No Turning Back

by Emily Wilson
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Consolidation in grain handling and processing on a global scale, together with dramatic technological changes in agriculture, stand as two colossal forces that will sort out which industry players will succeed in the years ahead, according to G. Allen Andreas, chairman and chief executive officer of Archer Daniels Midland Co., Decatur, Illinois, U.S.

In a recent interview with World Grain and its sister publication, Milling & Baking News, Andreas expressed confidence that ADM will emerge well positioned from this sorting out process.

Andreas, who is an attorney by training, was named chairman of ADM in 1999 when his uncle, Dwayne O. Andreas, retired after 28 years at the helm of the company. Andreas had been promoted to c.e.o. in April 1997; he has been with the company since 1973.

An edited version of the interview follows.

World Grain: ADM has always proposed the need for a world food economy. Will you address that economy and ADM's role in its progress?

Andreas: The world food economy is a reality today, so there is no turning back. We're in a very competitive environment. The world's population is not in the same location as the world's arable land, so as a result you have substantial movement in the international arena where the nutrition is necessary to feed the world's population. There has to be transportation and freight in developing a system that will maximize the advantages of countries blessed with natural resources to produce food and nutrition necessary for feeding the world population.

WG: What is ADM's role in that?

Andreas: We've developed for the last 30 years efficient systems to meet that model, and so our network includes a broad array in the arable parts of the Western Hemisphere; a broad spectrum of grain elevator systems for origination of the farm commodities; and our rail, freight and large transportation system. Our transportation system is connected to export elevators from the United States and from South America that feed a fleet of approximately 100 ships that we have under charter at any one time to deliver our food, feed and our products to the world marketplace.

WG: So, it's significant?

Andreas: It's the core basis of our business. We need to meet the customers' needs on a global scale. In today's world, the top 50 customers of ADM make up almost two-thirds of our sales, and those customers are on a worldwide basis selling and marketing their products across the entire globe.

WG: Expanding on the world situation, have we progressed from being concerned primarily about the minimal subsistence issues to those of "adequate nutrition," or is it really a little bit different?

Andreas: We still have substantial problems with basic core nutritional needs in places like Africa and in some of the interior sections of other countries in the world. We have population growth in Latin America — there are many remote areas of Latin America where nutrition is not adequate to meet the needs of the children. In those kinds of areas, we feel there is a great opportunity for us to open better standards of living and to work with governments and world agencies to provide those children with their nutritional needs.

WG: Is the world becoming complacent about the food supply?

Andreas: In the last few years, we've had over-production of agricultural commodities on a world scale. There's a washout of the economy, particularly in the Far Eastern region, where we have 60% of the world's population in the Asian Pacific region, including India and China, the two largest population countries in the world. There is the collapse of both economic systems throughout that Asian Pacific region that brought about a significant decline in their demand for nutritional products.

As a result, we saw a dramatic drop in the volume of business that went to that area, which then created a backlog of surplus within the United States and into Brazil and the Western Hemisphere. We didn't have markets for those products. That has had a dramatic impact on the business, primarily narrowing margins and making the agricultural community much more competitive and much lower value in being passed back to the farmers for the products they are producing.

WG: Regarding the whole GMO issue and the role that's likely to play in the European view vs. the American view, where do you think we are in this evolution right now? And, from the farmer's point of view, is ADM going to take an assertive position?

Andreas: When the issue was raised about genetically enhanced crops, we immediately recognized great potential in the long term for us to see increased yields from the farm based on better seeds and technology and the creation of plants that have a stronger ability to survive weather conditions. We were very interested in that aspect of the business as it would contribute to our availability of raw materials.

In addition, there was the interesting area of creating crops that would more efficiently be utilized within the processing system to create products that our customers would see more value in. So that came not only from the food and nutrition side, but also from the industrial side as the kind of product that could be maximized from the break-up of agricultural commodities into their various components.

