Andersons – Strategic Update Amid Strong Commodities
Demand – 17 June 2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Rhett Adams (RA)
Former Director, Commodities & Risk, Ethanol Division at The Andersons Inc
Agenda:
1. Sustainability of agricultural demand for Andersons (NASDAQ: ANDE)
2. Commodities pricing volatility and merchandising opportunities
3. Plant nutrition segment overview and fertiliser pricing
4. Production volumes outlook
Contents
Q: Could you give us an overview of the commodity processing industry, some of the main categories and
drivers and the influence of pricing?
Q: Could you name some of Andersons’ top competitors in ethanol production and other areas?
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Q: Could you give an overview of Andersons, some of the categories it operates in and what you think makes
Andersons unique in this market?
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Q: How diversified do you think the Andersons business is? What are some of the synergies for operating in
such distinct markets such as rail and commodities or soy crushing?
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Q: Could you outline the consistency and risk of operating a trading platform in-house? What are your
thoughts on that risk, given this is traditionally a production company and the market always has volatility? 5
Q: Could you speak to the cash commodity trading environment, nationally, of some bigger players
incorporating their own trading markets or teams and how the cash commodity trading business has evolved
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over the years since you’ve been in the business?
Q: Could you expand on plant nutrition and how it fits within the overall portfolio?
Q: Could you speak to Andersons’ overall scale?
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Q: Was scale was an ongoing topic of discussion at Andersons, particularly throughout your time there,
where it was seeking opportunities to scale up? Do you think it’s still that family-owned, conservative low
risk profile business?
Q: Could you expand on some of the players’ influence on supply and production and how that plays into
pricing? It seems like trading your own product but you also have a position where you can control supply
for a large part of the market. Could you speak to that dynamic and your overall thoughts on that close
relationship between free market?
Q: Could you elaborate on the ethanol market breaking down and some of the reasons for that?
Q: When you note the drop-off in demand of gasoline, did you think this was an opportunity to build
inventory and volumes in the anticipation of a rebound, even given that you think that there’s a part of the
market that may never come back?
Q: What are your thoughts on the challenge of capacity? What are some of the challenges the US has had
building the capacity of liquid gasoline? Why is that turnover timeline so quick and what is the bigger risk
that it has, given that you can’t really build capacity if it’s only out a week?
Q: You mentioned some of the different avenues for people moving away from the legacy model. Where in
Andersons do you think are scaling opportunities to diversify? You said it’s in all the different markets that
ADM and the big players play in, it just doesn’t have that scale. What one market would it be in, and why
would it make sense for Andersons to expand there?
Q: Could you discuss Andersons ability to capitalise on the higher commodity prices and the overall
inflationary environment, coming from a trader mindset, of the price of soybean, corn and lumber
skyrocketing throughout 2020 into 2021?
Q: Could you elaborate on Andersons’ feed strategy and how that’s evolved over the years that you were
there?
Q: Are there any other innovations you are tracking in the market around ethanol production?
Q: How strategic or important is Andersons’ propane business segment?
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Q: Could you elaborate on some of the strategic relationships that Andersons has, as well as some of its end
customers and how important those relationships are? How do you cultivate and continue to keep those
relationships and keep those customers or partners happy in this business?
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Q: Could you discuss the importance of risk management and any bad practices or other things that were
easily preventable throughout the market? Where do you expect the main risk within this industry in some of
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the categories that Andersons plays in?
Q: What are some of Andersons’ opportunities and what does the macro environment mean for Andersons?
Could you elaborate on its expansion into pet food? Consumers spend so much money on pets. How far is
Andersons into making plant-based diets and product offerings geared towards organic and niche markets?13
Q: You mentioned Andersons’ intention to enter California due to the high grade that’s only allowed there.
Are there any states that you expect Andersons not participating in? Would you be surprised by why it
doesn’t have a footprint in such areas?
Q: What is your outlook on the competitive landscape and some of the areas where Andersons plays?
Q: Is there anything the investor community commonly overlooks in the Andersons business overall?
Q: What is Andersons’ biggest weakness?
Q: What are your best- and worst-case scenarios for Andersons over the next 6-12 months?
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Andersons – Strategic Update Amid Strong
Commodities Demand
Transcription begins at 00:00:01 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Andersons – Strategic Update Amid Strong
Commodities Demand. I’m Nyree Hinton, and I’ll be facilitating today’s Interview with Mr Rhett Adams,
former Director, Commodities and Risks, Ethanol Division at The Andersons Inc.
Rhett, before we get started with today’s Interview, please state I agree or I disagree to the following
statement: You understand the definition of material non-public information and agree not to disclose any
such information, or any other information which is confidential, during this Interview.
RA: I agree.
NH: Thank you, Rhett. Could you give the audience an overview of your background and various roles you’ve
held in the industry?
RA: Again, my name is Rhett Adams. A majority of my background has been within procurement, trading of,
typically, ag-related commodities. I’ve got a pretty extensive risk management background. I’ve bought corn
for ethanol plants, I’ve traded corn, beans and wheat in the Midwest. I’ve held various managerial jobs of folks
doing similar type of roles, be it ethanol commodity merchandising, feed ingredients, corn procurement, prop
trading. Now, I’m the Senior Director of NPK for JR Simplot, which is a privately held company, and I look
over all of our fertiliser procurement for the company, as well as all of our risk management and pricing
outlooks to the market. That’s what I’m currently doing today, but about 12 years of commodity trading,
various type of experience, mostly at The Andersons, and I’ve been with JR Simplot about nine months now.
