Patricia Woertz and the New (Old) Thing

PatriciaWoertzandtheNew(Old)ThingTheADMchiefexecutivebethercompanyonbiofuels.Thentheethanolbubbleburst.Whatnow?ByRyanBlitstein1June4,2009Theman’snamewasDr.Russell.AmongthehundredsofshareholdersatArcherDanielsMidland’sannualmeeting2lastfall,hewasanobody.Yethestoodbeforethemicrophone,lookingrightupatPatriciaWoertz,ADM’schiefexecutive,awomaninchargeofacompanywithtentaclesinsomanyproducts–fromthefoodinyourpantrytothechemicalsinfire‐fightingfoam–thatthetitleofherpresentationthatday,“VitaltotheWorld,”3wasn’tstretchingthetruth.WoertzhadjustdeliveredahealthydoseofrosycorporatespeaktotheaudienceattheJamesR.RandallResearchCenterinDecatur,Ill.ADM,surroundedbyuncertaintyamidstthebeginningsofahistoriceconomiccrisis,wasthriving,shesaid,withastellarbusinessmodelandthestrongestbalancesheetinitshistory.AndherewasDr.RussellfromChicagoandDecatur,asmallshareholderfor25years,askingagarbledlaundrylistofquestionsthatboileddowntoasimplequery:WhydidmyADMstocklosealmosthalfitsvaluethisyear,andwhatareyougonnadoaboutit?WoertzempathizedwithDr.Russell.She,too,heldstockinADM,andonpaper,she’dlostmillionsin20084.WoertzbelievedthatpeoplelikeDr.Russelldeserveeverybitasmuchrespectashigh‐profileWallStreetmoneymen:Thebestfinancialresultsthatexecutiveslikehercanproduce,thebestcommunicationtheycanoffer.

1ThisstorywasassignedbyCondeNastPortfolioinfall2008.ThebulkofreportingtookplaceinNovemberandDecember2008.ItwasintheeditingprocesswhenCondeNastfoldedthemagazine.TheBigMoney(http://www.thebigmoney.com)publishedanabbreviatedversionwithupdatedreportingonJune1,2009.Iwasprettyhappywithit.(Foravarietyofreasons,Iwasunabletofindamagazinethatwouldpublishthelongerversionbeforetheinformationinitbecameverystale.)ThisdocumentismybestapproximationofwhatPortfoliomighthavepublished,althoughit’sprobablymorerawandmuchlongerthanitwould’vebeenaftermoreediting.

2IwasnotatADM’sannualmeeting.IlistenedtoitonlineandreviewedatranscriptprovidedbyADM.WoertzandADM’sPRdepartmentspoketomeaboutherstateofmind.

3ADMprovidedaPDFdocumentofherslidepresentation

4Accordingtoherstockoptionawardsinthecompany’s2008proxystatement.

Nevertheless,sherespondedthewayanysmartchiefexecutivewithfinancialanalystslisteninginwould:Shedodged.Woertzaffirmedthecompanylineofprice‐relatedrevenuechangesandhighlightedahugeone‐timegainduring2007,andthenmadenon‐committalcommitmentsaboutexpandingthecompany’sflaggingethanolbusiness.ShepromisedDr.Russellafollow‐upquestion–butonlyiftherewastime.It’snotthesortofexchangeCEOsenjoy,butWoertzknewitwascoming.5Twoyearsbefore,almosttotheday,WoertzspokeatADM’sanalystdayinChicago,stillinherhoneymoonasthenewchiefexecutiveofacompanypoisedforfinancialandsocialrevitalization.TheformerChevronexecutivetalkedofspearheadingitstransformationfromgorillaofgrainintoeco‐friendlyenergygiant.ADMhadrevampeditsstrategicvisionstatement,declaringitself“thegloballeaderinbioenergy.”6Thesemovestargetedanaudienceofinvestorshungrytostashcashinanythingremotelyrelatedtocleantechnology–especiallyacompanyatgroundzerooftheethanolexplosion.Woertzpledgednine‐figureinvestmentsintoapairofnewcornethanolplants.Shewouldsoonluretwohigh‐levelgovernmentbiofuelsscientiststojoinherexecutiveteam.Andthecompanysteppedupitsapplicationsforgovernmentgrantsinnext‐generationbiofuels.ButforaguylikeDr.Russell,whochallengedWoertzwiththebenefitofhindsightatADM’s85thannualmeeting,theCEO’sbigideaof2006couldn’thaveseemedtooprescient.Inthe24monthssince,theethanolbubblehadburst:Unprecedentedvolatilityproducedrecord‐highprices,followedbyrapidplunges,incommoditieslikecorn,turningtheethanolbusinessmodelupsidedown.ManyofADM’ssmallercompetitorsfiledforbankruptcy,buteventhediversifiedconglomeratetookahugehit:Itsethanol‐heavybioproductsunitexperienceda$432millionyearlydropin2008operatingprofits,andthecompanywouldwritedown$60millioninethanolinventory7inearly2009.Itsstocklosthalfitsvaluein9months‐‐beforetherestof5FromADM’scommunicationsoffice:“Lessthanamonthbeforetheannualmeeting,weheldourall‐colleagueglobaltownhallatthenadirofourvaluation.Pataddressedthedropinvaluation,expectedtohearquestionsaboutthestockprice.And–notsurprisingly–duringthatevent,Patgotthesamequestion….So,attheannualshareholders’meeting,weagainabsolutelyexpectedquestionsaboutthestockpriceandouractionstoaddressit.Patdirectlyaddressedthetopicduringherpreparedremarksandwaspreparedtodiscussthetopicingreaterdetailwhenasked.”

6ADMprovidedmewithtranscriptsandslidedecksfromthepresentation.

7SeeADMQ209earnings:http://www.adm.com/en‐US/news/_layouts/PressReleaseDetail.aspx?ID=44

thestockmarkettookanosedive.WhileADMwasabouttoannounceaquarterofrecordearnings,muchofitsrecentprofitsstemmedfromtradingandmerchandisingoperations,financialblackboxes8thatanalystsfearedwereunsustainable.Woertz’sresponsetothesecircumstanceshasbeenalloverthemap.Latelastyear,shewatchedchieftechnologyofficerMichaelPacheco,oneofthemuch‐toutedgovernmentscientisthires,leavewithoutreplacement,andinstitutedADM’ssecondrebrandinginasmanyyears.Yetthetwogiganticethanolplants,remnantsofastrategygoneawry,remainsettoopenthisyearandnext,andWoertzclaimsherplansforthecompanyhaven’tchanged.It’sleftADM‐watchersandanalystsscratchingtheircollectiveheads.Intypicallyperplexedlanguage,JPMorgananalystTerryBivens,referringtoADM’sethanol‐focusedvision,wroteinarecentreport:“Webelievethismissionmayhaveputundueemphasisonbioenergyandwesuspectthecompanyconcurs.”9Woertzsaysitwasalljustagreatbigmisunderstanding.10SheneversetouttoremakeADMintoanenergycompany‐‐sheonlywantedtoexpandsomebusinesslinesandparedownothers,makingafewnewinvestmentsinpromisingmarkets.Itwastheanalystsandreporters,shesays,wholatchedontothebiofuelsideawithoutlisteningtotherestofthecompany’soverallmessageofabroad,integratedagribusinessvaluechain.DespiteADM’sattempttorewriterecenthistory,though,it’sclearWoertz’sbioenergybethasn’tquitepaidoff,andlessapparentwhatsheplanstodoaboutit.

8Agoodexampleofthisthinking,fromBarclay’sanalysisofADM’sQ209earnings:“WeoftenhearinvestorsrefertoADMasablackbox.Followingafiscal1H09performanceinwhichthecompanybestedStreetestimates$2.52to$1.33,wecan'thelpbutshareinthissentiment‐‐asapresumablymeaningful,butunquantifiedportionoftheupsidewasderivedfromriskmgmtactivities.”

9ThisisfromaJPMorgancoveragereportfromlate2008…unfortunatelyIonlyhavethisinhardcopy.

10ImetwithPatriciaWoertzinpersoninJanuary,butherpublicstatementshavechangedlittle,andnothingfrommyconversationswithADM’scommunicationsteamsincethenindicatesaconversationthathappenedthisweekwouldbeverydifferent.

