Certainly in 1947, when construction began on a 500,000-bushel storage facility in Maumee, Ohio, Harold Anderson probably couldn’t have envisioned the company he founded, today known as The Andersons, growing its grain-handling assets to 36 facilities with roughly 150 million bushels of storage capacity in seven U.S. states and Saskatchewan, Canada.
A publicly traded company since 1996, The Andersons has four business groups: Grain, Ethanol, Plant Nutrient and Rail. The grain business, which long has been the cornerstone of the company, and the ethanol business, which the company added in 2005, have played a central role in making The Andersons one of the most successful agribusiness companies in the United States.
|Corbett J. Jorgenson, president of the Grain Group|
In a recent interview with World Grain, Corbett J. Jorgenson, president of the Grain Group, and Michael S. Irmen, president of the Ethanol Group, offered insights on their respective business units and the many challenges they face operating in the current global grain and biofuels markets.
Jorgenson, who replaced Neill McKinstray as president of the Grain Group in February 2016, came from Cargill where he worked for 20 years in multiple trading and management roles, including six years as vice-president and late senior vice-president for Cargill AgHorizons.
Like many other grain divisions of major agribusiness companies, The Andersons’ Grain Group has struggled recently in the face of a prolonged period of low grain prices due to oversupply after four consecutive bumper harvests that flooded the market even though demand for grain continues to rise globally.
In 2016, the division posted $11 million in adjusted earnings before interest, taxes, depreciation and amortization, well below the $72 million it took in in 2013. Through three quarters in 2017, the figure was $25 million.
Jorgenson said one of the long-term goals for the grain division is to diversify so that it can better endure the peaks and valleys of the grain market. He said the company wants to expand its capabilities in handling and services for specialty grains and food ingredients.
“It is an important long-term goal because we view it as a business segment with significant growth and we have the physical capabilities and the people to do a lot more than we do today,” he told World Grain. “We especially think our size and geographic structure makes us an ideal partner to both the producers of specialty grains and food crops, and the food companies seeking those inputs.”
The Andersons already has addressed this issue with the acquisition of Purity Foods, Inc., an organic and conventional ancient grains processor based in Hudson, Michigan, U.S., in April 2017.
“Purity Foods is an ideal fit for The Andersons because it connects growers of specialty ancient grain (spelt) to its users, and it adds value through simple milling,” Jorgenson said. “Its presence in southern Michigan is also strategically important and a great fit given our strong asset base in Michigan and Northwest Ohio.”
He said that acquisition is just the beginning.
“We’re a big food-grade handler of corn already,” he said. “We connect farmers who grow trait-specific food-grade corn to people who make chips and tortillas. We connect oat growers to the oatmeal makers. We are building a strong business in Saskatchewan, accessing the specialty and ancient grains that are being grown there and bringing them to end-use markets in the U.S.
“The point in this space is that the capability of connecting that farmer in Saskatchewan or in Nebraska or in Illinois or in Texas, to the end-use markets that need their crops is really similar to what we do on 500 million bushels of corn and soybeans and wheat every day. The assets are similar. The capabilities are similar. And we have a good opportunity to provide that clarity and transparency to the supply chain and to be trusted by the food companies and to be trusted by the farmers. This is the space that we want to grow as much as 300% over the coming five years and make it a pretty significant part of our earnings stream.”
Jorgenson said the Grain Group intends to grow the physical share of its business by 20 million bushels, which would represent about $2 million of gross profit in business over the next two years, and the total trade flows growth by 40 million bushels, representing $4 million of gross profit over the next 3 to 5 years. He said the plan to get there involved two crucial steps.
“First, we need to grow with yield growth in our markets; that will achieve part of this goal,” he said. “Second, we will set goals and measure progress toward those growth goals in visible ways. We are a more accountable team today and we will be better again a year from now and beyond.”
“We’re operating every day with SAP as our backbone,” he said. “It’s brought efficiencies to us and it’s given us information flows in a faster way, and we’re making more real-time decisions as the result of having it. It’s hard work and it’s a significant investment, but we’re happy to have it. Migration to that platform began in 2015. It benefits us with efficiencies in back office processing and it is also pretty easily scalable as we look at acquisition opportunities down the road.”
Having seen the ebbs and flows of grain prices in his more than two decades in the industry, Jorgenson said the keys to succeeding in the current climate are to “remain a trusted grain marketing partner to our farmer customers and to have a solid balance sheet that can carry us through the inevitable ups and downs of the grain cycle. If we are there through those tougher days to help our customers run better businesses, we know we will enjoy the good days again as well. Specific to being a trusted grain marketing partner, we have aggressive growth ambitions for our Freedom risk management portfolio. By 2020, we intend to grow three-fold our Freedom business as we connect with farmers who value a professional and disciplined approach to grain marketing.”
