April 25, 2002 #158
Monitoring Corporate Agribusiness
From a Public Interest Perspective
EDITOR\PUBLISHER: A.V. Krebs
ADDRESS: PO. Box 2201, Everett, Washington 98203-0201
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"THE NATURE OF WHAT'S TO COME":
ADM ACCUSED OF BID RIGGING,
"LAUNDERING" EU WINE ALCOHOL
IN THE PRODUCTION OF U.S. ETHANOL
GLENN R. SIMPSON, THE WALL STREET JOURNAL: Documents released on
Tuesday appear to show Archer-Daniels-Midland Co. and other ethanol-industry
participants "sharing bid information to rig bids," Sen. Dianne Feinstein
The documents detail contacts among firms that bid in auctions of wine alcohol, which can be used to make ethanol, conducted by the European Union. Rep. Doug Ose, Republican from California, a critic of federal subsidies for ethanol, released the papers on Tuesday.
Democratic Sen. Feinstein of California brought some of the documents to the
Senate floor and entered them in the record in the debate over a major expansion
in the federal subsidy for ethanol, which is blended with gasoline to reduce
pollution. Sen. Feinstein's bid to defeat an expansion of the ethanol subsidy
failed about an hour later by a wide margin.
In addition to raising questions about possible collusion, Ms. Feinstein said the documents show how the wine alcohol is "laundered" through Caribbean countries to take advantage of the Caribbean Basin Initiative trade preference law before being sold on the U.S. market.
Imported ethanol from the Caribbean, which accounts for about 7% of the U.S. market, is legal and well-known in the petroleum industry. BUT THE EXPOSURE OF ADM'S RELATIONSHIP WITH FOREIGN SUPPLIERS COULD UNDERCUT THE FIRM'S CAREFULLY CULTIVATED IMAGE AS AN ALLY OF AMERICAN CORN GROWERS, WHO SUPPLY THE BULK OF ETHANOL MATERIALS. (emphasis added)
Potentially far more damaging to the company, however, are the new allegations of questionable market practices that recall ADM's scandal over price-fixing activities in other agricultural markets that resulted in huge fines and sent some ADM executives to prison. ADM officials couldn't be reached on Tuesday night for comment.
Many of the documents that Rep. Ose released on Tuesday weren't composed by ADM executives, but rather were sent to them by Regent International of Brea, Calif. Documents show Regent has been a frequent buyer of EU wine alcohol from ADM Ingredients Ltd., an ADM unit based in London.
One 1995 letter from Regent to ADM Ingredients discusses consultations between Regent and a representative for another U.K. firm involved in bidding for EU wine alcohol. The letter recounts an agreement reached with the U.K. firm, ED&F Man Alcohols, which had demanded to be the actual purchaser of a lot that subsequently would be divided between Man and ADM/Regent. "In order to avoid a `show down' or bidding contest, I agreed to this request," wrote Dick Vind, president of Regent.
He followed with what Sen. Feinstein said appeared to be an attempt to
coordinate prices. Mr. Vind wrote: "I would suggest that ADM underbid . . . This
will serve as a safety net in the event Man's bid is rejected for any reason."
Mr. Vind didn't respond to a message seeking comment left at his office on
Tuesday night. In another instance, Mr. Vind tells another company: "I expect
that the winning bid for the 25% volume will be somewhere in the upper $1.30s to
low $1.40s. We are prepared to stop bidding should the price drop below $1.38
FTC GENERAL COUNSEL:
ADM, ETHANOL PRODUCERS
BID RIGGING DOCUMENTS
"NOT SIMPLY PROVOCATIVE,
BUT PERHAPS ALARMING AS WELL"
ZACHARY COILE, SAN FRANCISO CHRONICLE: The Senate backed a plan [Tuesday] to triple the amount of ethanol in gasoline, which opponents argued will lead to more expensive prices at the pumps for Californians. As lawmakers on both sides of the Capitol debated the ethanol requirement, a Sacramento congressman who opposes the plan revealed possible price manipulation among ethanol producers.
Rep. Doug Ose, the Republican chairman of the energy subcommittee of the House Government Reform Committee, released internal memorandums from ethanol suppliers at a hearing about a proposal to ban MTBE as a gasoline additive and require three times as much ethanol, a corn-based additive. The proposal is part of the energy bill scheduled for a Senate vote [Wednesday]. "These memos show a disturbing trend of potential market manipulation by ethanol producers," Ose said.
