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Posted on  

March 19, 2002

California's delay in ban on rival to ethanol hits ADM

Chicago Tribune

Shares of Archer Daniels Midland Co. tumbled more than 8 percent Monday after the State of California delayed a ban on a fuel additive that competes with ethanol, one of the agribusiness giant's rainmakers.

ADM, the nation's largest producer of ethanol, had been counting on selling hundreds of millions of gallons of the corn-based fuel in California starting next year, when the state's prohibition on methyl tertiary butyl ether takes effect. The state called for oil refiners to stop using MTBE, an additive that makes gasoline burn cleaner, because it leaks from storage tanks and pollutes groundwater.

But after California Gov. Gray Davis on Friday postponed the MTBE ban by one year, from Dec. 31, 2002, to Jan. 1, 2004, a potentially lucrative market for ADM dried up for the time being and possibly longer.

Without the ethanol demand from California--estimated at more than 800 million gallons a year, nearly half of the current market--ethanol prices are expected to fall. Prices have plunged from a peak near $1.70 a gallon a year ago to near $1 a gallon today, declining in tandem with wholesale gasoline prices.

"I think it will have some effect on ethanol pricing," said ADM spokesman Larry Cunningham. "I don't know how much."

Still, Wall Street analysts slashed their earnings forecast for ADM's fiscal 2003, which begins July 1. David Nelson of Credit Suisse First Boston cut his estimate for the year to 90 cents a share from 97 cents. Nelson also reduced his fiscal third-quarter estimate to 15 cents a share from 20 cents, citing a "cloudy current environment."

"This extension now increases risk for ethanol margins over the next two years and may place the eventual ban of MTBE in jeopardy," Nelson said.

Shares of ADM were under pressure from the opening bell Monday and finished down $1.25, to $13.40, on the New York Stock Exchange.

ADM will try to offset some of the damage by stepping up its lobbying of oil refiners and marketers to switch to ethanol before the ban takes effect. About 150 million gallons of ethanol are sold annually in California.

"There's nothing in Gov. Davis' decision that prevents refiners from getting rid of MTBE sooner and switching to ethanol," Cunningham said.

With 35 percent of the nation's ethanol production capacity, ADM had seen its earnings from the alternative fuel surge in recent years as ethanol and gasoline prices jumped. Over the last two decades, ethanol has yielded the company profits of about $1 billion, according to Prudential Securities. The company recently boosted capacity by about 100 million gallons, to 950 million gallons annually, in anticipation of higher demand.

ADM, the largest ethanol producer, is not the only manufacturer that will suffer from California's decision. Some farmer cooperatives that are building ethanol plants may not have a market for the fuel.

Indeed, the industry has added nearly 50 percent more capacity in the past 18 months, primarily to feed the California market, Nelson said.

"The real growth in the ethanol industry has been in the farmer-owned plants," said Monte Shaw, spokesman for the Renewable Fuels Association, which represents the U.S. ethanol industry. "California's decision could be plunging them into a financial nightmare."

Davis said he delayed the ban to avoid price hikes and shortages as the state moves to use ethanol. The governor, who is up for re-election this year, said he wanted to avoid a "second energy crisis," a reference to the dramatic spike in electricity prices last year following the state's deregulation of energy.

Ethanol supporters counter that given the construction of new plants, there is enough supply to meet California's demand.

Copyright 2002, Chicago Tribune



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