The year was 1988 and the country was parched by a once in a lifetime drought, an event that media nationwide had dubbed the “summer of our discontent,” twisting a Shakespearean phrase.
Fields that should have had tall green corn stalks instead were full of shriveled plants dying of thirst under a relentless scorching heat.
“In the drought of 1988, production was cut in half. We lost 50 percent of the crop. Fifty percent!” Mike Anderson, chairman of The Andersons Inc., recalled of that disastrous summer.
“Our retail expansion hadn’t worked that well in Columbus, and then the drought hit. We had to put on the brakes in a number of areas,” Mr. Andersons said.
Yet as bad as the ‘88 drought was for the bottom line of the Toledo area agribusiness — and it ranks as the second-worst drought in the 20th century with $130 billion (2019 dollars) in overall damages — in Mr. Anderson’s mind the drought ranks behind the current challenging period The Andersons now faces.
“I would say this time, in my tenure, has had the largest number of headwinds that have gone against us in a 12-to-16-month period,” the chairman said.
“In ‘88 it was like facing one huge hurricane that had a major, major impact on us for several years. This, though, would be No. 1. The drought is No. 2.”
The Andersons, which is headquartered in Monclova Township, indeed has been facing multiple headwinds like it has not seen in its 73-year history.
At this time last year, farmers throughout its 30-state footprint were struggling with a rainy planting season. The result was a crop that, at 13.7 million bushels, was down 5 percent from 2018’s crop, not a good result for a company that makes money storing grain.
Simultaneously, a U.S.-initiated trade war with China caused the Asian country to stop buying U.S.-grown soybeans, another blow to The Andersons.
And then in February, the coronavirus pandemic arrived.
“We were having a good year,” said Pat Bowe, CEO of The Andersons.
“I’ve been in agriculture over 35 years now and I’ve experienced a lot of ups and downs, trade issues, weather, shifts in demand. There are many factors that affect food and agriculture from the demand side and this year has been no different,” he said.
But the swiftness of the virus and the sharp response to it, including state lockdowns, caught the company by surprise, the CEO added.
“The ethanol dip in demand was so abrupt and had such a sharp impact in March and April. You could either slow up (production) or just shut down,” Mr. Bowe said. The Andersons chose the latter option.
As part of the food supply chain, The Andersons has kept operating. But with state lockdowns to avoid spreading the virus, Americans decreased their driving which led to a glut of ethanol and depressed ethanol margins — a key source of revenue for a company like The Andersons that produces ethanol at four plants, sells grain used to make ethanol, and has a fleet of rail cars that it leases to transport grain.
Compounding its problems, in late 2018 the company acquired a grain trading partner, the Lansing Trade Group, for $324 million in cash and stock. The purchase added another $160 million in debt, pushing the company’s long-term debt total to just over $1 billion.
The acquisition was not expected to be a problem, but the company did not foresee the virus shutting things down. In the first quarter, its Ethanol Group was significantly impacted by a $30 million decrease in revenue year-over-year.
Overall, the company suffered a first quarter loss of $37.7 million, or $1.15 a share, and it has taken a beating on Wall Street as a result.
In January, the company share price was cruising just above $25. By May 7, two days after announcing first quarter earnings, The Andersons’ share price fell to under $13, having dropped $5.50 in a week.
In fact, over the last 22-month period just before the purchase of the Lansing Trade Group, the share price of The Andersons has lost $28.
After the weather last year, the trade war, and a volatile ethanol sector over the last two years, “The pandemic was just kind of the cherry on top of that,” said Tristan Brown, a State University of New York business professor who follows The Andersons and writes about them for the investing website Seeking Alpha.
“One reason the market has been concerned is fears in the market for companies that had more debt than the sector average,” Mr. Brown said. The Andersons debt load is among those on that high side, he added.
“The concern there is that if we see a second wave of the pandemic and people have to lock down again there will be concerns about how sustainable is that debt load,” Mr. Brown said.
But Mr. Bowe said The Andersons, which had revenues of $8.2 billion last year, its first full one after the Lansing acquisition, has been prepared for the pandemic.
The company's liquidity is in good shape with $850 million of undrawn capacity from its primary credit line signed March 31. And the company, under Mr. Bowe’s long-term goals since he took over as CEO in 2015, has been on a mission to cut costs and reduce waste and will reduce expenses by $20 million in 2020.