[00:01:47]
Q: Could you give us an overview of the commodity processing industry, some of the main categories and
drivers and the influence of pricing?
RA: Is there a specific processing you’re looking for or is this corn, soy crush? Is there anything specific you’re
looking for? Is it ethanol?
NH: I would say it’s up to your discretion relevant to The Andersons business, which is ethanol and other
areas, but if you can describe maybe what you’re most knowledgeable about and maybe how that may
influence other areas of the business or other categories, and then we can touch on what Andersons trades
specifically.
RA: Commodity processing in general, I would typically categorise that as grinding corn into ethanol or soy
crush, which is going into your oilseeds and soy meal. If you think about it from just a domestic overview,
roughly a third of the corn in the United States goes into corn usage for ethanol, so that’s roughly 5-5.5 billion
bushels, depending on the year and the market dynamics. When you look at soy crush overall, that’s probably
2-2.2 billion bushels of soybeans annually, domestically, that’s going into that.
I would say that the soy crush piece of it, in my opinion, is growing. I think there’s plenty of evidence to
support that, I think there are plenty of projects being talked about, but the oilseed demand overall, both
domestically and globally, is a major driver for that. Another big one for the soy crush complex is renewable
Private and confidential 3
diesel demand is also on the uptick, and we can get into that in more detail later. From a corn ethanol
standpoint, it’s not necessarily growing. It’s seen more consolidation overall, and that was happening even
pre-COVID. I think the ethanol boom overall, we’re certainly on the back end of that. It still plays a vital role
just for gasoline consumption overall. As the major octane, it’s got to be about 10% for E10 in the United
States. It plays a significant role in the fuel market, it’s a significant driver of on-farm incomes for farmers,
because a third of their corn is going into ethanol overall, but we’ve seen a lot of consolidation, we’ve seen a lot
of new technology come along to try to diversify what the portfolio looks like. I think most ethanol plants, in
my opinion, are trying to look less like an ethanol company and they’re viewing their by-products that they’re
producing and trying to differentiate in a commodity market that is tough to really set yourself apart.
[00:04:42]
Q: Could you name some of Andersons’ top competitors in ethanol production and other areas?
RA: Ethanol production, you’re going to run into Poet, first and foremost, they recently acquired Flint Hills
biorefineries. They were either one or two before that and now they’re certainly number one. Another one
you’ll hear about, Cargill, ADM, Valero, Green Plains. Those are typically the large ones that you’ll hear about
from an ethanol production standpoint.
[00:05:21]
Q: Could you give an overview of Andersons, some of the categories it operates in and what you think makes
Andersons unique in this market?
RA: The Andersons now, really they have three divisions. They, for a long time, had four, but they recently
combined the ethanol and grain divisions to where, I believe, it’s their trade processing. You essentially have
their grain and oilseeds division for processing, which is extremely intermingled. What I mean by that is while
they make roughly 550 million gallons, that’s their nameplate capacity for ethanol production, the folks within
that division are also buying the corn, selling the feeds, selling the ethanol and doing the risk management.
The elevators for the grain side are also strategically placed around where some of these ethanol facilities are
as well. Some of that was done on purpose. When the ethanol boom happened, the Albion facility actually used
to be a grain elevator, so that has turned into a large plant, the largest ethanol producer in Michigan. Even the
Clymers, Indiana facility used to be a grain elevator as well. The Greenville facility was a new build. We don’t
have any grain assets, I say we, I’m not with them any more, but Andersons do not have grain assets down
there any more. Then the Denison, Iowa plant had changed hands several times over the years, but that one is
mostly grain and seed trading around that, no physical assets. Then the Colwich, Kansas plant, The Andersons
does a lot of grain trading in Kansas in general, they’re probably one of the largest corn traders in Kansas
today. You’ve got a very intermingled business between grain trading, grain storage at elevators and then
feeding the inputs to the ethanol production process.
When you move over to the fertiliser division, I would say the fertiliser piece is more of a regional player.
They’re, I would say, a medium to small regional fertiliser. They do a bit of scheduled manufacturing for
people, they do turf and horticulture, which is more for your golf courses, so more speciality fertilisers there,
but they’re also a regional wholesaler fertiliser, so they’re selling to other retail outfits. They don’t sell direct to
farmers. A regional fertiliser player, I’d say, is probably the best way to sum it up. The rail division, when I left,
had roughly 20,000-23,000 cars. Mostly hopper-bottom cars. They do have, I think, 5,000-7,000 tank cars in
their fleet, but they also have an extensive repair network as well, so that’s very nicely intermingled and it’s
spread throughout the US and growing. It’s a very heavy capital investment business, so small returns, but it’s
also extremely steady and you don’t see the volatility that you would in the other two divisions. I would say one
thing about the rail division is they are not manufacturers of cars. They will lease you a car, they will repair
your car, they do not manufacture cars for you, so they’re different from a Trinity, for example.
