gallons per year.

However, the value of those investments is now in doubt as low oil prices have started to go down discouraging the demand for ethanol.

Furthermore, the political situation in the US biofuel industry has been a discouraging factor for ADM towards its biofuel pursuit.

RFS mandate

ADM built its two mills in a big bet on the federal renewable fuel standard (RFS) mandate, which required fuel companies to blend ever more ethanol into the US petrol supply.

The company has also been facing difficult market conditions such as surging crop prices and shortfalls in grain supplies. It has also faced stiff competition from other ethanol manufacturing firms, resulting in lower profit margins.

In a Q4 2015 statement, ADM said its operating profit from its bioproducts division, which includes ethanol, dropped 70% in 2015 to $149m (€133m), when compared to the same period last year.

Speaking to analysts on a Q4 2015 conference call, ADM's CEO, Juan Luciano, said: "What we are seeing here is we continue to be implementing our cost reductions in the dry mills that we have seen, but margin continues to be historically low.

"And even with our improvements in cost, we are concerned about the long term from the dry mill ethanol part of the industry..."

However Luciano added that the "whole operation is having positive cash flows" so there is "no need to panic".

He added: "We just want to be prepared to look at the industry long term and see, can this industry present the returns that we expect and what are the options to maximise our return for ADM?"

Commenting on the outlook of the US ethanol sector, Bruce Babcock, an economist at Iowa State University, told the Financial Times: "The future of the ethanol industry in the US really depends on continued support from the RFS."