OnApril29,2006,PatriciaWoertzsteppedoffanairplaneontotheconcretefloorofthehangarattinyDecaturAirport,readytomeetwithADM’sexecutiveteam.Despiteahard‐chargingreputationearnedover29yearsintheoilindustry,shewasn’tthemostlikelycandidateforaplaceatoptheADMhierarchy.InthecenturysinceitsfoundingbyGeorgeArcherandJohnDaniels11thecompanyhadbuiltupasprawlingnetworkof200‐plusagriculturalandchemicalprocessingplantsaroundtheglobe,connectedbyships,trucks,andrailcars,allleadingtowardtheruralRomeofDecatur.12It’soneamongthecorporatequartetthatprocessesthree‐fourthsofallthegrainandoilseedsintheentireworld.13ManyofWoertz’snewdeputieswereADMlifers,thekindofguyswhomightjokeaboutbeingborninDecaturwithacorncobinonehandandasoybeanintheother.Woertzhadneitheragricultureexperiencenorengineeringtraining.She’dneverbeenaCEO,either.14ADM’sboard,though,wantedatalentedleaderfromoutsidethetraditionaloldboys’club.Someonewhowasn’tpartoftheAndreasfamilythathaddominatedthecompanysincetheJohnsonera,presidingoveranembarrassing1990sprice‐fixingscandalthattriggeredashareholderrevolt15andthelargestantitrustfineinU.S.history.16Woertzfitthebill:HerhiringmadeADM,atthetime,thelargestU.S.companywithawomanatthehelm.Woertzhadmanagedcomplex,geographicallydisparatebusinessesasaChevronexecutivevicepresident,andherbackgroundasacorporateaccountanttaughtherhowtovaluebig,rustyassets.17Whatintriguedanalysts–andsomeemployees–11MuchofthehistoricalinformationIhavehereisfromSupermarketertotheWorld,abiographyofDwayneAndreasbyE.J.Kahn.It’sfrom1990,soit’sdated,butinteresting.

12AlotofthisisfromADM’s200810‐K:http://ccbn.10kwizard.com/xml/download.php?repo=tenk&ipage=5860052&format=PDF

13AccordingtoaBarclaysCapitalchangeinearningsforecastonADMdated11/5/08

14ChicagoTribune12/29/06articleonherjoining:http://www.accessmylibrary.com/coms2/summary_0286‐30430518_ITM

15NewYorkTimes10/19/95Seehere:http://www.nytimes.com/1995/10/19/business/a‐shareholder‐rebellion‐investors‐demand‐answers‐from‐archer‐daniels.html.NYT’sKurtEichenwaldalsowroteaverygoodbutway‐too‐longbookontheseeventscalledTheInformant.AmovieversionwillbereleasedinOctober2009.

16ThisaccordingRatsintheGrain(2000)byattorney/authorJamesLieber,athoroughifone‐sidedbookonADM’ssketchypastbehavior.17Formoreonherqualifications,seethisdefinitive(butgushing)FortuneprofileonWoertzinherfirstmonthsatADM10/16/06:http://money.cnn.com/magazines/fortune/fortune_archive/2006/10/16/8390301/index.htm

most,however,wasthatWoertzhadspentsomuchtimeintheenergyindustry.Onewordappearedinalmosteveryresearchnoteandnewsarticleheraldingherascension:ethanol.18Thecorn‐derivedfuelalcoholwasjustbeginningtoremaketheheartlandeconomy.Itseemedapoliticaltriple‐whammy:creatingapathtowardindependencefromMiddleEastoil,loweringgreenhousegasemissions,andaidingAmericanfarmers.ADMhadalonghistoryinthebiofuelsbusiness,havingbasicallyinventedthemarketduringthelate1970senergycrisis.LongtimeCEO/patriarchDwayneAndreasfirstchampionedethanolasawaytokeepitscornprocessingplantsoperatingatfullcapacity,evenduringseasonalperiodswhendemandforhigh‐fructosecornsyrup(usedinsoftdrinks)waslow.19In1980,hepredictedthatethanolwouldreplacehalfofAmerica’simportedgasbytheendofthedecade.20Itdidn’tevenreachoneinfivebarrels.21ButAndreaskeptthebusinesslineafloat,largelythankstogenerousfederalsubsidiespurportedlyaimedataidingAmericanfarmers,22alongwithcyclical(thoughsteady)profitsfromitstraditionalagribusinesses.Itdidn’thurtthathewasoneofAmerica’smostgenerouspoliticaldonors,maintainingclosefriendshipswitharangeofWashingtonbigwigsonbothsidesoftheaisle,fromDemocratHubertHumphreytoRepublicanBobDole,theself‐described“Senatorfromethanol.”23AroundthetimeWoertzgavenoticeatChevron,themarketfinallycaughtupwithAndreas’vision.InFebruary,U.S.SecretaryofEnergySamuelBodmantooktothe18Iwasamazedathowcommonreferencestobiofuelswereamongthe2006/2007storiesonADMthatIreviewed.Peoplefrominsidethecompanyconfirmedthatsimilarconversationsweregoingoninternally.ADMmaintainsthatitsexecutivesatcommunicationspeopledidn’tpushtheethanolmemeveryhard,butIfindthathardtobelieve,giventhatitspreadlikewildfireinsideandoutsidethecompany.

19FromADM’scommunicationsteam:“Ethanolismadefromstarch.WhenADMfirstconsideredproducingethanol,theprimaryproductfromourcornwetmillswashigh‐fructosecornsyrup.MuchoftheHFCSwewereproducingwasbeingusedinsoftdrinks.Moresoftdrinksareconsumedinthesummerthaninwinter,whichresultedinADMexperiencingadecreaseindemandforHFCSinthefallandwintermonths.Tokeepourplantsoperatingatfullcapacity,theCompanylookedtoethanolasanotherproductthatcouldbeproducedfromthestarchstreamwhendemandforHFCSwasslower.Ethanolproductionwouldhelptokeepourplantsoperatingatfullcapacity.”

20FromSupermarketertotheWorld

21CentersforDiseaseControlgasolinetoxicityreport:www.atsdr.cdc.gov/toxprofiles/tp72‐c4.pdf

22Foragoodsummary,checkoutthisstudybyWallyTynerandFarzadTaheripour:http://www.farmfoundation.org/news/articlefiles/364‐Taheripour%20and%20Tyner_St_Louis.pdf.Inadditiontothesetwo,DaryllRaywasaveryhelpfulsourceonagriculturaleconomics:http://economics.ag.utk.edu/ray.html

23FromRatsintheGrain

tradingflooratADMheadquarterstoannounceapresidentialbiofuelsinitiativeandagovernmentmandateforethanolconsumption.InMay,theoxygenatingfueladditiveMTBEwasbannedfromuseinAmericangasoline.Ethanolwastheonlyalternative.Demandforthefuelsurged.Futurespricesspikedsohighthatifyoucould’veinstantlybuiltaplant(whichyoucouldn’t,theytakeatleasttwoyearstoconstruct),itwould’veearnedaprofitinjustmonths.24Farmersswitchedtheircroplandfromsoybeansandwheattocornandformedco‐opstoprocessthefuel.Venturecapitalistsrushedtofundnewplants.Theindustrycollectivelybrokegroundonhundredsofnewethanolfactories25‐‐two,three,fourplantannouncementsperweek26‐‐andsomeevenlaunchedinitialpublicofferings.“Itwaslikethegoldrush.Itwasphenomenal,”saidWallyTyner,anenergyandagricultureeconomistatPurdueUniversity.AtADM,whichproducedone‐thirdofthenation’sethanolsupply,27yearsofwindfallprofitsseemedacertainty.Itwasonereasonthecompany’sstockhadtripledsince2003.ADMhadlongreliedonagilitysurprisingforacorporationofitssize,capitalizingonquickdecisionstoenterandexitmarketsatjusttherighttime.Yetitsexecutiveshadrarelythoughtveryfarintothefuture,orimaginedhowthecompanymightevolveoverthecourseofadecade.28TheboardhadhiredWoertzpartlytocreatealong‐termstrategy.Shewasgivenfreereigntotakeoneoftheworld’slargest,mostcomplexcompanies,flyingashighasithadindecades,anddowhatevershepleased.“Thatwasoneofthethingsthatwasreallyveryexciting,”remembersVictoriaPodesta,Woertz’sin‐housepublicrelationsguru.“Theopportunitytotakeacompanythatwasalreadyperformingverywellandseewhatcouldbedonewithit.Howcouldyoumakeitperformevenbetter?”29

24AccordingtoWallyTyner.RickKment,DTN’sethanolanalyst,agreeswiththeclaim.

25TheNewYorkTimesdidagreatjobcoveringthesedynamicsatthetime.SeeespeciallyNYT6/25/06:http://www.nytimes.com/2006/06/25/business/25ethanol.html

26ThisaccordingtodataprovidedbyDTN.

