Archer-Daniels-Midland Co (ADM) 2003 Q1 法說會逐字稿

Good day ladies and gentlemen.

Welcome to the Archer Daniels Midland Company first quarter conference call.

At this time all participants are in a listen only mode.

Later we will conduct a question and answer session and instructions will follow at the time.

As a reminder this conference call is being recorded.

I would now like to introduce your host for today's conference Mr. Allen Andreas, Chairman and Chief Executive Officer of Archer Daniels Midland.

Please go ahead sir.

Thank you.

Good morning and welcome all of to the Archer Daniels Midland first quarter September 30th earnings conference call.

We will begin this morning with a brief overview of the financial aspects of the last quarter from our Chief Financial Officer Doug Schmaltz and then Larry Cunningham will bring you up to date on the various segments of our business and we will be available after those presentations for questions and comments on our business.

Thank you.

Doug.

Okay, thanks, Al.

As you've seen in our net earnings for the quarter ended September 30, 2002 were $108,075,000 or 17 cents a share.

That compared to net earnings last year of 131,618,000 or 20 cents a share.

Last year's first quarter did include a gain of $56 million or 34 million after taxes, equivalent to 5 cents a share which was related to the sale of our IBP shares.

Excluding that gain our net earnings for the current quarter were 17 cents a share compared to 15 cents a share last year.

Our average shares outstanding did decline 2% to 648,066,000.

Average shares for the quarter compared to 662, 613,000 average shares outstanding last year.

Our net sales and other operating income increased $2 billion to $7.5 billion in the quarter due to principally to sales of the recently acquired Tuckford, Minnesota corn processors operation and to a lesser extent commodity price level increases.

Those profits increased 4% to $420 million due principally to improved results of the agriculture services segment partially offset by a [life] inventory evaluation charge of $10 million.

Our total segment operating profit increased 19 million to $240 million for the quarter.

Our oilseed processing results declined 10% to $76 million in the quarter as crush margin and volumes declined slightly from prior year level.

Our corn processing results were comparable to last year's levels as improved operating results of the sweetener operations were offset by lower S&L selling prices.

Our net corn cost were slightly higher than prior year level.

Our wheat milling results were comparable to prior year levels, with operating profits of $20 million for the quarter.

Our agriculture services results improved to $40 million from $16 million last year due to improved operating results of domestic origination operations and also our international operations.

Partially offseting those gains were reduced operating results of the barge transportation system due to lower freight tariff rates.

Operating profits of our other segment include losses of $23 million this year and $28 million last year from our private equity fund investments.

If we exclude the results of the private equity investments or operating process of the other segments were comparable at $43 million in this current quarter compared to $42 million a year ago.

Our corporate cost reflected in the segment summary increased to $85 million from $23 million last year.

Last year's amounts included the $56 million gain from the sale of our IBP shares excluding that gain on allocated corporate costs were comparable year over year.

Company wide selling general and administrative cost increased $33 million to $216 million for the quarter.

That was due primarily to $21 million costs related to recently acquired companies and operations.

Our interest expense did decline $8 million reflecting lower interest rates and our investment income was comparable to prior year levels.

The net gain on security transactions declined $56 million as last year's results reflected the gain realized from the sale of the IBP shares and our equity and earnings affiliates improve $21 million due to a number of factors one being the reduced losses of our private equity fund investments.

We had improved results of our Eastern European starch ventures, and in addition last year Toughford International had a small loss.

That was reported on an equity basis whereas their operating results in the current quarter are consolidated.

And also last year had good will amortization charges of $4 million which we do not have this year based on the new accounting standards.

Our effective tax rate for the current quarter is 30.5% that's a decline of 2% from the 32.5% effective rate which we had for our full fiscal 2002 year, which ended June 30th.

The decline reflects reduction in anticipated foreign tax liabilities in the current year and also the impact of no goodwill amortization which is not deductable in the current year.

We continue to monitor the situation related to the WTO and EU challenge of the extra territorial income exclusion act benefits which they're proposing claiming to be illegal export subsidy.

That benefit did reduce our effective rate in fiscal 2002, by approximately 3.6% so if this particular tax benefit were eliminated it would have adversely affect our effective tax rate in the current year.

But no final decisions have been made on that at this time yet.

Cash flow from operations for the quarter equal to our net earnings plus depreciation and amortization was approximately $250 million.

Uses of cash included capital expenditures of about $100 million.

With the Minnesota corn processors acquisition of $380 million.

We repurchased company stock of $54 million and our dividends of approximately $40 million.

Reflecting the impact of Minnesota corn processors acquisition at September 30th, the company's net short-term debt position which I'll define as short-term debt less cash and cash equivalence position did increase approximately $400 million and our long term debt increased approximately $200 million from June 30th levels.

And subsequent to September 30th the company did issue a new 30 year adventure $500 million which is a very favorable interest cost of less than 6%.

With that I'll turn it over to Larry who will go through some of the individual segment operations.

Thank you, Doug.

Good morning, ladies and gentlemen.

Some of our comments today will reflect management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results.

Changes in those assumptions and factors such as oilseed crush margins, ethanol pricing or crop values could produce significantly different results.

We assume no obligation to update any forward-looking statement as a result of new information or future events.

