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Cargill dipping cautious, billion-dollar toe in ethanol boom

With an eye on risk, the conglomerate is working on a major expansion of its ethanol business, but with much of the focus on aiding the companies that own production plants.

By Star Tribune staff

Last update: September 24, 2006 - 10:18 AM

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Archer Daniels Midland rocked the Corn Belt this year when it
announced that it intended to stay atop burgeoning U.S. ethanol
production by building two giant refineries that would increase its
1.1 billion-gallon annual capacity by half.

Cargill, the nation's largest privately held company and its
third-largest ethanol producer, is pursuing a more cautious
strategy in which much of its role in the trade will focus on
serving other firms that build and operate ethanol plants.

With about $75 billion in total revenue, Cargill has $500 million directly invested worldwide in biofuels. The company plans
to invest $1 billion more over the next two years, Pat Bowe,
president of North American grain milling operations, said in a
recent interview. About $800 million will go to ethanol production
and the balance to biodiesel.

As of last year, Cargill had just 3 percent of the market behind
Aventine Renewable Energy Inc., with 4 percent, and ADM, with 29
percent. The company said it's unsure where it will stand after the
recent spate of investments in the industry.

Cargill is "going to get bigger" in ethanol, Bowe said. "But it
would be a relatively smaller percent of Cargill's total revenues"
compared with other players in the industry.

Minnetonka-based Cargill is expanding its ethanol plant in Blair,
Neb., and conducting research on a new production process at its
plant in Eddyville, Iowa. Even when that's complete, its total
domestic production will hit just 230 million gallons, or less than
a seventh of what ADM will have.

Cargill's caution stems from its view of ethanol as an uncertain
bet. Not only does the fuel's profitability depend on government
subsidies and mandates, which can come and go with election cycles,
but ethanol's primary inputs of corn and natural gas also are
subject to price swings, and its price generally swings in tandem
with oil.

Things look great now, Bowe said. But he recalls the drought that
hit one year after he helped start Cargill's Blair plant in 1995.
Corn prices rose to a record $5 a bushel, killing any chance for
profit.

"I didn't feel like I was raking it off 10 years ago when I was
losing about a million dollars a month running one of these things,"
Bowe said.

But that was then. Current oil prices and growing ethanol demand
means these biorefineries can be built and paid for in 18 to 24
months.

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