So I have a position in Archer Daniels Midland, ADM (just bought last week actually), and I see them as the safest and best play if you want to get involved with the ethanol industry.
Reasons I like them:
- They’re not a pure play ethanol company like Aventine Renewable Energy (AVR)…696-million gallons of ethanol in 2006, Pacific Ethanol Inc. (PEIX)…..102-million gallons of ethanol in 2006, Verasun Energy Corporation (VSE)….226-million gallons of ethanol in 2006, and US BioEnergy Corporation (USBE)…250-millions gallons/year. Some of these pure play ethanol companies IPO’ed in 2006, went up initially and have been in a downward spiral to their current prices. These companies are more affected by the price of corn and news related to ethanol (like government bills on alternative energies, crop allocation to corn, price of related commodities, etc)
- ADM on the other hand does more than just produce ethanol. They have three different business sectors: oilseed processing, corn processing, and agricultural services. They process oilseeds, such as soybeans, cottonseed, sunflower seeds, canola, peanuts, and flaxseed into vegetable oils and meals that are geared toward usage for the food and feed industries. They have corn operations that produce syrup, starch, glucose, dextrose, and sweeteners. They also have wet corn milling plans with an international presence in Bulgaria, Hungary, Romania, Slovakia and Turkey. It also doesn’t hurt that they’re the largest US ethanol proiducer.
Reasons that would go against them:
- CORN PRICES. Corn prices were above $4/bushel earlier this year and right now they’re hovering around $3.50/bushel. These prices are more than double what corn has been per bushel a couple years ago and many people will say that as the demand for ethanol increases, corn prices will increase. Thus, making it harder to profit on ethanol when corn prices are so inflated. Does anybody know where I can find charts on the historic prices of corn?
- Corn can be used for other things like food, feeding chickens, and using grain to feed cows. When we have all these other uses for corn, it’s hard to dedicate a huge proportion toward corn-based ethanol development. That is one reason why the Bush administration plus many others are touting a huge push toward cellulosic ethanol (for another post) over corn-based ethanol. But right now, corn-based ethanol is our best form of carbon-neutral energy so that’s why we’re all so green right now.
ADM was recently upgraded to buy with a $40 price target and it seems like they face a resistance at $35 based on moving averages. Would you guys buy into it? Would you wait and see how we evolve in the development of ethanol into this country? Or maybe find “better” energy investments like oil, solar power, or wind energy?
Be aware that their next earnings release is July 30 and ADM missed analyst expectations of .61 per share compared with an EPS of .51 for the last quarter. That news coupled with higher corn prices and lower than expected profit in the agricultural services was what drove ADM’s stock price down from around 39 to as low as 33’ish last week. In the long run, a lot of companies trying to get into ethanol won’t make it, but ADM will be one that will survive due to their diversity in products and their current huge presence in ethanol development.
This year, 6-billion gallons of ethanol were produced, and there’s a bill in the Senate calling for 35-billion gallons of ethanol production in 2017. The U.S. Department of Agriculture estimates that a maximum of 15-billion gallons a year of corn ethanol could be produced in the United States without causing a significant increase in food prices. So what to do about that extra 20-billions gallons of ethanol? Well that’s for another posting. Regardless, any increase in ethanol production should suit ADM very favorably. And trust me, any presidential candidate to replace Bush would support ethanol. It would not be in their interest to not support it.