Now let's get on the discussion of the results beginning with first quarter results from oilseeds.

As you have seen from our release the operating profits for oilseeds came in at $76.4 million.

This was down about 10% from last year.

There are a number of factors that contributed to that 10% decline including the short soy bean crop in North America that resulted from drought conditions in all crops particularly in the United States and also in Canada.

Soy bean prices have out paced mill and oil price gains this has put pressure and squeezed crush margins in soy bean processing.

Likewise in Europe and in Canada we've been adversely affected by short soft seed crops and that has affected our results.

The resulting stronger vegetable oil prices in Europe have hurt our biodiesel results as raw material costs have increased.

As a result of financial uncertainty in Argentina farmers in that country held on to their beans longer than usual stretching out the crushing season and affecting the normal seasonal gains we expect to see in the U.S.

In fact U.S. crush rates in the quarter were down 5% from last year as a result of that.

I think this underlines and highlights that oilseed crushing is in fact a global made--a global business.

We continue to be pleased with the results of our Chinese joint ventures and believe that there are good long term growth opportunities for us there.

We're now up to 15 processing plant facilities in China.

Our global oil refining and packaging operations continue to show good profits as we move up the value chain and help customers reach their goals.

Corn processing results of $83.9 million were down slightly compared to a year ago.

They were down about $2.5 million or a little less than 3%.

On the sweetener front, our profits improved but I think we need to keep in perspective that they improved with a very, very low level of profitability last year.

Regular corn start volumes were up just a bit, whereas high fructose corn syrup volumes were flat.

Pricing improved somewhat but again from a very low base.

Net corn costs are about the same as they were last year primarily as a result of our hedging activities.

Therefore improved unit margins and profits are -- occurred although returns on this portion of the business are still very unacceptable.

We remain cautiously optimistic about on-going talk between the U.S. and Mexican officials over sweetener trade issues.

Successful resolution of these issues would result in increased HSCS sales and when coupled with growing ethanol demand would improve both finishing and grinding capacity utilization nicely.

For the quarter profits on ethanol were down significantly.

Our volumes were essentially flat but pricing was down about 20 cents a gallon.

However both demand and pricing are strongly recovering as October brings in the start of the higher demand period when non-attainment CO areas increased their use of ethanol.

Further shipments are rolling to California as most of the refiners are switching from MTBE.

For calendar year 2003 we believe that both capacity and demand for fuel ethanol will be near 2.4 billion gallons.

That sales rate is up about 25% from calendar year 2002.

As you know crude oil and gasoline pricing have moved up sharply.

Likewise ethanol prices are up with current levels 15 to 20 cents per gallon above last year.

As with sweeteners, we generally hedge firm price sales of ethanol in the corn market to protect margins.

However in longer term rising corn markets such as we have eventually we'll be paying high prices for corn which will affect our cost and the prices we have to charge for our products.

On a year to year basis spot net corn costs are up 35%.

Although the latest U.S.D.A. report showed ending corn stocks up 35 million bushels, stocks are still under 800 million bushels or less than one month's usage.

So I think at this point we should have a moment of silence in all have a prayer for a good crop in corn next year.

A couple other quick points.

Congress hasn't yet passed an energy bill containing a renewable fuel standard.

However, this will likely happen when they reconvene.

This legislation however would have had no affect on 2003 demand anyway as the renewable fuel standards wouldn't have started until 2004 under the most recent proposal.

We have now seen core control of Minnesota corn processors and we're very pleased.

The MCP plants are well designed, maintained and operated.

Their distribution facilities have also been well operated.

We're in the process of unwinding the agreement between MCP and corn products and we will market the sweeteners from the MCP plants ourselves this year.

We have announced the closing of the former MCP headquarters in Marshall, Minnesota which will reduce head count by slightly over 100.

Along with this reduction we found freight savings and other days--other ways to significantly reduce costs.

Looking ahead, the MCP consolidation, the [Ceriol] consolidation and the [Cerol Cerstar] consolidation, confirm what we've been saying.

And that is in order to survive, offer the global services customers want, and earn satisfactory returns, means that such consolidations make sense and will likely continue in other areas of agri business.

Wheat milling results for the quarter were $19.9 million.

Just slightly below last year's $20.6 million operating profit.

Our biggest concern in milling is the size and the cost of the wheat crop with values over $4 per bushel.

U.S.D.A.'s most recent crop report shows ending stocks of $370 million bushels which is the lowest that we've had since 1973/1974 crop year.

Australia is a very large producer of wheat and they're projected to be down as much as 50% below last year's production numbers.

Whereas Russia and some of the former Soviet Union countries are showing gains in wheat production.

It may be possible that we'll have to end up importing some wheat into the U.S. from Europe.

Demand remains very strong.

The industry is currently running at about 95% of capacity.

But it's important to keep in mind this is the peak season for demand for flour milling as well.

Margins are still on the low side and we expect further rationalization of milling capacity in the industry over the next couple years.

In fact, this could be hastened by the growth of extended shelf life breads.

Caribbean results are satisfactory.

And UK margins are improving although from very low levels.

During the past quarter the U.S. government purchased about 40,000 metric tons of flour for donations.

Our ag services segment had a record quarterly profit of $40 million.

Up almost 3 full from $15 million last year.