27Forgoodnumbersanalysis,seethisBarron’sarticlefrom2006:http://www.smartmoney.com/investing/economy/adms‐growth‐story‐19280/

28ThisassertionisbasedpartlyonthehistoricalbooksandpartlyoninterviewswithWoertzandPodesta.

29IspokewithPodestabyphoneintheweeksbeforeImetwithWoertz.

Woertzsetouttodetermine,asoneex‐ADMmarketingemployeeputit,“Whatdowewanttobewhenwegrowup?”30WouldADMbecomeabioenergycompanywithagribusinessesontheside?Coulditcontinuedowntheroadasabewilderinglycomplexconglomeratewithunitsdistributedthroughoutfood,feed,andfuel?Orwasitreallyjustagiantchemicalcompany,31sellingmyriadcombinationsofcarbonmolecules,sugars,andstarches,allderivedfromplants?Togettoknowthewholecorporation,Woertzembarkedonacorporatejettouroffourcontinents,meetingpersonallywithnearlyone‐fifthofADM’semployees,orabout5,000people.InAugust2006,sheassembledherseniorleadershipteamforabig‐thinkstrategysession,examininghowbroadglobaltrendscouldimpactthecompanyandwhereopportunitiesmightarise.Duringthenextseveralweeks,thetopbrassandtheirsubordinatesbegantosortitallout–howtotellthestoryofthecompany,wheretoinvesttheheavycashflow,whichbusinesslinestoshed.EvenifWoertzwantedto,itwouldhavebeenalmostimpossibletoentirelycastoffADM’sagriculturalroots.Ethanolandbiodiesel(avegetableoil‐basedfuelsoldmostlyinEurope)werebothintertwinedwiththerestofthecornandoilseedsprocessingpipeline,andtogetheraccountedforonlyabout20percent32ofADM’sincome.Besides,Woertzsawopportunitytogrowagribusinessprofitsbyexpandinginternationallyanddiversifyingintonewplants,suchasoilpalms.YetbiofuelswasamongcorporateAmerica’shottestsectors,anddespitethefactthatADMwasthemarketleaderwithplansforexpansion,fewvieweditasanythinglikeanenergycompany.Woertzhopedtochangethat.“Wedidn’thavetosayweweregoingtobecometheleaderincornprocessing,becauseweare.Wedidn’thavetosayweweregoingtobethestarchandsweetenersleader,becauseweare,”saysPodesta,whowasinvolvedinthediscussions.Fearinganoveremphasisonenergymightbebadformorale,thecompanytookgreatpainstoexplaintoemployees–especiallythethousandswhodon’tworkwith

30ThislongtimeemployeeleftthecompanywellafterWoertzjoined.Theemployeedidn’twanttheirnameusedoutoffearofseemingliketheywerebeingcriticaltowardaformeremployer(theemployeefeltthatatthetime,thedecisionsmadesense).Severalotherformeremployeeswhospokeofftherecordconfirmedthatthiswastheinternalthinkingatthetime,andseveralanalystssaiditwasconsistentwithwhattheyheardfromADMpublicly.

31Thisideawassuggestedbyagovernmentagricultureeconomistwhospokeonbackground.

32Anotheranalysisfromthattime,NYT10/8/06http://www.nytimes.com/2006/10/08/business/yourmoney/08adm.html

biofuelsatall–thatagriculturewouldremainacorepartofthebusiness.33Outsidethecorporatetownhalls,though,themessagewasdifferent.“Itbecamesexytobeabioenergycompany,sowhynotplayupthataspectofourselves?”saidtheformermarketingemployee.“That’swhattheyledwith,becausethatwaswhatthemarketwasexcitedabout.”Therebrandingbeganthatfall,atWoertz’sfirstpublicspeechasCEO,atabiofuelsconference.34Itcontinuedamonthlater,atthecompany’sanalystday,whereethanolandbiodieselwerealloverherslidedeck.Thestrategicvisionstatementsheunveiledwasamouthful,butittransposedbiofuelstotheforefront:“Ourcommitmentistobethegloballeaderinbioenergy,whileexpandingourpremierpositionintheagriculturalprocessingvaluechain.”35ADMalsorewrotetheboilerplateatthebottomofallitspressreleasestomatch.36“Somepeopleheardthefirsthalfofthatsentenceandstoppedhearing,”saysPodesta.“Maybewedidn’tsaythesecondhalfloudenough.”Woertzpublicstatementscertainlydidn’thelp.“It’samistaketothinkthatotherscancompeteonourscale,”shebraggedtofarmingindustryragTopProducerthatDecember.“Ournextbiggest[ethanol]

33Severalemployeestalkedaboutmeetingsandinternalmemos/emailsWoertzandotherleaderssent.34Again,accordingtothe10/8/06NYTarticle.

35AnalystdaytranscriptprovidedbyADM(06analysttranscript.doc)

36Oldversion(early2006):“ArcherDanielsMidlandCompany(ADM)isaworldleaderinagriculturalprocessingandfermentationtechnology.ADMisoneoftheworld’slargestprocessorsofsoybeans,corn,wheatandcocoa.ADMisalsoaleaderintheproductionofsoybeanoilandmeal,ethanol,cornsweetenersandflour.Inaddition,ADMproducesvalue‐addedfoodandfeedingredients.HeadquarteredinDecatur,Illinois,ADMhasover26,000employees,morethan240processingplantsandnetsalesforthefiscalyearendedJune30,2006of$36.6billion.AdditionalinformationcanbefoundonADM’sWebsiteathttp://www.admworld.com.”

Newversion(late2006):“ArcherDanielsMidlandCompany(ADM)istheworldleaderinBioEnergyandhasapremierpositionintheagriculturalprocessingvaluechain.ADMisoneoftheworld’slargestprocessorsofsoybeans,corn,wheatandcocoa.ADMisaleadingmanufacturerofbiodiesel,ethanol,soybeanoilandmeal,cornsweeteners,flourandothervalue‐addedfoodandfeedingredients.HeadquarteredinDecatur,Illinois,ADMhasover26,000employees,morethan240processingplantsandnetsalesforthefiscalyearendedJune30,2006of$37billion.AdditionalinformationcanbefoundonADM’sWebsiteathttp://www.admworld.com/.”

competitorsareaboutthesizeofjustoneofourplants.Sothere’saverylargegapbetweenusandthem.”37Woertzwasbettingbigmoneybehindhertoughtalk,plunging$2billion38intothebioenergybusiness.ADMhadrecentlyinitiatedthelargestconstructionbingeinitshistory,39andthejewelsoftheplanweretwoethanoldrymills–oneeachinIowaandNebraska–intendedtoaddasmuchas550milliongallonsofpermittedproduction.40InApril2007,thecompanypledgedmillionstowardU.S.DepartmentofEnergy‐fundedPurdueUniversityresearchtocommercializecellulosicethanol,anascenttechnologythatreliesonplantsotherthancorn,andmayeventuallyreplacecornethanol41.InJune,itannouncedplanstobuildaresearchanddevelopmentcenterinHamburg,Germany,oneofitsbiggestbiodieselmarkets.WoertzhiredPacheco,42thendirectoroftheDOE’sNationalBioenergyCenterandaveteranofseveralenergycompanies,asADM’sfirstCTO,sittingonthecompany’sstrategicplanningcommittee.ShealsobroughtinDOEresearcherToddWerpytoheadupbiofuelsandbiochemicalresearch.43ADMwasfarfromthefirstcompanytodirectmoneyandmarketingtowardamajorrepositioning.Aroundtheturnofthemillennium,forexample,IBMmanagedtosheditsreputationasabureaucraticsoftwareandhardwarecompanyfullofarrogantsalesmen.Itbecameknownasabusinessfilledwithcustomer‐focusedInternetandtechnologyservicesexperts–theseworldwidechangesstartedwithlittlemorethanamarketingplan.44Morerecently,SteveJobsreinventedcomputermakerAppleasalifestylebrand,sellingiPodmediaplayersandiPhonehandsetsalongwithdigitalmusicandmovies.

