Grain industry giant Archer-Daniels-Midland Co. (ADM) is negotiating with less than five possible purchasers or potential joint venture partners for all or a share of its three dry mill ethanol plants, according to a January 9 report from Bloomberg News that quoted ADM Chief Executive Officer Juan Luciano.
ADM's desire to exit the industry, or play a much smaller role, has to be a bitter pill for the U.S. ethanol industry to swallow, given that ADM was the first large-scale ethanol producer in the U.S and dominated the U.S. ethanol industry in the late 1970s and 1980s, when it produced an estimated 70% of the ethanol made in the U.S. before the farmer-owned, cooperative ethanol plant movement took root in the Upper Midwest and diluted ADM's market share.
Read More: Ethanol: A Rollercoaster Year in Review
News of the potential sale or spin-off of ADM's dry mill plants comes on the heels of an announcement last week that another international trading giant, Bunge North America, was exiting the ethanol production industry by selling its stake in Southwest Iowa Renewable Energy (SIRE) in Council Bluffs, Iowa, in a repurchase agreement with SIRE. The repurchase by SIRE ended Bunge's 13-year ownership stake in the plant, which was built from 2007 to 2009. The plant began operations in February 2009.
The ethanol industry has seen this movie before. ADM also put its dry-mill ethanol plants up for sale in 2016 and then took them off the market when no suitable buyers appeared. At the time, industry analysts speculated that the sale of ADM's dry mill plants was complicated by the fact that two of the three dry mills are colocated next to wet-mill corn processing plants and share a large amount of infrastructure, making their asset value difficult to define.
Last month, Bloomberg reported, ADM moved its three ethanol dry mills into a wholly owned subsidiary called Vantage Corn Processors. "The move should facilitate a deal because it separates the three mills and makes clear any agreements that an interested party would have with ADM as the facilities are integrated with other assets," Bloomberg said.
In 2016, ADM had colocated wet and dry corn mills in Columbus, Nebraska, and Cedar Rapids, Iowa; a dry mill in Peoria, Illinois; and wet mills in Decatur, Illinois; Clinton, Iowa; and Marshall, Minnesota.
ADM's sister plants in Columbus, Nebraska, and Cedar Rapids, Iowa, are mirror images of each other and use cogeneration of steam and electricity for production. They also share transportation, pipes, and other infrastructure which adds synergy to many of the plants' dual processing capabilities but complicates the process of valuing the assets of the neighboring dry mill plants.
Dry-mill ethanol plants, which make up more than 90% of the U.S. ethanol industry's production, are more cost-efficient for ethanol production while wet-mill plants produce more coproducts in addition to ethanol.
ADM's total U.S. ethanol production capacity is 1.7 billion gallons a year, according to sources within the ethanol industry. It was the largest ethanol producer in the U.S. for decades until POET took the top spot when it reached 2 billion gallons of production capacity.
On August 20, 2019, POET announced it was idling production at its bioprocessing facility in Cloverdale, Indiana, reducing corn demand in the surrounding area by 30 million bushels a year. It also announced that it had reduced production at half of the 28 biorefineries it operates in seven states, with the largest cuts coming in Iowa and Ohio. The cutbacks have decreased demand for an additional 100 million bushels of corn in Iowa, Ohio, Michigan, Indiana, Minnesota, South Dakota, and Missouri, POET said at the time of the announcement.
The exit of Bunge and the possible diminishing role of ADM along with other cutbacks and plant shutdowns like the one announced by POET last year, underline the precarious financial state of the U.S. ethanol industry. Taken together, they strike another negative note for corn growers, who rely on ethanol plants' corn consumption as a corn market mover. Ethanol plants consumed a total of 5.65 billion bushels of corn in 2018, which was valued at an estimated $19.1 billion by John Urbanchuk of ABF Economics LLP. The 5.65 billion bushels of corn represented almost 40% of the 14.6 billion bushels of corn produced by U.S. farmers that year, according to the USDA.
"The largest share of spending by ethanol plants is for corn and other feedstocks used as raw material to make ethanol," Urbanchuk reported in an economic analysis prepared for the Renewable Fuels Association. "Reflecting this, the ethanol industry is a major source of support for agricultural output and farm income."
Chronic overproduction by the industry's 210 plants in 27 states has occurred for six straight years, Urbanchuk said, with 2018 U.S. ethanol production totaling 16.1 billion gallons, an increase of 1.1% from 2017.
Coupled with an estimated 4-billion-gallon drop in demand because of the Small Refinery Exemptions (SREs) granted by the U.S. Environmental Protection Agency and another drop in demand because of declining gasoline consumption by U.S. motorists, it is easy to see why ethanol industry profits have been shrinking for several years.
Adding to the economic woes of the U.S. ethanol industry is that an expected increase in ethanol exports to China has evaporated because of the Trump Administration's trade war with the world's second-largest economic power. That potentially huge market may be lost for years because China recently announced that it "has suspended its plans to implement a nationwide gasoline blend containing 10% ethanol this year," according to a report from Reuters.
"The reversal is a heavy blow to domestic producers that have built new plants, as well as biofuel exporters, including the U.S. and Brazil, which were looking to benefit from growing Chinese demand," the Reuters' report stated. "China was expected to increase imports of U.S. ethanol after the recent announcement of Phase 1 of a trade agreement."
Reuters reported that Beijing had announced in September 2017 that the country's gasoline supply would be composed of 10% ethanol blended with gasoline beginning this year. "But at a meeting in late December with ethanol producers and oil majors," Reuters reported, "China's National Development and Reform Commission (NDRC) said it will now halt the rollout of ethanol-gasoline supplies beyond the current handful of provinces that have already implemented full or partial blends, according to two of the three sources briefed on the meeting."
ADM's Founding Fathers of the U.S. Ethanol Industry
During 2016, when ADM first put its dry-mill ethanol plants up for sale, it also lost two of its longtime leaders and early ethanol industry proponents when Martin Andreas and his uncle, former ADM Chairman Dwayne Andreas, both died.
Martin Andreas was remembered as a pioneer in the ethanol industry by Bob Dinneen, who was president and CEO of the Renewable Fuels Association when Martin Andreas died of cancer on May 2, 2016 at age 77.
"Marty was there in the beginning when President Jimmy Carter gathered agribusiness together to challenge them to produce a domestic renewable fuel in the midst of the oil crisis in the 1970s," Dinneen recalled in Andreas's published obituary. "(Martin) Andreas was one of the giants of the U.S. ethanol industry, and it is without hyperbole or exaggeration that I say the industry would not be the success it is today without Marty's vision, commitment, and advocacy."
Dwayne Andreas, who was ADM's chairman from 1970 to 1999, was remembered by Juan Luciano, ADM's current chairman and CEO, in a statement issued by the company after Dwayne Andreas died on Nov. 16, 2016 at age 98.
"Under his many years of leadership, our company became a global leader in agricultural processing," Luciano stated. "When Mr. Andreas was elected the company's chairman and chief executive officer in 1970, ADM employed 3,000 people and owned 40 processing plants, primarily throughout the U.S. Midwest.
"When he retired as chairman of ADM's board of directors in 1999, the company employed more than 23,000 people and owned 274 processing plants around the world."
