Archer-Daniels-Midland Co (ADM) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2005 Archer Daniels Midland Company earnings conference call.

My name is Alicia (ph) and I will be your operator. [Operator Instructions].

I would now like to introduce your host for today's call, Mr. Allen Andreas, Chairman and Chief Executive Officer.

Please go ahead, sir.

Thank you.

Good morning, everyone.

Welcome to ADM's third quarter fiscal year 2005 earnings conference call.

I'm joined this morning by Doug Schmalz, our Chief Financial Officer and Brian Peterson, Senior Vice President.

Doug will start with a review of the accounting statements and Brian will follow with a review of our business operations and then we will look forward to your questions after that.

Doug.

Thank you, Al.

Good morning, everyone.

I just want to state some of today's comments that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance and financial result.

Any changes in such assumptions or factors such as (inaudible) crush (ph) margins, SNL (ph) prices, crop values, could produce significantly different results and we assume no obligation to update any forward-looking statements as a result of a new information or future events.

As reported our results for the quarter ended March 31, 2005 were $269,095,000 or $0.41 a share, that compared to net earnings last year of $226,769,000 or $0.35 a share.

This year's quarter does include a $74 million or $0.11 per share gain representing the company's after-tax gain upon the sale of its interest in Tate and Lyle.

ADM still does continue its Dutch joint venture operations with Tate and Lyle in Eastern Europe and Mexico.

Last year's second quarter results include a loss on abandonment of various assets of $12 million, that's $8 million after tax equal to $0.01 a share, $21 million which was 13 million after tax equal to $0.02 per share gain from an insurance related lawsuit pertaining to the flood of 1993.

And an $11 million, which is $7 million after tax equal to $0.01 per share a gain on securities transactions.

LIFO inventory valuations had no impact in the current year quarter compared to a charge of 99 million last year.

That equates to 63 million after tax, equal to $0.10 a share on the LIFO.

I will now discuss changes quarter-over-quarter in the line items of our consolidated statements of earnings and will discuss changes in the segment operating results a little later.

Our fiscal 2005 third quarter net sales and other operating income declined 9% to 8.5 billion primarily due to declining commodity values.

Our gross profits decreased 2% to $575 million due primarily to reduced operating profits of the oilseeds processing segment and increased energy cost partially offset by the fact that the current year quarter had no impact from changes in commodity price levels on LIFO inventory valuations while last year's quarter included a charge of 99 million.

Company-wide selling, general and administrative expenses increased 29 million to 280 million for the quarter due primarily to increased employee wages and benefits, increased litigation expense and increased accounting and auditing fees.

Our other income increased to 115 million from 3 million last year.

The components of that, interest expense declined $7 million to 80 million for the quarter due primarily to lower borrowing levels.

Investment income of 36 million was comparable to last year for the quarter.

Gains on marketable security transactions were 114 million for the current year reflecting the gain recognized upon the sale of the company's Tate and Lyle interest.

Last year's gain for the quarter of 11 million represented the gain realized upon the sale of a portion of the company's equity investment in overseas shipholding.

Equity and earnings of unconsolidated affiliates declined $8 million to 45 million from 37 million last year due primarily to a reduction in results of our Asian oilseeds, our Gruma, Agricore United and Enova Oil joint ventures partially offset by improved valuations of the company's private equity fund investments.

Our effective tax rate for the quarter was 34% compared to 33% last year.

For the nine months of fiscal 2005, our effective rate is 32% and is comparable to last year's effective rate of 31.8%.

The current year's rate reflects increases due to changes in the mix of pretax earnings and the phase-out of ETI credit with implementation of the new manufacturer's credit.

These increases were partially offset in the nine months as no taxes were provided on the $45 million equity share of the CIP gain since CIP is a foreign corporate joint venture and we anticipate that it will permanently reinvest the proceeds from the sale.

We anticipate our effective rate for the full fiscal year to be in the 32 to 33% range.

Turning now to results of our operating segments, total operating profit for the quarter declined 125 million to 377 million from the record level of 502 million last year.

Oilseed processing operating profits decreased 57 million to 61 million for the quarter from 118 million last year.

In Europe, improved crop conditions and good biodiesel demand resulted in improved earnings, improved operating results, and ample supplies of soybeans in South America also created improved operating results there.

However, these improvements were offset by lower operating results in the North American and Asian operations.

