Archer-Daniels-Midland Co (ADM) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Archer-Daniels-Midland Archer-Daniels-Midland second 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 that time.

As a reminder this conference call is being recorded.

I would now like to introduce your host for today's call, Mr. Allen Andreas.

Please go ahead, sir.

Good morning.

Welcome to ADM's second quarterly conference call for the December 31st quarter of 1902.

I am joined this morning by Doug Schmalz, our Chief Financial Officer and Larry Cunningham, our Senior Vice President who will begin the conference call with presentations on our financials and then our general operating environment of our businesses.

Then we will move into questions and we'll be happy to answer whatever you would choose to present us with.

Doug?

Thanks, Al.

As you see in our net earnings for the quarter ended December 31st, 2002, were $131,245,000 or 20 cents a share.

That compared to net earnings last year of $150,025,000 or 23 cents a share.

This year's results did include a gain from partial settlement of vitamin antitrust litigation of $25 million.

That was $15 million after tax, or about 2 cents a share, and a loss from security transactions of $3 million, which was $2 million after tax.

Our last year's quarter included a gain from partial settlement of vitamin antitrust litigation of $40 million, $25 million after tax, or 4 cents a share; and a loss from security transactions of $19 million, which was $12 million after tax, or 2 cents a share.

Our average shares outstanding declined 2% to $646,178,000 average shares for the quarter, compared to $660,285,000 average shares outstanding last year.

Our net sales and other operating income increased $2.3 billion to $7.8 billion in the quarter, due primarily to sales of recently acquired trading in corn processing operations, and to increased volumes and higher commodity price levels this year.

Our gross profits decreased 3% to $491 million, due principally to lower operating results of the oilseed processing, wheat processing and agricultural services segments.

This was partially offset by improved operating results of corn processing, cocoa and BioProducts processing segments.

Our total segment operating profit decreased $44 million to $297 million for the quarter.

Oilseeds processing results declined 23% to $103 million for the quarter as North American crush volumes and margins declined from prior year levels.

Although oil volumes did improve significantly, meal values stayed relatively flat, which combined with a higher seed cost, resulting in reduced crushed margins in North America.

These decreases more than offset improved crush margins and operating results in our South American and Asian oil seed operations.

Corn processing results improved 53% to $71 million for the quarter.

The increase was due primarily to increased ethanol sales volumes and to a lesser extent, higher average sweetener selling prices.

Our net corn costs were approximately equal to prior year levels.

Wheat processing results declined 40% to $19 million as last year's second quarter reflected very strong export volumes due to the government food donation programs.

In addition, in the current quarter our flour margins in the Canadian and Caribbean operations declined from prior year levels.

Agricultural services results declined 53% to $35 million from $74 million last year as international grain origination and marketing continues to be extremely competitive.

In addition, extremely difficult conditions in the United States due to the drought conditions have resulted in U.S. wheat being noncompetitive in global export markets.

Our origination operations in the draught areas have also suffered as reduced crop size negatively impacted handling revenues and certain crop prospects have negatively impacted crop input revenues.

In addition, higher fuel costs and low water conditions on the rivers have reduced operating results of our barge transportation operations.

Operating profits of our other segment include losses from our private equity fund investments of approximately $27 million in both this year and last year's quarterly result.

Also, payments received in the vitamin litigation settlements were $25 million this year compared to $40 million last year.

In addition, cocoa operations had improved results as good demand for better end powder resulted in improved margins.

Bioproduct results also improved as better licensing demand resulted in improved volumes and pricing.

Our corporate costs reflected in the segment summary decreased to $108 million from $116 million last year, principally due to reduced losses from security transactions.

In our companywide selling, general, and administrative costs, we did increase $36 million to $246 million for the quarter.

That was due primarily to $29 million of costs related to recently acquired operations, principally in the trading and corn processing operations.

Our interest expense increased $3 million to $95 million for the quarter, reflecting higher borrowing levels, primarily related to the increase in commodity prices.

Investment income also increased $2 million to $29 million for the quarter.

The results from our security transactions were a loss of $3 million.

That compared to losses last year of $20 million.

Last year's loss, if you recall, included a write-off of certain E-commerce investments which we had.