37Seeaportionhere:http://www.accessmylibrary.com/coms2/summary_0286‐28930074_ITM

38WoertzspeechtoEconomicClubofChicago:http://www.adm.com/en‐US/responsibility/Documents/The‐Energy‐Evolution.pdf

39ADManalystdayNov2008(transcript‐2008‐10‐07t13‐001.doc)

40InterviewwithPatriciaWoertz

41Seehttp://www.prnewswire.com/cgi‐bin/stories.pl?ACCT=104&STORY=/www/story/04‐16‐2007/0004566218&EDATE=42Seehttp://ethanolproducer.com/article.jsp?article_id=3051

43Seehttp://seekingalpha.com/article/38069‐adm‐hires‐head‐of‐department‐of‐energy‐to‐bring‐it‐to‐finish‐line

44Oneofmanyarticlesonthis:http://www.accessmylibrary.com/coms2/summary_0286‐6443516_ITM

Still,Woertzwastakingagamble.“Igetveryconcernedwhenacompanytriestorebranditselfwithagreatdegreeofseparationfromwhatthey’vereallybeenallabouttowhatitisthey’regoingtobeabout,”saysKevinO’Donnell,apartneratmarketingfirmProphetwho’sconsultedforotheragriculturegiants.“It’sahighlyriskypropositiontobethatdeclarativearoundafundamentalshift,becauseit’shardtostrikethebalancebetweengettingpeopletobelievesomethingcompletelynewaboutyou,whilealsonotwalkingawayfromyourpast.”45Atthetime,though,thereseemedlittlegroundsforcriticizingWoertz.Theethanolboomcontinuedthrough2007,andAmericanfarmersrespondedbyincreasingannualcornproductionbymorethan20percentto13billionbushels.46InthestateofWashington,thecropswelledby73percent.47Duringthesecondhalfof2007,morethan4billiongallonsofadditionalethanolcapacitywentunderconstructionintheU.S.,withalmost2billiongallonsannouncedduringDecemberalone.48ItwasaboonforADM:Thecompanydoesn’treleaseitsethanolrevenuefigures–they’rehiddeninthebioproductslineofcornprocessing,makingitdifficulttoassessexactlyhowwellthatpartofthebusinessisdoing.“It’dbeliketryingtofigureoutthenetprofitsthatWal‐Martasacompanydoesinsellingshoes,”jokesDTNanalystRickKment.49Onthestrengthofethanol,though,bioproductsoperatingprofitsrosebymorethan40percentinthefiscalyearendingJune2007,withADM’soverallincomejumping65percenttoarecord$2.2billion(includingextraordinaryitems).Anominoussigndidappearinthespring:Highcorncostsandlowerethanolvolumepusheditsquarterlycornprocessingunit’sincomedown$45million.50TheagriculturemarketwasbeginningtoturnagainstWoertz’sstrategy.Inprofitabletimes,greedyinvestorshadchasedprofits,pumpingtoomuchmoneyintotoomanyplants.BetweenJanuary2005andJanuary2008,U.S.ethanolproductioncapacity

45IquotedO’Donnellbyname,butIspokewithseveralmarketingfolksforthissection,notablyLisaBodellofFutureThink,and(viaemail)JohnGerzemaofYoung&RubicamandShelHorowitzofPrincipledProfit.46ADM’sJohnRiceusedthisnumberinaspeech:http://www.adm.com/Lists/PressRelease/Attachments/7/Rice_Sweetener_Colloquium_for_web.pdf

47ThisisaUSDAfigurequotedhere:http://crosscut.com/2008/07/13/energy‐utilities/15855/

48FuturesmagazineDec.07http://findarticles.com/p/articles/mi_qa5282/is_200703/ai_n21232084/

49Wespokeoverthephone.Kmentwasunbelievablyhelpful.50SeeADM’sfiscal2007results

woulddoubleto7.2billiongallonsperyear.51Itwastooeasytoraisecapital–evensmallfarmershadstoppedsellingcorntograinelevatorsinfavorofbuildingtheirownethanolproductionfacilities.52“Everybodyintheindustrylookedatthatandstoppedandsaid,‘Waitaminute.Howcanitmakesenselong‐termforafarmtotakecorn,turnitintoethanol,andbeaproduceronascalethatsmall?’”remembersKevinCalabrese,anArgusResearchanalystwhocoveredthemarketatthetime.53Analystsbegantoforecastaglutinsupplyanddecreasedprofitmargins–partlyfromtoomanyplantsbeingbuilt,andpartlybecause,withoutapipeline,itwasdifficulttotransportthefuelfromMidwestfarmstothecoasts.54Thepriceofcornwasswingingwildly,withrecordvolatility55drivingtheper‐bushelpricefrom$2to$4toarecord$6andeventuallyupto$856.Theunparalleledchangeshadavarietyofcauses:marketspeculation;aweakdollar;arisingdeveloping‐worldmiddleclassthatcravedmeat(whichrequiresalotofgrainfeed);risingenergyandfreightcosts.57AtleastonesourcewasofADM’sownmaking:Moreofthecorncropthaneverbeforewasbeingdivertedtoethanol,almostone‐quarterofallU.S.corn,upfrom18percentin2006.58InNovember2007,ADMreleasedthefirstquarterlyreportdescribingwhatwouldsoonbecomeatrend:Itsethanolbusinesswasseriouslylosingsteam.Hugesalesvolumeswereoffsetbyhighcorncostsand,consequently,minisculemargins.

51CongressionalResearchService,4/24/08:http://www.nationalaglawcenter.org/assets/crs/RL33290.pdf.Ialsowanttonotehowhelpfulmy“congressionalsource”wasonthisstory.Theyknowwhotheyare.

52InterviewwithKevinCalabrese.Kmentandotherssecondedtheinfo.

53InterviewwithKevinCalabrese

54Amazingly,theAssociatedPresspickeduponthisasearlyasJune2007.See:http://www.msnbc.msn.com/id/19214116/

55SeeUSDAfigureshere:http://www.cmegroup.com/market‐data/datamine‐historical‐data/market‐reports/historical‐volatility/corn‐volatility.html

56USATodayarticlerepresentativeofstoriesatthetime:http://www.usatoday.com/money/economy/2008‐04‐29‐2048612564_x.htm

57Conclusionmadebasedonasynthesisofalotofmaterial,notablyWallyTynerpaperhttp://www.agecon.purdue.edu/news/financial/Bioscience_2008_Tyner.pdfandinterviewswithTyner,DaryllRay,etc

58ThisaccordingtotheNationalCornGrowersAssociation

Throughouttheyear59,companyrevenuenumbersskyrocketedduetohighcommodityprices,withrespectableincomegrowth.Butethanolprofitswerefading.Duringthefirstthreequartersof2008,bioproductsmadebarelyhalfasmuchin2008asduring2007.Biodieselprofitsdecreasedduringseveralquarters,too,asthepriceofsoybeansrose‐‐partlybecauseoftightersupplies,asmanysoyfarmershadswitchedtocorn.ADMwasmakingakillinginonearea:Merchandisingandhandling,theobscurebusinesslinewithinaunitcalledagriculturalservices,whichhadthepowertohedgebetsinfuturesmarkets,andshipandtradegrainsfromcountrieswithsurplusestoareasdesperateforfood.ADM’sM&Hbusinessdoubleditsprofitsduringfiscal2008,pullinginmoreincomethanalmostanyothersegment.60Woertzacknowledgedsuchgainswere“unprecedented,”andWallStreetwasskepticalaboutthecompany’sabilitytosustainsuccesslikethatinabusinessoverwhichithadlittlecontrol.TheysawmanyofADM’sunitsascommodity‐dependentbusinesses,andfrettedovertheethanolmarket.“Thatcombinationspookedinvestors,”saidBarclaysanalystChrisBledsoe.Byfall2008,ADMstockhadlostalmosthalfitsvalueduringWoertz’sreign.61Itcouldhavebeenevenworse.Lastsummer,Midwestfloodsportendedaweakcorncrop,andanalystswerepredictingasmuchasone‐fifthoftheyieldcouldbedestroyed62.Ethanolproducers–probablyincludingADM63–scrambledtolockinthemassivesuppliestheyneededfortheyearwith$10‐per‐bushelfuturescontracts.Theywantedtobeabletocountonadeliveryprice,fearingthatpricesmightreach$12byautumn.ButthecornbubblepoppedaroundAugust64,andthepricedwindledto$4.Companiesthathadcommittedtobuycornatpricesalmosttriplethemarketvaluesawtheirbusinessmodelscrumble,asgasolinepricesdroppedcomparedtoethanol.“Whatwasconsideredimpracticalandimpossibleayearagohashappened,”Kmentsaidinlate2008.

59SeeADMQ108,Q208,Q308earningsreleasesavailableviaedgar.sec.govandathttp://www.adm.com/en‐US/news/_layouts/PressReleaseList.aspx?more=true

60ADMQ108earningsrelease

61USATodayarticleonQ3earnings(linkabove)andstockpricedataretrivedfromfinance.google.comforticker“ADM”

62InterviewswithKevinCalabreseandotheranalysts.