Corn processing operating profits of 178 million for the quarter declined 54 million from 232 million last year due primarily to lower lysine selling prices.

Lower ethanol sales volumes and increased energy cost partially offset by the positive impact of lower net corn costs and increased ethanol-selling prices.

Net corn costs have continued to decline over the first nine months of the fiscal 2005 and third quarter results improved 35% over second quarter levels.

Our operating profits of sweetener and starch products declined to 12 million to 80 million for the quarter, as increased energy cost more than offset lower net corn cost and improved selling prices.

Operating profits of corn processing and bioproducts decreased 42 million to 98 million for the quarter as increased energy costs, lower ethanol sales volumes and lower selling prices of lysine more than offset lower net corn cost and increased average ethanol selling prices.

The well-balanced nature of our agricultural services businesses resulted in operating profits of 55 million, which were comparable to last year as improved North American origination and transportation results offset the decline in earnings of our global merchandising operations.

Operating profit of the other segment decreased to 83 million from 97 million last year due to a decrease in food and feeding ingredients results partially offset by improved financial results.

Operating profit of the food and feed ingredients declined 26 million to 44 million from 70 million last year due principally to reduced result for the national health and nutrition operations due to margin pressure on Vitamin E and to marketing cost related to the roll-off of the Enova Oil by our joint venture.

To a lesser extent, the reduction in cocoa operations results from last year's record levels also contributed to the decline.

Operating profits of the financial operations increased 13 million to 40 million for the quarter due principally to improved evaluations of the private equity investment funds.

Corporate reported a $32 million profit compared to a charge of 164 million last year.

The improvement of 196 million is due principally to the $114 million pretax gain from the sale of our Tate and Lyle interest and a $99 million quarter-over-quarter positive impact of commodity price level changes on LIFO inventory evaluations.

As I mentioned earlier, LIFO evaluations had no impact on the current year quarter whereas last year's lysine commodity prices resulted in a $99 million charge.

I will now turn to the financial condition cash flow and discuss some significant factors there.

During the nine months ended March 31, 2005 our trade working capital decreased 483 million to 5 billion at March 31st as our readily marketable inventory levels decreased 644 million from June 30, 2004 level.

Readily marketable inventories have a carrying value at March 31 of approximately 2.1 billion.

This decrease reflects the impact of decreased commodity price levels.

The working capital decrease and positive cash flow from operations were used to reduce short-term debt by 1.5 billion to 270 million at March 31, 2005.

The company's total interest bearing debt short and long term as a percent of investor capital was 29% at March 31, a decline from June30, 2004 levels of 39%.

Cash flows from operations for the nine months ended March 31 equal to net earnings of 849 million plus depreciation and amortization of 508 million accumulated to 1.4 billion.

This cash flow was used principally for capital expenditures of 451 million, dividends of 154 million and to reduce debt levels.

I will turn the discussion over to Brian Peterson who will review the business fundamentals of our operating segment.

Good morning.

I will start this morning, my presentation talking about our Oilseed group.

While operating profits in oil seed processing were 61 million for the third quarter 2005 versus 118 million for the third quarter 2004.

European and South American results improved in the third quarter while North American and Asian results declined.

We face difficult operating conditions in soybeans last quarter although we are currently seeing improved crushing margins.

Regionally, we see the following.

North America, our North American operating results declined in the third quarter on lower crush margins.

The two co-op facilities that started up in Minnesota added about 4% to the total North American crushing capacity putting pressure on margins.

US industry capacity utilization was approximately 86 to 87% in the third quarter down from 90% in the second quarter.

Returns from our North American soybeans crushing assets are unsatisfactory with under utilization of capacity.

Planting intentions for soybeans this the US are at 73.9 million acres for 2005 down slightly from 75 million acres in2004.

With today's soybean inventory levels and projected carryout we anticipate an ample soybean supply for both North America and the rest of the world.

In South America, we saw year-over-year our Brazilian crushing refining and packaging operations improved.

South American origination and transportation also improved this quarter as we continue to strengthen our origination capabilities in South America, meet market demands in China and Europe.

We did announce the closure of a small poorly located Brazilian plant in real ground that sold last quarter.

This was a region that was most heavily impacted by the drought.

For the second year, projections for the South American soybean crop have been substantially reduced from earlier estimates.

Current projections are for a soybean crop of 51 million metric tons in Brazil, 39 million tons in Argentina and 5 million tons totaled from Paraguay and Bolivia.

