Forget Soybeans. ADM Signals Doom for Ethanol Without Trade Deal

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One of the world's biggest ethanol producers painted a grim picture for American-made biofuel, along with its own prospects, if Donald Trump's trade war with China lingers much longer.

Archer-Daniels-Midland Co. said Thursday that the main risk to its goal of matching earnings levels of last year is a continuation of the trade spat between the world's two largest economies. Like U.S.-grown soybeans, ethanol -- made primarily from corn and a revenue generator for farmers -- faces steep tariffs in China.

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“If we don't see a resumption of significant agricultural trade with China, particularly ethanol, well before the end of the third quarter, it would be difficult to achieve adjusted earnings per share in 2019 similar to 2018,” Chief Financial Officer Ray Young said on a call with analysts.

America's ethanol industry is beset by a supply glut and negative returns. On Wednesday, Pacific Ethanol Inc. reported its 10th straight quarter of losses. Last week, Plymouth Energy LLC said it shut a plant in Merrill, Iowa. ADM warned of more plant closures without a trade resolution.

“If this thing persists, I could see more capacity coming offline,” Young said. “I mean, this industry is not sustainable long-term with negative EBITDA margins.”

Chief Executive Officer Juan Luciano said on the same call that the ADM continues to “work on the operational and legal separation” of its ethanol plants into a standalone business that positions it for a sale or joint venture.

The agribusiness industry is navigating an operating environment pockmarked with everything from the trade war to African swine fever in China to inclement weather in the U.S. Midwest that washed out fields and delayed planting. That's led to higher corn costs for ethanol plants.

In recent years, the biofuel industry expanded with an eye toward meeting burgeoning demand from China. The country has a goal to use more ethanol by 2020 in order to reduce smog. China's ethanol program may mean it needs to import 2 billion to 3 billion gallons of the fuel, annually

For that reason, Luciano said it's “a no-brainer” and a “win-win” for ethanol sales to be included in a trade deal.

Earlier this year, Luciano expressed optimism for a strong second half, citing expectations of a mid-year trade resolution. He tempered that outlook on Thursday, declining to estimate a time-line for a deal, although he did say he was confident one would be reached.

To contact the reporters on this story: Mario Parker in Chicago at mparker22@bloomberg.net;Isis Almeida in Chicago at ialmeida3@bloomberg.net

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net, Millie Munshi

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