63Kmentandothersbelievethistobethecase.ADMwouldn’tcomment.

64See,forexample:http://seekingalpha.com/article/92194‐hedge‐fund‐manager‐s‐notebook‐as‐corn‐prices‐crash‐the‐first‐hydrogen‐hybrid‐car

ADM’spure‐playethanolcompetitorsborethebruntofthecollapse:VeraSunEnergy,thesecond‐largestethanolproducer,declaredbankruptcyandreportedathird‐quarternetlossof$464million.65Othersshranktopennystocks:BioFuelEnergy,whichhadIPO’dat$43persharein2006,wastradingbelow50cents.66“Theyexpectedgovernmentsupport,ahugebasketofsubsidies.Itlookedliketherewasnowaytolosemoney.Turnsout,itwasprettyeasytolosemoney,”saidMichaelTian,whountilrecentlytrackedADMforMorningstar.67DiversifiedADMwassomewhatshieldedfromthesenightmarescenarios,anditsexecutivesclaimtohaveforeseenboththeoverbuildingandtheresultingfallout,butitdoesn’tlookgreatwhenyourCEOseemstobebettingthecompany’sfutureonanimplodingbusiness.Itsbioproductsunitexperienceda28percentdropinoperatingprofitduring200868,butADMstillhadtwoplantsthatwouldincreaseitstotalannualethanolproductionby50percent,to1.7billiongallons.Weather,labor,andequipmentdelayshadpushedthepairbacktocomingonlinelate,inlate2009andearly2010.69ADMhasrepeatedlymaintainedthattheplantswilleventuallybeaprofitcenter.70Analystsareskeptical.71“Underneathitall,I’mnotsurethey’dbedoingthisexpansion”iftheycouldstopitrightnow,saidIanHorowitz,ananalystwithSoleilSecurities.7265See,forexample:http://quicktake.morningstar.com/Stocknet/san.aspx?id=262517

66InterviewwithPavelMolchanov

67InterviewwithTian

68See:http://ccbn.10kwizard.com/xml/download.php?repo=tenk&ipage=5860052&format=PDF69MorefromADMcommunications:“Thetwoethanoldrymillswereoriginallyscheduledtobecompletedinmid‐tolate‐2009,not2008.Thenewtimeframecallsforthemillstobecompletedinlate‐2009into2010.Weatherandpartsdelaysdidrequireustoadjustourtimeframeforcompletion.Also,becausethedesignandscaleofthesefacilitiesareuniquetoADM,wemadethedecisiontofinishtheColumbus,Neb.,facilityfirstanduseourinsightsfromthatprocessaswecompletetheCedarRapidsfacility.Webelievethisapproachwillhelpustoreduceoverallconstructioncosts.”

70SeethisearningscalltranscriptatSeekingAlpha.com:http://seekingalpha.com/article/74666‐archer‐daniels‐midland‐co‐f3q08‐qtr‐end‐3‐31‐08‐earnings‐call‐transcript

71InterviewswithBledsoe,Horowitz,andothers

72InterviewwithIanHorowitz.ADMcommunicationsresponse:“Theprojectsarewellontheirwaytocompletion,andwhilethecurrentmarketconditionsareverychallenging,webelievewehaveasustainablelong‐termadvantageindrymillethanol.ADMhasnetworkadvantagesfromsourcingandtransportingcorntoprocessingethanolinlargecornprocessingcomplexestotransportingethanolinADM‐ownedrailcars.Theseadvantagesimproveourprofitoutlookrelativetothemanystandaloneplantsthathavebeenconstructed.”

ThesamepricevolatilitythatwreakedhavoconADM’scornprocessingbusinessalsoboostedfoodprices,whichrosemoreduring2007thananyyearsince199073.FoodmanufacturerTysonFoodslost$91millioninasinglequarter,largelyduetotheextracostofchickenfeed.74Consumers,too,wereangry–someinthedevelopingworldevenrioted75‐‐andhuntingforavillain.Despitetheabundantnumberofcauses,nowthatnearlyone‐thirdofthecornharvestwasbeingdivertedtoethanol,thesubsidy‐heavyindustrybecameaneasytarget.76TheGroceryManufacturersAssociation–ADMis,surprisingly,amember–launchedapublicrelationsoffensivearguingthatethanolwasthereasonforhighgroceryprices.Thetradegroupjoinedadisparatecoalition,includinganti‐subsidyconservativesandenvironmentalistsconcernedabouttheecologicalimpactoflandgobbledupbyexcesscornplanting.ADMwasensnaredinwhatcametobecalledthe“foodversusfuel”debate.Thecompanyanditscompetitorsdismissedthearguments,rightlysayingthatethanolwasonlyapartialcauseoffoodinflation.Woertzdidn’tmincewordsindefendingherindustry:“Retreatfrombiofuelsiswrong.It’sfoolish.Ithinkit'sdangerous,it'samistake,”shetoldanalysts77inApril2008.Thosecommentslaterprovedaccurate–aftercornpricesdropped,foodpricesdidn’t.78Yetbythetimetheindustryembarkedoncounter‐campaignsthatsummer,seriousbranddamagehadbeendone.79“Ethanolwentfrombeingapoliticalideathateverybodywastoutingandfloutingtosomethingthatwasbeingdemonized.Thathappenedinthecourseofasingleyear,”Calabresesays.80

73CongressionalResearchServicereport:http://www.nationalaglawcenter.org/assets/crs/RS22859.pdf

74CommentsviaemailfromTysonFoodsPR

75Onerepresentativearticle:http://www.cnn.com/2008/WORLD/americas/04/14/world.food.crisis/76CharlesRentschlerofWallStreetAccess,whoIendedupnotquoting,wasparticularlyhelpfulonthepoliticalinformation.77Seetheseekingalphatranscriptlinkedaboveandthisspeech:http://www.adm.com/Lists/PressRelease/Attachments/10/3‐27‐08_NGFA_final.pdf

78EveryeconomistIspokewithagreedwithherinretrospect,goodsummariesofthefactshere(maybealittlebiased):www.growthenergy.org/2009/press/Growth‐Energy‐Food‐Fact‐Sheet.pdfandhere:http://www.agpolicy.org/weekcol/435.html

79InterviewswithHorowitz,Bledsoe,andCalabrese

AndittookplacewhileADMwasstrugglingtoeekoutprofitsfromethanol.Woertzendedupinthebizarresituationofbeingsavagedasaruthless,food‐wastingenergycapitalist,despitemediocrefinancialreturnsfrombioenergy.81Theindustry’sdiminishedpoliticalcapitalshowedupinthefarmbillenactedinJune.82Theethanolproductiontaxcreditwasloweredbyfivecents83pergallon–ahugefigureinasmall‐margin/high‐volumebusinesslikeethanol.Congressalsoaddedanew,separatesubsidyforcellulosicbiofuels.“Theindustrywillcontinuetofunction,butitwon’tgrow,”saysTyner,speakingforseveraleconomistsandanalysts.“Cornethanolisfinished.”84

80InterviewwithArgusResearch’sKevinCalabrese

81AlsohelpfulinexplainingthedynamicwasJacquiFatkaofthetradeindustrymagFeedstuffs

82FarmbillanalysisbyCongressionalResearchServicencseonline.org/NLE/CRSreports/08Jun/RL33934.pdf

83See:http://www.nationalaglawcenter.org/assets/crs/RL34696.pdf84InterviewwithTyner.ADMcommunicationsresponse:“Webelievethereisastrongfutureforcorn‐basedethanol.ItisanimportantfoundationforAmerica’srenewable‐energyfuture.Wecontinuetoinvestintheconstructionoftwodrymillplants,andwebelievethattheyremainsoundinvestments.”

