Interesting ADM Purchase

Much has been said about what might be the next move for Archer Daniel's Midland's (ADM) US operations. We got a very interesting answer Friday.

There has been speculation that ADM maybe after another ethanol producer like Verasun (VSE) or Aventine (AVR) or even a jump to the west coast and a partnership with Bill Gates and Pacific Ethanol (PEIX). On Friday ADM may have given us a glimsp at their direction. Rather than adding more production (ADM already produces more than twice it's closest competitor), ADM entered into an agreement to acquire the Fasco Mills Company in Illinois.

Fasco Mills is a family-owned grain and feed company operating one of the largest networks of grain elevators and rail shipping terminals in Illinois. Their thirteen grain elevators will dramatically increase ADM's footprint tributary to the prime farm production areas of northern Illinois. The grain from these elevators will flow into ADM's domestic and global processing and marketing network.

Matthew Jansen, president of ADM's Grain Group, said "these elevators allow ADM to offer increased marketing alternatives to farmers in northern Illinois while securing the commodity flow for ADM's biofuel, food and feed needs."

Richard Zimmerman, chairman of Fasco Mills, said "our management team at Fasco has built significant value into these operations, and we feel that ADM's diverse resources will further enhance their value to the farmer." The parties expect the transaction to close on September 1, 2007.

To be honest I am a bit miffed at myself for not looking in this area sooner. Rather than go after another producer, what is ADM doing? Securing the corn! The recent high prices must have convinced ADM that the single most important move for them now is expansion to cheaper production areas abroad and securing feedstock at home. ADM is moving into Brazil very soon and this move, to be honest is brilliant. With the other, less diversified producers struggling now to cope with temporary high corn and low ethanol prices, only ADM is in a position to do deals like this.

What they have effectively done is secure lower cost inputs for their ethanol than their rivals and other grain products from the upper Midwest. This move basically corners the region for ADM. This is like Exxon (XOM) making a huge oil find in the US.

ADM is moving to control it's corn cost for decades to come and at the same time, act a a toll bridge for the corn coming out of that area to other companies.

Nice. In the end what will be the most important, producing the most ethanol or controlling the corn that makes it? If you control the corn, you dictate ethanol profits, at least for the other companies. It at least guarantees you significantly remain the low cost producer of the stuff.