For the last few years, I have been reminded too frequently I'm not very good at making business decisions. To be sure, we've muddled through, but my strategies have been snowplowed by totally unforeseen developments almost routinely.
I don't think I'm alone. Although shrouded in semi-obscurity, the decision-making at Archer Daniels Midland (ADM) apparently hasn't been all that different. I must admit I find some perverse comfort in this idea.
The gap between Woertz’s actions and her after-the-fact explanations leaves her in a pickle. The bioenergy strategy was either oversold, or it’s underperforming. Much of ADM’s profit growth during the past year has come from one area: merchandising and handling, the obscure business line within a unit called agricultural services, which uses ADM’s unmatched proprietary market intelligence to hedge bets in futures markets and ships and trades grains from countries with surpluses to areas desperate for food. This unit has earned hundreds of millions in several quarters— orders of magnitude more than before Woertz took over.
Yet it’s an unpredictable source of income: Analysts don’t quite understand the surge of this black-box business, but they do know the company is taking more market risk than ever before. This spring, its luck ran out, with agricultural services profits dropping 67 percent, to $121 million. The company’s overall income plummeted 54 percent, even excluding one-time losses.
While a single down quarter might not be significant, ADM executives’ word choices have shifted toward the negative. During the November earnings call, they talked about external problems in the economy but boasted of being “well-positioned and confident.” In early February, they admitted the downturn is affecting ADM to the point at which the executives are “adjusting our business model.” Woertz continues to be vague about what exactly that means. ADM’s expansion and growth aren’t targeted toward any one geographic region or business line but everywhere along ADM’s long, complex value chain. It’s a convenient position for a CEO who talked up one slice of her vast corporation a little too much and then watched it blow up in her face. But it may be the way she should’ve been running ADM from the beginning. [More]
I suspect the real problems for ethanol are just beginning, and not simply for the reasons I have mentioned before: too little energy gain, specious national security claims, and on-going distribution headaches, for starters.
The bigger issue is its dependence on the government to continue to push the marketing, instead of actual demand. As the worst of the recession fears slowly subside, the sobering reality of how much we have (for good reason) spent to prevent a much worse economy is sliding into center stage. Of course, mandates have the magic of not appearing as a budget figure, but the tariff and credit certainly do.
In short, ethanol will be competing for some very scarce federal dollars sooner than anticipated. It will be affected, perhaps profoundly, by the consequences of GHG regulation/legislation. And it will always be subject to the truly unpredictable outlook for oil prices.
Which makes me think if ADM is easing back on the emphasis on biofuels, maybe they are doing it for reasons that I should pay attention to as well.