Woertz,ofcourse,hasgoodreasontodisagree.Thepoliticalclimatelookspromisingforthebiofuelsindustryasawhole,withADMhomestate85nativePresidentBarackObamaintheWhiteHouse,andcorn‐heavyIowa’sformerGovernorTomVilsackthenewSecretaryofAgriculture.Theadministrationhasalreadycommitted86toextendingrenewablefuelsubsidiesandraisingfuelstandards,thoughObamahasn’tmadeitclearhowexactlycornethanolfitsin.ADMdoeshavebettercreditratingsthancompetitors,anadvantageinborrowingcapitalfortheindustry’songoingscrambletoacquirebankruptplantsonthecheap.87Italsomaintainsarguablythestrongestinfrastructureofanybiofuelsprovider,andaknowledgenetworkthattranslatesintosqueezingafewextracentspergallonversusmanypeers.YetevenifthebiofuelsmarketfulfillsWoertz’shopes,there’snoguaranteeADMwillremainadominantplayer‐‐inMarch,oilcompanyValerooutbidtheminpurchasingVeraSun’splants.88Amorepressingproblemloomsforcornethanolproducers:theblendingwall.MostcarscanrunonE10,agasolineblendincluding10percentethanol,andgasolinecompanieslegallycan’taddanymoreethanoltotheirstandardfuel.Someflex‐fuelvehicleswillrunonethanol‐heavyE85fuel,butthey’reatinysliceofthemarket.Eventheon‐sitegasstationatADMheadquartersdoesn’tofferit.89Sodespiteagovernmentstandardof15billiongallons(andrising),evenifallgasolineinAmericawasE10,thetotalamountofethanolusedwouldn’tbemorethan14billiongallons.90“Unlessthatchanges,”saysTyner,“it’snotgoingtogoanywhere.Itdoesn’tmatteraboutthe[governmentstandards]orsubsidies,itdoesn’tmatteraboutanythingelse.That’sasfarasyoucangrowthemarket.”

85ObamahasflownonADM‐ownedcorporatejetsatleasttwice:http://query.nytimes.com/gst/fullpage.html?res=9E04E1D61531F93BA35750C0A9609C8B63&sec=&spon=86SeeADM’sstatementre:Obama’ssupportforbiofuels:http://www.adm.com/en‐US/news/Pages/Biofuels‐Statement.aspx

87InterviewswithTian,Molchanov,Kment,Ray

88Seehttp://online.wsj.com/article/SB123740358722374797.html89InterviewwithTyner,confirmedbyADMemployeesduringsitevisit

90That’sanupperboundbasedonnumbersprovidedbyADM(basedonEIA:http://tonto.eia.doe.gov/dnav/pet/hist/mgfupus1A.htm).Others,suchasTyner,setthenumberaround12B.

ThoughVilsackandtheEnvironmentalProtectionAgencyareconsideringraisingtheblendinglimitto15percent91,Washingtonandmuchofthebiofuelsindustrysaythemostsignificantexpansionopportunitieswillcomefromadvancedbiofuels,suchascellulosicethanolmadefrombiomasslikeswitchgrassorcanesugar.Venturecapitalistsandgovernmentagencieshavealreadypumpedhundredsofmillionsofdollarsintocellulosicbiofuelprojects.92Ifanyofthesecreatesfuelcheapenoughtocompetewithcornethanol,itcouldcutintoprofitsatADM,93whichisconductingallmannerofresearchinthearea,butlittlewithnear‐termcommercialpotential.Woertzhasannouncedseveralprojects,includingcollaborationswithMonsantoandJohnDeere94tocreatefuelfromcornstover(partofthestalk),andwithConocoPhillipstocreatebiocrude,abiomass‐basedfuelthatcanbemadeintogasolineatexistingrefineries95.BothareyearsawayfromaffectingADM’sbottomline.WarythattheU.S.maydropatariffkeepingBraziliansugarethanoloutofthecountry,ADMhasalsoinvestedinajointventureinSouthAmericafocusedontheproduct,butthemarketthereseemstobeskiddingalongwiththeU.S.one.96FortunatelyforWoertz,otherinvestorshaven’tseenmuchsuccess,either.TheadvancedbiofuelsindustrymaynotevenmaturequicklyenoughtotakeadvantageofthegeneroussubsidiesCongresshasrecentlyinstituted.Allsortsofhurdleshaveyettobeovercome,butanoft‐citedoneisthedifficultyoftransportingthick,densebiomassmaterialtoprocessingplants.“Cellulosicethanolisbasicallyascienceexperiment,”saysRaymondJamesenergyanalystPavelMolchanov.97

91Onestoryamongmanythatmentionsthis:http://www.marketwatch.com/m/Story/43d03a12‐f7d3‐4b89‐b504‐1144467b0cbd.Thestoryalsomentionstheproblemofthecarbonfootprintofcornethanol.Idecidednottoaddressthisinmyarticle,butit’sworthnoting.92SeethisBiocyclestory:http://www.jgpress.com/archives/_free/001764.html

93ADMcommunicationsresponse:“Conversiontechnologyisjustonepartoftheequationfornext‐generationbiofuels.Large‐scaleproductionofbiofuelsfromcropsrequiressignificantinvestmentthatextendsbeyondproductionfacilities.OneofthereasonsitmakessenseforADMtopursuethenext‐generationbiofuelsopportunityisourextensivecroporiginationandtransportationnetworkaswellasourproductdeliverynetworkincludingalargefleetrailcars,anextensivestoragenetworkandanunrivaledmarketingteam.”

94See:http://www.adm.com/en‐US/news/_layouts/PressReleaseDetail.aspx?ID=26

95Onestoryonthis:http://afp.google.com/article/ALeqM5ibbhloqDPDfaxENZIMLYAlOAxFlw96SeeAPstory:http://abcnews.go.com/Business/WireStory?id=6300416&page=1

97AviewsharedbyKment,Tyner,Fatka,Cox,andPacificNorthwestLaboratory’s(whereWerpyusedtowork)Holladay.Here’swhatADMcommunicationssaidtothat:“Aren’talltechnologies

Fornow,ADM’sbioenergystrategyseemstobeinlimbo–Woertzhasn’tcancelledanyprojects,butit’snolongeracorefocus.98Lastsummer,herflakschangedthepressreleaseboilerplateagain,buryingtheword“energy”amidstaslewofotherbusinesses.99WhenPacheco,theenergy‐expertCTO,leftafterbarelyayear,100thecompanydidn’tannouncehisexit.Pachecodeclinedtocomment,citinganon‐disclosureagreement.Woertzclaimsheresignedtobeclosertohisfamily,whoremainedinDenverwhenhejoinedADM.Pachecowasn’treplaced,thoughWoertzsaysWerpyhastakenoverhisduties.EthanolnowmakesupasmallerandsmallerportionofADMincome101.Duringthemostrecenttwoquarters,bioproductslostacombined$208million,102andbiodieselisn’tgrowingmuch.Aftermonthsofusingeuphemismssuchas“underpressure”todescribetheethanolmarkettoanalysts,chieffinancialofficerStevenMillsfinallyacknowledgedinFebruarythatmarginshad“collapsed.”103Theboringoldbusinessesthatcontinuetohumalong–stufflikeoilseedscrushing–arelargelymanagedbythesameliferswhowerewaitingforherattheairportbackinthespringof2006.Foracompanythatpledgedtobeonthecuttingedge104ofbiofueltechnology,ADMhasspentremarkablylittlenewmoneyonresearchanddevelopmentduringtheWoertzera.ItsR&Doutlaystayedflatat$45millionbetween2006and2007,andgrewonlyslightlyto$49millionin2008.105Forallthe

“basicallyscienceexperiment[s]”untilthey’recommercialized?Agriculturecanprovidearangeofproductsthatwillhelpmeettheworld’senergyneeds.ADMresearchersareactivelyevaluatingarangeoftechnologies.”

98AviewsharedbyShanahan,Horowitz,andBledsoe,amongothers.

99Hereitis:“Everyday,the27,000peopleofArcherDanielsMidlandCompany(NYSE:ADM)turncropsintorenewableproductsthatmeetthedemandsofagrowingworld.Atmorethan240processingplants,weconvertcorn,oilseeds,wheatandcocoaintoproductsforfood,animalfeed,chemicalandenergyuses.Weoperatetheworld’spremiercroporiginationandtransportationnetwork,connectingcropsandmarketsinmorethan60countries.OurglobalheadquartersisinDecatur,Illinois,andournetsalesforthefiscalyearendedJune30,2008,were$70billion.FormoreinformationaboutourCompanyandourproducts,visitwww.admworld.com.”100MultiplemessagesleftforPachecoandthelab’sPRfolks,followedbyareturncallfromanassistantsayinghecouldn’ttalk.