In terms of going back to you’ve got the grain and ethanol business, they’re competing with the ABCs, your
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ADM, your Cargill, your Bunge. They’ve got a lot of regional players right around them. MAC, which is
Michigan Agricultural Commodities, they’re scattered throughout Michigan. Various ethanol plants, many of
which are independent, are major competitors as well. Different types of grain trading companies would be
like Gavilon, Scoular, Redwood. Those folks are who they’re competing with on their non-asset trading
business. In terms of competitors for the fertiliser division, I know Michigan Agricultural Commodities in
Michigan is a major competitor for them, but really they’re a customer and a competitor of major fertiliser
companies. Other publicly traded companies like a CF Industries, a Nutrien, an Intrepid, these are people that,
while they may be being supplied with it, they’re also, in some ways, competing with as well. It’s just the way
this industry works. On the rail standpoint, they’re competing mostly with Trinity, GATX, UTLX. Those are
folks that lease cars, manufacture and repair cars as well, so certainly they’re running into that every day.
[00:10:00]
Q: How diversified do you think the Andersons business is? What are some of the synergies for operating in
such distinct markets such as rail and commodities or soy crushing?
RA: I’d say the biggest synergy is going to exist around the ethanol plants. A couple of years ago, and this is
publicly traded knowledge, The Andersons bought Lansing Trade Group, and really what they bought was a
few assets but a lot of people, and with those people came some of the best traders in the company. Those
traders, they don’t like to deal with assets. They’re very little capital intensive. They literally have opinions on
the market and they go take positions and they’re very good at that. What that brought to The Andersons, who
was a very asset-heavy business, was a trade mentality on maximising not only what’s coming out of our own
facilities, but also giving looks into the market for those facilities that maybe they didn’t have before. That has
helped out because the grain division has always bought the corn for the ethanol plants. They receive a fee
from that ethanol plant to buy the corn, they receive a fee to sell the feed, they receive a fee to sell the ethanol
as well. Every single one of those fee income streams, they have a trade book around that as well, so not only
are they capitalising on the products that are going out the door, they’re trading around it as well, which gives
them visibility to maximise their trade books, but they have a very steady income of fees every year that’s
constantly coming in. That’s something a lot of other grain companies don’t necessarily have on that scale,
because one of those big synergies comes from Marathon Petroleum owning half of at least four of the assets,
basically, everything but Colwich. Having the largest ethanol end user in the country as your partner and that
is also essentially paying you a fee to sell them the ethanol is a pretty nice gig.
There’s very little synergy between fertiliser and anywhere else in the company. The grain division leases cars
from the rail group, the ethanol plants lease cars from the rail group, fertiliser leases cars from the rail group
and they also get them repaired at those shops, but for fertiliser, it’s pretty standalone. They don’t have a big
retail footprint. They’re a regional wholesaler and they’ve got some niche products that they manufacture for
others, but there’s very little synergy back and forth outside of the fertiliser division. The rail group, I would
say that is a good synergy with what I just described in the leasing and repair capabilities going back and forth.
That has worked out really nicely over the years. They have kept a lot of money in-house that would have
typically gone to a competitor.
[00:13:10]
Q: Could you outline the consistency and risk of operating a trading platform in-house? What are your
thoughts on that risk, given this is traditionally a production company and the market always has volatility?
RA: I would say keep in mind that a majority of that trade book would be what I would classify as cash
trading. When I say cash, I mean you’re buying and selling physical commodity markets, you’re not
speculating on the futures component of it. They do have a small team of prop traders that are literally trading
futures. That piece has more risk to it, but I would say they’ve got a lot of risk policies in place to help monitor
that day-to-day. They use VAR, which is value at risk, so it’s tough for a person to get horribly out of position
without them getting forced out. Small portion of the trading book is futures prop-related, which is historically
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more volatile. The cash trading business, they are buying corn in Kansas and selling it to, say, a Nestlé or a
Tyson Foods, other feed end users that are out there, and they have a lot of that business, basically, as theirs to
fill and they back into with their margin.
I view the cash business as relatively unrisky and I would say they have the policies in place to monitor and
mitigate that risk. I would also say that the neatest part about the trade portion of their platform is the grain
business overall has produced weaker returns, from a storage and carry standpoint, than what others would
like. That is just it’s less sexy of a business than it was, say, 10 years ago. The trade, no matter what market
condition you’re in, you can always trade grain, and that’s what they do. Whether it’s a drought, a surplus or
anything else, they’re always trading it based on their opinion, so even when your assets are underperforming
because they don’t have the crop, you could still trade off of that and it’s not a capital-intensive business. All
you have into that is essentially people at that point. I think it’s a great synergy, from what I saw, and they
have done probably one of the better jobs, in my opinion, of just moulding a trade and asset group together. It
looked like it was going to be a train wreck when it initially happened and it has come together quite nicely.
[00:15:46]
Q: Could you speak to the cash commodity trading environment, nationally, of some bigger players
incorporating their own trading markets or teams and how the cash commodity trading business has evolved
over the years since you’ve been in the business?
RA: Cash trading has gotten harder because end users have gotten more savvy. If you think about it, in 2008,
when a lot of these plants started coming online, their expertise was not ethanol production, it wasn’t selling
feed and products that were not on the market yet, but there was so much margin available, they were
constantly giving that money away to folks like The Andersons, ADM and Cargill to help them procure product
and sell product efficiently. These were investors, a majority of them, they weren’t commodity traders. The
way that that has evolved over time is there have been enough people in the industry that now have experience
that they’re cutting out the middleman overall. If you’re trading a cash book, you want to deal as directly as
you can with the end user, but you also want folks that are as unsavvy as possible because they tend to leave
margin on the table. The industry, overall, has gotten more disciplined, there are less trade types out there
than there used to be because it is difficult. I know at The Andersons, while I was there, we did a good job of
cutting out the middleman. We wanted to deal directly with a Marathon, we weren’t going to sell it to a broker
to then go sell it to a Marathon. As we cut out brokers, others were doing the same. I would say it’s gotten
harder and those relationships that do still exist have become extremely important, and I know that they still
have a lot of those key strategic customers out there that rely on them to supply them with goods or move it for
them.