However, even with these lower crop projections, there appears to be an adequate supply of soybeans given current soybeans inventory levels.

In Europe, we continue to deliver improved results from European oil seeds on the strength of our soft seed crushing and refining as well as biodiesel operations.

In Poland, our crushing and refining operations are having another record year.

In Germany, our biodiesel plants are well positioned to capitalize on the continued growth in this business.

European biodiesel is made primarily from Rape oil, which results in enhanced prices for Rapeseed oil.

Not only is biodiesel a good business in itself but it improves the value of our soft feed crush as well.

Soft seed crushing capacity utilization was over 92% in the third quarter and is currently running over 90% in the first quarter, which is the transition quarter as we make the transition to the new crop supplies.

In Europe soybean margins are improving.

The prospects for a continued large supplies of indigenous European oil seeds are very good for the coming season and augers well for the crushing margins.

Our new joint venture oil seed in plant in Odessa Ukraine is expected to commence operations this month.

Turning to Asia, Asia results declined on poorer local operating conditions.

The Chinese crushing industry is modernizing at a rapid pace and in the process excess capacity has been built.

During the quarter, it has been reported that overall Chinese crushing capacity ran at a 40% utilization rate.

Our plants ran at a 65% utilization rate.

This market will go through a consolidation phase and the inefficient players will be rationalized.

We have a very strong position in China.

Our plants are well located, very efficient and we have strong Partners.

Growth in demand for soybean meal and soybean oil is very healthy.

We are confident our long-term strategy for building ADM's presence in this region will be successful.

Looking at refined and packaged oil operations, every major food company is busy working through the range of options to address the trans fat label requirements that take effect in January of 2006.

Our vegetable oil portfolio is the most viable in the industry and we are busy working with each customer to find the best solution for their products.

ADM's refining and packaging business is a solid contributor and is increasingly adding value to our oil seed operations.

Turning to the corn processing segment, profits were 178 million versus 232 million a year ago.

In the sweetener and starch segment of this group, profits were 80 million versus 92 million and bio products they were 98 million versus 140 million in the year ago period.

Planting intentions for corn in the US are at 81.4 acres for 2005,up slightly from 80.9 million acres in 2004. 30% of the crop has been planted, which is well ahead of average and we are off to a very good start for another good corn crop.

Looking at sweeteners and starves year-over-year profits were down as lower net corn cost were more than offset by higher manufacturing cost primarily from energy.

Our net corn cost today is down from last quarter and that trend will accelerate in our fourth quarter.

As we had indicated earlier pricing for high fructose corn syrup was virtually unchanged although prices were up on average across to our entire sweetener and starve portfolio products.

In bio products, year-over-year profits were down as declines in lighting profitability more than offset the profit improvement in ethanol.

Ethanol profits were up as year-over-year price increases and lower new corn cost more than offset lower volumes, as you recall we have large volume or large shipments last year as we delivered ethanol from inventory to meet the start-up of needs of new east coast markets.

Ethanol pricing in the quarter improved versus last year.

We are contracted for ethanol through September and as we have previously indicated our contract prices are above today's spot prices.

The net cost of ethanol to a blender is very attractive relative to today's gasoline prices.

The large price differential is a recent phenomenon and as you might expect a number of distributors are responding by making plans to install the equipment necessary to blend ethanol into their formulations.

With this strong economic incentive to use ethanol, the industry should see a better supply demand balance in late 2005.

Looking at specialty feed ingredients, lysine profits this quarter were down from the very high levels we enjoyed last year.

Lower shadow values and increased capacity in China have resulted in lower prices.

However inclusion rates for lysine are high and demand continues to grow as increasing DVG usage requires more supplementation replacing.

The low US dollar has resulted in more Chinese lysine being exported to Europe rather than the US, and here recently spot prices in the US market have modestly recovered from recent lows.

Looking at agricultural services, profits for the quarter were 55 million versus 56 million in the comparable quarter 2004.

Agricultural services segment delivered solid performance this quarter, which is driven by our North American grain origination, port facilities, storage and transportation business.

With large crops these assets are well positioned to originate the producer's crops, bring them to market and deliver solid returns.

The ADM transportation asset base is generating good returns and providing value as we meet our customers' requirements in today's challenging transportation environment.

Our barge assets are performing well and our rail car fleet adds a competitive advantage in dealing with today's challenging transportation environment.