10110/7/08AnalystmeetingtranscriptprovidedbyADM

102Q3earnings:http://www.adm.com/en‐US/news/_layouts/PressReleaseDetail.aspx?ID=49103ThisaccordingtoareviewofthecallbyBarclays’Bledsoe

104SeeMarkMatlock2006ADManalystday,transcriptprovidedbyADM

105ViaemailRomanBlahoski,ADMcommunications,declinedtodiscussdetailsofADM’sresearchbudgetorspending.

hooplaaroundherbioenergystrategy,Woertz,whotookin$17millionworthofcompensationin2008106wasn’tthevisionaryoutsidermanyanalystsexpected.107Inthedeadofwinter108,thehulkingmassofboxyplantsthatdominateADM’sheadquartersspewcloudsaslargeasanyMotherNaturemightcreate.Visiblefrommilesaway,thecomplexevokessomethingoutofanenvironmentalistpropagandafilm,althoughwhatlooksliketoxicsmokeismostlyjuststeam.Anungodlyamountofcornandsoyprocessinglendsitallthestenchofafrathousethemorningafteraparty.Andyettheattitudeofemployees,fromsecretariestoindustriallaborers,isoptimistic,evenjovial.It’sthesortofplacewherethesecurityguardatthefrontgateisamiddle‐agedwomanwhocallsyou,“Honey.”Intheexecutivebuilding,thewallofwindowsinPatriciaWoertz’scornerofficeoffersaviewofbare,gloomytreesandflatlandtowardanendlesshorizon.ShestepsoutfrombehindherdesktositataroundconferencetableandmakethecasethatatADM,she’sdoneeverythingshesetouttodothusfar,withoutcontradictionorfailure.“Thestrategyhasn’tchanged,”109shesays.“We’veevolvedourmessage,notourstrategy.”Woertzhasareputationasaninspiringcoach110ofhersubordinates,notacommand‐and‐controlleader,anditisn’thardtoseewhy.Shehasthewell‐honed,media‐trainedabilitytosmilewhenshethinksyou’rewrong;tosmilewhenshe’s106SeeADM’s2008proxyfiling

107IsentADMcommunicationsaquote(cutfromthepiece)fromananalystaboutWoertznotchangingthecompanyverymuch.Theresponse:“…givenADM’shistoryofstrongperformance,Ican’timaginewhyanyonewouldexpectPattohaveturnedthecompanyintoa‘differentanimal.’[theanalyst’sphrase]Patjoinedthecompanytobuilduponalegacyofsuccess.TheADMemployeeswhodrovethatsuccessarestillhere,stilldoinggreatwork.Certainly,Pathasbroughtnewenergyandinsighttovariousareasofthebusinessincludingstrategicplanning,research,communications,colleaguedevelopmentandsustainability.Shehasalsooverseencontinuedgrowthinanumberofproductareas,includingbiofuels.ButanyonewhoexpectedPattotakethecompanyinaradicallynewdirection—awayfromthebusinessofprocessingcropsintoproductsthatmeetglobaldemands—mayhavemissedthepoint.”

108IwentdowntoDecaturtwiceinatwo‐weekperiodinJanuary.OnceforaplanttourandmeetingwithDavidWeintraubofthecommunicationsteam,andthesecondtimetointerviewWoertz.

109InterviewwithPatriciaWoertz

110InterviewwithVictoriaPodesta,Horowitz,Bledsoe,etc

roboticallyrattlingofftalkingpoints;tosmilewhenshe’sbeingalittlebitsarcastic;tosmilewhenshe’sflabbergasted.Woertzwearsblackpearlsandpointyfingernails,andconstantlygestureswithhersmallhands.WoertzclaimsADM’scurrentgoalsarethesameastheywerebackin2006,whensheunveiledhermissiontoWallStreet.Despitebioenergy’sfront‐and‐centerspotinherspeeches,marketingmaterials,andotherpublicstatements,shesaysitwasjustonepartofacomprehensiveplanforchangeacrossADM.Thosewhoseizedonethanolmisinterpretedherintentions:“What,probably,wedidn’texpectis,likeanycommunication,whenyouputsomethingoutthere,whattheyreceiveisnotnecessarilywhatyou’resending,”sheexplains.Woertzandherexecutiveteamtalkedaboutbiofuelsoftenonlybecauseanalystswereaskingsomanyquestionsaboutit.ADM,shesays,wasmerelyrespondingtotheirqueries.ThegapbetweenWoertz’sactionsandherafter‐the‐factexplanationsleavesherinapickle.Thebioenergystrategywaseitheroversoldorit’sunderperforming.Shemaintainsthattheanalystsunderstandhernow,andyetshe’sdisappointed(and,thoughshedoesn’tsayit,obviouslyfrustrated)thatthepeoplewhotradeADM’sstockhavepusheditsvaluationsolow.“Wecontinuetoperformyear‐on‐yeardoingbetterthanever.We’reinaspacethat’squiteexciting.Peopleneedtoeat.Wecontinuetogrowglobally.Peopleneedtheproductswemake.It’sagreatspacetobein.Mostcompanieswouldgivetheirrightteeth111forourbalancesheet,forourstateofourcompany,”shesays.TheprocessingoperationsthathavelongformedthecoreofADM’sbusiness–two‐thirdsofitsprofitsduring2008–havedroppedtoaccountforlessthanhalfitsearnings.Yetevenasmanyofitsagribusinesscompetitorsstruggle112,ADMhasreliedonitstrading,merchandising,shipping,andotherformsofriskmanagement.Profitsfromagriculturalserviceshavebeenearningthecompanyhundredsofmillionsofdollarsperquarter,anorderofmagnitudemorethanintheyearsbeforeWoertztookover.ADM‐watchersdon’tfullyunderstandthissurge.Thecompany’smarketbetsandarbitragearesosecretive,analystsvisitingtheDecaturheadquartersaren’tevenallowedtowalkthroughitstradingfloor.113

111Iknowitsoundsweird,but“rightteeth”iswhatshesaid.Ihaveitontape.Apparentlyit’sanobscureBritishism.

112ParticularlyBunge

113Interviewswithseveralanalysts,andavisittoChicagoBoardofTrade

Nevertheless,thoseintheindustryknowhowthemoneygenerallyflows.Someofitismerelythesortoftradingthatgoesoninmarketsallovertheworld.WhenADMbuyscornfuturesmonthsaheadofharvests,forexample,itmightalsosellanoptiontohedgeagainstpricesgoinglow.ADMpossessesmoreagriculturemarketintelligencethanalmostanyothercompany:ABraziliantraderinDecaturcantalktoanADMtraderinBrazil,aswellastheSingaporedeskandtheAmericandesk,evenashedrawsonADM’sdataonlocalBraziliangrainelevatorsandfarmers.Whenopportunitiesemerge,thecompanycanpounceinthephysicalworld,too.SayanADMsoybeansshipmentisonitswaytoIndiaforprocessing.TheChinesegovernmentputsanorderout:Itneedssoybeans,andit’swillingtopayapremiumtogetthemfast.ADMhastheglobalinventory,thecustomeraccess,andtheshippinginfrastructuretogetsoybeanstoChinaquickly,andfollowitupwithanothershipmenttoIndia.114Areal‐world,thoughsmaller‐scale,episodeoccurredlastsummerjustoutsideADM’sDesMoinesplant.Massivefloodinghadeffectivelyhaltedshipmentsinandoutofthearea.IttopplednearbyCargillrailcarsfromtheirtracks,soakingthecornasthecarsbustedopen.Thecorncouldn’tbeusedforhumanconsumption,butADMboughtitfromCargill–afrequentcompetitorandcollaborator–atarock‐bottomprice,thencleaneditupandprocesseditintoethanol.“Theysaw,inthemidstofdisaster,anopportunity,”saysBledsoe.“Heretheywere,stillthinkingentrepreneuriallyaboutanarbitrageopportunityrightintheirbackyard.”ProfitsfromsuchphysicalandvirtualtradesshowupalloverADM’searningsreports–asmartfuturestradeonsoybeans,forinstance,likelygetsbookedintheoilseedsprocessingunit,eventhough“processing”maynothavetakenplace.115ADM’splantsalsobenefitfromthatintellectualcapital.Whencornpricesaretoohigh,plantmanagerscanchangethemixoftheirfeedproductsforswineproducerstowheatorbarley.Iftheethanolmarketlooksdubious,theycanadjustwetmillswithinhourstoproducemorecornstarchorcornsyrup.116

114ThisexampleisfromBledsoe,butTianandHorowitzhadsimilarconceptionofhowitworks.AndADM’sexplanationswereinlinewiththis.

115InterviewswithHorowitz,Tian.ADMcommunications:“Generally,variousbusinessgroupswithinADMroutinelyrunpositionsthataremadeupofphysicalpositions(includinginventoriesandpurchase/salecommitments),aswellasderivativeinstruments(includingfutures).Thegainsorlossesarisingfromthesepositionsarereportedinthatbusinessgroup’srespectivesegment.”