Short crops have had a negative affect on storage incomes especially in areas where wheat has been the principal crop.

Results from domestic origination and international operations were strong during the quarter.

Latin American results are flattening out after several quarters of strong growth.

And this is due to heightened competition.

South American activities primarily in Argentina are still doing well though competition is very keen there.

Sales of wheat and corn to Mexico are strong.

Artco and ADM trucking result were down sharply from last year with short crops, and slow exports, volumes and rates are well below normal levels.

We're keeping our hundred tanker barges busy with ethanol but then that's a small number compared to our overall fleet of 2800 barges.

Northbound traffic on the Mississippi likewise is slow.

Our storage income and barge and trucking income will be under pressure until new crop intentions are known.

Undoubtedly there will be significant swings in acreage between the major crops in this country.

Cocoa results were down year over year but this is a business that is strengthening.

Cocoa processing businesses continue to consolidate as seen by Cargills acquisition of the Peters Chocolate business from Nestle.

We believe we will continue to see this long term trend of retailers exiting the processing business.

We're seeing improved processing margins as demand for finished product has improved substantially.

The recent Ivory Coast turmoil had a minor negative impact on our operations as deliveries have lagged behind recent years.

The Ivory Coast produces about 40% of the world's cocoa beans, so stability in that region is vital to all cocoa processors.

Vitamin E volumes are growing but prices continue to erode.

We're developing higher volume forms of vitamin E to incorporate into foods and beverages.

Sterol demand continues to be very strong.

In the [vital] products area, license practice are currently 70 cent per pound range up slightly from last quarter as demand continues to grow.

Citric acid continues to suffer from industry over capacity.

And our Zanthan gum expansion is nearing completion.

And this will allow us to go after applications in the food industry, which carry higher margins.

So Mr. Chairman that includes our discussion of the segments and I guess we're ready to answer some questions.

Thank you Larry, [INAUDIBLE] we want to have -- open the session now for questions please.

Thank you.

If you have a question at this time, please press the 1 key on your touch tone telephone.

If your question has been answered or you wish to remove yourself from the queue please press the pound key, once again if you do have a question at this time please press the 1 key now.

One moment please for the first question.

Our first question is John McMillian of Prudential Securities, please go ahead.

Good morning everybody.

Good morning, John.

Congratulations on these corn processing numbers and the overall numbers.

How long can these corn hedges benefit?

Do you have corn hedges you basically have hedged through the December quarter as you would the previous quarter.

Yeah, John.

Thanks for your comment.

We generally hedge our sales of fixed priced commodities.

So this year the discussion that came up about corn led us to the position for the year where we had presold our fructose at the end of last year at prices then we hedged those transactions and also with ethanol up through the year.

So the net corn cost that were talked about here which is relatively similar level to last year reflects the value of those hedges in the total portfolio.

But we are currently doing the same thing with respect to our fixed price sales on our books for the coming year.

And so sales of ethanol and other products that now run out into 2003 are hedged also in the same fashion in which we previously hedged our other previous commitment.

That's good.

The oilseed side, that's great that you can now see your segment numbers.

But your first tendency is to compare them to Bungies(ph).

Which clearly has a different base of operations.

But you know does it bother you Al, to kind of look at your oilseed numbers and compare them to them?

Not at all, John.

We do that on a continuous basis as you would imagine.

We're always monitoring the activities of other companies that are engaged in our business and if we look on a comparable basis given the position of our factories across the world and Bungies(ph) we think that our results compare favorly in today's market position.

As you know Bungy(ph) will soon be acquiring the remainder of Cereol(ph) so that will spread their book of business in a more general fashion so that they can meet their customer needs more efficiently across the whole world so their numbers will probably be closer in line and reflect the same kind of results from tonage process as ours will in the coming years.

But for this past period, Bungy(ph) was coming off a very low base as you know and had because of their substantial South American activities had great deal of impact with currency fluctuations on their results.

And when we compare ours with what we expect given the current climate for crushing margins we're very satisfied and pleased with the results of our oilseed operating division.

And, Doug, did I hear you say there was a $10 million lifeo charge in this quarter?.

That's correct.

And um --

That's pretaxed.

Pretaxed, great, thanks a lot.

You are welcome.

Thanks, John.

Our next question is from Eric Katzman of Deutsche Bank.

Please go ahead.

Hi good morning everybody.

Good morning.

I guess the first question I had which was kind of a surprise is in the cocoa with all of the volatility there and the questions about the butter versus -- what's -- maybe you could explain that more as to why you see things improving.

Well I think Eric, one of the factors that's resulted in the improvement is some increase in demand for butter and powder.

But I think rationalization of industry capacity over the last couple years has also been a factor.

We aren't grinding and building the inventories of powder and butter that we were.

I think supply and demand is reasonably balanced now.

And we're putting very attractive margins on the books with sales that we've made in recent months.

So we're confident we'll see continued improvement.

Barring disaster in the political situation in the Ivory Coast.

And is that business also -- I mean is that business run in terms of contracts kind of like month to month?

Or are you contracting out a year and then hedging off of the board?

I mean how exactly does that part of your business differ from where you obviously have to hedge out a year in corn.

Well I think it's like most of our business we have a mixed bag of different kinds of arrangements depending on what the customer wants from spot sales to longer term sales.