Our equity and earnings of affiliates were at comparable levels to last year.

Our effective tax rate for the current quarter is 30 1/2%.

That's a decline of 2% from our 32 1/2% effective tax rate for our 2002 fiscal year that ended June 30th.

The decline reflects a reduction in anticipated foreign tax liabilities in the current year and the impact of no goodwill amortization in the current year.

Our cash growth from operations for the first six months of 2003 are equal to our earnings, plus our depreciation and amortization was approximately $548 million.

Uses of cash include cap expenditures of about $200 million for the six months.

We had the Minnesota corn processors acquisition of $380 million, repurchases of company stock were approximately $81 million and dividends were $78 million.

Our cash flow from operations was supplemented in October when we issued an additional $500 million of 30 year debentures at a cost which was slightly under 6%.

With that I'll turn it over to Larry Cunningham who will take you into more detail in some of the operating segment divisions.

Thank you, Doug.

Good morning, everyone.

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

Any changes from such assumptions or factors such as oilseed crushing margins, ethanol prices or crop values could produce significantly different results.

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

Now let's take a look at the oilseeds segment performance for the second quarter.

Profits were $102.7 million, down $30 million, or 23% from the same quarter, prior year.

And while these results were down significantly, we should keep in mind that they were down from what was a very good quarter a year ago.

The primary reason for the decrease is weak North American margins, partially offset by improved margins and results in the rest of the world.

In North America we're faced with weak domestic demand for soybean meal, primarily as a result of less poultry exports and mostly going to Russia.

We also are faced with high domestic soybean prices due to the drought and due to the fact that China is buying significant quantities of their soybean needs from North America and not from South America.

I think there are some trade differences that they are trying to get worked out between China and Brazil and, of course, there will be a new crop coming in in a couple of months in South America.

So we suspect that the high domestic soybean prices are a rather temporary nature.

Crushing results in North America have also been adversely affected by high canola and sunflower prices as a result of drought conditions.

The South Americans did indeed have a good crop and they are crushing longer this season than they typically have in the past.

Normally they stop crushing beans and it gives a bump to margins in North America.

That hasn't happened this year.

And we don't think it's likely to be the case very often in the future as they stretch out their supplies to crush year-round.

So as a result of these circumstances, we've slowed production at several North American crushing plants, including most recently at Kansas City, Missouri.

Short crops, soft seeds in Europe have hurt crushing results.

High vegetable oil prices have hurt biodiesel results, although in our case we've had some offset by decent pricing for the by-product of biodiesel glycerin.

As we look at longer term trends, we see a continuation of most oilseed processing growth taking place outside North America.

This is a strategy that we've been pursuing at ADM the last few years.

In fact, 10 years ago, 75% of our crush would have been in North America.

Today it's less than 50%.

The reality is that South America has overtaken the U.S. in soybean production.

That demand in the U.S. for protein fees is only going to grow at 2% to 3% per year.

European demand will really only grow as eastern European demand for protein grows, and most of the protein demand will be met by local production.

The ramification for North America is slow growth, less export demand, and the need to reposition assets to fit domestic demand.

We're pleased with our joint venture investments in China and obviously with our recent announcement of expansion in Brazil with the results that we're experiencing in South America.

Global -- our global strategy of moving up the value chain continues to pay off and improved results in global vegetable oil refining and packaging.

Corn processing profits were $71 million, up $24 million, or a little better than 50% compared to last year.

This is primarily due to improved ethanol results and some upturn in sweetener margins.

In sweeteners, industry sales of HFCS continue to grow about 1 1/2% this year, slowly closing the gap between supply and demand.

Pricing has improved from the prior year.

Net corn costs are only slightly up.

And these circumstances resulted in improved margins and profits, although returns on this business are still unacceptable.

We are in the midst of finishing negotiations for calendar year 2003.

Pricing will be up, and profits should be improved.

As we are still under negotiating discussions, we can't be more specific about the amount of the increases.

We remain hopeful about resolving Mexico but we have no new news at this point.

On the ethanol front for the quarter, profits were up primarily due to higher demand and higher volumes.

Demand is up due in large part to California refiners replacing MTBE.