In the other segment, profits for the total segment were 83 million versus 97 million in the year ago period.

The food and feed ingredient category profits were 44 million versus 70 million last year.

And the financial category profits were 40 million versus 27 million in the year ago period.

Wheat milling results were comparable to last year.

Industry capacity utilization for the quarter was approximately 80% in North America and 75% in Europe.

Our cocoa operations have solid results and continue to generate excellent returns.

The cocoa bean harvest in western Africa is somewhat smaller than last year but there's a good carryover quantity, which should ensure an ample supply for processing.

We see continued interest on the part of customers to outsource finished and or semi-finished chocolate production.

Our plants have a cost and quality profile that is attractive to our customers and will give us the opportunity to grow our chocolate volumes.

In the other food and feed operations earnings were down this quarter due to marketing expenses and the cost associated with a recent national in over product launch.

Also we saw reduced volumes in prices for vitamin E. That concludes my prepared comments.

We are now ready for questions.

[Operator Instructions].

The first question is John McMillin with Prudential Securities.

Please go ahead.

Hello, everybody.

Good morning, John.

I guess the good news is you outperformed corn products one-way to look at the quarter.

But the negative here, and I know you don't want to get in long discussions about Bunge and people have different hedges and businesses and so forth, but I think the oil seed processing numbers, while I expected trends to be down in oil seed processing I think we were a little surprised yesterday to see your largest competitor post pretty good gains in that business and you here post a rather large decline.

Can you just kind of give us a little more color than you did on the prepared remarks in terms of why you might have been hurt a little bit more by the North American capacity additions?

Are trends that that good in South America?

Do they have more exposure in Europe?

Can you give us a little more color on those numbers?

Well, John, I think the results in North America frankly I disappointing to us.

We think that we are working the industry here has added capacity recently.

I indicated that 4% capacity was added recently with the two additional plants in Minnesota.

We have talked about the need for rationalizing the industry.

If you look at over the last four years, ADM is closed six plants in an effort to improve the efficiencies of our operations in this industry.

Those six plants looked like they equaled about 4% of the capacity of the US crush.

So that has been added again.

It is just, Frankly, to us it is a disappointing environment and we have to continued work on improving our efficiencies and trying to rectify the situation.

You have more exposure to that Minnesota area?

I know it is a regional business to some extent.

Again I'm just trying to understand why your results might be so much lower than your competitors'.

Is it tied to locations in North America that you got hurt more by the addition they did?

John, this is Allen Andreas.

If I might just comment, we each have different footprints in this industry, as you pointed out and Bunge is substantially stronger in South America in the oil seed processing business than we are, and we have really concentrated our efforts and our growth in the last few years in some key areas of the world that were very important contributors for what we saw as the future.

So, as you know we have made substantial investments in the Asia region.

China -- we built a lot of excess capacity there in China in anticipation of markets that will develop in the future.

So, the productivity of that portion of our investments at this point in time is not as favorable as what we would expect.

But that doesn't change our view that that's very important.

In Eastern Europe we have the new plant starting in Ukraine.

We had excellent results in Poland.

So we've got good results in the Eastern European area where building.

In North America, we are not particularly exposed to the Minnesota region.

We are spread across in a very, very good way across the country but we find in North America that processing margins are very narrow and that reflects the fact that there is overcapacity here.

So if you look at our overall footprint and include the exceptional results that we are getting out of our European operations this year, we came up with just a lower overall profile but we are also comparing different results.

When you look at Bunge's agribusiness you have to understand that we have in the interests of bringing more transparency to our businesses have segregated our agricultural industries even though we are basically in one primary industry, our oil feed division is -- you are really looking at crushing and refining and the results of that kind of business.

You take our other businesses in the higher profile and in protein isolates and vitamin e, and all of those they fit in a different category.

And you take all of the grain divisions in the marketing and the global merchandising of that which would be included in agribusiness are not included in the oil seed results.

So, overall of course we would like to have done better, but I think that we have had pretty solid performance out of our oil seed group this past year and we see continued rationalization and better opportunities in the future.

Listen, you gave people a lot of warning between CAGNY and coming to New York that this was not Exxon or Shell, you know, a pure energy play so I think you deserve some praise for that.

Again, I'm just trying to get a little better read.

In the South American area do you have more exposure than Bunge in the south?

No, but we have one plant down there that is in the drought area and then we have large well-located plants up in Montegrasso.

