POSTCARD from Hamburg - ADM

At Econopolis we combine in-depth research and analysis with on-the-ground company visits around the world to find the best opportunities in this ever changing world. Yesterday, we had the unique opportunity to meet with some members of the top management from Archer Daniels Midland (ADM) in Hamburg. We talked at length to Patricia Woertz, CEO and chairman of the board of directors; Ray Young, CFO and Valmor Schaffer, president of ADM South America. We also visited their operations in Hamburg, including Europe's largest oilseeds crushing and refinery complex.

ADM runs a global agriculture business. They buy, transport, store, process and market a wide range of agricultural products. They are one of the largest processors of oilseeds, corn, wheat and cocoa in the world. Main products include for instance soybean oil, soybean meal, high fructose corn syrup, ethanol, flour and cocoa products.

In ADM's very large Hamburg plant (which celebrated its 100th anniversary in 2010) rapeseed and soybeans are processed and refined for use in margarines, vegetable oils, bakery products, frying applications, pharmaceutical glycerine and bipdiesel fuel. In recent years, increasing global use of vegetable oils has led ADM to add capacity for seed crushing. Higher demand for rapeseed oil prompted ADM to expand also their crushing facility at the Hamburg plant. Their storage assets include a silo complex which can be seen clearly on the following picture slide show:

We also picked up some interesting information about the state of their primary business segments. For example, we learned that ethanol margins in the current quarter (following the December 31st expiration of the ethanol blender's tax credit) were significantly weaker than ADM had anticipated. On the other hand, within ADM's oilseed processing business, results seem to be coming in above their expectations. Furthermore, they stated that the Ag Services division is doing well and quarterly profit should be exactly in the target range of $150-200million.

ADM will continue to focus its growth investments in South America, India and potentially (through acquisitions) in Europe. They are currently expanding their capacity via a new plant in Paraguay which should come online in time for the 2012 harvest. In Europe, ADM prefers to buy existing capacity rather than build new facilities from scratch.

In China, ADM plans to grow in two ways. First, through increasing exports from North America and South America to China. Second, they expect increasing profits and synergies from their Memorandum of Understanding with Wilmar International. They indicated some $30-40million in initial cost savings in ocean freight, fertilizer and European refined oils, to be split between the two companies.

One last note maybe is that ADM is definitely looking more and more at the whole agricultural value chain to find opportunities and take advantage of its global sourcing capabilities. They highlighted some meaningful value-added new businesses such as their new ClariSoy product, which will be targeted initially at juices and sports drinks.

In conclusion, it is fair to say that the company is faced with short-term challenges, especially in the ethanol division. The remainder of the business appears to be performing well, with oilseeds showing some encouraging signs of improvement. ADM also believes oilseeds provide solid growth opportunities, both organically and through acquisitions. They will invest more in this business in order to take advantage of this growth potential. Increasing scale should give the company a competitive advantage over smaller regional players.