Chevron, the last major refiner to announce a switch, will phase out MTBE in Southern California by May of this year.

For 2003, capacity will be sufficient to supply ethanol demand, and we estimate that demand to be about 2.7 billion gallons.

This balance and higher gasoline prices should support strong ethanol values.

While Congress did not pass an energy bill with a renewable fuel standards, there is still strong pressure to do so.

A few comments about our most recent and largest acquisition, Minnesota Corn Processing.

We're very pleased with the results so far.

MCP had designed and operated their plants very well, but they were challenged by being a relatively small regional producer.

So they are fitting very well into the ADM global network.

In today's world it's increasingly tough to survive in the global economy in agri business, as well as most other business sectors if you are a small food producer.

ADM has a long history of taking struggling assets into its network and making them profitable.

Already at MCP we've implemented numerous cost reductions in administration, plant operations, purchasing, and transportation.

Other opportunities have been identified and are in the process of being implemented.

As I said, we're very pleased so far in the addition of MCP to our corn processing business at ADM, we'll improve overall performance in this segment.

Wheat results were down about 40%, from $31.4 million to $18.8 million in the current quarter.

This decrease is due to the poor quality wheat from last year's short crop.

And while the world is not desperately short for wheat, Australia, and North America are very, very dry.

In fact, Kansas City is the driest on record for this time of the year.

We do expect increased production in Russia, Ukraine, and some other former Soviet countries to take some pressure off wheat prices.

In North America, margins continue to be under pressure.

Government flour purchases are below last year.

The industry is running at slightly less than 90% of capacity.

The U.S. baking industry is consolidating into fewer but larger bakeries, and as this happens, the milling industry will likewise have to further consolidate and improve efficiencies.

We expect as soon as February perhaps to receive approval from U.K. officials for the acquisitions of the six mills we bought from associated British Foods.

In our ag services sector, results were $34.9 million, down about 50% from last year.

The primary reason is the short harvest in North America in virtually all crops due to drought.

This has hurt storage income and origination incomes.

Carry-out stocks to usage are under 10% for corn, about 5% for soybeans, and only a little above 10% for wheat.

As a result of these short crops, Artco and ADM trucking results are both down.

Both volumes and rates have been affected.

Low water levels and Arctic weather conditions on the Mississippi are causing lighter loadings, shorter tows, higher costs, and lower profits.

Storage income and barge and trucking income will continue to be hurt by short crops.

Planning intentions are encouraging and with the return to normal yields, ag services results will improve.

Small crop carry-overs will create opportunities for the ADM global network to match supplies with demands around the world.

Our other businesses category was up $14 million to $69 1/2 million for the quarter, mostly due to improved results in cocoa and licensing.

In cocoa last quarter we reported to you that we felt the fundamentals were improving due to the industry consolidation and growing demand, and this indeed continues to be the case.

Butter demand and prices have improved, and powder has maintained its steady growth.

Therefore, margins have improved.

We continue to see chocolate retailers pursue focusing more on their marketing strands and relying more on suppliers such as ADM in outsourcing the processing of cocoa beans into the ingredients that they need.

The Ivory Coast is still a concern as 40% of the world's cocoa crop is grown there, and they are in a stage of war.

Ivory Coast is vital to all cocoa processors.

So we hope for a quick and peaceful solution.

In our vital products area, lycine demand is up with higher ethanol production, the feed product dried distiller grains that we get from ethanol production has to be supplemented by lycine.

So the more ethanol that's produced, the larger the demand.

Lycine pricing is strengthened from 90 cents to the 70-cent area.

We have benefited from improved yields and cost reduction in our system and can report to you that lysine is now profitable.

Citric acid is still underperforming due to overcapacity conditions in the industry.

However, demand continues to grow for citric at about 7% to 8% for year, and capacity utilization is going to improve to the point where we will see improved results.

In health and nutrition, we continue to see growth in demand worldwide for edible protein.

Retail growth in developed countries for soy-containing products is in the double digit range.

There are tremendous opportunities for edible protein.

In fact, ADM is expanding its edible protein capacity by adding capacity in China.

Our Enova vegetable oil retail launch takes place in Chicago next month and then in Atlanta in April.

