Climate Challenges Ahead for ADM
Archer Daniels Midland is one of the largest food and ingredients processors and providers in the world, feeding people, livestock and even extending its business to creating additives for fuel.
Notably ADM was one of the corporations that had signed the Paris climate agreement before the Trump administration announced that the United States would withdraw from the pact’s agreement to combat climate change.
Executives at ADM view climate change as a real threat towards its agricultural business, which accounts for the bulk (~85%) of its revenue streams. ADM’s value chain is global, connecting crops across 150+ different countries through a complex logistics network. As temperatures across the globe fluctuate, crops, which are particularly sensitive to weather, will be increasingly stressed; droughts, heat waves, pests and various other shifting weather conditions will result in lower yields, higher risk of crop failure, poor crop nutritional value and rise in weeds and pests. This will lead to a vicious cycle of decreasing production, and increasing use of pesticides.
The problem has already manifested itself in steep financial losses for big-Ag. For 2019, the US Department of Agriculture has already estimated loss of crop and livestock in the single state of Nebraska to be $3B. The difficulty of modeling agro businesses and predicting commodity prices has appeared to worsen as the frequency of extreme weather events has increased.
In the Midwest US, flooding damage caused ADM to lose between $50-60M in Q1 2019 alone. An extreme winter also slowed down rail and truck transportation, negatively impacting shipment activities as well. Flooding washed away corn and soybean harvests, contaminating whatever was not destroyed.
ADM Tools to Manage Risk and Combat Climate Change
ADM has managed these risks through a combination of trading derivatives and hedging to reduce short or long commodity positions.
It also has taken advantage of its comprehensive transportation and storage network to take advantage of price spikes globally.
In addition to its logistics and financial tools, ADM has notably invested in a variety of projects to mitigate the risks of climate change.
Agriculture is traditionally extremely taxing on the environment, so ADM has also taken steps to reduce carbon emissions by reducing water and energy usage, as well as improving plants across the US. ADM pursued initiatives and reduced Greenhouse Gas Emissions by 16% since 2010 by developing lower-carbon fuels, renewable fuels, and renewable chemicals. Operationally ADM has conducted numerous internal energy efficiency projects and enabled a reduction of energy-intensity of 30% since 2010.
One notable project that ADM has undertaken is carbon sequestration, which involves capturing carbon and storing this as liquid or solid underground, committing to capturing 1M tons per year until it reaches 2.5M tons of carbon.
Additionally, ADM has extended its work into alternative transportation fuels, becoming a leader in ethanol and biodiesel production. ADM sustainably produces biodiesel from vegetable oil while also utilizing its corn processing facilities to produce ethanol. These fuels are generally considered ways to decrease harmful emissions and ADM has continued to commit research and development to the next generation of biofuels.
What’s Next for ADM?
All current signs point to climate change occurring at an increasingly quickening pace, and ADM will have to stay nimble in order to survive.
The agricultural business is traditionally behind on digitalization when compared to other industries, such as the financial or retail. From the technology side, ADM may be able to improve decision making by leveraging big data and analytics to better understand satellite and advanced weather pattern data to predict crop yields. Analytics will also allow ADM to squeeze out further productivity in plant growth, as well as to identify areas to optimize costs in production, storage and distribution.
At the next level, ADM can take these tools in its arsenal and collaborate more closely with its crop suppliers to maximize their performance across the globe.
Operationally, ADM will have to think about ways it can make its crops more flexible and mobile. As conditions change, ADM may have to figure out how to optimize the locations of the types of crops it grows, moving water-intensive crops out of drought-worsening areas. Distribution will need to be flexible enough to support these types of rotations.
ADM has already taken quite a few steps to minimize its footprint and to manage risk, by diversifying its portfolio and investing in green initiatives, but continuous improvement will be their best chance for driving positive change in a tumultuous environment.
Sources:
- http://big-agwatch.org/2017/02/06/climate-change-trump-says-no-big-ag-says-yes/#Archer-Daniels-Midland
- https://assets.adm.com/Sustainability/2017-CSR-Final-5-14-18.pdf
- https://www.business-humanrights.org/en/oxfam-report-raises-concerns-about-impacts-of-archer-daniels-midland-bunge-cargill-louis-dreyfusyour-trading-activities-on-small-farmers-in-poor-countries
- https://www.adm.com/news/news-releases/adm-recognized-for-outstanding-sustainability-leadership
- https://www.reuters.com/article/us-usa-funds-climatechange/climate-change-has-u-s-fund-managers-adjusting-agriculture-investments-idUSKCN1S746P
- https://rctom.hbs.org/submission/is-adm-ready-to-feed-a-warmer-world/
- https://www.bcg.com/en-us/publications/2016/process-industries-building-materials-strategy-lessons-frontlines-agtech-revolution.aspx
- https://investigatemidwest.org/2019/04/03/recent-flooding-costs-grain-trader-archer-daniels-midland-millions-in-losses/
Created By: Brian Tang
The idea of hedging derivatives for agricultural commodities is interesting. Is it safe to say this is a relatively short-term approach to risk since it only secures ADM’s cash flow and not anything else in its value chain? It would be interesting to track the long-term effect of them betting against themselves!