OMAHA (DTN) -- Omaha-based Green Plains Inc. alleges Archer Daniels Midland conducted a scheme to illegally depress the ethanol cash spot market beginning in November 2017, in a class-action lawsuit filed Monday in the U.S. District Court for the District of Nebraska in Lincoln.
ADM already faces a similar lawsuit in the U.S. District Court for the Central District of Illinois, where AOT Holding AG alleged ADM manipulated the market at the Argo, Illinois, terminal by flooding the fuel terminal with lower-priced ethanol starting in November 2017 through March 2019.
The Argo terminal is the daily location for ethanol trading.
The 30-minute trading window at the terminal is considered crucial because it is used to set the daily Chicago benchmark price to determine the value of Chicago ethanol derivatives.
That benchmark price is used to price and settle ethanol derivatives on the New York Mercantile Exchange and the Chicago Board of Trade.
Green Plains alleges in its lawsuit ADM has continued to manipulate the market to the present day.
"During the relevant time period from November 2017 to present, ADM routinely acquired financial derivative contracts that went up in value if the price for ethanol at the Argo Terminal went down," Green Plains said in the lawsuit.
"As a physical producer of ethanol, ADM should want stable or rising prices so that its physical sales would earn a profit. However, because of the disproportionate size of its derivative financial position, ADM manipulated prices to fall so that its financial derivatives would earn a profit."
ADM declined DTN's request for comment.
JURY TRIAL REQUESTED
Green Plains has asked the court for a jury trial, to order ADM to pay all financial damages and legal fees to a class of plaintiffs, and to enjoin ADM from continuing the conduct.
Green Plains alleges in its complaint a strategy used by ADM. To bring down prices, Green Plains states, ADM flooded the Argo terminal with ethanol and accepted low-priced bids as the dominant seller rather than asking or waiting for a higher price.
Green Plains states ADM was selling 1 million gallons of ethanol on average near the market closing window. That adversely affected industry-wide prices for ethanol. ADM offset lower prices on its own physical ethanol sales at the Argo terminal by "acquiring short-sided speculative derivative contracts at an unprecedented scale and then targeting the terminal and pricing mechanism used to determine the price of those derivative contracts," Green Plains states in its lawsuit.
Derivatives are contracts with values derived from other assets such as stocks, commodities or currencies.
A derivative is a contractual agreement generally between two parties. When one party buys a derivative security, it is said to be long the derivative. When a party is short a derivative, it is a seller of the derivative.
Green Plains alleges that, by executing this strategy with derivatives, ADM uses the closing market window to sell approximately 821 million gallons ethanol, which Green Plains called "a sea change" in ADM's market trading behavior before November 2017.
Green Plains operates 13 ethanol plants across the Midwest, including five in Nebraska. In all, the company has an annual production capacity of about 1.1 billion gallons. ADM operates eight ethanol plants across the Midwest, with about 1.7 billion gallons in annual production capacity.
SUIT ALLEGES ADM FORCED PRICE OUTCOME
The lawsuit said ADM used its "size, proximity and relationships to exploit and overwhelm" the Argo terminal and "force a desired, self-serving pricing outcome" on other market participants.
"The uneconomic nature of ADM's trading behavior left other participants in the dark about ADM's strategy, and even those participants who understood it could not take on the enormous risk required to defend themselves through their own derivatives positions," the lawsuit said.
"ADM put ill-gotten money into its own pockets by its strategy of making uneconomic decisions that were not correlated to the actual price of ethanol in order to support its speculative financial positions."
During the time of the alleged scheme, the lawsuit said, ADM had five ethanol plants within 250 miles of Argo with about 1.2 billion gallons of production capacity.
Green Plains said this means ADM had "a greater ability to flood the Argo terminal" with ethanol and sell it at lower prices.
The lawsuit provides many examples of how ADM allegedly manipulated the market.
For instance, on Nov. 28, 2018, ADM nominated eight barges of ethanol from New Orleans to Argo. Barge freight rates at Argo from the Gulf were at the time about 8 cents per gallon.
"The New Orleans market was paying $1.35 for ethanol, which means that the New Orleans buyer was willing to pay ADM the equivalent of $1.27 ($1.35 less $0.08)," the complaint said.
"In contrast, buyers at Argo were willing to pay about $1.17 at that time. Although the economic trade would be to barge gallons south to New Orleans for a 10-cent premium market, ADM instead took gallons from a premium New Orleans market to sell them at a discount at Argo.
Beginning around November 2017, the lawsuit said, "heavy inbound rail" was moving through the Argo terminal and persisted through 2018, "despite market conditions.
"ADM has intentionally disrupted the proper functioning of the Argo terminal by sending a meaningful number of well-timed barges into the terminal at or near the same time," Green Plains said.
"Ethanol-market participants are aware of the limited take-away capabilities of the Argo terminal. Nonetheless, market participants have expressed their opinion that, on at least one occasion in November 2018, ADM nominated multiple barges to the Argo terminal from the Gulf Coast sources knowing that doing so would cripple the terminal's inbound and outbound supply capabilities and force it to store ethanol in tanks, creating the appearance of excess supply and further downward pressure on prices, which is precisely what occurred."
Todd Neeley can be reached at email@example.com
Follow him on Twitter @toddneeleyDTN
(c) Copyright 2020 DTN, LLC. All rights reserved.