Archer Daniel Midland (ADM), the world’s largest grain processor, is looking to invest in more greenfield soybean crushing capacity for the Brazilian biodiesel market, despite acknowledging its own weakness in the region.
And they’re not the only ones: ADM’s main competitor, Bunge (BG), recently announced a big Brazilian bean investment, and privately held Cargill is said to be investing alongside ADM.
ADM’s most recent third-quarter earnings release, in early May, showed strength in oilseed crushing globally, with oilseeds operating profit up 20 percent on the year at $512 million. But it was strong North American results that offset weakness in South America oilseed crushing, while biodiesel profits in North and South America more than compensated for losses in Europe.
“Oilseeds exceeded our expectation for the quarter,” Ann Gurkin, an analyst with Davenport & Co., told Medill Reports Chicago. The figures were driven by “higher demand than we were expecting,” she said.
The quarter’s biodiesel profits rose to $89 million from $23 million last year, so ADM may be willing to take the risk by putting the focus on fuel rather than soymeal.
Brazil’s new president, Dilma Rousseff, is pushing to keep a tight hold on inflation and boost growth in poorer parts of the country, including where soybean is king. With only low-level B5 blends now, local producers expect that to go up to B7 in the next six months and up to B10 in the next few years.
It’s clear the government will allow that to happen only if the vegetable oil is available locally, to avoid exchanging diesel imports for soy oil imports. Yet the biodiesel industry is already at overcapacity, with almost twice as much to get rid of, supply that would have to compete with world leader Argentina if Brazil opted to export.
Bringing in the big guns
Perhaps timely is ADM’s decision to add Monsanto (MON) retired chief financial officer Terrell K. Crews to its board of directors and to the board's audit committee.
Earlier, Crews was the global finance lead for Monsanto's Global Seed Group, where he oversaw the financial integration of 11 acquired seed companies. In 1997, he was appointed the company's general auditor following assignments as controller for Latin America and as CFO of Monsanto's Asia-Pacific operations.
As these new greenfield soy investments in Brazil are expected to be joint ventures with local producers who seek to expand capacity, Crews may be the most logical choice to make sure that goes off without a hitch.
Bank of America/Merrill Lynch has ADM at a price target of $32, slightly under recent trading action.
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