We're cognizant of the fact that there is concern on the part of the consumers, particularly in Europe, with the safety and health aspects of these crops. So we attempted to design our system to maximize our ability to identity preserve crops that meet the future needs. That is not a step that we took only because of the concerns of genetically modified crops in certain parts of the world, like Japan and Europe. It also reflected our commitment to maximize the technological achievements in evaluating not only the makeup, but also the genetic ability of these plants to produce the kind of ingredients that we need for our processing. In the course of sorting that out, we felt that to spend some of our capital to make sophisticated systems of identity preservation was a step forward, irrespective of the genetic issues.

WG: Farmers may still be confused as to when they can really embrace this and when the market is going to work with them to let them make the most of that opportunity. Is ADM urging farmers to move in that direction, or is the customer going to decide that first?

Andreas: We asked our grain elevator system to segregate the materials as they were arriving from farmers so we could maximize the value of each of those. But we have worked very closely as a company to make this system of food and feed ingredients and industrial products as transparent as we can for purposes of the farmers making the decision of what crops they are going to plant and how they are going to segregate those crops to maximize their value on the production side.

WG: Over the last three years, three major commodity product groups at ADM held steady or declined, which in part reflects the underlying value of commodities. But the "other products" more than doubled during that same period. How does that change the basic core business of ADM?

Andreas: We have a very solid matrix across the world cutting the crops' geographic boundaries and national boundaries to create a global system that is very efficient and effective. Over the past few years, we have been encouraged by major customers to broaden our product range. They are more interested in narrowing the number of suppliers for their products to assure the quality and timeliness of delivery of their necessary materials.

So with the encouragement of those customers, we have moved into some other businesses. We have expanded our grain and transportation facilities. We have opened offices across Latin America in a number of areas that have increased our volume there significantly. We have purchased substantial interests in cocoa processing businesses across the world from Latin America to North America to Europe, Africa and the Asian Pacific region. So that "other products" category continues to grow, but our core base is still food and feed and industrial products. That model promises more growth and profitability from the newer segments of the specialty products and the nutritional and health-related types of products. We hope we're able to bring from that foundation and that core base of businesses a better return to our shareholders in the coming years.

WG: You mentioned regions, and I believe the annual report breaks out the U.S., Germany and then other countries. Why is Germany broken out?

Andreas: Because of the size of our investment in Germany. The S.E.C. required us to break Germany out as a country because it was large enough to have it's own definition. As a practical matter, we are a substantial producer in all of western Europe, and Germany is only one of those countries.

WG: Do you isolate specific targets and say, for example, that flour milling has been a growth area internationally for you in certain parts of world, or is it opportunity driven?

Andreas: It's largely driven by opportunity. We are very cognizant of the fact that the world's population growth is in the Asian Pacific region, Africa and Latin America, so we have in the past five years made significant investments in those areas. We consider them to be very important to the future development of our business.

The reasons we have targeted those areas relate primarily to what their natural resources might be and what opportunities there are to grow and expand. We found very substantial pressure on profits and margins at our grain elevator operations down in Latin America and good opportunities to buy some excellent flour mills across Mexico. We had a great opportunity to become involved in the tortilla business with Gruma, and so we seized those opportunities. The cocoa division came up for sale, and that gave us an interest in Africa and in the Asian Pacific region as well as the rest of the world. So it really was driven by unique opportunities created as a result of pressure on the margin structures across the world's agricultural market.

WG: Is it imperative that origination and processing both be in place to make international opportunities something that you feel comfortable about?

Andreas: For us to have a matrix of businesses that create the efficiency necessary to be competitive in today's global food economy, we have to be cognizant of that. We bought, for example, about 150 grain elevators in Brazil and Paraguay that primarily bring raw materials to our factories in Europe. So 40% of their putthrough went to Europe to our own factories.

We needed to tie together that network. Once we were in South America, we looked for other opportunities that would create value in that system and give us more strength to have a more commanding position in those marketplaces.