William Kovacic, the general counsel for the Federal Trade Commission and a witness at Ose's hearing, said the full commission could initiate an investigation of the ethanol suppliers. Kovacic said that he could not tell whether the documents were evidence of possible industry collusion but that the memos were "not simply provocative, but perhaps alarming as well."
"Direct communications between rivals that suggest such behavior are a matter of keen concern to the enforcement community," Kovacic said, adding that he would alert antitrust investigators at the Justice Department. A spokesman for the Renewable Fuels Association, the ethanol industry's trade association, said his group had not seen any of the documents and could not comment on Ose's allegations.
"I am very suspect of the timing and motivation of this charge,"" Bob Dinneen, the group's president, said in a statement. "Congressman Ose called today's hearing at the request of the MTBE industry, and no one from the ethanol industry was called to testify. It strikes me as more than a coincidence that Mr. Ose raised this issue at the eleventh-hour on the day the Senate is debating the renewable fuels standard."
The release of the documents came on a day of often bitter debate that split the Senate along regional lines, pitting Midwestern lawmakers who support the ethanol requirement against senators from California and New York, who strongly oppose it. The Senate [Tuesday] night defeated, by a 68-to-31 vote, an amendment by Sen. Charles Schumer, Dem.-New York, that would have stripped the ethanol requirement from the energy bill.
Earlier in the day, California Sen. Dianne Feinstein temporarily delayed the bill until senators could debate proposals to alter the ethanol requirement. Feinstein, a Democrat, said the requirement could sharply raise gas prices for California consumers because much of the ethanol will have to be transported by rail from the Midwest, where 98% of ethanol plants are located. The requirement "may be fine in the Midwest, where all of the facilities that produce ethanol are based," Feinstein said. "But for those of us on the West Coast and those of us on the East Coast, it is truly egregious."
In releasing the memos, Ose said the documents appear to show a pattern by ethanol suppliers to discuss what prices they intended to bid for supplies before ethanol auctions took place --- with the goal of assuring that suppliers got the prices they wanted.
In one of the memos, . . . .an executive at another Orange County company, Regent International, wrote to an official at Archer Daniels Midland, the nation's largest ethanol producer, on November 20, 1995, to discuss a proposed deal with a London-based ethanol producer, ED & F Man Alcohols, to jointly bid on fuel from France. "Therefore (ED & F) Man will be bidding on the 75,000 hl out of France at a price of 5.02," the memo read. "I would suggest that ADM underbid at a price of 4.85. This will serve as a safety net in the event Man's bid is rejected for any reason."
ADM officials could not be reached for comment. Messages left at the offices of the Orange County companies [Tuesday] afternoon were not returned. The release of the memos was part of a last-ditch attempt by ethanol opponents to derail the plan to phase out MTBE as a gasoline additive and triple the use of ethanol by 2012.
California and a dozen other states have moved to ban MTBE, which has been implicated in groundwater contamination. Gov. Gray Davis last month delayed the state's MTBE ban by a year, to January 1, 2004, after a report by the California Energy Commission said replacing MTBE with ethanol could cut the state's gas supply by 5 to 10 percent and drive up prices to $2 to $3 a gallon.
Ethanol advocates in California have disputed those figures and say there
will be plenty of ethanol to meet demand. "It's been sort of surprising how
strident the narrow but influential opposition has been to (the requirement)"
said Neil Koehler, director of the California Renewable Fuels Partnership, a
group of ethanol producers, environmentalists and others who back the
requirement. "This renewable fuels standard is a great thing for California and
the country. It's been frustrating to hear people suggest otherwise."
ADM STOCK PRICES NOSEDIVE AFTER RELEASE
OF ETHANOL PRICE RIGGING DOCUMENTS
DOW JONES NEWSWIRES: Shares in Archer Daniels MidlandCo. (ADM) fell Wednesday after documents released at a subcommittee hearing in Washington suggested price collusion among ethanol producers. "I think it's definitely a reaction to it," said Leonard Teitelbaum, analyst at Merrill Lynch & Co., referring to tie between the stock drop and the internal memos.
Shares in ADM closed down 30 cents, or 2.1%, to $14.01 on volume of 1.1 million shares. The stock had been down about 3% at one point in the day, but recovered somewhat into the close.
Internal documents were made public Tuesday by California lawmakers, Democratic Sen. Dianne Feinstein and Republican Rep. Doug Ose, suggesting ethanol makers had discussed bids amongst themselves. Both failed in striking from the new Energy Bill proposals that would require the use of ethanol to triple over the next ten years to five billion gallons by 2012 from 1.7 billion last year.