So we've got a pretty good footprint there and we actually have had improved results in South America reflecting the fact that most of our capacity is really in the north, not in the south.

And the overcapacity is primarily located in the south.

So we are pleased with our situation in crushing in South America.

But as I have said before, our real emphasis in South America was to provide an origination capacity for China and for Europe because we have the benefits of having substantial crushing capacity in China and in the Asia Pacific region and also in Europe that is served by those markets.

So, if we had the opportunity to become larger in South America at the right kind of entry price in oil seed processing we would consider it.

But it is not a critical part of or strategy there.

Our strategy is really to be involved in the business and to build origination capacity to serve the investments that we are making across the rest of the world where there are no oil seeds and they are needed in terms of the meal demand and oil demand that's growing.

So if you look at our European and East European businesses and into China, you will see the real reason why we are active in South America.

So our profits are probably substantially less than some of our competitors there but we are not unhappy with our physical location of our small capacity in South America.

Well, one thing that might get crushed today is your stock and at times you have had some appetite for buybacks.

You have prudently not done any recently.

Do you see that changing, Al?

It has already changed, John.

On the substantial dip after CAGNY acquired a very, very small number of shares because that event only lasted for a very short period of time as you know and then it rebounded to higher levels.

But recently on the depth that we have seen since the end of the quarter ending March 31st, we have accumulated some additional shares and we will accelerate that program.

As was pointed out in Doug's financial discussion, we have had a really substantial shift in our liquidity and a year ago in May our short-term debt in commercial paper was 2.75 billion.

Today, we have a substantial $300 million approximately investment portfolio and so our cash and liquidity continues to build and it is very strong and so we are looking for good opportunities to put it pack to work.

One of those opportunities will be stock repurchase and we have started that process and if the stock does continue to weaken we think our global profile is very interesting in this business despite the fact that this was a particularly competitive and difficult quarter, we are very optimistic about the future at ADM and we plan to look for the most prudent places to put our liquidity back to work.

One of those is stock repurchase as we continue to look for other good opportunities in our businesses to grow and expand.

Just two quick questions for Doug then I will get off.

The tax rate when you talk about the mix being negative, what are you talking about, Doug?

Well, more revenues -- the U.S. is perhaps one of the higher tax jurisdictions right now and so as more profits moved into the U.S., it affects our rates as our balance between domestic and foreign income changes.

Okay.

And then you mentioned a, $0.01 gain from securities.

That was in last year's quarter.

Last year.

The only thing in this was the Tate and Lile.

That's correct.

Okay, thanks a lot.

You're welcome.

The next question is from the line of David Driscoll with Citigroup Smith Barney.

Thank you.

Good morning, everyone.

On the corn side on the sweetener division Allen, I am a little bit surprised on the results of the quarter.

I thought the net corn costs being down was really going to be the big item in that when Archer Daniels the number one fructose player in the United States went in to contracting, the fact that price increases were not gained would be more than offset by lower net corn costs.

However, with the profit result in the quarter being down versus last year, it seems pretty disappointing.

Can you give us some idea here?

I mean you guys have the number one position, you spent a significant amount of money buying MCP and we are just not seeing results here improve like I would have otherwise expected.

I mean Cargill also took out one of the mid-year players, does this business inherently have the right trajectory?

And if not, what can you do about it?

Yes, David, I appreciate the question.

We, over this past period of time as you know last year we had a very profound spike in the value of corn.

So our net corn costs last year were relatively high when spread out over the year.

And so, the facts are that this year with lower corn costs we have enjoyed lower net corn costs and on the sales side with our products high fructose corn syrup pricing was about flat with last year as I indicated when we were out in Phoenix.

And in the overall complex, if you take into account our other products like dextrose and syrups and starches and everything else, we did have some nice increases in some of those products.

As a result, we had a total sweeteners profile.

We had a little stronger result from our sales side.

Two factors that went against our overall operations there, first of all, despite the fact that we had lower corn cost on a net basis our energy costs were up.

And I think, you are going to see this across the board in all of our industries that we all need to address the fact that our energy costs in our plants are going to be higher than what they have been in the past.

So, we are all trying to get that fact across to our customers and they will have to be realized eventually because we are all faced with that same situation.

Now on the other side of this transaction, it's also involving the freight for delivery of our products to our customers.

And so, we don't all sell the same basis to our customers and this year freight costs went up and primarily also because of energy.

