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A Bet on Ethanol, With a Convert at the Helm

October 8, 2006
By ALEXEI BARRIONUEVO

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BACK in 1999, when she was the head of refining at Chevron, Patricia A. Woertz told a group of energy officials that it was ³time to stop mixing agricultural policy with fuels policy.²

In that same speech, at a fuels conference in Washington, Ms. Woertz also publicly expressed worry about the ³unintended consequences² of a federal mandate requiring the use of corn-based ethanol in gasoline.

Today Ms. Woertz is standing on the other side of the gasoline debate, wholeheartedly supporting the growth of ethanol, the fuel the oil industry loves to hate but has had to learn to live with. In May, she took over as the chief executive of Archer Daniels Midland, the giant agricultural company that also happens to be the biggest ethanol producer in the country.

A.D.M. spent nearly three decades pushing relentlessly for the use of ethanol in gasoline, lobbying Congress and the White House and rousing farmers. But only in the last few years, amid record-high oil prices and government mandates to use ethanol, has this clear, colorless fuel ‹ a form of ethyl alcohol ‹ finally begun to catch on, transforming it from a dream into almost a religion in the Midwestern states that produce corn.

Ethanol has been a boon to A.D.M.¹s fortunes, helping it to achieve record earnings last year of $1.3 billion on sales of $36.6 billion. While the company does not break down the sources of its profit, analysts say ethanol could make up 40 percent of A.D.M.¹s net income in fiscal 2007, about double what it meant to the company last year.

With that bigger profit potential has come greater volatility in A.D.M.¹s stock, which lately has mirrored more closely the rise and fall of energy prices. That has caused some analysts to caution its investors to go slow on the company.

³For the bulk of the company¹s history, the vast majority of their profits came from crushing products like corn to feed the world,² said Eric Katzman, an analyst at Deutsche Bank. But a greater proportion of A.D.M.¹s earnings will come from biofuels in the future, he said, as a large portion of the $2.4 billion the company plans to invest in the next two years is energy related.

So far, that capital is devoted to sustaining corn as the preferred crop for producing ethanol. While ethanol can be made more cheaply from sugar cane, as it is in Brazil, lobbying by A.D.M. and farm-state politicians has helped corn win out as the crop of choice for ethanol in the United States. It did not hurt that the powerful American sugar lobby helped to erect trade barriers keeping out cheaper imported sugar and cheaper imported ethanol.

MOST politicians originally saw ethanol as a way to help farmers to make more money from their corn crop. Now it is being seen by policy makers, including President Bush, as a partial antidote to the nation¹s reliance on foreign oil. To achieve that vision of energy independence will require much more ethanol, and many agricultural experts have begun to worry about the food-for-fuel trade-off of using so much corn ‹ more than 60 percent of which is used to feed livestock, an important American export ‹ to produce fuel. And corn is one of the most energy-intensive and water-intensive crops to grow anywhere.

But A.D.M. has been slow thus far to be a party to research that might sway ethanol production away from corn and into crops that require less water and fossil-fuel based fertilizers; one such crop is switchgrass, a tall prairie grass that is highly drought resistant. Some outside experts call A.D.M.¹s strategy shortsighted.

³I am sure A.D.M. shareholders want the company to be economically viable for the next 20 to 25 years, not just for the next 5 to 10,² said Clayton K. Yeutter, a former secretary of agriculture and United States trade representative. ³If ethanol is going to be a significant part of A.D.M.¹s profits, they should have as much interest in finding the lower-cost inputs as anyone would.²

Sitting in a conference room in A.D.M.¹s global headquarters, Ms. Woertz, 53, did not dwell on the risks of A.D.M.¹s focus on corn as the primary source of ethanol. She promoted ethanol¹s growth potential, saying she sees the fuel making up 10 percent of the country¹s gasoline supply, by sometime next decade, up from about 4 percent this year.

The idea that ethanol could one day replace more than half of gasoline is not out of the realm of possibility, either, she said, but will require successful development of ethanol from agricultural waste like corn stalks, or hardy grasses like switchgrass. The technology to efficiently produce this so-called ³cellulosic² ethanol is most likely many years away. In any event, ³We will be there when it¹s there,² she said. ³We want to intersect the future and still be a big player in the bio-energy world.²

She said she saw little contradiction in her previous concern about the fuel ‹ a worry that she said was tied to federal clean air standards for tailpipe emissions and the debate over how to meet them. Refiners, she said, wanted to be told what the emissions standards were and to allow their scientists to find a way to meet them, rather than to have a specific gasoline formulation dictated by regulators.

³Things have evolved,² she said, and the oil industry and ethanol producers ³have come to work much more closely on the fuel supplies for this country.²

Many analysts saw the hiring of Ms. Woertz as a signal that A.D.M. wanted to become the Exxon Mobil of ethanol. Indeed, her energy experience helped win her the job, A.D.M. officials said. But they added that she was also selected because her background as a strategic planner at Chevron gave A.D.M.¹s board members the confidence that she could chart a vision for the company¹s future.