Teitelbaum said the suggestion of collusion is the culprit in Wednesday's stock drop since Tuesday's quarterly results from Archer Daniels were in line with most analysts expectations and passage of the Energy Bill would be a positive development for the company.
Archer Daniels controls about 41% of the U.S. market for ethanol, which is a fuel additive derived from corn. The company has been hurt recently by a decline in the price of ethanol after California delayed a ban on a rival additive, MTBE, for a year until January 1, 2004. The ban was to have started at the end of this year. "There's no question there's some people who, for whatever reason, would like to see ethanol, at least presently, eliminated from the product mix," said Teitelbaum.
Ethanol is an oxygenate used to make gasoline cleaner burning. It has also
become a political football, bounced between lawmakers in the Midwest corn belt
who are pushing its use, and those on the coasts that fear potential shortages
of the additive could push up the cost of gasoline. Archer Daniels did not
return calls for comment.
ADM SHOWED 26% EARNINGS INCREASE
IN 3RD Q MISSING STOCK ANALYSTíS EXPECTATIONS
ASSOCIATED PRESS: Agricultural processing giant Archer Daniels Midland Co. reported Tuesday a 26% increase in the quarter that ended March 31, but missed analysts' expectations.
ADM said gains in oilseed crushing margins and agricultural services lifted net income to $117 million, or 18 cents per share, for the first three months of the year --- the Decatur, Illinois-based companys fiscal third quarter. That compares to $93 million, or 14 cents per share, during the same period last year. Excluding the impact of a one-time gain related to a lawsuit, ADM had quarterly operating income of 17 cents a share, missing by a penny the earnings expectations of analysts surveyed by Thomson Financial/First Call..
. . . . Sales rose four percent to $5.3 billion from $5.1 billion a year ago. Operating profit increased to $254 million from $212 million last year.
ADM is the world's largest processor of soybeans, corn, wheat and cocoa, and is among the biggest makers of ethanol, oil and corn syrup. The company has 275 processing plants across the world.
Earnings from corn whet milling operations were down for the quarter because of decreased demand for ethanol, a fuel additive derived from corn. ADM did not provide specifics. California Gov. Gray Davis last month pushed back a self-imposed deadline to phase out the fuel additive MTBE, which is derived from natural gas, and replace it with cleaner-burning additives such as ethanol. . . . .
"We remain cautiously optimistic, and I repeat cautiously, that refiners will move ahead with replacing MTBE sooner rather than later," ADM Senior Vice President Larry Cunningham said. "We will be the most competitive player in this industry."
Operating profits for oilseed and corn processing were $138 million, up from $136 million in 2001. Agricultural services increased to $38 million from $21 million a year ago. ADM said results from cocoa production were below last year and were poor overall. The company recently closed cocoa grinding operations in Savannah, Georgia., and in Poland.
For the first nine months of its fiscal year, net profit was $399 million, or
61 cents per share, compared with $327 million, or 50 cents a share, the year
U.S. SENATE PREPARES TO PASS ENERGY BILL,
TAX INCENTIVES FOR ETHANOL PRODUCTION
"This type of issue occasionally slips through Congress without much
attention, then, a year or two later, it turns out to be a big disaster. Our
constituents turn to us, and ask: `How could you have done this? How could you
have created something that has caused so much hardship without even thinking
about it, without debating it, without opposing it?'"
--- Senator Charles E. Schumer, Democrat of New York
DAVID E. ROSENBAUM, NEW YORK TIMES: After six weeks of slow debate on energy legislation, the Senate entered the final stretch [Tuesday], agreeing to a package of tax incentives for energy production and conservation and voting to expand the amount of ethanol in the nation's gasoline.
By 86 to 13, the Senate decided to cut off debate and take a final vote on the legislation by the end of the week. The decision to bring the debate to a close became possible after the Democratic leader, Senator Tom Daschle of South Dakota, agreed to allow a vote by June 28 on a proposal to make a repeal of the federal estate tax permanent. Passage by the Senate will send the energy bill to a conference committee for reconciliation with a differing measure that has been approved by the House.
The tax package in the energy legislation involves $14.1 billion in tax incentives over the next decade to promote conservation and encourage production of new sources of fuel. Senator Max Baucus, Democrat of Montana, said the incentives would "help on the margin to wean us" from imported oil.
Senators from New York and California led a fight to delete from the legislation a section that would triple the amount of ethanol in the nation's gasoline supply by 2012, but their proposal was rejected, 68 to 31.
