A worker checks equipment at Incauca SA's ethanol distillery in El Ortigal, near western Cali, Colombia on Monday, June 29, 2011. A 27% increase in the price of crude oil in the last year has helped spur demand for alternative fuels such as ethanol. Photographer: Alejandra Parra/Bloomberg
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Exactly 10 years ago, Archer Daniels Midland announced the first of two new corn mills that would cement the agribusiness company’s status as America’s top ethanol producer.

“Ethanol and other biofuels are an increasingly important part of the world’s energy supply, especially as the world’s energy needs continue to grow,” Edward Harjehausen, ADM senior vice-president of corn milling and bioproducts, said in a statement in 2006. 

However, less than six years after ribbons were cut, the two mills in Nebraska and Iowa and an older one in Illinois will be reviewed for “strategic options,” the company disclosed last week— a study that could lead to a sale.

It is a far cry from 2006: crude oil prices had cleared $60 a barrel, travellers were burning record amounts of petrol and Washington had just passed a mandate requiring biofuel use. ADM spent $1.3bn on new mills to lift its ethanol production capacity to 1.7bn gallons per year.

But now the value of those investments is in doubt. Low oil prices and shifting politics are forcing a reckoning for the US biofuel industry, the world’s largest by production volumes. ADM, a potent ethanol advocate since opening its first plant in 1978, will be a test case. 

“Going back the last three decades, ADM has probably been the biggest proponent of ethanol along with being the biggest producer,” said David Nelson, a consultant who covered ADM for years as an equities analyst. “The fact that they might be scaling back suggests the reality for this industry has changed.” 

ADM built the 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. When grain supplies tightened and crop prices surged, then-chief executive Patricia Woertz stood behind the policy. “Retreat from biofuels is wrong. It’s foolish. It’s dangerous. It’s a mistake,” she told an analyst in April 2008. 

But ADM was not the only company building. US ethanol production capacity has now expanded to 15.5bn gallons per year from 214 refineries, according to the Renewable Fuels Association. Profit margins shrank as competition intensified. And, under pressure from the oil industry, Washington tempered the mandate to 14.5bn gallons of corn-based ethanol this year, 500m gallons less than volumes originally envisioned by Congress. 

Charts: Ethanol production

Bruce Babcock, an economist at Iowa State university, said: “The future of ethanol in the United States really depends on continued support from the RFS.” 

Corn farmers and biofuels refiners are a powerful alliance, but the amended mandate and trends in presidential politics suggest their clout is losing its impact. In Iowa, a corn belt state, Texas senator Ted Cruz last week won the Republican presidential caucus despite opposing government support for ethanol. 

Ethanol is also good for boosting octane and reducing tailpipe emissions, qualities that spur some sales irrespective of the mandate. However, the plunge in crude oil prices has made ethanol less appealing for this market. A gallon of wholesale ethanol now costs about 30 cents more than petrol even though it provides less energy. 

Ms Woertz stepped down as chief executive in December 2014 and retired as chairman at the end of last year. Juan Luciano, her successor, outlined his plans on an earnings call last week after operating profit from ADM’s bioproducts division, which includes ethanol, dropped 79 per cent in 2015 to $149m. 

Charts: Ethanol production

The three mills under review comprise 800m gallons of ADM’s annual ethanol capacity. The plants in Columbus, Nebraska, and Cedar Rapids, Iowa, opened in 2010, while the third in Peoria, Illinois, was acquired in 1980. 

The plants are “dry mills”, relatively 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 broader menu of products including ethanol and high-fructose corn syrup, are not part of the study. Mr Luciano told analysts he was “concerned about the long-term fundamentals of the dry mill ethanol part of the industry”. 

ADM is not the only company to struggle with ethanol. Valero, mainly an oil refiner, said that adjusted operating profit from its 11 ethanol plants had fallen 75 per cent in 2015 to $192m. 

Paul Massoud, an analyst at Stifel, said that a sale of the mills may eventually be on the table, but he doubted that ADM would part with them now given the state of the industry. “I am pretty certain they have no interest in selling the plants at $30 oil,” he said.

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