In cocoa, I believe most of our business is probably done in quarterly or six months counts.

In the case of the Ivory Coast they have two crops a year.

One large crop then a smaller secondary crop.

And that tends to drive contracting.

So most of our business is booked on either a three month or six month basis.

And then we do the best we can to hedge that.

If I might comment on those questions also.

Cocoa is very similar to corn processing in that you don't have futures markets for all of your products and all of your raw materials.

And so whereas oilseed is a much easier overall product to have effective hedges all the time we have to deal in the market situations in both cocoa butter and liquor as well as in the beans.

We do have a futures market in London on the beans but in all of our businesses, corn, cocoa, whatever they are, we're generally trying to lay off our risks and exposures from a financial perspective and to run a basic industrial business to supply our customers with products and so we're trying to maintain our hedges as effectively as we can.

As a practical matter over the past quarter as contrasted with last year we saw a much stronger relationship amongst the product values in cocoa.

The increases in product values along with the increases in cocoa beans than what we have seen in previous years.

And so as a result that complex has operated on a much more consistent basic pattern over the last quarter.

Okay, and then if I can just follow up with two more.

One, on the corn you know the rising net corn costs looking out into calendar '03, can you talk a little bit about capacity utilization in HSCS today, how you think that's changed over time?

How that affects the negotiations as you go forward in your ability to pass through pricing or higher costs.

And then, Doug, if you could give us an update on what the excluding amortization, what the deappreciation level is now on a run rate basis, what you're looking for for the year as well as Cap-X for the year.

Thank you.

With respect to question on the capacity utilization, we're probably somewhere between 88 and 90% capacity utilization in corn wet milling at this point.

One of the key factors looking ahead, Eric, is the question of Mexico and you know what those figures were that we used to be able to send down to Mexico.

Around 300 or 350,000 tons of HSCS on a dry basis.

So you know should we be able to resolve our dispute and get that demand back it makes quite a nice change in industry finishing capacity utilization and grind capacity utilization in HSCS.

So I think that would be something that would help strengthen our hand in next year's negotiations.

But without question we're going have to have have substantial price increasing---increases to offset the higher corn costs as well as to make some improvement in the returns that we have on the capital invested in this business.

Yes.

And on the deappreciation.

Our annualized rate we're running around the 600 million could be higher than that.

At the end of the year.

Our Cap-x as I mentioned was $100 million this quarter.

We would anticipate that to be kind of a norm.

We'll be around that level quarter to quarter.

So we should be around that $400 million range.

Okay.

Thank you very much.

You're welcome.

Our next question is from Thomas O'Neal of Barkley's.

Please go ahead.

Good morning.

Good morning.

Calling for the fixed income side just a quick question on your comments on industry consolidation.

You know you mentioned that industry consolidation does make sense and will continue.

S & P did change your outlook to negative earlier in the month on the heels of of the dead increase.

Maybe you can give us guidance on acquisition, activity going forward.

You know, are you likely now in near turn to be in debt reduction mode.

Or are you looking at other opportunities?

How do you balance that in the context of your high single a rating?

Thank you.

Doug do you want to comment on that.

Sure.

As we went into that bond issue of course they had put out something earlier when we did the Minnesota corn processors acquisition and so forth.

It was just more or less a confirmation what they put out at that time.

But I mean, we continue to look at acquisitions and will continue to look at those as to how they fit into our complex and we'll address those as we go along.

There's nothing significant out there that we're aware of at at the present time and so we'll just go forward throughout the year but we'll still be looking at acquisitions as we go.

I think the action of S & P deserves at least a comment on our part.

We have a good relationship with Moody's and [Standard and Pours] a they've continued to rate us as a solid, strong a credit for some period of time.

This last month when we came out our with $500 million bond issue for 30 years, we actually were very fortunate to price that right into the very, very favorable levels of the market.

And so we are one of the few companies that was able to put that money to our balance sheet at less than 6% cost.

S & P as you know has been challenged by the efficiencies and efficacies of their business with all of the recent problems of companies in the credit area and the surprise results because of accounting indiscretions.

ADM doesn't possess any of those kind of difficulties.

We have always had a solid balance sheet and we're in basic business producing food that everyone has to eat.

And S & P knows very well that we have solid cash flows and that our numbers are sound and secure given the current environment.

And so when they came out with their analysis of our 500 million bond issue, right on the tail end of our acquisition of MCP all they did was say that they thought that we had taken on considerable amounts of exposures and liabilities for the coming period.

And so they commented that there was a negative outlook for our industry.

We hope that the strength of our earnings not only in this quarter but in the coming year will overcome any concern that they might have about our balance sheet and our income statements and our cash flows.

They did reaffirm their a rating and did not place us on credit watch like they've done with so many other companies in today's market place.

So all they made was a precautionary kind of comment.

Our bond issue was oversubscribed.

We went out into the market place with $500 million and had 2 billion orders in the first 15 minutes.

So I think market place has a very good understanding of the strength of our balance sheet and of our cash flows and we're very fortunate to get that dead issue off to help us keep a better balance to our overall financial situation.

Very good then.

I appreciate your comments.

You're welcome.

Our next question is from Christine McCracken of Midwest Research.

Please go ahead.

Good morning.

