G. Allen Andreas of Archer Daniels Midland Co. - Cultivating his garden
Archer Daniels Midland feeds hundreds of millions of people, but its stockholders have been famished for years. Shares of the agricultural products company trade about where they were a decade ago.
The self-proclaimed “supermarket to the world” pleaded guilty in 1996 to U.S. Justice Department charges that it and several competitors conspired to fix the prices of lysine, a feed additive, and citric acid. Archer Daniels Midland Co. paid a $100 million fine to settle the charges. Michael Andreas, the son of former chairman and CEO Dwayne Andreas, and the onetime heir apparent at ADM, was sentenced last year to two years in federal prison in connection with the case.
G. Allen Andreas, Dwayne’s nephew and a former member of ADM’s executive committee, took over as CEO in 1997 and added the title of chairman when his uncle retired in January 1999. With the scandal finally subsiding, Andreas, a 27-year company veteran, is focusing on improving ADM’s operations. He aims to make the company less dependent on food and feed products, where profit margins are thin and highly sensitive to fluctuations in the prices of agricultural commodities. To this end, ADM is boosting research, development and production of higher-margin retail products, such as nutraceuticals , over-the-counter medications derived from agricultural chemicals , and other dietary supplements.
Another ADM product is ethanol, a gasoline additive made from corn. ADM now derives nearly 10 percent of its revenues from sales of ethanol. Meanwhile, the $13 billion concern continues to lobby for freer trade with China and Cuba, in an effort to broaden its export markets.
ADM is moving in the right direction; it earned $300 million for the fiscal year ended June 30, up 13 percent from the previous year, in which profits fell by more than one third. Still, investors shrugged off the good news. As a result, the company declined to award pay raises to its top eight executives this year.
Allen Andreas recently discussed ADM’s outlook with Institutional Investor Staff Writer Justin Schack.
Institutional Investor: ADM’s financial performance has improved this year, but investors haven,t really bid up the stock that much. Why?
Andreas: Even with the improvement in earnings from last year to fiscal 2000, we still returned only about $300 million of profits on shareholders, equity of some $6 billion. That’s only about 5 percent, which doesn,t generate a great deal of enthusiasm from investors. But we are confident that those circumstances will improve. There’s a better balance now between supply and demand in most of our basic core businesses. And we,re improving the profitability of the company and the stability of our earnings base by diversifying across a broad range of retail products.
Can you talk about those new product lines and how much of your business they will represent in the future?
We,re hopeful that we will be able to generate a solid base of businesses, away from our core processing industries, that could make up 25 to 30 percent of our profits and reduce somewhat the cyclicality of our earnings. We have a number of bioproducts under production now. Nutraceuticals, for example, is a relatively new division. We have just begun production at our vitamin C plant, and we already have a very stable market share of about 40 to 50 percent globally in natural,vitamin E production. We,re also building additional capacity to extract new food products from our raw materials, products that have very positive health benefits, such as preventing or at least slowing down the onset of diseases like diabetes, heart disease, Alzheimer’s and osteoporosis. It’s very new technology, but we,re optimistic that these businesses will grow and contribute quite substantially to the bottom line.
And that’s because they carry higher margins?
Yes, and we think that they will continue to do so because they are more conducive to branding than our core products. And there are only a few of us in the world that can extract and unlock these valuable characteristics from crops. You need to have a substantial flow of raw materials through your factories in order to produce very small quantities of these chemicals.
Ethanol has been a strong business for you lately. Where do you see that going?
There are some projections that the demand for ethanol in the U.S. market could double over the coming four or five years. One reason is that the major competitor to ethanol as an oxygenate in the fuel supply is a product called MTBE, which has been found to contaminate groundwater. And so there’s a movement across the country to ban MTBE. In addition, we have seen a dramatic increase in petroleum prices, and the dependence of the U.S. on foreign oil has grown from about 35 percent of our consumption back in the early 1970s to more than 50 percent today. Those trends have helped strengthen the price of ethanol. So all of our plants are running at 100 percent, and we have construction under way to increase capacity.
How difficult has it been to repair the damage to ADM’s public image done by the price-fixing scandal?
It has been five years since that event transpired. I think the most important thing now is what an impact that has had on our employees and customers. Over the past couple of years, we have made a real effort to convey to those people that we do not tolerate in any way conduct on the part of our employees that is outside the realm of legal compliance and that we expect our company to operate according to the highest ethical standards in the industry. On that score, I think we,ve had great success. Five years have passed, and most of the public focus on ADM has to do with our future and what kind of a company we are today. So it,s a great pleasure to have that all behind us.
ADM has long played an active role in public policy. What’s your biggest priority in that area now?
Opening up trade relations with China. We,re very optimistic that China will soon be brought into the World Trade Organization. We,re pleased to see that Congress has solidified the matter of permanent trade relationships, which puts us in a position to begin a more meaningful dialogue, with a far lower tariff base, about our ability to provide food products and nutrition to China. It opens up the entire Asia-Pacific region for us to distribute our products. That,s critical because the bulk of global population growth is happening in the East, while the bulk of arable land that can provide them with a food supply remains here in the West.
Your effort to open up the Cuban market seems a tougher task. How’s that going?
We,re also pleased to see the efforts that Congress has made recently to open Cuba up. For the past several years, we have provided nutrition on a charitable basis to children in Cuba’s school lunch program and to their elderly in hospitals. We can very efficiently provide the Cuban population with good, quality products that will open up a new market for our farmers here in America. But we obviously still need considerable reforms before we will be able to do a large volume of business there.
Supporting open relations with Cuba is highly controversial. Have you experienced any backlash as a result?
Absolutely not. To the contrary, we found that there are many people who support our efforts and who feel very strongly that the Cuban people deserve better than what they have received from the U.S. Our embargo has actually only acted as an embargo against U.S. business. The rest of the world is doing business with Cuba , Canada, France, Vietnam, everyone. I made a trip with Governor [George] Ryan of Illinois down to Cuba last year. We enjoyed the kind hospitality of the Cuban people and a great deal of interest from them. And when we returned home, we found that there are a lot of people who are concerned about our embargo policy, that it has not accomplished in any way the results that were originally envisioned almost 40 years ago.
How is the Internet affecting your business?
The Internet is only beginning to affect what goes on in agriculture. We think it will reduce costs in our industry and have made three or four investments in Internet companies that do everything from helping farmers input crop and fertilizer data to making commodities trading more efficient. This technology ultimately will be utilized by the entire world to reduce back-office expense, standardize contract terms and provide a growing marketplace for the purchase and sale of the basic core materials we produce.