Archer Daniels Midland (NYSE: ADM) is a U. S. -listed global commodity processor and distributor. U. S. Think wheat, corn, and most importantly, soybeans. ADM can be an expert in the chain of origin of raw fabrics. And it makes it more than 60 final products that are useful to consumers.
Our article on weapons of mass destruction focuses on the two things that matter: 1) the demand for protein and biofuels, and 2) the milling capacity of soybeans.
Demand for proteins and biofuels
Demand for WMD is driven by structural tailwinds.
The first is the growing demand for protein, especially plant proteins. A soy contains approximately 34% protein, making it one of the richest commodities in protein. This is a valuable feature. Other commodities with higher production rates, such as wheat and rice, are high in carbohydrates but involve minimal protein.
The more protein we consume, whether from animal or plant sources, the more the demand for soy increases. Soy is used to feed livestock, especially in the production of beef, dairy, and poultry. It is also fed through humans in the form of tofu. , soy milk and other products.
The current driving force of demand is the use of soybeans (in the form of soybean oil) as feedstock for biofuels. oil. In addition, “biodiesel”, which is a blend of fossil diesel fuel and up to 20% sustainably sourced, can be produced from soybean oil.
In the United States, about 50% of biodiesel is produced from soybean oil. This has been a recent driving force of soybean growth. Comparisons can be made to the mid-2000s, when ethanol (corn-based) blending was commonplace. The ethanol blend has led to a structural increase in the value of corn.
The long-term expansion in soybean demand is shown in Figure 2 below.
Now that soybeans are being used to produce biofuels, there is a strong correlation between soybean oil costs and the classic bureaucracy of energy, such as crude oil. This allows us similar exposure to crude oil movements in the Firetrail S3 Global Opportunities Fund, minus the corresponding peak of greenhouse fuel emissions.
By replacing fossil fuels, ADM is one of the largest decarbonizers in the portfolio and has the highest point of having avoided emissions.
Soybean grinding capacity
In its raw form, soybeans are used to produce soybean oil and soybean meal, soybeans’ two maximum usable bureaucratic resources. The grinding procedure includes cracking, soaking, distillation and heating. This procedure requires specialized facilities.
As a soybean mill, ADM’s profit is the margin between the value it will pay for raw soybeans and the value it receives from the sale of soybean meal and soybean oil. This is called the crushing gap and its cost is shown in Figure 3 below. :
A 2% replacement in the soybean milling well translates to a 1% replacement in ADM’s EBITDA. It is a key factor in the evolution of the profitability of the entire company.
Lately we are in an era where the bottleneck in the soybean commodity complex is not the amount of soybeans that can be grown, but the milling capacity put in place to process soybeans into their most useful form.
No significant capacity will be added in the U. S. Until 2024. Si all new plants are on time, this would still equate to capacity demand for an expansion of approximately 3% consistent with the year over the next 3 years. This is less than the expansion in demand we are expecting for finished products.
In addition, it is not as undeniable as building a plant and obtaining a soybean crushing margin. The plant’s capital charge is vital, but relationships with suppliers (producers) and the plant’s internal and external logistics networks are more vital to profitability. The starting players have great merit here. Three players (ADM, Bunge and Cargill) account for approximately 75% of total crushing capacity in the United States. The length of those players allows them to achieve a higher return than a new entrant or smaller competitor would likely achieve in any new capacity.
Third Quarter 2022 Results
ADM reported earlier this week and far exceeded consensus expectations. Management reported continued cyclical strength, through continued execution of trades and an accumulation of money being returned to shareholders. We expect the continued increase in renewable diesel production in North America. to domestic soybean milling margins and strong edible oil refining margins. ADM CEO Juan Luciano described the company as “hitting every cylinder. . . I would say all 3 parts of the business will be very physically powerful in the fourth quarter, bigger than last year, no doubt. “
resumen
Favorable winds show a strong investment case for ADM. As always, it is equally vital to evaluation. Earnings have already begun to rise, but the valuation remains attractive. With a price/earnings multiple of 13x and long-term earnings growth, excited about ADM’s prospect.
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