As I'm sure you'll recall, Enova helps maintain weight and improved health.

Since it is unlike other fats burned as energy instead of stored as fat.

We continue to, in our research area, develop more markets for natural vitamin E in foods and beverages.

The vitamin E market continues to be very competitive but profitable.

Sterols continue to show good growth in volume with attractive margins.

Okay.

That concludes our general review of the business and of our financials.

Could I open up the session, please, for any questions.

Thank you.

If you do 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 our first question.

Our first question is William Leech of Bank of America.

Please go ahead.

Good morning.

Good morning, Bill.

Doug, did you say the private equity funding loss was $27 million in the quarter?

Yeah, that was -- last year it was also the same amount.

So that's like 3 cents a share after tax?

Two, two and a half.

How are we supposed to view that?

Do we view that as sort of an ongoing operating cost for the business or is that sort of like, you know, your financial stuff which we generally take out?

Well, I mean, the information's there for you.

I guess everybody treats it different, but we will have those funds.

I mean, they're 10 year lifes, most of them, were in the midterm, most of them, so they're going to continue on for another 3 to 5 years and dropping off and then taking out as I feel the market is hopefully heating up around the world.

See some (INAUDIBLE) but right now it's real tough.

So we should to expect to see contained losses of this magnitude going forward?

Well, I can't really say that.

I mean, we're marking the market so I really can't say the losses are never going to be there.

It could be gains.

And the vitamin settlement you said was a $25 million gain, pre-tax?

Yes, last year it was $40 million so it was down comparitive, quarter to quarter, it was down $15 million.

Okay.

Larry, if you look at ethanol prices, it seem like they have been declining recently.

It's like higher gasoline prices.

Does that look like overcapacity in the industry?

I think there is, on a spot basis Bill, some overcapacity in the industry but as Chevron and others gear up in California, I think Chevron by itself was another 84 million gallons of demand that will be coming on stream between now and May.

It's still our guess that supply and demand will be relatively balanced thoughout most of the year and pricing should strenthen.

And on the fructose pricing, Baking News has reported price increases of about 2 cents a pound.

Is that something you can comment on?

I've not seen the article.

So I'll beg off on that one.

But, no, as I said during my earlier comments, Bill, we're still in the midst of negotiations with several of our major customers and just don't feel that it's appropriate to get into the specifics other than to say we know the direction, the direction is going to be up but we just aren't liberty to say how much at this point.

Okay.

Thanks a lot.

Our next question is from John McMillian of Prudential Securities.

Please go ahead.

Good morning, everybody.

Hi, John.

Good morning, John.

If it were two cents per pound, it would be about a 15% price increase.

Is that about right, if my math -- I don't know what your price realizations are.

How would you --

it would be a little more than that.

It would be closer to 20?

So that's really what list prices are.

So geez, I hope you get a 2 cent price increase. [ LAUGHTER ] Al, your quote in the front page of the press release, and I know this is a general question or comment but it just -- you know, it just -- I just kind of wonder where you are kind of coming from talking about how you continue to produce value for shareholders when, by any measure, if you compared a bungy, you compare to the market over five years at 10 years, you know, ADM stock really has not created much value for shareholders since you were CEO.

Can you just kind of comment what you mean by that statement?

Yeah, John.

I think you have to put it into context as to what the results were for the quarter.

All I was doing was commenting on the conditions in our business over the last quarter.

Your points are well taken, and as we have indicated in many different discussions about our company, that we do consider our results to be below the kinds of performance that should be achieved in the food processing industries and in the variety of businesses that we're engaged in.

My point is really directed to the fact that the policies that we have put in place in the last five years and the strategies that we've employed to diversify this company and to take us into the international area and to broaden its scope and its depth and the size of its operations is creating real value for our shareholders and if you took the same company that we were five years ago today and put us in a similar circumstances with respect to weather and all of the other conditions that we've faced, the lack of resolution of the trade issues with Mexico, the lack of energy legislation, that we would not have produced the results that we did this quarter.

So my comment was only to demonstrate that our performance this quarter demonstrates the stability that has been achieved from the diversity that we've put together in our global operations and that we continued to strive in a very competitive environment to improve the returns to our shareholders.

