Ethanol uproar threatens ADM chief's strategy

Skyrocketing food prices are threatening Patricia Woertz’s plan to recast grain processor Archer Daniels Midland as the eco-friendly giant of green energy.

ADM’s CEO tied her growth strategy to corn-based ethanol, the alternative fuel that’s suddenly emerged as the bogeyman of the world food crisis. Critics say ADM and other ethanol makers are driving up the price of everything from hamburgers to corn flakes.

“They’re getting blamed for higher food prices and people starving all over the world,” said Morningstar analyst Ann Gilpin. “ADM’s got a political fight on its hands and an image problem.”

Ethanol is turning into a business problem too, as an expanding array of opponents—from environmental and hunger activists to food companies and federal lawmakers—join forces to attack government supports that make it economically viable. Any meaningful reduction in those supports would cripple ADM’s ethanol business, which is already struggling under the weight of the same rising corn prices that have stoked outrage against the company.

Ms. Woertz lashed out at ethanol critics recently with a vehemence that underscores the company’s stake in the controversy. “To retreat from biofuels is wrong,” she said in an April 29 conference call with analysts. “It’s foolish. It’s dangerous. It’s an empty gesture. It won’t fill anyone’s stomach. It won’t fill anyone’s gas tank.”

Decatur, Ill.-based ADM makes an inviting target for anger over food costs. It is raking in profits in its corn and soybean-processing businesses. At the same time, its ethanol business—the third-largest in the world—gobbles up acres of corn. Ethanol is diverting more than 20% of the U.S. corn crop and pushing corn prices to their highest level in more than a decade.

Ethanol’s sudden fall from grace marks a sharp reversal for Ms. Woertz, 55. ADM hired the former oil executive two years ago to ramp up its ethanol business and repair a corporate image battered by a price-fixing scandal that sent three former executives to jail.

Back then, ethanol enjoyed widespread support from renewable energy advocates and the farm industry. A complex system of tax subsidies, consumption mandates and tariffs vouchsafed its profitability. Just five months ago, President Bush signed a law doubling the amount of ethanol that must be mixed into the nation’s gasoline supplies by 2015.

Citigroup estimates ethanol accounted for about 25% of ADM’s $3.16 billion in operating profit last year and 5.5% of its $44.02 billion in net sales.

But the same government supports that boosted ADM’s ethanol business sparked a building boom that raised overall capacity. The resulting glut is pulling down ethanol prices even as the new plants’ corn consumption drives costs higher. ADM’s operating income from ethanol plunged about 38% in the most recent quarter from a year earlier.

More ominously, the backlash against ethanol is building as higher corn prices contribute to a worldwide rise in food costs. The controversy is intensifying in the wake of food riots from Haiti to Egypt to Bangladesh.

Ms. Woertz declined to comment for this story, but she has blamed rising food costs on higher oil prices and warned gasoline prices would surge without ethanol.

But the arguments of ethanol foes are gaining force as their numbers grow. A group of 24 Republican senators called on federal officials to roll back ethanol consumption mandates. Food companies like Kraft are adding their lobbying clout as higher corn costs squeeze their profit margins.

The final version of this year’s farm bill would reduce the tax subsidy for corn-based ethanol by 6 cents, to 45 cents a gallon. Congress isn’t likely to reverse itself on the consumption mandates before the presidential election, said grains analyst Thomas Elam, formerly with the Agriculture Department. But he predicted if corn prices continue to rise then that could trigger action to reduce ethanol consumption mandates.

Significant cuts in government support for ethanol could torpedo Ms. Woertz’s growth strategy for ADM and put at risk the billions it has invested in the business.

“If the government mandates are eliminated, for ADM it would be horrible,” said Morningstar’s Ms. Gilpin. “Their profits are down in that business already.”—Crain’s Chicago Business News