Good morning, Christine.

Wondering on MCP if you could discuss it appears as though you are looking for quite a bit of cost savings out of that operation.

I am looking at the filing for MCP.

It appeared as though they were expecting losses for the next couple years.

Wondering are you expecting to put any money into their plant?

It sounds as though they're in pretty good shape.

But I am wondering what changes are you expecting to make to turn that around?

I don't think we anticipate having to put any major capital into it, Christine.

There are a few things in the area of transportation which require you know a few million dollar investments to improve some efficiencies and get some better freight rates there but payoff will be very short-term.

It won't be major money.

And we believe that the future looks very encouraging for the synergies that we can get by combining their facilities and our facilities into an operating network that allows us to service the areas of demand with more efficiency than what either company could do previously.

So they have plants that are located in geographic areas where we did not have plants previously.

So they'll be able to get some -- we'll be able to get to some areas with lower costs than what we were under the ADM system and that will likewise apply to them too.

So I think there will be significant synergies in the area of head count that we've discussed during our comments.

I think there also will be fairly significant savings in the area of freight and terminal operations.

And also I think as time goes along we will find ways to bring additional efficiencies to their manufacturing process.

Some of the marketing activities.

It would be is a --I'm sorry.

Yeah, Christine, if I just might add that the comments that were made by MCP before we acquired them about the outlook for their future really have very little to do with our ability to run those factories.

We fit them into our overall corn wet milling division and we immediately got a lot of cynergys in addition to the cost savings that Larry has referred to.

By adding their strength in high fructose corn syrup and in the ethanol market to our own commercial activities we expect to have the kinds of returns out of those plants that are very similar to the ones from ours and the combined-- combination of the two will bring synergies that really will enhance our bottom line.

We do not forsee any losses in future operations from MCP's plants and are so far very pleased with what we've found from an engineering viewpoint from a construction viewpoint and think it was a very effective purchase that will allow both the farmers in that area as well as ourselves to have benefits from our ownership.

There are rumors currently in the market that someone is looking to shut down some capacity.

It doesn't sound as though that's going be you.

It will not be us.

Have you heard those same rumors?

Is that your expectation that some plants will close?

Or one plant in particular.

We can really only comment that our plants are very well located and very low cost.

And the same spread both not only to our basic product lines in food products and nutrition but also in the ethanol sector.

When it comes to energy we're very well postured.

With the new demands that is coming out of California and off the east coast we expect to see improved results from our corn milling division in the coming years.

It appears to be very promising.

There are some other other factories in our industry that are less favorably positioned with respect to both raw material cost as well as transportation rates to their markets, and I can't speak for those companies.

They will have to make their own decisions.

Obviously it's an extremely competitive business and we expect it to be successful at it in the coming years.

And if a plant did close would it be your expectation that any additional capacity would need to be built in the industry more efficient maybe better geographically positioned?

There is currently no need for additional capacity in this industry.

I think between the major players we've all got more than an adequate amount of capabilities of converting corn into products that are needed.

We are all hopeful the Mexican problem will soon be resolved and that will open up Mexico to our high fructose corn syrup sales.

That should occur then there will still be plenty of capacity to meet all of that demand.

And so for us it's a question of shifting our starch processes from one product to another.

Whether it's bioproducts producing the animal feed components or whether its ethanol or high fructose corn syrup that stream has to go somewhere.

So we don't anticipate that there's any need for additional grind in this business for some several years ahead.

As you know the soft drink industry has been relatively flat.

And so the growth in high fructose corn syrup has already been put in place in order to meet the Mexican demands and so if that situation is resolved it'll just provide a better balance and we'll shift more of our capacity away from ethanol and over to high fructose corn syrup.

We don't expect to see any new construction barring significant improvements or new products that would come online.

For example very important discoveries are being made in the areas of fermentation to supplement products that are made currently from petroleum.

And should that occur then there might be a whole new view of the industry.

There may be other major new products that could compete with biodegradable plastics and other kinds of products that could create the need for additional grind.

But not given the current product lines that we're talking about.

Thanks so much.

You're welcome.

Our next question is from Leonard Tidlebaum of Merrill Lynch.

Please go ahead.

Good morning.

Good morning Lenny.

When do you guys start to go to battle with coke and pepsi?

Are you going to try and accelerate this year or are you going to wait to November or December .

I mean December , excuse me.

Well, we won't go to battle with coke.

Oh, I know it's just in negotiations.

They're long time friends of ours, Lenny.

What's good for coke and pepsi is good for us in the long run.

We will open our discussions with them for pricing for the next year beginning about any time now.

Especially you know I think in light of volatility of the grain markets both sides are interested in opening discussions at this point.

So I think it's going to start a little earlier than usual.

All right.

That's what we're hearing too.

Also two years ago it stretched out until almost the second quarter.

Last year you finished a little early.

Are you really going try and knock this thing down before the end of the year?

Are or do you think it's going expend into the first quarter?.

That would be our hope to have it put to bed by the end of this year so that we can hedge our corn positions and have the business on the books before we start next calendar year.

Yeah, that would be our hope.

Okay.

What is -- Doug, what's the tax rate we should be using for next year, please?

I think in that 30.5 rate.

Now and we'll continue to monitor what we talked about in the issue at the extra territorial as to where that goes.