We consider them to be inappropriate in terms of what kinds of risks we are engaged in our business.

Our returns last year were a little over 8% on shareholders equity and we hope that the future has a lot better results ahead of us and are confident that we are on the right strategies and in the right course of action.

And that these international investments are paying off?

That is absolutely key.

This quarter demonstrates that very clearly.

Well, it just seems to me that if corn refining is ever going to start carrying you, it's in calendar 2003-2004.

I know you don't want to be specific on fructose and there are ethanol of uncertainties but it seems to me with MCP in hand that you are kind of finally ready to start positive earnings acceleration.

I know you don't want to predict things and I'll let Lenny ask more questions that are sure to confuse but, you know, are you comfortable with the estimates that are out there?

John, we, of course, can't predict what's going to happen in our businesses, but we agree with you that the outlook is very favorable for that industry, and what we've tried to do the last few years from your viewpoint is to increase the transparency of the disclosure of our financial information so you could make better judgments about what that future is.

We continue to work as diligently as we can here to improve our results.

Our acquisition of MCP and other consolidations in the industry I think have led to a much stronger environment and the prospects for the future as we make the changes we need to make in our balance of production of products with MCP in our portfolio, along with our other factories, gives us a much stronger view towards the future than what we previously had.

So we're encouraged and very optimistic.

As you know, the ethanol markets were strong this last year.

We continue to look forward to better results from negotiations of our trade relationships around the world and compliance with WTO commitments by Mexico and others, and we continue to look forward to growth in the need for renewable fuels in an environment where the oil supplies around the world are certainly in jeopardy because of the political environment.

So yes, I share your view, and I trust that will be the case.

Thanks a lot.

You're welcome.

And our next question is from Leonard Tidlebaum of Merrill Lynch.

Please go ahead.

Now we know why you're number one, John.

Let me try a couple of things this way.

If we take a look at your asset base now in the United States, in light of what you've said, and I agree with John.

If we're going to improve our return to shareholders, we've got to improve not only return on equity, we've got to return on assets as well.

Does this mean that we've got to critically review these assets to find out whether or not we're overasseted, if you will, in the U.S., we've got to close them down and basically relocate outside the U.S.?

That's the first question.

Well, Lenny, let me just take a little shot at that.

That's precisely what we have been doing the last two or three years.

We're looking across the world to try and anticipate where the growth is coming from and what that balance of capacity means as to where it's located.

And as you know, we have closed numerous oilseed processing businesses, flour mills, and other capacities that we have had in areas where they were not the most efficient and really improved the competitive climate and margin operating basis that we have.

So that's precisely the strategy we've employed, and I think my comment in the quarterly report reflects the view that we still feel confident that that strategy is wise and appropriate in today's global environment, and we're expecting to get better returns from the remaining assets that we have.

We've taken some write-offs over the past several years and we are becoming much better balanced and much stronger in those areas of the world that have greater promise of growth in our industries.

Well, then why -- I guess what I was leading up to is why wouldn't we look to reduce some of the soybean plants, even though they are -- you know, obviously you've spent a lot of money getting them up to date but I mean, why couldn't we close, say, 4% or 5% of our soybean crushing capacity and if we could take out the fixed costs associated with it, improve the overall returns?

And why wouldn't you do that?

Or is that just too big a bite to take?

Well, to start with, we have actually done that.

In the last two years we have closed five oilseed processing plants and in the last six months we've cut back on our production in certain areas and closed a couple more.

So that is precisely what we are doing.

At the same time we're bringing on capacity, improving our efficiencies and our capacities in South America and building strategically located well-engineered new plants in the Asia Pacific region where they can most effectively meet the demand there.

And that's improving our overall trading capacities and abilities and improving our efficiencies in the global oilseed market.

All right.

Let me switch just a minute to ethanol.

Don't you contract your ethanol out for a year, and where do you stand in that contracting process?

Do you want to comment on that?

Lenny, we contract most of our ethanol out for six-month periods, not for a year at a time.

So we will be coming into a new pricing period in April.

So we're locked in until April and I'm guessing that's on probably 100% capacity?

For all intents and purposes, 90% at any rate.

Okay.

