Friday, October 5, 2007

ADM Going Shopping?

For a while I have been saying that the ethanol industry is due for consolidation and it seems that the largest producer of it in the US, Archer Daniels Midland (ADM) agrees.

ADM's Chief Financial Officer Doug Schmalz said Tuesday the corn and soy bean processing giant would consider buying ethanol plants now that lower prices for the fuel have been preassuring production margins. "In general, we'll look at all opportunitites including acquisitons," Schmalz said at the Citi Biofuels Conference.

"We have to have properties that will fit within our network. Some plants just wouldn't fit; others might. We'll analyze that as they become available."

This is where it gets real fun. We get to speculate as to what may happen. ADM will not be picking up the mom and pop ethanol collaboratives that have sprung up in recent years. When you will be producing 1.5 billion gallons of ethanol by the end of next year, picking up a 20 million gallon a year plant is a waste of your time.

That being said, when companies like Verasun (VSE) and Pacific Ethanol(PEIX) both trading a 52 week lows, the time to pick one of them up is perfect. Verasun would give ADM another 500 mgpy of production and access to an E85 infrastructure and partnerships with auto makers. Pacific Ethanol would give ADM another 300 mgpy and instant access to the potentially largest ethanol market in the US, California.

Pacific Ethanol has a market cap of $350 million and Verasun's is $810 million so either would easily be digestible for the $21 billion ADM.

There has been way too much coming from ADM recently about expansion plans via partnerships or purchases for something not to be either in the works already or about to be. ADM, as I have said before is probably the quietest company out there. For them to actually be talking means something, most likely something very big is about to happen.

Investors have watched the stock drift for most of 2007 and I have repeatedly said to be patient and hold on (I am holding on to my shares with you). Continue to do so and by this time next year, we'll be laughing at those who did not.

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