116CFOSteveMillstalkedaboutthiscapabilityonthe10/7/08analystday,andsodidADMplantmanagersMarkBurau.Buttheyapparentlydon’tmakechangeslikethistoooften.ADMcommunicationssaysthis:“Theabilitytoadjustproductionisnotunlimited.Wedohavesomeflexibilityinourgrindandtheabilitytoadjustfinishedratesbasedondemandandmargins.Wetypicallymakeadjustmentslikethis4‐5timesperyear.Forinstance,inthespringandsummer,

ADMhasalwaysbeenagrainprocessorthattradedbecauseitneededto‐‐unlikeold‐schoolgrainmerchantslikeCargill,whoseproductionunitsweresecondary.Butthatmaybechanging:ADMistakingmoremarketriskthaneverbefore,117anditmaycomewithacost.“Beingsolargeandbroadinthemarket,theycarryalotofrisk,”saysKment.“Theyaretiedtothevolatilityofthemarketinawaythatothercompaniesmightnotbe.There’snowayyoucouldaccuratelypricethewaythemarketmoves.”118Woertzclaimsonlyavastknowledgenetwork,notspecialpredictivepowers.InFebruary,ADMexecutiveshintedtoanalyststhattheluckymerchandisingandhandlingbreaksofthepastyearmightnotlastthroughspring.Indeed,duringthequarterendinginMarch,agriculturalservicesprofitsdropped67percent,to$121million.Thecompany’soverallincomeplummeted54percent,evenexcludingone‐timelosses.Whileasingledownquartermightnotbesignificant,ADMexecutives’wordchoiceshaveshiftedtowardthenegative.DuringtheNovemberearningscall,theytalkedaboutexternalproblemsintheeconomy,butboastedofbeing“well‐positionedandconfident.”InearlyFebruary,theyadmittedthedownturnisimpactingADM,tothepointwherethey’re“adjustingourbusinessmodel.”119

whensodaconsumptionishigher,wecanputmoreofthestarchstreamintoHFCS.Inthefallandwinter,wecanshiftthatstarchstreamtomakemoreethanol.”

117SeeADM’s10‐Kfor2008:http://ccbn.10kwizard.com/xml/download.php?repo=tenk&ipage=5860052&format=PDF

118ADMrefusedtoletmespeaktotheirriskmanagementfolks.ThecommunicationsteamdidsendthisinresponsetotheKmentquote:“Whilewecan’tcommentonhowoneshouldvalueourstock,wecansaythatwethinkourriskmanagementcapabilitiesareunmatched.Hereagain,ImightpointyoutotheCAGNYpresentationandPat’sdiscussionofourriskmanagementcapabilities:‘Quitesimply,Ithinkweexcelatriskmanagement.Ourbusinessoperatesbycapturingverysmallmarginsacrossveryhugevolumes.Andyousawthatsupplychain.Ateverytouchpoint,weneedtoaddvalue.Butourabilitytomanageriskacrossthatentirevaluechainwithvariousandlargenumbersofcounterpartiesiscriticaltooursuccess.Letmegiveyouacoupleofexamples.WemanageriskwithSouthAmericanfarmers.Weprovidefertilizerandotherinputs.They'repaidbackwithaportionofthefarmer'scrop.Weactivelymanageourcounterpartyriskwithcustomersandsuppliers.Ourcreditfolkssitsidebysidewithourcommercialfolks.It'sacompetencythatIthinkisunmatchedanywhereelse.Wehedgecommodityinputs,commodityoutputs.Weturncropsintoabroadportfolio.Wereallyhavetohavethisunderstandingthroughoutthemarketsandthroughoutourvaluechainandwhereourpositionsareatanypointintheday,atanyhouroftheday.Oursuccessdependsontheabilitytocontinuallymanagethisriskatalllevels.Andwecontinuetobelievenotonlythisisacorecompetency,butwecontinuetoworktoimproveit.Ithinkit'sallowedustomanageverywellinrealtimeandcapturehighermarginsduringaperiodofvolatility.’”

119Again,thesedifferencesarecalledoutinBledsoe’sBarclaysQ209note.

Woertzcontinuestobevague120121aboutwhatexactlythatmeans.ADM’sexpansionandgrowtharen’ttargetedtowardanyonegeographicregionorbusinessline,buteverywherealongADM’slong,complexvaluechain.Therecenttriumphs(andletdowns)inagriculturalservicesarelessthecornerstoneofADM’sfuturethansymbolicofwhereWoertzseemstobeheaded.SheisnowmanagingADMasasortofhedgefund.122123Someproductlinesareriskierthanothers,somewillgrowfasterthanothers.She’swillingtomakea5‐centsacrificeinonepartoftheADMworldfora10‐centgaininanother.Bioenergy,shestillhopes,willbeamongthemostsuccessfulbets,butevenifitfalters,ADMwillsurvive.It’saconvenientpositionforaCEOwhotalkeduponesliceofhervastcorporationalittletoomuch,andthenwatcheditblowupinherface.Butitmaybethewaysheshould’vebeenrunning‐‐andbranding–ADMfromthebeginning.“Theindustrygetsthemselvesintotroublewhentheytrytopullarabbitoutoftheirhats.Ifyousticktoyourknittingandblockandtackleandwatchglobalpopulationincreaseandwatchproteinconsumptiondriftdownintonewmarkets,it’llalltakecareofitself.You’renotthesexiestcompanyoutthere,butyougoinandmakemoney[and]haveyourcashflowandgohome,”saysSoleilSecuritiesanalystIanHorowitz.Fromtheoutside,it’shardtolookatADMwithoutviewingastrategyinretreat,andaCEOwho’sboththevictimandbeneficiaryoffreakishmarketmovements.Woertz,

120Thisishowmanyanalystsfeel.

121SeeespeciallytheSeekingAlphatranscriptfromQ209earningscall,responsetoMcGlone’squestionabout“thereisnopointoffocuslikelogisticsorgeography”:http://seekingalpha.com/article/118214‐archer‐daniels‐midland‐f2q09‐qtr‐end‐12‐31‐08‐earnings‐call‐transcript

122InterviewswithHorowitzandBledsoe.Woertzdidn’tdisagree.

123SeealsothisthatADMcommunicationssenttome,fromSteveMills’commentsfromConsumerAnalystGroupofNewYorkconferencethiswinter:“Thesepiechartsshowoursegmentoperatingprofitmixforfiscalyears'06,'07,and'08.Andyou'llnotethatwhilethepercentageofearningsfromindividualbusinessunitschangedfromyeartoyear,overallearningshavegrowneachyear.Earningsgrowthfromfiscal'06to'07camefromeverybusinessunitandincludedespeciallystrongcontributionfromourcornprocessingsegment,whileearningsgrowthfrom'07to'08wasledbyouroilseedsprocessingandouragservicessegment.Aswelookatthepiechartforourmostrecentsix‐monthperiodascomparedtotheprioryear'ssixmonths,ourearningsgrowthinfiscal'09,asImentionedearlier,hascomeprimarilyfromouragservicesandoilseedprocessingsegments.Thetakeawayhereisthatourvaluechaingivesustheabilitytocaptureprofitsasconditionschangeacrossthesevarioussegments.Infact,inmanyways,welookatouroperationsasonelineofbusiness.Andasyoucanseefromthechangingsizesofoursegmentresults,profitopportunitiescananddoshiftalongourvaluechain.Andwearewellpositionedineachsegmenttobenefitfromthoseopportunitieswheneverandwherevertheyarise.”

though,seessomethingmuchlarger,morepromising:acomplexmachinewhoseprofitpotentialisgreaterthanthesumofitsparts.SheknowsnoteveryoneonWallStreetwillquiteseeitthatway,becausetoomuchofthecorporationishiddenbehindaveil.Shehasgoodreasonsforkeepinginternalfiguresandestimatessecret:shemustprotectproprietaryinformationfromcompetitors;businesslinesaretoointegratedtoreportresultsinfinedetail;ADM’smarketisjusttoovolatiletomakepredictions.ButthatmeansthatnomatterhowstrongADM’sperformance,themodelstheanalystsruncannevercapturetheentiretyofhervision.Theirpredictions,evenofthebest‐casescenarios,seldomreachaboveacertainpoint,aspotwellbelowtheoneWoertzimaginesshe’lleventuallyreach.“Itcanappear,”shesays,“that,maybe,that’sasgoodasitgets.”­RDBRyanBlitsteinisaChicagojournalistandacontributingeditoratMiller‐McCune.AshorterversionofthisstorywasfirstpublishedinTheBigMoneyarticle(http://www.thebigmoney.com/articles/after‐fad/2009/06/02/adm‐does‐ethanol‐shuffle?page=full).AresponsefromArcherDanielsMidland,ifthecompanyprovidesone,willbepublishedatRyanBlitstein.com.