Senator Charles E. Schumer, Democrat of New York, argued that the requirement for increased use of ethanol, a clean-burning additive usually made of corn, would lead to increased gasoline prices on the East and West Coasts, where that crop is not widely grown. But Mr. Daschle, the main sponsor of the ethanol provision, said this view of higher prices was "just not accurate."
Mr. Daschle relented on the question of the estate tax repeal because Senator Phil Gramm of Texas and other Republicans had vowed to tie up the energy legislation and additional measures unless they were promised a vote on repeal. The $1.35 trillion tax cut President Bush signed last year phases out the tax on large estates, with the tax completely eliminated in 2010. But the entire tax law expires at the end of 2010, and without an extension, all taxes it addresses, including the estate tax, will revert to the levels that prevailed at the beginning of 2001.
Now that the Senate has rejected oil and gas exploration in the Alaska wilderness and strict new fuel-efficiency standards for cars and trucks, the most ambitious part of the energy bill likely to be passed this week may be a vast expansion of the amount of ethanol that has to be added to gasoline. . . .
The ethanol measure was written by Senator Tom Daschle, Democrat of South Dakota, the majority leader, and it is backed by an unusual coalition of interests that include farmers, big oil companies and environmentalists.
"I do not fool myself," Senator Charles E. Schumer of New York, who is leading the opposition to the measure, told the Senate last week, conceding that a "huge group" was against him. But Mr. Schumer, a Democrat, said he was fighting the proposal because it would "hurt consumers dramatically in my state of New York and throughout the country."
Support for ethanol, a clean-burning gasoline additive made mostly from corn and already heavily subsidized, is generally weaker in the House, where lawmakers from corn-growing states have less influence. But this measure is advocated by Speaker J. Dennis Hastert, who has plenty of corn farmers in his state, Illinois, and his position may assure its approval by the Senate-House conference committee on the energy legislation. If so, it cannot be stopped on the House floor without defeating the entire bill.
President Bush, who came out for the expanded use of ethanol when he campaigned in Iowa in 2000, supports the bill before the Senate. . . .
The energy bill before the Senate, sent to the floor without going through the normal committee process, would ban M.T.B.E. nationwide and eliminate the general requirement for oxygenates in gasoline. But it would require that the amount of ethanol blended into gasoline, now 1.7 billion gallons a year, be increased, to 2.3 billion gallons by 2004 and even more every year afterward until it reaches 5 billion gallons in 2012.
Midwestern farmers like the plan because it would expand the market for corn. Environmentalists favor it because they say they think that it would lead to less air pollution. Oil companies approve because it would reduce the pressure to find another way to produce cleaner gasoline and because the measure specifies that they cannot be held liable if ethanol turns out to be damaging like M.T.B.E. The companies would also not be disappointed if an ethanol shortage developed and gasoline prices rose.
Of course, the legislation also makes the Archer Daniels Midland Company happy. The Illinois company, a big contributor to both political parties, is the largest manufacturer of ethanol. . . .
But Mr. Schumer said the high cost of shipping ethanol would lead to a big
increase in the price of gasoline, a rise that would be the equivalent of a new
gasoline tax. He would ban M.T.B.E. and abolish the oxygenate standard but make
the use of ethanol optional. He would maintain clean air laws and require the
companies that sell gasoline to find a way to meet the antipollution
requirements in places where using ethanol was not
economical. . . .
He is standing up to his party's leaders, Mr. Schumer said, because this type of issue occasionally slips through Congress without much attention, "then, a year or two later, it turns out to be a big disaster."
"Our constituents turn to us," Mr. Schumer went on, "and ask: `How could you
have done this? How could you have created something that has caused so much
hardship without even thinking about it, without debating it, without opposing
DEVELOPMENT UNDER WAY AT UNIV. OF ILLINOIS
TO COMBINE ETHANOL AND DIESEL FUEL
DOW JONES NEWSWIRES: Mixing the corn in his fields with the diesel powering his tractors has worked so far for farmer Paul Keiser. Now experts are trying to prove it can work for others, too. University of Illinois researchers are studying an experimental fuel that combines ethanol, which is produced from corn, with diesel. They hope testing of the so-called E diesel at two Illinois farms and in the lab will show the blend is durable, cost-effective and better for the environment than normal diesel.
