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A. LE FLOCH
Archer-Daniels-Midland Co., the U.S.'s largest ethanol producer, is preparing to enter the sugar-cane-ethanol business in Brazil, company executives say. Such a move by the grain and ethanol giant would mark an endorsement of a gasoline substitute that competes directly with the corn-based approach used by U.S. ethanol companies.
ADM is exploring a variety of strategies to enter Brazil's
sugar-cane-ethanol market, ranging from building sugar-cane mills and
ethanol plants from the ground up to acquiring sugar-cane companies. In
an interview, ADM's senior vice president of strategy, Steve Mills, said
the company hasn't ruled out an outright purchase of Cosan SA, Brazil's
largest ethanol producer, in which ADM owns a small stake it declined to
specify. A Cosan spokeswoman declined to comment.
Mr. Mills wouldn't say how much money ADM is willing to invest, and it
isn't clear how soon the Decatur, Ill., company would move. But Mr.
Mills said sugar-cane ethanol is now "a key component" of ADM's
short-term strategy. "We're devoting a lot of time and energy to this
area. We're not talking about something 10 years down the road. It's on
the front burner," he said.
Buying into Brazil's ethanol business could be difficult. Many producers
are flush, and some are considering initial public offerings.
Competition for acquisitions is stiff, and U.S. and overseas
private-equity firms have been looking. "At the right price and the
right opportunity, we've got the wherewithal to make a significant
investment," Mr. Mills said.
Any foray into sugar cane would be a bold move for ADM, which for years
has relied on corn at its U.S. ethanol plants, of which there are now
seven. It also could substantially alter the playing field, especially
if ADM produces ethanol in Brazil and ships it north to the U.S., as Mr.
Mills said the company would consider.
Congress has been under some pressure to drop the tariff of 54 cents a
gallon on imported ethanol, which has been an obstacle to entry for
producers from countries like China and Brazil. This week, the Senate
voted to extend the tariff until 2010. ADM has been generally supportive
of the tariff, and Mr. Mills said its Brazil interest "doesn't
necessarily signal we're changing policy." But a shift could swing
momentum in favor of importers, some oil companies and others who oppose
it.
Whatever happens to the tariff, ADM believes it will have enough
flexibility to sell Brazilian production. It could funnel Brazilian-made
ethanol through Caribbean countries that can export a limited amount to
the U.S. duty-free. ADM also could look to overseas markets, which are
expected to grow over coming years. "What ADM really understands is the
global nature of green fuels," said Dan Basse, president of AgResource
Co., a Chicago commodity-advisory firm.
The U.S. ethanol market has grown increasingly competitive as the price
of corn cuts into ethanol producers' profits even as dozens more plants
are scheduled to come on line in coming years. A recent report by Lehman
Brothers predicts that U.S. corn-based ethanol production might soon
outstrip demand, which could force prices down and squeeze profits
further.
Brazil is among the world's lowest-cost producers of ethanol, at a cost
of about 90 cents a gallon, roughly two-thirds that of corn ethanol,
according to the Institute for Studies of Commerce and International
Negotiations, a think tank in Sao Paulo.
Relying solely on corn puts ADM at the mercy of weather and political
factors that could drive up grain prices. Livestock and poultry
producers have been complaining on Capitol Hill about the rising price
of corn, which has hurt farmers who rely on corn to feed animals.
ADM reported net income for the fiscal year ended June 30 of $1.3
billion, on revenue of $39.6 billion. The company doesn't specify
results from ethanol, but some analysts estimate that about 30% of
earnings come from ethanol.