So we should look for new pricing in ethanol, and with California coming on, we should be operating at pretty close to capacity?

Is that -- I think bill Leach's question was, where do we stand on that, but aren't you going to pretty well sell out in April at higher prices?

We certainly hope so.

I think the market fundamentals look like we should be able to do that, Lenny.

How much more do we have to go on the vitamin settlement?

Negligible.

It could be a little bit more but it won't be --

that's over?

Pretty much over, yeah.

And then the last question, can you give us some kind of a feel or outlook for U.S. commodity supplies?

I know, you know, articles are written about problems with the drought and all, but realistically with the exception of wheat, shouldn't we be in pretty good shape on corn and soybeans as we get into, from spring plantings and hopefully harvest in the fall?

We need good crops in both of those areas.

You know, we are going to have less than a 5% carry-over in soybeans and less than a 10% carry-over compared to usage in corn.

So it's critical that we get good crops in both of those.

But don't we have enough subsoil moisture going through in some of those critical states to get a decent supply?

Well, I think in the eastern corn belt we probably do not.

I think in the heart of the corn belt, we probably do, but we'll need good rainfalls at hassling times and other critical times for the crop and the further west you go out into the wheat-producing areas and in the upper plains, they are very short of subsoil moisture.

Final question.

If we take a look at the industry conditions now, why shouldn't we have a pretty good improvement next quarter?

We know that ethanol's going to be better.

We would hope that, you know, fructose starts to kick in as you get ready for, you know, at least, you know, some inventory load, and you are starting to make money in, you know, in the BioProducts area, which is a pleasant surprise.

So why wouldn't we see a stronger trend in, let's say the March and June quarters than we've seen in this quarter?

Well, there are a lot of ifs in this business and what happens with spring plantings, the timing of them, rainfall, too much rainfall, not enough rainfall can all have pretty big impacts on that, but I think the fundamentals in most of our businesses, as you mention, are looking favorable.

Thank you very much.

And our next question is from Eric Katzman of Deutsche Bank.

Please go ahead.

Good morning, everybody.

Good morning, Eric.

Good morning.

I guess I really kind of have one specific question.

In the past you've talked about when your ROE normalizes it would be kind of in the 12% range versus the 8% you had for fiscal 2002.

Can you kind of explain how you get to a 12% ROE target?

Is that kind of a function of what historically has been normal returns across those businesses?

Yeah.

Eric, I think the 12% number is probably reflective of our discussions of historical trends, and if you look back over 30 years or so in the food businesses and then at the kind of differences that you've seen in the consolidation in the industries and all that, double-digit returns were very well achieved over a period of many, many years, and more recently with the volatility in demand from Asia Pacific and other areas, that process has been disrupted.

So we would never talk in terms of normalized returns, but we're very optimistic that there is the opportunity coming as these businesses unfold in the future to give much better returns than what we've enjoyed for the past few years and hopefully in the double-digit area.

Okay.

And then follow-up for Doug, I guess.

Can you again just give us a sense as to a few items capacity -- I'm sorry, capital expenditures, depreciation, amortization and tax rate kind of going forward for this year and if you care to comment on next year, that would also be heavily.

Sure.

Our depreciation the first six months is overall $300 million.

I would anticipate that to be approximately the same for the rest of the six months, remaining six months.

Cap Ex with $200 million, we've said we're going to be about the $100 million level.

We expect that to continue.

We, of course, have the ABF transaction coming up here in the short future but other than that, nothing else in the near horizon.

What was your other question?

I think the tax rate?

Tax rate should be about at the 30 1/2.

We don't see any change on that at this time.

The only kind of thing that hangs out there always on us is the point sales corporation issues which still aren't fully resolved but we would anticipate there would be some sort of favorable resolution of that.

Okay.

Thank you very much.

And our next question is from David Driskell of Salomon Smith Barney.

Please go ahead.

Thank you.

Good morning, everyone.

Good morning.

I wanted to get back onto the corn processing side.

I know you can't give us specifics but I was hoping you might be able to throw us a bone here and tell us at least that high fructose corn syrup prices are going to be up by double digits.

Is that a fair statement?

I would like to be able to throw you that bone, David, and, you know, maybe when we finish with our negotiations and we have a discussion, I can tell you that, but at this point I just cannot.