³We needed someone that was a proven and capable strategist,² said Kelvin R. Westbrook, the board member who led the search process. Her energy experience ³was a valued part of her background but by no means was it a determining factor.²

Ms. Woertz arrives at a favorable time in the company¹s 104-year history. A.D.M. paid $400 million last year to settle the last of a pile of lawsuits stemming from a price-fixing scandal in the mid-1990¹s involving lysine, an animal feed additive. Three top executives were sent to prison over the scandal, including Michael D. Andreas, A.D.M.¹s former executive vice president and the son of Dwayne O. Andreas, the chief executive who led the company for 27 years.

At the same time, prices are rising for high-fructose corn syrup and other products that A.D.M. processes from corn, soybeans and wheat. And the demand for ethanol is forecast to soar as federally mandated fuel formulations take effect. Congress passed a law last year requiring refiners to increase their use of ethanol to 7.5 billion gallons by 2012, from 4 billion this year.

The future looks even better, if that is possible. While the federal government has mandated greater ethanol use in the United States, European governments are pushing for higher use of soybean-based biodiesel in the fuel supply. A.D.M. is one of the world¹s biggest producers of both of those fuels.

A.D.M. is also the world¹s largest producer of food and animal feed. The company, which adopted the slogan ³Supermarket to the World² in the 1990¹s, says it makes enough to feed 300 million people, as well as many millions of cows, chickens and pigs.

WHEN Ms. Woertz looks to the future, she sees the twin trends of a growing population that needs additional food ‹ with a diet that increasingly demands protein ‹ and the quest for alternative sources of energy to oil.

She said A.D.M. was ³uniquely positioned² to benefit from growing global demand for both food and fuel. ³We have the technologies, we have the assets and we have the infrastructure,² she said.

That optimism is apparent in A.D.M.¹s latest annual report, the first to feature Ms. Woertz. Its title is ³We See Opportunity.²

How exactly A.D.M. will go about capitalizing on its opportunities remains to be seen. Ms. Woertz says senior managers are working on a plan, to be unveiled to analysts in November, that will outline the company¹s biofuels strategy over the next decade.

While the plan is still being drafted, Ms. Woertz said that it clearly would involve a stronger push by A.D.M. to develop ways to make ethanol from grasses and agricultural waste ‹ cellulosic ethanol. She hinted that the plan might involve partnerships with venture capitalists like Vinod Khosla, the founding chief executive of Sun Microsystems, who is investing in companies working on cellulosic ethanol and other alternative fuels, and stumping for ethanol all over the country.

In August, Ms. Woertz invited Mr. Khosla to sit in on a meeting in Chicago of A.D.M.¹s strategic planning committee, where he briefed the executives on cellulosic ethanol opportunities.

³We have discussed opportunities we could pursue together,² Ms. Woertz said of Mr. Khosla. ³All of this question about the longer term is something we absolutely have under way and there will be more to come.²

In Decatur, Ms. Woertz and two other top executives at the company made it clear that A.D.M.¹s plans, for the moment, revolved mostly around getting ethanol from corn. The company has little concern about the amount of corn being harvested for biofuels, even as it is set to commercialize a promising new technology to produce biodegradable plastics that will use even more corn.

Ms. Woertz and the other A.D.M. executives said they believed that the genetic modification of corn seed, which has led to a 75 percent increase in corn yields since 1980, would continue to keep pace with growing demand for nonfood products like ethanol. That stands in stark contrast to the concern of some agriculture executives ‹ notably Warren R. Staley, chief executive of Cargill, an A.D.M. rival ‹ that if the ethanol boom were left unchecked, it would eventually raise food prices and hurt America¹s grain exports.

At A.D.M.¹s main research center, a converted high school here in Decatur, two company executives seemed unfazed by that concern. Mark G. Matlock, senior vice president for research and development, said A.D.M. was trying to wring more ethanol out of unused parts of the corn crop. He said he was less optimistic about the near-term economics of producing ethanol from switchgrass, an idea promoted by President Bush in his State of the Union address this year. While switchgrass is cheaper to grow than corn, it would be more costly to convert to ethanol, partly because the country lacks the machines to harvest and transport switchgrass efficiently as a crop.

³From a strategy standpoint it made the most sense to look at the existing corn streams that we are handling through our network of everything from country elevators to processing facilities,² said Edward A. Harjehausen, the senior vice president for food and feed ingredients. The company is involved in a research project with the Energy Department to take the corn fiber stream and convert as much of the cellulose as possible to additional ethanol.

