ADM suffers one-two punch from GrainCorp, ethanol

CHICAGO Mon Dec 2, 2013 11:30am IST

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CHICAGO Dec 2 (Reuters) - November was not kind to Archer Daniels Midland Co.

The Illinois-based grain trader suffered two blows in two weeks last month when Australia rejected its planned takeover of GrainCorp Ltd and the Obama administration proposed the first-ever cuts to requirements for use of U.S. biofuel produced by ADM.

The GrainCorp decision, announced on Friday by Australia's treasurer, disappointed ADM executives who had pursued GrainCorp for 13 months as a central part of their strategy to expand. The deal would have increased opportunities for exports to fast-growing areas of Asia and the Middle East.

Analysts said ADM was down, but not out by a long shot. The company is already benefiting from a record-large U.S. corn harvest that should support profits well into 2014.

Shares fell 3 percent on Friday but remain up 47 percent this year.

The company, led by Chief Executive Patricia Woertz, faces a difficult decision in the near term about whether to maintain, increase, or dump its 20 percent stake in GrainCorp, said Ken Zaslow, analyst for BMO Capital Markets.

ADM may decide the position is no longer strategically beneficial, unless executives believe they can successfully acquire GrainCorp in the future, or form a strategic partnership, he said.

There are few other takeover targets in Australia as GrainCorp is the country's last major independent grain handler.

"We wonder if this signals the inability for agribusiness companies to continue to consolidate, which limits a key opportunity for them to deploy high cash balances and expand returns," Zaslow said.

ADM spokeswoman Jackie Anderson declined to comment on Friday.

The GrainCorp deal was set to become the latest tie-up in the rapid consolidation of the global grains sector amid intense competition to feed countries like China.

ADM is one of the world's largest agricultural trading houses, competing with rivals Bunge, Cargill and Louis Dreyfus to buy, sell, transport, store and process crops.

Australia is the world's second-largest wheat exporter, with easy access to key Asian markets. GrainCorp dominates the country's east coast storage, distribution and marketing of grains, handling 85 percent of eastern Australia's exports.

Bankers determined over the last 10 days that ADM's acquisition would likely fail, a source familiar with the matter told Reuters. ADM representatives had stepped up talks with Australia's government in an attempt to save the acquisition, the source said.

In a final public attempt, ADM on Wednesday bolstered its bid for GrainCorp with additional commitments to Australian farmers.

ADM could still use partnerships with GrainCorp to build relationships with farmers and "go some way to meeting its objectives in securing a competitive position in accumulating east coast grain," JP Morgan analyst Stuart Jackson said.

ETHANOL OUTLOOK

The move by the U.S. Environmental Protection Agency to slash requirements for the use of biofuels came as less of a surprise to analysts than the GrainCorp defeat. The proposal, announced Nov. 15, still stung ADM, one of the nation's largest producers of corn-based ethanol.

Tom Graves, equity analyst for S&P Capital IQ, recently downgraded ADM to a "sell" from a "hold" due to the EPA's proposed cuts.

"Demand for ethanol could be something of a swing factor of the results that they report," Graves said about ADM. "It's potentially perhaps one of the more volatile businesses depending on prices and levels of demand."

So far, an influx of corn from a record-large U.S. harvest has pushed corn futures to three-year lows and ethanol margins to their highest level since late 2009, the last year of a record corn harvest.

Demand for ethanol could support production, even if government mandates for usage drop, Woertz said recently.

The massive harvest also increases the amount of grain available for ADM to handle.

GrainCorp was not "a make-or-break deal" for the company's future, said Ken Smithmier, an independent grain trader who formerly worked for ADM.

"They still have the right idea," he said about ADM. "Their attention is in the right direction."

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