So energy is going to impact us in a number of different ways.

It is true that there's plenty of capacity but we're encouraged by continued discussions about opening up new markets and are hopeful that we can resolve this controversy with the WTO on high fructose corn syrup down in Mexico.

The real significant difference this year as compared to last year in our corn is that last year was improved by some extraordinary items, for example, claims that came out of insurance relating to a flood opportunity that we had.

And then secondly we do have a substantial compression of our margins in the lysine business.

As Brian pointed out, lysine prices have strengthened somewhat recently and so we are encouraged and there's very good growth in that industry.

The lysine industry is driven in the United States by the increased capacity that is coming on stream for ethanol because the distillers grains that come out as a by-product need amino acid supplements in order to make a proper feed formulation for the animal consumption.

So our lysine business is strong, it's growing and it is healthy despite the fact that our margin of profit was down this quarter.

So, if you look out into the future, we are very encouraged by the opportunities in this business.

We think that wet corn milling business is the right place to be not only in ethanol but also in all of the new fermentation products that are coming along.

We are looking at a number of products that have become very competitive as a result of the high prices of petroleum.

And so we are very encouraged by our corn division results despite the fact they were off slightly this year.

Allen, can you say whether or not the energy costs and the freight costs are ultimately going to be a big drag on profits this year in the Corn business in terms of the fact that I thought for a while you were anticipating better profits in corn processing, but given what I'm seeing in the sweetener side, I'm not sure that that statement is still true.

Because you obviously contract this stuff at the beginning of the year since this contractor signed, do you have any recourse with these higher energy costs and freight costs?

Usually, we absorb those ourselves in our business.

But our net corn costs continue to decline and as we move into the coming period, we have also seen some moderation in the high cost of energy.

So, all of these things interact and as you well know we have a nice book of business for ethanol at this point in time.

But that's going to run over a period and then we will need to address the supply and demand relationships in that business and will see how that goes.

But I can't really predict how it's going to come out, but we are not depressed in any way by our outlook for this industry.

And we continue to believe that we will be able to produce solid results out of the corn division this year.

One final question for you guys is simply, you made a comment very interesting comment about the refineries adding ethanol-blending capacity and an expectation that some of this would come on by the end of '05.

Can you just give us a bit more color here, because the drop in ethanol prices relative to gasoline prices has been a bit startling and I'm curious if you could just drill down a level here and give us, if you know any numbers about amounts of new capacity, blending capacity that's coming online that would be extremely helpful?

David, as you know obviously there's a strong economic incentive for refineries and distributors to blend ethanol.

In some instances the infrastructure isn't there to immediately take advantage of this opportunity.

But there are people that are recognizing the opportunities that are moving in the direction of readying their facilities to be able to blend.

And, so we will be seeing this come on in the next, I would guess over the next three to six months.

In terms of quantity, what would be quantity it's a guess on my part that I think, it could be more than several hundred million gallons.

Very good.

Thanks a lot, everyone.

You are welcome, David.

The next question is from Eric Katzman with Deutsche Bank.

Please go ahead.

Good morning, everybody.

I suppose if buying back stock immediately after CAGNY was a good idea it going to be a great one this morning because I think your stocks indicated down about 25%.

Be that as it may, I guess some people have been concerned about what you said with regard to the blenders adding capacity in ethenol.

I mean what is the CapEx required that is required to do that?

It would seem like for a company like Conoco or Exxon.

I mean this is like a minimal CapEx expenditure for them to add blend capacity and that if the economics are justified, they would go ahead and do it.

I think, Eric, that we are seeing that happen.

I don't think -- I can't speak obviously for our customers but I doubt that the CapEx would be an issue.

I think it is just a matter of time, the time it takes to get ready to do it.

I don't think CapEx is an issue.

So, we are seeing strong interest and so I think it is just a matter of time, a relatively short time, before the people who perceive this opportunity are taking advantage of it, taking full advantage of it.

Eric, I think that the decision for an oil company depends quite significantly on their position in the industry.

If you are running your own Gasoline refineries and your own operations and have surplus capacity to produce gasoline, you have a different agenda than if you have basically a marketing organization that is buying in gasoline from other people.

And when the companies of the size that they are make decisions to go in particular markets it has to match up with their capacity there to utilize it, their with their storage capacity, their tank farms and has to fit into their blending capabilities.