[00:17:50]
Q: Could you expand on plant nutrition and how it fits within the overall portfolio?
RA: We did actually talk about it, it’s the fertiliser division essentially. They manufacture a little bit. They’re
mostly a wholesaler of goods, so they’re buying from a Nutrien, a CF, a Mosaic and they’re turning around and
selling that to other small retail outfits. That’s the majority of what they’re doing. Then they have that turf and
horticulture business, which is supplying golf courses with bagged fertiliser.
NH: Sorry about that, I got confused with animal nutrition, usually that’s with ADM and Cargill. Everyone
calls it nutrition something.
RA: No problem.
NH: When you assess Andersons and that fertiliser business, what do you think Andersons thinks when it
determines a business no longer fits within the overall portfolio, and when it comes to some of the synergies or
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lack of synergies that you mentioned, when it comes to rail and how that’s cross-functional, and it seems like
plant nutrition is the odd one out?
RA: I would say my opinion of that is you are correct, that they are the odd one out. The only division I’ve ever
seen The Andersons close was the retail division and they took that one on the chin for over 10 years of losing
millions and millions of dollars because it was such a large impact on the local economy, over 1,000 people
employed. That’s the only one I’ve seen them actually close. Historically, they’ve had a tough time closing
assets that are underperformers. I think they’ve gotten better at it with the Lansing transaction because these
are unemotional traders that just see net returns. I think, historically, transitioning from a family-owned
company to a publicly owned company that now has even less Andersons involved in it, they are treating it
more like a typical company would, which is if you don’t have the returns needed and you don’t have the
outlook necessary, I think they’re at least looking to exit, but historically it’s not been something they’ve done.
[00:20:17]
Q: Could you speak to Andersons’ overall scale?
RA: I would say the coolest thing about The Andersons is both their size and scale, but it’s also the biggest
problem that they have, and what I mean by that is they’re not one of the large ABCs, ADM, Cargill, Bunge,
which means they can be more nimble and move quicker than what others can. I think they’ve shown some of
that success, but part of the problem also is that they don’t have the size and scale necessary to throw their
weight around at times as well. If you look at each of their divisions, they’re roughly fifth or sixth in each of
them. They’re not at the top, they’re not at the bottom, they’re the steady Eddie and they’re not market
movers. They have a strong domestic presence, they have a better international presence than they did before,
by buying Lansing, but most of that has come from a feed ingredients standpoint and I don’t think that has
produced the returns because China, right now, is buying feed grains but not ethanol by-products as feed
grains. Right now, China is now buying DDGs, for example, which is what The Andersons produce at their
ethanol plant.
[00:21:44]
Q: Was scale was an ongoing topic of discussion at Andersons, particularly throughout your time there, where
it was seeking opportunities to scale up? Do you think it’s still that family-owned, conservative low risk profile
business?
RA: I think they are still a relatively low-risk business and part of that came with the discipline that came
from the Lansing guys that are used to trading large, they had a lot more discipline and risk policies that came
with that so I think that’s helped a lot. It was a discussion about growing but there was never a desire to be
number one, two or three. We always talked about being the most profitable per bushel or per gallon. We
wanted to be better than everyone else, but we had zero desire to go out and be a Cargill or a Richardson or an
ADM, it was never of interest. I think their commitment to what they spent on Lansing did show that they
want to grow, for sure. They built an ethanol plant with brand-new technology at Colwich. There was a need to
grow, but you’re not talking billion-dollar transactions either.
[00:23:05]
Q: Could you expand on some of the players’ influence on supply and production and how that plays into
pricing? It seems like trading your own product but you also have a position where you can control supply for
a large part of the market. Could you speak to that dynamic and your overall thoughts on that close
relationship between free market?
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RA: These commodity firms get their hands slapped every once in a while because it is supposed to be a free
market. It’s public knowledge ADM was under investigation for them essentially manipulating the Chicago
ethanol market. Because they were so large, they were able to play games that others were not and I think that
investigation is still ongoing. From a size and scale standpoint, I think you’ve got to talk about integration. The
Andersons are very well-integrated throughout the US. They do ship their feed products overseas, they do play
in international trade markets, but it is not near the size and scale of the ABCs that I mentioned earlier. An
ADM and a Cargill are literally everywhere. I can tell you, when ADM would do anything in the ethanol
market, it was a market mover because when their plants are at full production and, especially, they were such
large export players and they were such large players into Chicago, they could swing the domestic supply very
quickly. If they stop shipping to Chicago and decide they want to take it out of the Gulf, all of a sudden, there’s
a big sucking noise in Chicago and the market is short ethanol. They know before they do that and they would
position their futures accordingly. You think about their grain network, they buy, what is it, it’s a ridiculous
amount of grain weekly to supply those big ethanol plants, and they have an entire network set up all along the
Union Pacific to supply them. There are very few grain outfits that could actually supply the size of ethanol
plants that they have. Their size and scale are literally market movers.
The Andersons touches in all of these businesses, but I think that the way they’ve aligned strategically is
they’re integrated, they’re still in the same markets as ADM, Cargill, Bunge and everyone else, they’re just not
as large. I think that’s what helps keep their risk profile down a little bit. When the ethanol business, for
example, fell apart, you look at the earnings losses to an ADM compared to an Andersons, painful for both of
us, but they have a larger risk profile than I would say that The Andersons do.
