Morningstar | Archer Daniels Midland Will Benefit From Shifting Global Crop Trade Patterns
Archer Daniels Midland buys, processes, and sells agricultural commodities. The firm purchases crops from farmers and then transports, stores, and/or processes the crops before selling them to food, feed, and energy buyers. The commodity products ADM moves around the world are readily available from competitors, and the company has little pricing power over the products it buys and sells, making for slim margins. In addition, the capital intensity of its operations makes it difficult, but not impossible, for ADM to generate economic profits.ADM is a major processor of soybeans and corn. Soybean oil and meal are the firm's primary soybean products, with oils sold mainly to food customers and meal to feed customers. As such, ADM’s oilseeds segment is exposed to the soy crush margin, or the difference between the price of soybeans and the prices of soy meal and oil. The soybean trading business has benefited from increased Chinese soybean consumption. We expect demand will increase as China's population and income per capita both advance.Corn processed by ADM makes its way into sweeteners and starches or ethanol. The sweetener business sells primarily commodity-grade products, such as high-fructose corn syrup, which have little pricing power. In response to declining demand for high-fructose corn syrup, the company has been developing more specialty products, which command higher margins. ADM's ethanol business has been aided by an important U.S. mandate for ethanol use in fuel, which provides a floor for demand. In recent years, the ethanol industry has been oversupplied. In response, ADM converted an ethanol plant that effectively reduces U.S. ethanol production by 100 million gallons per year.ADM has expanded its flavors and specialty ingredients business primarily through acquisitions. ADM acquired Wild Flavors in 2014 and Neovia in early 2019 to grow its nutrition business. Specialty flavors and ingredients are value-added, requiring additional processing and, in many cases, proprietary formulations. As ADM continues to invest in the development of new products, we expect nutrition segment sales to grow above inflation.Archer Daniels Midland is a human and animal nutrition and an agricultural origination and processing company. The company has three segments: Ag Services and Oilseeds, which includes activities related to the origination, merchandising, transportation, and storage of agricultural raw materials, and the crushing and further processing of oilseeds such as soybeans and soft seeds into vegetable oils and protein meals; Carbohydrate Solutions, which is engaged in corn and wheat wet and dry milling and other activities; and Nutrition, which engages in the manufacturing, sale, and distribution of an array of products including plant-based proteins, natural flavor ingredients, and flavor systems.
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