It's not only facilities and the configuration of businesses that you have — they need to cut across the origination, the production and the transportation of your products to the marketplace. It is mandatory that you tie that together with an effective communication system on a world scale among sales offices, so you can create a model that brings efficiencies that your competitors will have a difficult time matching.

WG: Is it more difficult to go into certain countries now like India and China because it is going to be hard to make that matrix work?

Andreas: These are always enormous challenges because of the cultural differences and government systems all the way through to the marketing and sales of products in these countries. But in many countries, we have made sure to develop relationships with local investors or companies that would have the expertise we lack. The combination on a world scale of tying together a local business with our network on a global scale brings efficiency to both of us.

We're the largest, for example, in the Asia Pacific region in the vegetable oil business. We own palm plantations, extraction plants, vegetable oil refineries off the coast of China, businesses that are directly tied to our expertise and knowledge. For example, we own an oilseed processing business and a wheat flour mill in Shanghai. Also, we're developing a customer base across China that will enable us to expand those processing operations and meet the needs of all the Chinese people.

It is critically important that the United States recognize the trade relationships we need with China and that we accept it as a normal trading partner. We need to be sitting at the table at the W.T.O. to negotiate the tariff and trade relationships that will be so critically important for both of us.

WG: You mentioned the Shanghai wheat flour mill – is that part of the arrangement with KUOK?

Andreas: Yes, that's 51% owned by COFCO, 25% by KUOK and 25% by us, roughly. Then we are considering other relationships and other partnerships with both COFCO and KUOK about that whole region in oilseed processing and vegetable oil refineries. We have a small partnership with a company that is publicly traded in Hong Kong right now with COFCO, and we're looking forward to substantially increasing that relationship if we can find the proper basis on which to do it. China is a very important region for us and would be excellent partners for us for the long term.

WG: ADM has become very proactive in expanding flour milling outside the U.S. The world is awash with flour milling capacity right now, and so one takes the view that it's either an ideal time to create a broader asset base or to retract. You have obviously taken the first application. Was this a decision based on worldwide over-capacity, or is it just that the market opportunities have presented themselves and you have responded to those?

Andreas: We've always been basic in flour milling in the United States and more recently in North America with our acquisitions in Canada. We have made some excellent purchases of factories across the Caribbean and into Mexico in a joint venture with Gruma there. That part of our business has been a substantial contributor, and we have been very pleased with our results.

It's an extremely competitive business. It's very low margin, so you have to have a great deal of excellence, and raw materials are critical to being competitive. So our vast network of elevator and transportation systems has increased ADM Milling Co.'s ability to be able to maximize returns of that business. To the extent that we could find opportunities to penetrate other markets and become a valid provider of the milling products to those other nations of the world, we would be very pleased to accept that challenge.

The problem over the years is that there have been few good opportunities to grow at the price level that would give you the kind of returns you like to see from invested capital for our shareholders. We acquired four mills in England, which brought us into the common market for purposes of a presence and bringing our technology and efficiencies to that business. I hope we can build on that base, but to date we have not found other good opportunities in Europe.

There are some interesting opportunities across the Asian Pacific region that we've recently looked at, some in Africa and maybe in South America, so an opportunity could arise.

If we can't find those opportunities, we will continue to build on the base of what we have in oilseeds and then grain elevators and other systems and wait until we can enter the international markets in a significant way in the milling business at a price that we consider adequate for returns to our shareholders.

ADM Milling has powerful ties to parent

Even though ADM Milling Co., based in suburban Kansas City, is separated geographically from Archer Daniels Midland Co. corporate headquarters in Decatur, Illinois, Craig L. Hamlin, president and chief executive officer, said the flour milling business taps into its parent's resources in a host of ways.

"Our corporate headquarters is the most significant resource our operating divisions have," said Hamlin, who also is a corporate senior vice-president of ADM. "Research and development through a base of intellectual technologies and processes, worldwide grain origination from ADM-owned facilities, as well as partnerships and alliances, a local transportation network that facilitates the origination and delivery of products on a critical time basis are just a few examples of operational resources. In addition, credit, finance, legal, risk management and engineering resources lend further support."