[00:26:07]
Q: Could you elaborate on the ethanol market breaking down and some of the reasons for that?
RA: On why it broke down over the last year? Is that what you’re asking?
NH: Yes, in your opinion, given some of the demand from commodities and other areas of the market.
RA: If you think about it, the ethanol boom happened 2008 to about 2014-15 and really, since 2015, ethanol
has been sideways to a lower trajectory overall. You’ve seen a lot of consolidation happen as margins have
been squeezed. Even pre-COVID, ethanol was on that trajectory. What happened with COVID just completely
rocked the industry, like it did anything else, because gasoline demand, for an entire month-and-a-half, was
50% of what was anticipated. That has slowly crept back to the point where you could realistically get within
probably 95% of where we were pre-COVID, and that’s your new steady case as you move forward. That
implies 5-7% of US motor gasoline never comes back, but I think that’s a really positive sign for ethanol overall
because you have to supply 10%. You’re the only octane that can be blended in US gasoline. It’s the most
economical form of octane in the US on a commercial scale. Right off the bat, you’ve got roughly 14 billion
gallons of ethanol demand that is there year in and year out, and the only way that changes is if they gut the
RFS, Renewable Fuel Standard, and today that looks, I would say, highly unlikely. It would require both sides
of the Senate getting together and making a decision, and it looks quite unlikely today that’s going to happen,
in my opinion.
I think, at this point, now that we’ve seen the consolidation happen, there’s going to be more consolidation but
it’s really going to come down to can folks like Pacific Ethanol really make it? They’re essentially a penny stock
at this point. Green Plains is trying to completely reshape who they are as a company. They don’t want to be
viewed as an ethanol company any more. The Andersons, Poet, you name it, they’re all trying to figure out how
to make different products out of their ethanol plants. A good example of that would be, traditionally, the feed
product that came out of an ethanol plant was called DDGs, dried distillers grain, so a bushel of corn comes
into the plant, it gets made into ethanol, but the solid by-product that comes out, they dry it down and you’ve
got a higher-condensed protein feed. The protein of something like that’s usually 26-29% protein. They’re
coming out with feed products out of ethanol plants today that are upwards of 60% proteins, so instead of
feeding cows, chickens and hogs, they’re looking to feed fish, they’re looking to go into pet food. Those are
higher-netback types of margins. I know Poet has publicly come out and they’re trying to make products that
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go into asphalt and things that go onto the road from their corn oil. Nobody wants to be a traditional ethanol
plant because it’s not going to produce the returns that they want. They want to be known as a biofuels
company with neat product. Everyone is trying to go that route, but it’s capital-intensive.
[00:29:33]
Q: When you note the drop-off in demand of gasoline, did you think this was an opportunity to build
inventory and volumes in the anticipation of a rebound, even given that you think that there’s a part of the
market that may never come back?
RA: Everybody did it, but not by choice. If you think about the storage capacity in the United States, there’s
typically, at any given time, about three days’ worth of supply sitting at a gas station, so I’ll try to back into the
numbers for you. On average, pre-COVID, the US demand for gasoline was 143 billion gallons. That 143 billion
gallons, over 12 months, is always going through pipelines, into storage facilities and then eventually to a gas
station, where folks like you and I go and put it in our cars. At any given time, that gas station network can
only hold about three days’ worth of gasoline, and you’ve only got about a week or two worth of gasoline
storage throughout the rest of the United States. That’s why, when you have the online hackers that hit the
Colonial Pipeline, that’s why you suddenly saw supply so tight off of one major pipeline, is because you’ve got
such a tight supply infrastructure overall that you fill up quickly and you run out very quickly. When you say,
“Is this an opportunity to build inventories for the rebound?” Yes, people did it. They didn’t want to. Oil went
negative, everybody filled up their tanks and had to shut down their facilities, and Q2 of last year, gasoline
demand was down 40% or 50%. Then in the summertime, it was down 20%. Then in, most recently, Q4, that
was down probably 8-10%. The forward projection on what I’ve seen and read out there is more like 5-6%
down, but it’s never coming back mostly because our behaviours have changed at this point. Even as the
economy roars back and we all go back to work, there are some behaviours that are just physically different
and that gasoline demand, some of it is never coming back.
[00:31:57]
Q: What are your thoughts on the challenge of capacity? What are some of the challenges the US has had
building the capacity of liquid gasoline? Why is that turnover timeline so quick and what is the bigger risk that
it has, given that you can’t really build capacity if it’s only out a week?
RA: Here’s the problem. We have probably more gasoline stored in the United States than anywhere in the
world. We’re one of the largest driving demand markets, so the supply chain, when you’re not in a, I don’t
know what you would COVID, a once-every-20-year event, you can’t set up supply chain for disaster scenarios.
That supply chain is set up for a well-humming efficient system and nine out of 10 days, it works perfectly. You
get some minor interruptions, it’s winter weather, but typically demand is pretty steady, and if you’re an oil
company and the proposition is to go build more tanks, they’re going to find better returns somewhere else
because the return on a tank is pretty dismal.
[00:33:25]
Q: You mentioned some of the different avenues for people moving away from the legacy model. Where in
Andersons do you think are scaling opportunities to diversify? You said it’s in all the different markets that
ADM and the big players play in, it just doesn’t have that scale. What one market would it be in, and why
would it make sense for Andersons to expand there?