The way the A.D.M. executives see it, by focusing on waste streams already coming out of its corn-processing plants, the company can avoid the ³chicken and egg² problems that other companies may face in trying to make cellulosic ethanol from new crops like switchgrass: farmers may be hesitant to grow the grass until there is a market for the crop, but companies will be reluctant to create a market and build separate processing plants until they see a ready supply of raw material.

³Everyone has this vision in the end of a billion tons of biomass generating all of our fuel needs,² Mr. Matlock said. ³That is the far vision. So we focus on those intermediate steps to get to the vision.²

Ms. Woertz is a fresh start for a company that had been run by four families for a century. The families once controlled more than half its board seats and still control some 10 percent of A.D.M.¹s stock, analysts said. That insular grip on power allowed the company to make long-term bets, which paid off handily. In the 1970¹s, for example, A.D.M. invested heavily in factories to make high-fructose corn syrup, a low-cost corn-based sweetener that later replaced sugar in Coke and Pepsi and hundreds of other foods.

A.D.M. fell into the biofuels business later in the decade, when the company tried to solve a problem with seasonal overcapacity in its corn syrup plants by producing something else from abundant corn supplies: ethanol. That set off a two-decade-long lobbying and public-relations effort by the elder Mr. Andreas to win broader acceptance for ethanol as a fuel.

CRITICS, noting ethanol¹s shortcomings like its lower energy content versus gasoline and the fact that it receives a 51-cent-a-gallon subsidy, say that while the marketing campaign has been good for the company, it has been bad for the country. ³A.D.M.¹s role in the ethanol debate has largely been to provide the narrative that the politicians need to justify the handouts they want to give to farmers anyway,² said Jerry Taylor, a senior fellow at the Cato Institute who has been critical of ethanol.

The ethanol promotion campaign was hurt when the lysine price-fixing scandal torpedoed A.D.M.¹s reputation. Secret audio tapes made by a former executive, Mark E. Whitacre, in the early-1990¹s revealed a scheme by top A.D.M. executives to fix the global price for lysine with executives from Japanese, French and Korean competitors. Michael Andreas and Terrance S. Wilson, the head of corn processing, were both sentenced to two years in prison for their roles in the scandal. Mr. Whitacre was sentenced to nine years for embezzling $9.5 million at the same time he was helping the government to investigate his bosses.

Since the scandals shook public confidence in A.D.M., the board has been overhauled with independent outsiders like Mr. Westbrook, who joined in 2003 and is chief executive of Millennium Digital Media, a broadband services company. Ms. Woertz¹s hiring continues the trend.

³The board was cognizant of the fact that A.D.M.¹s image had approached a Mafioso level over the last few decades with all the scandals,² said John M. McMillin, a longtime analyst for the Prudential Equity Group. ³I am not sure she understands the difference between a soybean and a rapeseed, but she knows people and has identified the people within the company to trust.²

Ms. Woertz¹s energy background, especially in refining, has helped her grasp quickly the basics of A.D.M.¹s agricultural business. Oil refiners take a barrel of crude oil and process it into a slate of products like gasoline and jet fuel. A.D.M. takes a bushel of corn or soybeans and spits out dozens of food products on the other side.

Mr. Westbrook and analysts agree that she also brings a human touch that was lacking at A.D.M. in the past. A divorced mother of three grown children, she quickly embraced the idea of moving to Decatur, a sleepy city of 78,000. Other candidates hoped to commute to work from Chicago, some 180 miles away, Mr. Westbrook said.

SHE is also comfortable with bold initiatives. A.D.M. once controlled more than 60 percent of ethanol production, but today it controls less than 25 percent after the building of a number of farmer-owned ethanol plants in recent years. A.D.M. is planning to recapture some market share by adding 550 million gallons of ethanol capacity over the next two years, pushing up its total by 50 percent, to 1.65 billion gallons.

Ms. Woertz is also fascinated by aspects of A.D.M. that have nothing to do with biofuels, especially the company¹s push to commercialize technology that uses corn starch to make plastics that, theoretically, at least, are biodegradable.

At one point, she reached behind her chair and pulled a clear plastic bag from her purse containing several green plastic items, including golf tees. ³This is made from corn, so it is a corn and starch stream, and you can dial up or dial down the biodegradability,² she said, showing off a tee. ³People throw their spoons out the window from McDonald¹s. Ours will biodegrade.²

But for now, it is ethanol, the fuel she once questioned, that is giving Ms. Woertz the spotlight. She is set to make her first public speech since becoming C.E.O. at a conference promoting biofuels on Wednesday in St. Louis, where she will be joined by Mike Johanns, the secretary of agriculture; Samuel W. Bodman, the energy secretary; and Charles O. Holliday Jr., the chief executive of DuPont. President Bush has been invited and may speak on Thursday.

One person who has reviewed Ms. Woertz¹s speech said it would focus on the ³innovation, investment, partnership and vision² needed to ensure that biofuels ³fulfill their promise in meeting global needs for sustainable supply, energy security and environmental improvement.²

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