While he still has an office in Leawood, Hamlin in his corporate role has been located primarily at Decatur headquarters in recent months.

Expanding on the Decatur resources used by the operating divisions, Hamlin noted that a quarter of the grain processed at ADM plants was delivered from another ADM facility. "At ADM Milling, we grind 1 million bushels of grain a day in our system, and 24% of all the grain that we mill comes from another ADM division," he said.

Research functions are split between Decatur and a facility in Olathe, Kansas. Decatur does technical research on product development and Olathe does the practical applications with bakers and technicians.

ADM also has a very active risk management component, he said. "It, together with research and development, represents the best kept secret at the company. We have people in Chicago at ADM Investors, people in Decatur, and we have three outside consultants with whom we interact every day relative to market positions in everything from hedging and options strategies on grain to energy markets in New York and Chicago as well."

While most added-value products introduced so far by ADM derive either from soybeans or corn, the potential for wheat to contribute in this way should not be discounted, Hamlin said. Most recently, the company has devoted considerable attention to soy protein and isoflavones as well as soy-derived vitamin E, but Hamlin said it won't be long before specialty wheat flour products come to the fore.

"We are looking at a lot of ways to offer products that fit into the nutrition or health foods category," he said. "Initially, we are looking at a combination of wheat flour with other ingredients. For instance, wheat flour combined with soy flour has potential."

The potential for specialty wheat products is even greater, Hamlin said. "There is a great potential to unlock certain nutrient values and new product categories from wheat," he said. "We have not moved in this direction on wheat yet because there has not been the research on wheat from a nutritional standpoint that has been devoted to soybeans and corn.

"Whether we're talking about more fiber or a different type of starch, the technology that we have to understand to produce these products on a commercial basis is something we are just beginning to explore."

The value-added strategy stems from an unwavering commitment to ADM's core processing business, he added. "If you understand that the differentiated product of the value-added items we offer comes from our core base then you see that we have no ambivalence to our core business," he said. "The value-added strategy is a clear effort on our part to extract every ounce of product that is in the grain."

Hamlin said that the management structure of ADM Milling Co. has worked well even as the company has expanded increasingly into the Caribbean, South America and Europe. "The basic operating criteria for a business in any region of the world is essentially the same — customer demand, product quality, operational efficiencies, current technology and qualified staff are the core areas of commonality that create success," he said. A decentralized approach recognizes the need to adjust to local market conditions, Hamlin added.

"The structure minimizes the number of people required to run the overall business of ADM Milling, but more importantly, vests the basic decision-making process with people who are involved in every facet of their business," he said. "This avoids time delays in making decisions. We work very hard to eliminate layering of people, avoiding a bureaucratic process and respecting each person's knowledge to take advantage of opportunities when they come."

Looking at the U.S. flour milling industry broadly, Hamlin said the issue of excess capacity needs to be addressed. He noted that in the past year, ADM sold a flour mill in Portland, Oregon, that had been closed.

"Our management objective at ADM is to create profits for the company and, more importantly, value for the stockholders. With that focus, Portland or any other facility is a single piece of a larger picture that is multi-dimensional. Asset utilization on a forward looking basis coupled to after-tax-profit return on a given facility compels you to make strategic decisions as you position for the future. Business is about timing and opportunity. Therefore, it is understood that all elements are subject to change."

Hamlin also noted significant changes in ADM's customer base. "Beyond the obvious customer base consolidations, ADM Milling has experienced a very positive change with our customers in the areas of enhanced communications on product development, consumer trends, market risk assessment, improved inventory control for both parties and technical support cooperation at the functional levels," he said.

"It is clear that all customers want a working environment with continuing effective communications that have a forward looking perspective to better manage market risk, quality, consumer demands and overall costs."

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