RA: Are you saying where would I build a new business or how would I change their business?
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NH: It could be a mixture of both. How would you assess what it’s currently doing to expand in new markets
and innovating to keep up with the big players, but scale more that specific market because it offers the
highest-margin opportunity and the best diversification in terms of barriers to entry?
RA: It also happens to be the most risky, but the Colwich facility is one of the most expensive per-gallon
facilities ever built, but it’s got some of the most unique technologies that, when it’s all working, it’s one of the
most efficient green facilities in the United States. What that allows them to do is to capitalise on biofuel
products that go to California under the Low Carbon Fuel Standard. For example, the average CI score when I
left The Andersons was, I don’t know, an 80 for example, and you got to be at least an 85 to go to California,
just for example. Initially, when that plant was built, I don’t know the details on where this is at today, but the
idea behind that technology, and they have publicly stated this, is that they wanted initially a CI, a carbon
intensity score closer to a 50. That 50 would have been worth a lot of money for them, taking ethanol to
California. They’re trying to grow their California market share, they’re trying to meet a growing trend, which
is, if you think about what’s happening in Canada around carbon emissions and really along the coast in the
United States and in Europe, these carbon fuel standards are becoming bigger and bigger. They set that plant
up to capitalise off of it and be a major player there.
Since I’ve left, I don’t know how well that’s gone or not, but they’ve certainly tried to do that because the grain
business, it’s going to be low-return business for the most part. Corn carries used to be USD 0.20. It’s going to
be tough to get USD 0.20 carries deep to March. You’re going to be lucky to get USD 0.10-0.12 at this point
because there’s so much domestic demand in the US. The fertiliser business is on an uptick. Every fertiliser
company in the US is making money today. If you’re not making money in fertiliser today, you should get out
of the business. Everybody’s making money. There’s nothing special about it. The market is completely
appreciated, we’re all making money. The rail business is a steady Eddie for them. They don’t like the returns
that they get out of the rail business because it’s so capital-intensive, it’s by far the worst returns, but it makes
money every single year and it has virtually no volatility. When the economy is doing really well on this type of
upswing, their utilisation rates in cars are going to continue to increase, so going from a 95% to a 99% is
doable. The only cars that they don’t have running right now should be cars that are currently in shop, and
you’re always going to have a few per cent getting cycled through.
[00:37:15]
Q: Could you discuss Andersons ability to capitalise on the higher commodity prices and the overall
inflationary environment, coming from a trader mindset, of the price of soybean, corn and lumber
skyrocketing throughout 2020 into 2021?
RA: I would say, keep in mind that, outside of futures or prop trading, a commodity company like The
Andersons or an ADM does not care whether it is USD 3 corn or USD 9 corn. They make all of their money off
of the futures carry in the market which capitalises on storage and then they make their money on basis. If you
buy something at USD 0.10 over and sell it for USD 0.30 over, that’s a USD 0.20 profit. They don’t really care.
When you’re trading ethanol and everything else, I guess the main ways that it really helps them is, when corn
is USD 6, their DDGs are USD 250 instead of USD 100, because it’s all based off of a per cent of corn. For the
most part, the reason that you have high corn prices is where they might be able to position themselves,
because having knowledge of what is happening on the ground, because they’re so spread out east or west,
they’re going to see problems before maybe some others do and take positions to capitalise. They’re not
banking on whether corn is going from USD 3 to USD 6. What they’re banking on is what’s causing it from
going to USD 3 to USD 6, and should I go buy that corn a little early, from a basis standpoint, because supply
is going to be tighter in that area, or did we have an inkling that China was going to buy corn, so I can go buy
up corn that sits well into an export programme and hold on to it and sell it at a profit?
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[00:39:19]
Q: Could you elaborate on Andersons’ feed strategy and how that’s evolved over the years that you were there?
RA: We went from a traditional ethanol company, where I mentioned that a bushel of corn comes in.
Typically, a bushel of corn is 56 pounds, and what that bushel of corn usually makes is about, I think it’s 10 or
12 pounds go into ethanol, another 13 or 14 pounds go into CO2, and then you’ve got the rest that gets split out
among various feed products. Corn oil could be a pound a bushel, feed ingredients could be anywhere from 13
to 20 pounds a bushel. It all adds up to 56, but they’ve gone from making traditional dried distillers grains,
which were about 15-16 pounds a bushel, 26-29% proteins, and they’ve put in systems that help debottleneck
their plant but also create different higher-protein feed product. The payoff there is you get a more efficient
plant. That could come through energy usage, it could come through a higher yield, but also having a product
that you would normally sell at USD 200 a ton and can now sell it for USD 300 a ton because it can reach
niche markets, that’s the direction that they were going. I know they’ve come out with a protein product that is
over 40%. I would say, in my opinion, that should be creating better dividends, but without being behind the
scenes and seeing how it’s really pencilling out, I wouldn’t be able to tell you for sure. They definitely are trying
to make higher-protein products and increase their ethanol yield and their corn oil yield. Corn oil is the
highest per-pound, most profitable product made out of an ethanol plant, and that goes into either feed
rations or renewable diesel.
[00:41:26]
Q: Are there any other innovations you are tracking in the market around ethanol production?