If that changes sometime along the line that could affect it.

But as of right now the 30.5 range would be about right.

The area that was probably the most surprising to me versus what we had estimated was the ag service area.

I am just wondering was there anything unusual in this quarter that would have popped it?

You are still acting as agent and not principal is that correct in your agreements with for your international sales as well as domestic sales?

No.

We've got a substantial operation located in Hamburg that is international.

The Tuckford group.

We've consolidated that this past year.

But we're doing all different kinds of business so we're primarily a principal and we're originating grain from our elevator systems and feed stocks and materials and trading them in amongst our companies to then deliver those to our customers overseas.

So it's an origination business and Tuckford has done an excellent job this past year.

Those markets as you know have become largely consolidated over the past few years so there's a lot fewer players on both sides of origination both from the U.S. domestic groups as well as our international operations we have better results this past year.

I think it reflects -- or this past quarter.

I think it reflects our comments at the last quarterly analyst call where we said although our storage income was likely to decline that there may be better opportunities for us to capture profitability from those divisions in more volatile times on commodities.

And I believe that's reflected really in the ag services result this time.

If you look at the fundamental core characteristics of transportation equipment, barges, railroad cars, and trucks and the utilization of our elevators, a short crop and drought problems and weather problems around the world is not a positive development.

But on the other hand our control of large volumes of raw materials and finished products into the global market place gives us opportunities when the markets are more volatile that we wouldn't normally have in quiet times.

Would you expect this kind of activity and level of profitability to obtain in the ensuing quarters or was this an unusually good one?

We don't know for certain how those businesses are going to be in the future.

But I would say that there's good reason to believe our network is a very effective system of delivery of both raw materials and finished products to customers across the world.

I see no reason why that origination system doesn't have great promise in the coming years despite the fact we may have some uncertainty in weather conditions in particular areas.

This past year as you know we had a very extreme drought in western Canada.

We had a drought across the Midwest in the United States.

A drought in Australia.

Too much rain and so the seed crop was very poor in Europe.

So those conditions changed the dynamics of both the oil and mill sectors and that gave us some opportunities to capture some profits in that division that wouldn't normally be the case.

We expect that strength of that system to continue well into the future.

And final question.

Mexico has been obviously holy grail here for the corn--fructose anyway.

You guys have had clever ideas on how this whole thing might come about.

Have you refined that at all as to what you think the final agreement if we do get one might look like?

Or will it be a straight export situation?

Well I think the parties are still negotiating.

We're not principal in those negotiations as a member of the corn refiner association and as someone closely associated with a national corn growers we obviouosly have some input into it.

But there are a number of different rumors that are floating around Lenny, on how it's going resolve itself.

My best information is that it's going to be on some sort of a pound for pound basis giving Mexico access to the U.S. sugar market for an amount that's equal to what we get in way of fructose quotas going into Mexico.

And you know we're hopeful to at least get back to the levels that we have enjoyed in the past going into Mexico.

President Fox and the administration in Mexico is well aware of the fact that high fructose corn syrup as more efficient utilization of sweeteners in their soft drinks and also is a very good method for them to have a more consistent product that is more aggressively priced so that more consumers can enjoy it.

Brings a better quality of life to the people of Mexico.

So they have the same objectives that we do.

And the politics of sugar on both sides is what needs to be resolved over the long term and as you know in Brazil they use a substantial amount of sugar for ethanol.

So we're hopeful that as part of a long term solution that there will be other considerations of the use of those carbohydrates in both the United States and in Mexico.

But all of us benefit, the consumers benefit, the voters benefit.

And the agricultureal interests all benefit from open trade between our borders.

That was the purpose of NAFTA to start off with and we expect they will continue to pursue those final results both if the USTR with Bob [Zellek](ph) in the United States's side and also down in Mexico to try to achieve a fair and balanced result that allows the Mexican consumers to have a better product.

Thank you very much.

Yes you're welcome.

Our next question is from David Driskell of Solomon and Smith.

Please go ahead.

Hi.

Thank you.

And good morning, everyone.

Good morning David.

First off I would like to say good job on the corn sweetener side.

This is where I would like to focus for just a moment.

It seems as though in your prepared comments that you're trying to fell us to be cautious on the corn cost issue going forward.

I want to make sure that I did interpret those comments correctly.

Then you know also I would just say that corn costs have been a chief concern of mine as ADM historically has not said very much about its hedge positions.

And I know you have various reasons for that.

However, if we could try to get some closure on this issue, I'd really like to just ask in the beginning of the year did you in fact lock in your corn requirements for not just high fructose but also for ethanol that had been contracted and then consequently in the December quarter coming up, the one that we're in right now, are margins essentially locked in?

I think you could just generally -- Larry, I'd like you to comment.

Just as a matter of general observation, David, that as I pointed out earlier in oilseed processing you have futures contracts and cash contracts for all of your products.

We don't have that in almost any other part of our business.

And so there is no way to lock in as you use your terminology a complete margin of cost.

We're in the business and we are selling our customers based on the kinds of requirements they have for the time frames that they have.

And so what we're doing is running our businesses in as prudent as industrial fashion as we can in order to offset the exposures that we have to volatile changing markets in our raw material prices.

And in our product prices.

