Archer Daniels Midland, Where Inventory Valuation Takes A Bite (ADM, BG, POT, VLO, ANDE)

Farm products giant Archer Daniels Midland Co. (NYSE: ADM) posted EPS of $0.54 on revenue of $16.8 billion. Analysts were expecting EPS of $0.75 on revenue of $15.66 billion, so the company’s shares are taking a beating this morning.  Competitor Bunge Ltd. (NYSE: BG) posted better-than-expected earnings last week, but like ADM, earnings were lower than the same period a year ago. Fertilizer maker Potash Corp. of Saskatchewan Inc. (NYSE: POT) also posted very strong third quarter results last week.

ADM got solid profit help from its bioproducts group, which is where the company counts its revenue from ethanol sales. Bioproducts swung from a -$6 million loss in the third quarter of 2009 to a $195 million profit this year. This is substantially better than ethanol profit from either Valero Energy Corp. (NYSE: VLO), which posted a profit of $47 million from its ethanol operations, or The Andersons, Inc. (NASDAQ: ANDE), which posted profit from its ethanol group of $30 million in the second quarter of 2010. The Andersons report third quarter earnings later this week.

ADM took a -$124 million after-tax charge against earnings for “changing LIFO inventory valuations.” Oilseeds processing rose $24 million year-over-year, and crushing and origination grew $41 million. The company also noted improving business in its South American biodiesel business.

Corn processing profits, which includes the ethanol business, rose $153 million year-over-year, reflecting increased capacity in the company’s new mills. That profit also includes $32 million in costs for starting up the new plants.

Corn processing has overtaken ADM’s oilseed business as the largest profit contributor. That’s either good news or bad news, depending on how one views corn ethanol as a transportation fuel.

The good news is that as demand grows for ethanol, ADM will sell more. Because it already buys its own grain, and the subsidy payments for ethanol are still in force, the company is somewhat insulated from corn prices rises and still benefits for the $0.45/gallon federal ethanol subsidy.

The bad news is that the ethanol subsidy expires in December, and it remains to be seen whether it is renewed by Congress. Because the subsidy is primarily a benefit to agriculture, it is a good bet that it will be extended. But if it is not, ADM could face some serious profit pressure.

ADM stock is trading down about 7% at noon today, on more than double normal volume.

Paul Ausick