And while companies like The Andersons are dealing with the challenge of this long period of depressed grain prices, another potential dark cloud looms on the horizon for American agribusiness as President Trump’s administration is renegotiating the North American Free Trade Agreement that has had a positive impact on U.S. farmers and grain traders since it was signed in 1994.
“The Andersons supports free and transparent trade,” Jorgenson said. “Any renegotiation that constrains free trade, or the elimination of it altogether, would be a step backward not just for The Andersons’ business, but for agriculture across the U.S.”
The challenging environment also extends to the ethanol side of the business, as in its most recent third-quarter earnings, released in November 2017, The Andersons reported that the Ethanol Group generated pretax income of $6.1 million, down from $9.5 million during the same period in 2016.
|Michael S. Irmen, president of the Ethanol Group|
Irmen, who became president of The Andersons’ Ethanol Group in July 2016 after having served as a member of its leadership team since 2005, said negative margins due to industry overcapacity is the biggest challenge facing his division, which produces 475 million gallons of the fuel additive annually, making it one of the top 10 ethanol producers in the United States.
“Plant capacity expansions coupled with the low in-seasonal demand that is typical for this time of year have resulted in high ethanol stocks and is pressuring margins,” Irmen told World Grain. “There’s little we can do to deal with the macro margin environment, but we will continue our work on fine-tuning our operations to remain a low-cost producer and extract more value from the co-products.”
Irmen outlined several strategies that the company is considering to increase revenues, including one that involves DDGS, an ethanol co-product that is used for animal feed.
“We continue to evaluate several technologies that will enhance the protein content and hence the value of the DDGS we produce,” he said. “The benefit of this strategy is that it produces several different feed types that are directed at specific species as opposed to just a generic DDGS feed product.”
He said the concept behind this strategy is simple: removing the low protein fiber early in the process raises the protein for the remaining DDGS.
“It also increases the fermentation time since you’re not trying to ferment the fiber in the normal process,” he said.
The Andersons are also in the process of evaluating cellulosic ethanol production from corn kernel fiber feedstock, he said, and the company also is looking at refining corn oil, another co-product in the ethanol production process, to food-grade quality.
The Andersons’ Ethanol Group is even adding $500,000 to $1 million of revenue per year by capturing liquified CO2 that is generated during the fermentation process at three of its four ethanol plants and selling it to dry ice makers.
While overcapacity in the ethanol industry is an issue, demand for the fuel additive and its co-products continues to surge both domestically and overseas, Irmen said.
“Demand for both ethanol and DDGS is at an all-time high and we expect that it will continue to grow,” he said. “This growth is driven by continued strong world demand for protein and clean burning, high octane ethanol. The fact that we have been blessed by yet another record-large corn crop will help keep our production costs down and allow us to continue to introduce these products into new world markets with very competitive pricing.”
Japan recently indicated it may be interested in purchasing U.S. corn ethanol, and many other markets are expanding their use as well, said Irmen, noting that demand continues to grow in countries such as China, Canada, Brazil, Mexico, Europe, Bolivia and India.
“There’s no blend wall in the rest of the world that is within reach with current production capacity,” he said. “It’s a matter of building out the biofuel blending infrastructure (in the U.S.) and abroad that keeps me excited about the future of the ethanol business.”
The Andersons has four ethanol facilities:
- The Andersons Albion Ethanol LLC, which opened in Albion, Michigan, in 2006 as a 55-million-gallon-per-year plant. An expansion project was completed in spring 2017 and it now operates at a 140-million-gallon-per-year capacity, requires approximately 49 million bushels of corn and produces 365,000 tons of DDGS annually.
- The Andersons Clymers Ethanol LLC, which opened in Logansport, Indiana, in 2007 at a 110-million-gallon-per-year capacity. It now operates at 135-million-gallon-per-year rate, requires approximately 47 million bushels of corn and produces 350,000 tons of DDGS annually.
- The Andersons Marathon Ethanol LLC, which opened in Greensville, Ohio, in 2008 at a 110-million-gallon-per-year capacity. It now operates at 140-million-gallon-per-year rate, requires approximately 49 million bushels of corn and produces 365,000 tons of DDGS annually.
- The Andersons Denison Ethanol LLC in Denison, Iowa, was purchased in 2012 from Amaizing Energy Denison LLC. It consists of a 60-million-gallon-per-year ethanol plant sitting next to a 2.7-million-bushel grain terminal with direct access to two Class 1 railroads.
All four facilities produce E85 (85% ethanol fuel). According to the third-quarter results released in November, its industry-leading sales of that product increased by 25% year over year.
“Quite frankly, the success of our E85 program has been the result of sound strategy, focused talent and hard work,” Irmen said. “It’s much more of a challenge to sell ethanol by the truckload to retailers rather than by train load to obligated parties. But, we work very hard at assuring specified deliveries of very low-cost, precision-blended fuel and remove the hassle of RIN accounting in the process.”