I think all of our customers recognize that when high fructose corn syrup is selling at a very substantial discount to any of the alternative products to be used and that corn prices come up somewhat and net corn prices come up even more as a result of less than complete offsets in the by-product credit, that they are all going have a little higher sweetener cost coming into the future months.

So you don't lock in anything 100%.

You run your factories the best you can and you make the best business judgments you can.

We have put together here a team of very excellent management people who understand those risks and exposures.

We have the systems in place to manage those risks and exposures and we know on a day-to-day basis what those are.

And so that's the art of running a business like ours.

And we continue to work towards solid results based on the industrial production of our plants.

And to that extent that we can compliment those activities with futures contracts we do it.

But that does not mean that we've locked in all of our margins or that we run our business in a way in which we have no exposures to financial risks.

That's part of the business that we're in.

Okay.

One follow up then.

On the -- Larry, I believe you were giving us information on utilization rates.

When you gave the number between 88 and 90% was that HSCS finishing capacity or front end grind?

Both.

Both?

Yes.

Okay.

Then lastly just also one comment on ethanol.

You had mentioned that prices for ethanol have moved up substantially.

Has the price movement in ethanol more than offset the rise in net corn costs?

So ie I recognize that that thing has moved up substantially but since we see the corn costs moving up it's difficult to determine whether of not, you know, we've seen enough of a price increase or should we be expecting ethanol prices to continue to move higher?

I think we'll have to have ethanol prices likely move somewhat higher to maintain the margins that we're currently enjoying, David.

Okay very good.

This is really a moving target as you know.

I mean corn prices might be up 20 or so percent but net corn prices if the products all don't follow have increased as you know depending on what period you pick quite dramatically more than that.

Maybe 35 to 40%.

And ethanol prices have gone from $1.70 down to about $.90 and are back up to the $1.30, $1.40 range depending on what you are doing now.

So, and in the meantime you had lots of fluctuation in corn prices.

So it's a changing market.

We look at it every day.

We're watching the markets and contracting with customers in a fashion that we think will bring good returns to our shareholders over time by being in this business.

Thank you.

Going back to one of our earlier points, David.

I think we did try to make it clear in our comments that watching what happens in the direction of the corn market is an important element to keep in mind.

Very good.

I appreciate the comments.

If there are any additional questions please press 1 now.

Our next question is from Bill Leech of Bank of America Securities.

Please go ahead.

Good morning everyone.

Good morning, Bill.

I wanted to follow up on your tax rate guidance.

You said 30.5.

So if the WTO thing has changed then, your rate would jump up to like 34%?

Yeah, it could.

That's all going to depend on what total pretax is because the effective rate and the amount of benefit you get out of that particular item will fluctuate based on where your pretax is.

Last year it ran about 3.6% of our effective rate.

Bill, as you know that SSC tax was passed many years ago in an effort to try to keep the United States competitive with other countries around the world including the EU who is the one who contested our system.

There is a serious effort being made in Washington that if they are going to concede to the WTO's decision and eliminate that tax incentive that they will revise the tax code in a way in which we stay competitive in the world market place.

And s even if that decision is made, it is quite likely that congress will be studying other alternatives to give us some tax relief so that we can remain competitive with our products around the entire world.

So we're not really pessimistic although I think from a straight dollar viewpoint what Doug has said is exactly accurate.

When do you think this will be resolved?

It's an ongoing process.

So far the United States has not conceded the FSC legislation it remains in place despite the WTO ruling.

But the study is going and the EU has granted some time for us to do this because they realize the complexities and also the vulnerability of their own systems to contest under WTO on this issue.

So it will be resolved I think in a very prudent fashion by some very thoughtful people in Washington before they just eliminate that tax.

Okay.

And, Larry, on ethanol, is there any overcapacity in ethanol right now you have had about 15 smaller plants open up which I guess caused pricing to weaken a couple months ago.

Has that been pretty much absorbed into the market place?

Yeah, you know, Bill, we're beginning to make shipments of ethanol to the west coast in anticipation of the refiners over there making the conversion away from MTBE.

So that's drawing down stocks.

And I think our indication was and this actually came from the renewable fuels association, that demand next year would be about 2.4 billion gallons.

And supply including those new plants would be about 2.4 billion gallons.

So it looks pretty balanced from this point forward.

And you think congress will come back and pass the energy bill?

Well we thought they would pass an energy bill in this last session and that didn't happen.

But there needs to be an energy bill.

And there's strong support on both sides of Congress and in the White House for the renewable fuel legislation.

So yeah we're optimistic at some point we will have that legislation.

Okay.

The administration has committed to support it.

I think it's very important that we do review our energy policy.

And so that's likely to sometime in the next six months to a year be resolved.

In the meantime we're operating under a system that is very favorable for us.

Because as long as we have the oxygen 8 standard and the problems we do in California those markets will open up and those companies the oil companies there have committed for contracts for ethanol despite the new energy bill.

So we're still in a favorable climate even if the energy bill does not pass from our perspective with our production capabilities.

Okay.

And lastly, could you tell me where life lean is selling these days.

About 70 cents a pound.

Do you know how that compares to a year ago.

It's up slightly from a year ago.

Probably would have been lower 60s as I recall, Bill.

Okay, great.