Okay.

Can you tell us then, you know, what percent of contracting is complete and is this a normal percentage at this time?

And what I'm driving at here is it seems to be late in January and these contracts presumably begin in January.

So it's already late, and you would think that the longer these price negotiations go, I guess that suggests to me that they are very tough, meaning we're really going for a large price increase.

Well, I think that assumption is correct.

The longer the negotiations drag on, the tougher the sides are digging in.

You know, if we had had everything done by the first of January, we probably would have settled for far too little.

We're probably past the 50% mark with our volume at this point, and I think practically within the next couple of weeks we should be completed.

What expectation do you have for volume growth in high-fructose corn syrup for 2003?

I think we'll see about the same sort of volume growth that we had this past year, 1 1/2% or in that range.

Okay.

Unless something breaks the stand-off with the Mexicans.

Can you comment on your front end grind utilization rate and then also your HFCS utilization rate?

Well, we think industry utilization rates on HFCS is about 90% now, and in terms of our own front end grind utilization at ADM, it's very high because of the ability to maximize ethanol production and then maximize sweetener production during its season.

You mentioned Mexico in your remarks and said that you were hopeful on Mexico.

Can you share with us why you are hopeful?

It would seem to me after the Mexican congress has passed the law here that really has continued to hurt fructose producers.

I don't feel that hopeful and I would like you to kind of help us out and understand why we should be.

Well, I think it's in the best interest of both governments to resolve this situation, David.

Mexico does have a surplus of sugar, and if they are able to come in under the U.S. sugar program, they will get more for it here in the United States than they will by selling it in the world market or in any other country.

So there's a lot of millions and millions of dollars on the table for the Mexicans, and obviously there's an opportunity for corn producers and corn farmers to be able to take another 300 million pounds of HFCS into Mexico.

There are reasons why the Mexicans need to also resolve this, most of it having to do with the relatively high value of the U.S. sugar market versus their alternative markets.

Are there lawsuits going on in Mexico for the law that had been put into place, and is ADM part of those lawsuits?

I'm not aware of any lawsuits that are currently being pursued.

Okay.

Then, final question.

I just wanted to flip over to soy for just a moment.

December utilization rates in the U.S. industry were actually not that bad.

Certainly when I look at utilization rates and crush margins in North America, there appears to be absolutely no correlation whatsoever, which is highly unusual in my mind for a true commodity.

What's your interpretation of this?

And what's your outlook for when -- you know, do we really look for the South American harvest to change the U.S. margins?

Well, I think what we're doing by shutting back crush at ADM is going to help the supply demand imbalance for crushing in North America.

That, and I think China buying soybeans from South America will take pressure off of the soybean market here in the United States, and between those two we should see some improvement in crushing margins.

And could you comment on the utilization rates?

Because that has really been perplexing.

Well, I think the utilization rates are below 85% in North America.

Okay.

A current number.

Thank you.

Yes.

And our next question is from Craig Albert of the Osprey Fund.

Please go ahead.

Hi.

Good morning.

Good morning.

I just have one question.

Could you just remind me of the seasonality of the business?

I just look back a few years and it looks like the second half is weaker, but there are a lot of moving pieces.

So I was just trying to remind myself.

Just from an earnings standpoint whether, just the seasonality generally earned more in the second half than you do in the first half.

I think if we just look historically at quarters, that's definitely true.

It tends to drop off and I think we are changing so dramatically into a global environment from what we had as a pure current domestic market is not that long ago.

With those trends tending to change and so I think it's leveling out because we now have where we're now in South America where we weren't before.

Where theirs is just the opposite our crop.

So we get more leveling of it now than we did before.

And you certainly have, of course, you know the sweeteners in the summertime is definitely seasonal, more seasonal then, ethanol more in the wintertime.

So you have some of those factors, but overall I think it's more level.

Great.

Thank you very much.

And we have no further questions at this time.

Please continue.

Okay.

Thank you very much, all of you, for joining us, and we look forward to our next conference call in three months.

Ladies and gentlemen, this concludes your conference for today.

Thank you for your participation and you may disconnect at this time.

Have a good day.