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 The shift could be one of the most transformative moves ever made
by 113-year-old ADM, triggered by signs of strain in its legacy
products. Demand for the gasoline additive ethanol is forecast to
remain flat over the next decade while its other mainstay, high
fructose corn syrup (HFCS), is beset by health concerns.
"Coming up with new products is really what keeps us up at night,"
said Chris Cuddy, president of corn processing.
Critics associate HFCS with obesity, and companies including Panera
Bread Co and Kraft Foods Group Inc are cutting it from their goods.
ADM's corn business profit dropped 39 percent in the first quarter
due to poor ethanol margins. Demand is flattening as government
targets for ethanol use in gasoline have been reached and
increasingly efficient vehicles consume less fuel. (Graphic:
http://link.reuters.com/myr64w)
But its ingredients business, currently just a tiny revenue
generator for the $31.6 billion company, posted a 17 percent profit
jump in the same period.
It invested $3 billion in that business last summer with the
purchase of natural flavorings company Wild Flavors, ADM's
largest-ever acquisition.
Analysts say it is too early to tell if the strategy will be
successful.
"They did deliver a higher return on invested capital in their
business last year. Now, it's hard to tell if that's just low corn
prices for the ethanol side or whether it's a combination of lower
input cost plus better strategy, so it remains to be seen if those
returns are sustainable," said JP Morgan analyst Ann Duignan.
FLEXIBILITY EQUALS PROFITABILITY
ADM has three domestic corn wet mills with the flexibility to make
more of what is in demand and profitable and less of what is not.
It grinds about 3 million bushels of corn a day worldwide and
produces about 11 percent of U.S. ethanol, so even a tiny change can
resonate in the commodity supply chain.
The mills break corn into the oil-rich germ, high-protein gluten,
fiber and the versatile starch which can be processed further with
enzymes, yeast or bacteria.
At ADM's Decatur, Illinois, plant, the world's largest, computer
operators in a tiny, air conditioned control room tucked among
towering grain tanks, can tweak output in a couple of key strokes.
"Every day we have to figure out new homes for that starch
capacity," Cuddy said, holding up for scrutiny one of nine jars,
each filled with a different corn byproduct.
He said ethanol and corn syrup currently account for over half of
the starch but declined to elaborate.
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Competitors like Cargill Inc and Bunge Ltd are also aiming for
higher-margin businesses in corn and other crops. Cargill last
August opened an expanded food and beverage ingredient research and
development facility in Minnesota.
THE HUNT FOR RARE SUGAR
Today, half of ADM's research dollars go into finding ways to make
food and drinks taste better. Some of its initial forays - such as
Fibersol, an odorless, tasteless soluble fiber that helps dieters
feel fuller - are slowly gaining traction among the food industry.
But it is still seeking the next killer application to transform the
market, as ethanol or HFCS did. It hopes to find "Rare Sugar," the
proposed name for "the holy grail of sweeteners" with all the taste
and baking ability of sugar but without the calories.
ADM said is has increased research in low-calorie sweeteners since
2010 when it hired a sweetener development expert to lead the effort
but would not provide details.
More niche products would help ADM deliver more consistent returns
by reducing exposure to oil markets through reliance on a
gasoline-blending component.
In 2008, ADM posted a record quarterly profit after oil roared to an
all-time high but turned in its worst performance in five years two
quarters later after oil plummeted.
Whether the strategy is working is unclear. Analysts say the corn
unit's 46-percent profit surge last year was at least partly due to
plentiful cheap grain.
Either way, Cuddy is confident.
"Our customers rely on us so we can't pull in and out of markets to
huge degrees. But with the amount of flex we have, given our size,
it doesn't take much to influence our bottom line."
(Editing by P.J. Huffstutter and Lisa Shumaker)
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