Thank you very much.

You are welcome.

Our next question is from Craig Albert of Osprey Fund.

Please go ahead.

Hi, good morning, everyone.

Good morning.

I had a couple questions.

One had to do with this FIFO issue.

Doug, could you elaborate for us a little bit, what percent of your inventories are FIFO as opposed to LIFO and then what the reserve or change was in the quarter?

Yeah, I'm going to say our LIFO inventories there is a footnote in the annual report that would be 20, 30%.

Our FIFO inventories [like] in the last year, about a billion five.

Our LIFO was about 350 million.

Okay.

Then we have market inventories over and above that of about a billion four.

So our total inventory is 10%.

Excuse me I missed that last statement.

About 10% as of the end of last year.

Sure.

Okay so of the LIFO.

A little higher the year before.

So it's going vary by what market prices are and all that.

Right.

What causes something to be placed in market inventory's bucket as opposed to a LIFO/FIFO bucket.

Is it something that's been hedged and therefore its mark to market every day.

No those are products that we put on many years ago on the lifo basis and we've carried them that way.

It's basically corn and beans and oil.

On the LIFO and the FIFO.

On LIFO.

Right.

And so what makes something be categorized as FIFO as opposed to market inventories?

First of all LIFO is a cost basis inventory.

Right.

Valued at that.

If market is in fact less than that, you recorded that market.

For book purposes.

Got it.

So the 1.4 represents those for which market inventory.

Which are not on LIFO that's correct.

I understand thank you for clearing that up.

My next question had to do with with cocoa.

If you could give us an update I am not sure how many facilities you have there, but in terms what you are seeing in terms of beans moving and product flowing and if we could just get an update there that would be helpful.

I think we have six cocoa processing facilities that we're currently operating.

We have closed a couple.

And others in the industry have closed three or four other processing facilities as you know Barry [INAUDIBLE] exited the cocoa grinding business and we are now a contractual basis doing that work for them.

Nestle sold part of their chocolate business to Cargill(ph).

And they're now making the transition and move that away from Nestle's facility and into Cargill's facility.

I don't think there have been any serious restrictions in this point in moving cargos of cocoa.

But we do have a lot of eggs in the Ivory Coast basket with 40% of the cocoa production coming from that country.

So that is a concern.

But at this point I am not aware that it has interrupted significantly any production facilities anywhere in the world.

Great.

Craig, our cocoa businesses are spread across the entire world.

So we've got a lot of diversity in our origination systems and in our processing systems.

We have factories in Brazil, in United States and Canada and North America we're in England, we're in the Netherlands.

We're in the Ivory Coast, we're in Singapore.

We have a small operation in China.

And we're -- we have buying agencies in Ecuador and in the areas of Malasia.

So we have a very diverse base.

But it is true 60% of the beans are grown in the area of the Ivory Coast and 40% are right in the Ivory Coast itself.

So those political concerns there we're watching very closely.

But so far there have been not major disruptions in our ability to originate beans for our factories around the world and that business is improving and looking to be stronger in the coming years.

We've developed a very good relationship with our major customers which of course are Mars and Hershey and Calabow and Nestle and those companies so we're working together with them to make more efficient to cut our cost, to bring new technologies.

We've got a lot of new developments in cocoa that cause it to be a very interesting product for our future.

Got it.

One last one.

On soy beans and that processing business, can you comment on whether hedging helped earnings in the quarter?

I don't think -- we don't keep our books and records that way.

The prices soy beans have gone up during this period.

We hedge generally our exposures.

If we are buying a bushel of beans in Nebraska and selling some meal in Japan and oil in Russia that's all centralized in our hedging center here in Decatur, Illinois and have those results every day.

So our hedging operations are an integral part of our overall portfolio of businesses and so it doesn't compute back in terms of either a gain or a loss on hedging.

Right, I'm just trying to understand whether you are realized profitability was above what you would have gotten if you had been completely unhedged.

Just what you saw in the spot market.

We would not run our businesses unhedged because we wouldn't be here after 100 years if we did. [ laughter ]

Well said.

Okay, thank you.

Yes, you're welcome.

Our next question is from Herb Hart of [INAUDIBLE].

Good morning.

Good morning Herb.

Can you give us an update on the share buyback.

Has there been anything else pubically stated other than to do it opportunistically?

What we -- we only ever buy our stock back opportunistically.

We've got solid cash flows and not a great need for expansion of our existing businesses so our cash flows have been surplused to our needs for capex for the last several years.

So we've had in place just scaled down orders when we thought the market was attractive and when it was opportunistic for us.

We have now with MCP and some other possibilities good utilization of our cash flows but we have over the last couple years I think been buying back approximately $50 million worth a quarter.

And so we've reduced.

We have a current program in place for a purchase buyback program of up to 100 million shares and we're about 80 some into that.

And so this last quarter we bought another roughly 50 million dollars worth of stock back and we continue to look for opportunities to do that at attractive levels when we have surplus cash flows.

Okay.

Thank you.

You are welcome.

And there are no further questions at this time.

Please continue.

Okay great.

Any other comments?

If not thank you very much for joining us and we're pleased to have your support always and we look forward to talking with you again at the end of next quarter.

Thanks.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation.

You may disconnect at this time.

Have a good day.