Keiser, who farms corn and soybeans, noticed little difference between the ethanol blend and normal diesel fuel used in most farm equipment. "We've liked the results and we especially like the fact that it is a renewable resource that we can get right out of our own fields," he said. "I'm growing what I'm using. I don't know any farmer that wouldn't be excited about that."
The long-term goal is to get the product on the market and expand demand for corn-based ethanol, in turn creating more income for farmers. Illinois is the nation's largest ethanol producer. About 280 million bushels of corn are processed each year at ethanol plants owned by Archer Daniels Midland (ADM) in Decatur and Midwest Grain Producers and Williams Bio-Energy, both in Pekin.
"Farmers will tell you it can't come soon enough," university researcher Alan Hansen said. "But to be realistic there are some years to go." Blending crops with diesel fuel isn't a new idea; soybeans are already used as an additive to make biodiesel and ethanol has been mixed with gasoline for years. However, blending ethanol with diesel has been problematic.
Ethanol reduces the lubrication of diesel, making it harder on engines, so other additives are needed to counter that effect. Researchers also have been concerned they would see a significant decrease in power by adding ethanol to diesel. Hansen said the farm testing has been positive, with no perceptible reduction in power. But some issues remain before E diesel is commercially viable, he said.
One of those is cost. Initial estimates show the ethanol-diesel blend would cost between five and 15 cents more a gallon than regular diesel. Without government subsidies, that could make it too expensive to buy at the pump. But for use by farmers, the higher cost likely would be offset by an increased demand for corn.
Even if it's used only in farm equipment, researchers estimate demand for corn would go up by 300 million bushels and the price would jump two cents a bushel. Corn currently is selling around $2 a bushel.
"Indirectly it's feeding back into the system. They're kind of closing their loop and in a real way benefiting from that," Hansen said.
Another problem is availability. There is growing support to replace the fuel additive MTBE with ethanol, which would triple its demand during a time when ethanol producers are already operating at maximum capacity. Mixed environmental benefits are another obstacle.
The ethanol-diesel blend significantly reduces trucks' release of particulate matter --- tiny particles found in the black smoke that spews from diesel engines --- and nitrogen oxide emissions, according to the university research. It could also cut down on the release of carbon monoxide. But environmentalists prefer phasing out the use of diesel engines altogether in favor of engines that use cleaner energy sources such as natural gas.
The university's research is part of a larger study by the Illinois
Department of Commerce and Community Affairs. As part of the study, the Chicago
Transit Authority has been running 15 of its buses on E diesel the past two
years. Archer Daniels Midland also has been fueling two of its heavy trucks with
the ethanol-diesel blend. Larry Cunningham, a senior vice president at Archer
Daniels Midland, said the trucks powered by E diesel have logged a combined
400,000 miles without any inordinate wear.
CHINESE OFFICIALS DISCUSS IMPORTING
BRAZIL'S SUGAR CANE-BASED ETHANOL
REUTERS NEWS SERVICE: Chinese sugar industry executives from the northeastern state of Heilongjiang are visiting Brazil to investigate the production and possible import of sugar cane-based fuel alcohol (ethanol), a Sao Paulo Cane Agroindustry Union (Unica) official said last week. "They are observing how Brazil implements its fuel alcohol program," the Unica official said by phone from the organization's Sao Paulo headquarters, adding that the Chinese were interested in logistics.
Brazil, the world's largest sugar cane producer, launched the Pro-Alcohol program in the mid-1970s in a bid to reduce dependence on oil imports and risk of soaring prices. Brazil, which has just started harvesting what is expected to be a record cane crop, is seeking new export markets for its fuel alcohol. Unica estimates that most of a forecast 28 million tonnes increase in cane output will be crushed into fuel alcohol rather than sugar.
Heilongjiang, which started testing the use of anhydrous alcohol in motor vehicles last July, plans to start commercial production in 2003. "Chinese gasoline demand is rising fast and they are worried about the cost of imports and air pollution in the cities. They also want to boost agriculture," said the Unica official, who accompanied the Chinese during talks with sugar companies in Sao Paul on Tuesday.
Although China is the world's third largest ethanol producer, after Brazil
and the United States, output is mostly corn-based and destined for industrial
or direct human consumption. The Chinese mission was in Brasilia on Wednesday
for talks with government officials.
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newsletter can be found at the Corporate Agribusiness Research Projectís web site on
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AGRIBUSINESS EXAMINER and "Between the Furrows."
THE AGBIZ TILLER, the progeny of the one-time printed newsletter, now becomes
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which is an effort to assist the reader in the necessary art of researching corporations; a
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