Is Archer-Daniels-Midland Co. Going Shopping?

For a while I have been saying that the ethanol industry is due for consolidation and it seems that the largest producer of it in the US, Archer Daniels Midland (ADM) agrees.

ADM's Chief Financial Officer Doug Schmalz said Tuesday the corn and soy bean processing giant would consider buying ethanol plants now that lower prices for the fuel have been preassuring production margins. "In general, we'll look at all opportunitites including acquisitons," Schmalz said at the Citi Biofuels Conference.

"We have to have properties that will fit within our network. Some plants just wouldn't fit; others might. We'll analyze that as they become available."

This is where it gets really fun. We get to speculate as to what may happen. ADM will not be picking up the mom and pop ethanol collaboratives that have sprung up in recent years. When you will be producing 1.5 billion gallons of ethanol by the end of next year, picking up a 20 million gallon a year plant is a waste of your time.

That being said, when companies like Verasun (VSE) and Pacific Ethanol (PEIX) are both trading a 52 week lows, the timing to pick one of them up is perfect. Verasun would give ADM another 500 mgpy of production and access to an E85 infrastructure and partnerships with auto makers. Pacific Ethanol would give ADM another 300 mgpy and instant access to the potentially largest ethanol market in the US, California.

Pacific Ethanol has a market cap of $350 million and Verasun's is $810 million so either would easily be digestible for the $21 billion ADM.

There has been way too much coming from ADM recently about expansion plans via partnerships or purchases for something not to be either in the works already or about to be. ADM, as I have said before is probably the quietest company out there. For them to actually be talking means something, most likely something very big is about to happen.

Investors have watched the stock drift for most of 2007 and I have repeatedly said to be patient and hold on (I am holding on to my shares with you). Continue to do so and by this time next year, we'll be laughing at those who did not.

Disclosure: Author is long ADM.

Comments

[Tom B:]

The ethanol industry will only last until we get a president smarter than a brick-- Jan. 2009, presumably. And I'd prefer to avoid buying into an ethically challenged company like ADM. I never bought Enron, but my wife did. If a company is sufficiently corrupt, you can't trust the books. That's also why I don't touch anything in China, though there's plenty of money to be made there if you are always ready to sell fast at the first sign of trouble.

2007 Oct 08 12:16 AM

[Kennedy:]

Thomas! Ethanol is not going anywhere except into the cars on American highways. 10% or 85%. Once the blending bottleneck and end consumer pump problems are worked out.....look out. All current presidentials, Democrate and Republician, support Ethanol. It wont matter who is President, the US government will support it. Companies selling the stuff will sell it all and then some. Maybe you prefer expensive pure gasoline but I dont. Blending will keep prices down, espically once technology moves the industry away from corn production and on to cheaper, more price stable methods.
If you dont like ADM (and your the first I have heard of) then VaraSun is a solid company which almost all analysts agree will survive consolidation.

Bottom line....Im staying in...

2007 Oct 08 09:58 AM

[Tom B:]

Corn Ethanol uses more energy in the production than you get out.

And a tank of E85 will give you lower mileage than E90 or straight gasoline. Ethanol is a sucker's bet.

2007 Oct 08 10:40 AM

[todd su:]

tom,

you are wrong on the energy balance. those studies have been proven flawed time and time again. for every one you can fins that claims that, there are a dozen that claim the opposite.

gas mileage. SAAB has a engine that gets the same miles and NASCAR gets better mileage using ethanol. All it take in an adjustment to the calibration. simple...

2007 Oct 08 01:14 PM

[Carl leason:]

Ethanol is here to stay and certainly will be undergoing refinemennt in the sources of product to make it, but bottom line is that it will cut down on our energy dependence. One big advantage is that an ethanol plant can be built cheaply as compared to gasoline, etc. and also built close to major cities without a lot of pollution concerns and without having to build lengthy pipelines. Also, it's all on shore, not in deep water ! LC

2007 Oct 08 08:39 PM

[User 31269:]

Notable by its absence from your list of ethanol stocks that could be affected is Aventine. It's got the lowest P/E and the strongest balance sheet. It's got flexibility as a producer and distributor combined. And it has its own distribution infrastructure, meaning its vertically integrated with all its attendant benefits. It could be the most attractive acquisition target out there. (True confessions - I own a chunk of it.)

2007 Oct 08 07:32 PM

[Kennedy:]

I agree about Aventine. Certainly a great candidate for acquisition and a consolidation survivor. Also agree that Ethanol is here to stay. Rolling Stone Magazine, The New York Times and the LA Times can take their twisted up statistics and go jump in a lake. Every argument against Ethanol has been debunked. Lee's point is on the mark too. I'd rather live surrounded by Ethanol plants then next to one oil refinery. You guys should see the north side of Kuwait City. Looks like Batman's Gotham City. Good written's to gasoline. But I digress........Ethanol is a smart move, its day is coming.

2007 Oct 09 03:00 AM

[todd su:]

aventine is a good company, they may not produce a ton of it but they market a ton for the coop farmers

2007 Oct 09 02:49 PM

[todd su:]

i was operating under the assumption ADM wants production and Aventine is not there yet. their marketing prowess though may be coveted by a Verasun or the andersons...

2007 Oct 09 02:56 PM

[Greg Pinelli:]

Thomas...did you get lost on the way to your 5th grade class and end up here? Please provide us with a detailed list of sufficiently ethical companies you think are suitable for investment...and don't give us ANY that are governemnt subsidized or engage in trade or commerce with repressive regimes...or abuse women. Or benefit from legislation that restricts free entry (EVERY Jones Act carrier for instance). Well..enlighten us.
ADM is a politically astute company that works the system..it also provides a decent set of products..employs several thousand American citizens...and has rather forward looking management that has its fingers in many essential resources in many places. Grow up.

2007 Oct 09 11:49 PM