So, that is a decision that they make on an area-by-area basis but there are some particular areas that are very likely to open up in the near future and some of those are tied up in litigation.

For example, the Atlanta, Georgia where the decision will come shortly about their position in the ethanol business.

So, with MTBE being increasingly removed from the supply, the future is very good for this business.

But as you well know, we've got 84 plants already producing ethanol, another 15 under construction and the supply and demand relationships will be critical going forward in this industry.

We are optimistic about our situation.

We have been in this business since the late '70s and early '80s and we have a very vast network of transportation systems, tank farms and delivery, and we have a good relationship with all of our customers to be able to assure them of substantial supplies because of our size.

So we do enjoy a particularly advantageous position as these markets open up.

And Allen, obviously in the business you have to be politically connected globally.

Do you think that the energy bill will get passed in August like the president hopes and that between I guess the senate and the house that some kind of finally a resolution can come, some kind of compromise can exist between maybe getting a little bit more ethanol expansion and maybe some kind of modified cap on MTBE litigation exposure?

I think that that is achievable.

The President and many of the people in Congress have a very strong inclination to see renewable fuels and particularly in view of the high cost of petroleum in today's environment.

We really would benefit from a renewable fuel standard being put in place.

The current legislation passed by the house contains a provision of increasing the market up to 5 billion gallons in 2012 and the one in the senate is likely to be substantially larger.

So there will be negotiations going on that issue.

And, of course, last time the MTBE liability was what got in the way of the passage of that particular legislation.

We don't know for certain that is going to happen but there are very active discussions to get that in place and because of the importance of renewable fuels in today's energy picture and president's conviction, we need to have a new energy policy in this country, we are very optimistic about that process going forward and we are confident that we will have at some point in time a renewable fuel standard that is beneficial to our industry across the board.

Okay, let me switch topics here and kind of follow up on I guess John's question on oilseed.

It sounded like at least from yesterday's call that Bunge was very optimistic on the demand side of things.

Is that what you are kind of suggesting that in North America you started to see an improving crush environment and that with the better global demand that that will at least maybe not Asia but help out some of the other areas that may have been challenged?

Yes, we do not disagree with Bunge's outlook on the growth and demand in North America.

We see a shift in terms of how this market unfolds in the animal feeding side and so that's why we have put in place substantial capacity to produce lysine and also meeting the demand of our customers on the feeding side as they continue to take more of the distillers' grains that come out of the ethenol factories.

So we are studying this shift and we are optimistic about our position in both of these industries as we continue to be a major provider of feed to the animal industry and protein industry.

Okay then last question and I will let it go.

At CAGNY I think you indicated that you were very comfortable for the foreseeable future acquisition that CapEx would remain at around 600 to 650 or so, which as you kind of pointed out gives you a fair amount of cash flow, which I guess now you are willing to spend more back in terms of buyback.

But is that correct, the 600 to 650 number?

And two what debt to capital ratio are you comfortable with if you are down below 30?

On the CapEx I think that is a good reasonable number. 600 to 650 range I think is appropriate.

On the debt level I think we are very comfortable with our debt level right now.

We could certainly carry more debt as we have in the past.

So we have that capacity there if a good opportunity should come along.

Eric, none of us really knows about prices for all of these things, but assuming we continue to have the kind of weather we started this season with here in the Midwest, we are going to have ample crops in both North and South America and adequate supplies.

So we do not see the kind of experience that we had more than a year ago when we had the very substantial increase in commodity prices.

Of course, weather conditions can change that.

But we have got very substantial liquidity with backup lines close to $3 billion and net investment portfolio right now with the exception of some small borrowing their international operations.

So we have got a very solid balance sheet and very comfortable debt levels at today's environment.

Thank you.

You are welcome.

The next question comes from David Nelson with CSFB.

Please go ahead.

Good morning.

Good morning.

Sorry to go back it North American oil seeds for a second but you cited capacity utilization being down sequentially and that does happen seasonably but you are reporting your results year over year.

Wasn't capacity utilization up year-over-year quite a bit?

Compared yes to the third quarter of '04 off the top of my head, I think the capacity utilization in North America was about 75%.

So, yes year-over-year it was up.

Then it wasn't a capacity utilization issue.

Did you just get caught hedged wrong?

No, if you look at the market we were dealing with last year we were dealing with a very short crop and we had a short crop of soybeans, we had people trying to deal with the perceived shortage of soybeans and soybean products.