RA: Yes, there are plants trying to do all kinds of things, whether it’s a bolt-on technology. Essentially, an
ethanol plant is just a big brewery. It’s a refiner, it’s just a refiner of corn to making ethanol. There have been
ideas about bolting on a renewable diesel facility to an ethanol plant, for example, and just using your corn oil
there, on-site, and feeding that, that’s been talked about. There are these ideas around clean sugars, there are
ideas around food-grade corn oil. You’ll see some things out in the news about carbon sequestration, which
I’m not going to tell you at all I’m an expert on, but I would tell you that that is an avenue to diversify from
traditional corn ethanol production. It’s a different revenue stream that’s ag-related overall. There are things
that plants are trying to do, certainly.
It also depends on whether you’re a dry mill or a wet mill. Another interesting trend is that, so a wet mill, for
example, Cargill and ADM are the two biggest wet mills. All that really means to you is that the feed that
they’re making is typically a little higher moisture, higher protein and there’s a little bit of flexibility that
comes with wet-mill ethanol production. The trend that has been happening over the last five years is that as
these dry mills have diversified their product, they’ve been able to come out with different products to compete
with a wet mill that historically would not have been the case. Dry mills have always been pegged as a standard
cookie-cutter type of production, and now they’re able to spit out various products and move their production
to meet demand, maybe it’s make a little more ethanol at times, make a little less, change to this feed type
during one season, switch to another. Wet mills have been able to do that forever, but dry mills are definitely
getting there.
[00:43:44]
Q: How strategic or important is Andersons’ propane business segment?
RA: The propane piece, I’ll tell you, it’s as uncomplicated as they want to make it. If you think about just the
cash trading business for grain, their propane is very similar. They’ve got storage positions where they try to go
fill up when they think it’s at the cheapest, and then they’ve got strategic customers that they sell to
throughout the year at a carry in the market. It’s that uncomplicated. Easier said than done to pick when the
time to buy and things like that. They’re in the market every day, so they know more, but that’s the majority of
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what it is.
[00:44:31]
Q: Could you elaborate on some of the strategic relationships that Andersons has, as well as some of its end
customers and how important those relationships are? How do you cultivate and continue to keep those
relationships and keep those customers or partners happy in this business?
RA: A lot of those relationships are very long, so on the feed grain side, think about the type of feed mills that
are along the East Coast that have been there for 50-60 years. The Andersons have been doing business with
them and shipping them corn, beans and wheat for decades. On the ethanol side, I mentioned Marathon,
because not only is Marathon a strategic partner who owns half of four of the ethanol plants, but they also take
probably 40% of the ethanol produced out of those facilities, so they’re a major customer and a strategic
partner. While both companies can’t go share confidential information about their sale side customers or ours,
for example, there was a lot of collaboration back and forth on opinions in the market and just different ideas
on what they were working on and how The Andersons could help them do that. When Marathon would look
at renewable diesel projects, they would come to The Andersons to see if they could supply them with the feed
products that would go into that production process. That’s the give and take relationship, even though they’re
a partner, that I think is probably the most important relationship at The Andersons, in my opinion. They are
the largest ethanol end user in the country and The Andersons are in their back pocket. That’s a pretty cool
deal.
[00:46:22]
Q: Could you discuss the importance of risk management and any bad practices or other things that were
easily preventable throughout the market? Where do you expect the main risk within this industry in some of
the categories that Andersons plays in?
RA: There’s risk in cash and futures trading, but I would say on the futures piece, which has more volatility,
they don’t really trade a lot of futures that are just flat price, long or short. What I mean by that is you could go
buy a contract of corn today and every penny it goes up or down, you’re winning or losing. A lot of the way that
they trade is via spreads, which have far less volatility, and it ties directly to the cash markets that they’re in
every day, so there’s a synergy. If you see in your local market you’re going to have a bigger crop, spreads
should get wider. The Andersons were also large players in the delivery market for wheat. Playing spreads
based off of cash market opinions is immediately de-risking your prop trading overall. They also trade a lot of
options with delta positions. What I mean by that is, instead of buying that corn contract that has 100% delta,
you’re moving with the market, it might have a 30% delta, so a market move against you, instead of losing one
for one, you’re only losing at 30%. That’s often how they trade.
I would say their risk mitigation policies are really good now that Lansing is on board. They track that all the
way to the CEO every single day by the dollar, throughout the day, and you can only lose so much money in
one day before you’re kicked out of the position. The odds of coming in and losing USD 5m are virtually non-
existent. You also cannot just go make USD 5m because you’re not going to have positions big enough or risky
enough to do that, so I would say, overall, they’ve done a really good job of putting policies in place to control
good behaviours and keep bad behaviours from happening.
NH: Could you follow-up on those points with capacity management in that area?
RA: The way that they look to position is, I’m trying to think of what I can say and what I cant say here. I
would just say that it is not unique to them that they look at a trader’s risk based off of volume and potential
dollar move that could go against them one day or another. None of their traders have the ability to just go
rogue and go do something crazy. There are just too many policies in place and too many checks and balances.
I would say that they are very big into the spreads market, they are big into the delivery market, but the three
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or four traders that they have that are more prop-related are not buying flat price. They’re mostly trading
spreads or options, and they just have a lot of people staring at what they’re doing all day long, and there are
penalties if you go outside of policy. You could be fined, you could be fired, you could be kicked out of your
position. There are things that happen if you do things you’re not supposed to.
[00:50:04]
Q: What are some of Andersons’ opportunities and what does the macro environment mean for Andersons?
Could you elaborate on its expansion into pet food? Consumers spend so much money on pets. How far is
Andersons into making plant-based diets and product offerings geared towards organic and niche markets?