It also has cut capital expenditures in half, to approximately $100 million this year and strategically decided to use the time shutting down its ethanol plants as its annual maintenance period.
The company’s long-term debt is structured so that no significant amounts come due before August of 2021.
“We have a strong balance sheet and ample borrowing capacity. We’re still in a good position,” Mr. Bowe said. “For us, we would like to work on that billion in long term debt. We’d like to work that down. Our plan was to do that this year. That might be delayed now.”
Mr. Bowe was given an unusual opportunity this year. He was named to Ohio Gov. Mike DeWine’s economic task force during the pandemic.
The selection gave him an opportunity to see how other businesses have fared and the strategies they have used to survive thus far.
“Being a North America supply chain company deemed ‘essential,’ all of our 140 facilities across North America have been up and running during the pandemic,” Mr. Bowe said.
And each facility and office, including the headquarters, has followed CDC guidelines for sanitation and social distancing, the CEO said.
“Here in Toledo we followed strict guidelines. We have 500 employees working remotely at home. Now about 5 or 10 percent of them who work in the headquarters are starting to come back, but I’ve been pleased that we’ve serviced our customers and done so very efficiently during this and haven’t faced disruptions,” he said.
And lately, there have been some pleasant financial surprises — small ones that do not affect revenues greatly but are good to see nonetheless.
Plant nutrient sales are doing well because this year’s planting season for farming has been mostly ideal with some rain but not too much, and good dry weather overall that is good for planting.
“The funny part of things is people also are paying more attention to their lawns and gardens during the pandemic. Retail (sales) has improved and even golf courses have seen more rounds of play,” Mr. Bowe said.
Meanwhile, the Grain Group has seen an increase in grain sales fuel by an increase in demand for baking flour and wheat flour.
Rail leasing, unfortunately, is linked to GDP and the economy has been falling for some time.
But financially, Mr. Bowe said the biggest impact to the company in the first half of 2020 has been the decrease in diving miles which has affected ethanol demand. Demand is down 50 percent, he said.
But the situation is changing, and so have company plans. In the last month its four plants, located in Ohio, Indiana, Iowa, and Michigan, are operating again, albeit, not at full capacity.
“The gas demand has returned to 25 percent of what it was. It’s been an economic hit for the company,” Mr. Bowe said. “It looks better, but we have to see if people return to work. That’s the biggest impact to The Andersons,” he added.
Mr. Brown agrees and lays the culpability for the drop in share price to ethanol demand, some of which has been affected somewhat by government decisions and much more by the coronavirus pandemic.
“I think a lot of what’s happened to the share price in 2020 has a lot to do with ethanol margins,” he said. “But we’re looking at a record to near-record corn harvest later this year. Barring a repeat of what’s occurred, there should be a lot of grain moving on the market — and that’s where The Andersons is well-positioned in the markets.”
Mr. Brown said a bumper crop will lower corn prices and increase ethanol margins. And as people drive more, ethanol demand should rebound this summer and next summer.
“The last two years have been very bad for the ethanol sector. And the government hasn’t responded,” he said.
“It’s not just The Andersons either that are affected. Every company in this sector has really struggled. And we don’t talk enough about the impact of Trump’s trade war and its effect on the rural economy,” Mr. Brown said.
However, a good crop this fall will cure many ills.
“They’ve largely made it through the worst of it, in my view,” Mr. Brown said. “They shut plants down for maintenance, which allowed them to largely avoid the losses we’ve seen from other companies.”
Mr. Bowe agrees.
While the Grain Group is still absorbing a “hangover” from the bad planting season last year and a smaller crop that left The Andersons’ storage elevators half-full this year, the CEO is a believer that things go in cycles, “and cycles swing back and forth.”
Mr. Anderson, the company chairman, has seen many cycles in his tenure and believes the company is positioned to rebound this fall.
In 1980 the company suffered through a grain embargo against the Soviet Union, and simultaneously the European Common Market, through subsidies for feed grains that came with their “common agricultural policy,” became virtually self-sufficient in feed grain and wheat production.
“Right in that period of time we lost our No. 1 and No. 2 largest customers for grain. That was a significant time for the company,” Mr. Anderson said.
“But the flipside of that was in the ‘70s when production of grain had to step up. We happened to be extremely positioned for that and in 1973, everything that could go right went right. It was one of those times when the stars aligned,” he said.
First Published June 20, 2020, 2:00 p.m.
