The Andersons Inc.

Fuel for the future┬áThe Andersons Inc. has a long history of finding the most efficient ways to bring agricultural commodities from farm to market. Keith Regan finds out how the companyÔÇÖs entry into the ethanol business turned out better than expected. When he opened his first grain elevator in the 1940s, Harold Anderson was seeking to find more efficient ways for farmers to get their crops to market.   Some sixty years later, The Andersons, Inc., based in Maumee, Ohio, is a publicly traded, diversified company that racked up 2007 sales of $2.4 billion and employs some 3,000 people across operations in grain, rail transportation, plant nutrients, retail and related markets. One of The AndersonsÔÇÖ newer lines of business is in the production and distribution of ethanol. That business evolved starting in 2001, when the company first began to provide consulting services to others already in the ethanol production business, lending help with issues such as marketing of distiller dried grains (DDGs) and risk management, expertise The Andersons gained over the decades in the agricultural business. Before long, the decision was made to invest directly in ethanol production. The ethanol division now operates three production facilities. The plantsÔÇölocated in Logansport, Indiana; Albion, Michigan and Greenville, OhioÔÇöare capable of producing a total of 275 million gallons of ethanol annually and all were built through joint venture LLCs that helped make the initial investment possible. For instance, the Greenville plantÔÇöthe newest in the fleet, which came on line early in 2008 after about 15 months of construction and is capable of turning out 110 million gallons of ethanol a yearÔÇöwas built as a 50/50 joint venture between The Andersons and Marathon Petroleum Company. ÔÇ£As we looked at the industry we began to understand that ethanol is a commodities business and that the same capabilities we have developed in our other products and services lent themselves quite well to the commodity ethanol business,ÔÇØ says Neill McKinstray, the vice president of The AndersonsÔÇÖ ethanol division. Expertise on functions such as trading and risk management, plant operations, safety, finance and transportation were already in place. A key part of the strategy was to locate those production facilities at the companyÔÇÖs existing terminal grain facilities, where infrastructure existed to dry, store and handle grain and where connections to rail networks existed. Thanks in large part to the push to boost ethanol usage as a way of reducing American dependence on foreign oil, the new venture has exceeded initial expectations. Still, the market remains a dynamic one, recently experiencing lower profit margins that require a constant effort at driving out cost and finding efficiencies. McKinstray says that the company has invested heavily in technology upgrades at its plants to ensure production is maximized. ÔÇ£WeÔÇÖve been a bit surprised at how quickly those opportunities have shown themselves, how diverse they are and how challenging it is to stay on top of them.ÔÇØ Technology has not only impacted the core ethanol production process but also ancillary processes and products, such as fractionalization and separation of corn and the creation of byproducts such as corn syrup. In addition to the ethanol output, the three facilities will yield a combined 875,000 tons annually of distillers dried grains, which is sold into the animal feeds production marketplace. McKinstray believes one of the biggest advantages The Andersons has over competitors in the ethanol field is its experience in handling commodity price risk. ÔÇ£We knew early on that our ability to run an ethanol business successfully was going to be predicated on our ability to manage price risk well,ÔÇØ he notes. The challenge is an enormous one, given the complexity of the process for many producers. Even with control of the process from end-to-end, The Andersons must constantly adjust for changing corn prices at one end and ethanol prices at the other. For competitors, that challenge is even greater, given that many parts of the process are outsourced to third parties. ÔÇ£Knowing what positions we have now and in the future and the impacts that has on operations and forward-decision making is a huge challenge.ÔÇØEven a minor change in the price of corn, for instance, can have a ripple effect on the entire ethanol production process, with implications for cash flow, the supply chain and, eventually, profits. ÔÇ£Those are things weÔÇÖve been dealing with for a long time in other parts of our business.ÔÇØThe Andersons believes the future remains bright for ethanol for several reasons. While alternatives such as cellulose-based ethanol fuelsÔÇöthose derived from non-feedstocks such as grasses and treesÔÇöare the focus of significant development work and investment, even backers of that technology acknowledge it is years from being brought to market. And while the number of miles Americans are driving has dipped as fuel prices spiked in recent months, the fundamental dependence on automobiles hasnÔÇÖt changed. Ethanol plants can provide a significant economic boost to rural parts of the US that might not see such sizeable investment and employment centers created otherwise, he argues. The Andersons remains open to making additional investments to boost its ethanol production, but is in the position of being able to wait until the time is right. While investing in new plants may not make financial sense in the short term given the narrow margins on ethanol, the company does have sites already in mind for additional production facilities. And strategic acquisitions are constantly being evaluated. ÔÇ£We are interested in strategic acquisitions, but weÔÇÖll be very selective in this current market,ÔÇØ McKinstray says. ÔÇ£We think this is still a long-term growth market.ÔÇØ ┬á