RA: I would say they’re not far along. I’m trying to think of a way to say this. Organic products have a lot of
margin to them, but, from a commodity standpoint, they’re such low-volume and niche markets. They toy in
them, they’re certainly involved because they do some food processing, they supply the corn to Frito-Lay, for
example, and they have to buy organic corn and some non-GMO to go into that, but the organic piece isn’t
what most people think it is. I’m not going to get into a political debate on whether it’s a fat or not, but these
are commodity volume-based traders. I don’t know that they’re going to waste their time for such a small,
niche type of market. I know that they have non-GMO programmes in Ohio and Michigan, that they supply
Mitsui, so they grow non-GMO soybeans that eventually get sent overseas and they get made into shampoo,
oils or soy sauce.
They’re invested in it, but I would say the opportunity is not organic. Getting niche products with higher
protein values to get into pet food is a big deal, if you can meet their specs, which, historically, ethanol plants
have quality control problems trying to meet the specs of a pet food plant year in and year out. Part of the
reason for that, it’s not because the plants have hiccups all the time, it’s just, from year to year, you could have
toxin issues that you physically can’t go into pet food with. That could change year to year, so they’re always
supplying from different places. They’re heavily tied into Kansas and supplying the pet food market down into
Oklahoma, but Kansas is also a hotbed for vomitoxin and aflatoxin, so that’s good and bad. Makes it hard to
supply, but as a logistics and commodity company, they benefit from it because they have such a large pool
that they can grab from, that they can go find the clean corn and extract a premium by shipping it down there
and bailing them out.
[00:53:00]
Q: You mentioned Andersons’ intention to enter California due to the high grade that’s only allowed there. Are
there any states that you expect Andersons not participating in? Would you be surprised by why it doesn’t
have a footprint in such areas?
RA: Not really. If you think about it, the structure of end users, a bulk of your ethanol plants are in the
Midwest, your feed customers are on the coast, for the most part. You’ve got cattle markets in the centre of the
country, that we’ve heard that The Andersons participate in, but all your big chicken, turkey hog guys are
scattered on the East Coast and in the south, and then you’ve got some of those niche markets in California,
like you mentioned non-GMO, organic, whatever. They’re pretty much everywhere. They may not be as big,
but if you think about the Dakotas, for example, most people don’t play in the Dakotas because there are a
bunch of co-ops and there’s just not a lot of margin to be had because co-ops don’t have to make money.
[00:54:23]
Q: What is your outlook on the competitive landscape and some of the areas where Andersons plays?
Private and confidential 13
RA: From an ethanol standpoint, you’re going to see the big players either get bigger or just flat out exit. The
fact that Flint Hills was willing to sell tells you the Koch brothers looked at the long-term outlook of biofuels
and said, “I can get a better return elsewhere.” Won’t disagree with that. The Andersons, the strategic
partnership with Marathon Petroleum, in my opinion, Marathon Petroleum use biofuels as a way for them to
keep market share because that 5-6% of gasoline demand that I mentioned is gone, it’s never coming back. As
electrification comes and things like that, their market share is going to shrink if they don’t do something
differently. One of the ways for them to compete is through biofuels and renewable diesel, so a lot of those
plants, the lower-end assets are getting repurposed into renewable diesel and things like that, so that’s
definitely helping.
[00:55:36]
Q: Is there anything the investor community commonly overlooks in the Andersons business overall?
RA: I would prepare for those investor calls and information and I would tell you the number one problem
we’d always have is people have no idea how the businesses are tied together. They just could not get their
head wrapped around why is it a benefit to have a rail group and a fertiliser group? The grain and ethanol
thing, people can get their head around really quickly, but the synergies between all of the groups are not that
good, other than grain and ethanol. I think most analysts struggled with rail and fertiliser overall, as to why
they kept it. They’re low-return businesses, they’re heavily capital investment types of propositions, and there
weren’t a lot of synergies.
[00:56:33]
Q: What is Andersons’ biggest weakness?
RA: They’re still predominantly viewed as the regional eastern corn belt company. Lansing has helped with
that, but being five or six in anything is not anything to write home about. They’re small enough that people
love doing business with them, they can be nimble, but they’re not big enough to move the market. They’re just
constantly following market trends vs leading them.
[00:57:10]
Q: What are your best- and worst-case scenarios for Andersons over the next 6-12 months?
RA: I think best case is that China continues to buy feed grains, you’ve got good farmer incomes, and when
that happens, the ag business, in general, makes really good money, and they will find a way to profit off of
that. I think the economy returning, rail is going to continue high utilisation rates, that’s good for their
business. It’s good for fertiliser overall, because farmers are going to be paying more for fertiliser and there’ll
be higher demand for fertiliser. That’s best-case scenario. I think worst-case scenario is we settle into a new
plateau and this is as good as it got from an ag standpoint, and you’re two or three years down the line and
realise The Andersons need to go sell a couple of businesses, and it’s probably fertiliser and/or rail, in my
opinion.
[00:58:10]
NH: We will now end the Interview. Let me close by saying, thank you, Rhett, for your input. It was a really
great Interview. There was a lot to unpack there, so thank you for taking the time, and thank you, clients, for
joining Third Bridge Forum’s Interview today. If you would like to speak with our specialist, Rhett, in a private
Private and confidential 14
call or meeting then please let your relationship manager know. Thanks all. Goodbye.
RA: Thank you.
Transcription ends at 00:58:23 of the recorded material
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