And I think that generated some really particularly aggressive demand.

At the same time that you had a crop limitation on the ability to use capacity, and I think that the combination of those two things generated better margins.

So, margins offset your lower capacity last year?

Correct.

So the issue is lower margins, not capacity utilization?

Well, I think the capacity utilization right now is leading to lower margins.

Okay.

Now, if I could move back to share repurchase, you obviously last November you announced 100 million share repurchase program, you know presumably over a number of years.

Maybe I'm not hearing you correctly today but it sounds like you are only planning to do that on share price weakness and when I saw 100 million shares I thought something perhaps more substantial or aggressive than that.

Am I hearing you correctly that you only plan to buy back stock on weakness?

Well, David, we have always been opportune buyers of our stock as long as I can recall, and I have been with his company for more than 30 years.

We have always stock repurchase program in place and we were always in a constant evaluation of or need for liquidity and our cash flows and utilized our repurchase program when we felt that the stock price was advantageous crust given the prospects for cash flow in the future.

When we got to the end of 2004 our last stock repurchase program expired and so our Board of Directors put in place another stock repurchase program which was for 100 million shares over a five-year period on the concept that we basically over the past years if you look back at them had approximately 20 million shares per year repurchase during the year.

So that program was put in place and we have the authority to go forward with that.

But I think the real issue is not what our program is but, rather, what capital needs we have and what opportunities we have to put our capital back to work and how we feel for our long-term interest of or shareholders what is the best utilization of or liquidity.

So we are opportune buyers and we are not fixed on any particular number of shares but our board is very receptive to the discussion as to how we can create value for our shareholders here and if share public share price of our stock seems very attractive in relationship to our needs for the capital we have, we will continue to repurchase shares.

I still don't understand the criteria in that Doug just mentioned, reiterated that CapEx needs are 600 to 650.

Our cash flows will be substantially in excess of that this year.

Right and you started again a CAGNY reduced need for liquidity posts your fructose liability segment.

We are six months into this and your shares outstanding are actually higher than a year ago.

That's because we didn't repurchase any during that period of time really.

The 20 million shares you were repurchasing in the past is when you also had a 5% share dividend every year.

Yes.

That is true.

Okay.

Thank you very much.

Yes, you're welcome.

The next question is from the line of Leonard Teitelbaum with Merrill Lynch.

Good morning.

Good morning, Lenny.

Now that everybody is wringing their hands and beating themselves and what have you, let's talk about where we are going to go from here.

Thank you.

Number one, I know in this quarter you have got kind a gimme going for you because that's where China hit right, in your June quarter last year.

Yes.

Could you remind me again, I believe we have the number but what was the full impact of that in the quarter, do you remember, Doug?

After everything got settled down?

I think we reported a loss for the quarter of about $15 million if I recall.

What I'm trying to figure out is how much of that was China?

We never really put a number on that, Lenny.

But in our general discussions about what the impact of that default situation was on us, a number of $100 million was discussed and I think give or take some comfortable margin that probably reflects the kind of impact that the defaults had on our oil seed results.

So at least we got an easier comp this time going through.

Dave asked what I thought was a pretty good question on that.

If we look at how we are positioned in the soybean area, volumes are going to be certainly better for this quarter, next quarter, than maybe a year ago even though some of the other metrics maybe down.

But I want to make sure I'm coming away with the right point that at least from a utilization rate capacity we will be up in the June quarter versus a year ago.

Did I hear incorrectly or not?

I think if you look at the US we are seeing higher.

I'm sorry, just the US

We are seeing higher soybean crushing margins at the present time and it is reasonable to assume that that could improve the utilization.

Demand is good.

Farmers right at the present time have course been heavily involved in fieldwork but as that comes to an end typically they sell more.

So I think one could be optimistic there.

Also if you look at China where I gave really pretty low utilization rates during that quarter of course it was Chinese new year;

Chinese economy almost comes to stop during that period of time particularly in our industry and crushing the industry and particularly in the oil market, and there's really a very large decline inactivity.

So I think that and also we have the Asian flu situation there.

But things are getting back more to normal in terms of activity n China now.

If you look at Europe, in Europe soybean margins have improved, capacity utilization is going up.

In the soft seed area I indicated we had continued very good capacity utilization.

However, we are in a transition period to new crops for plants typically take place a little bit of down time.

So although margins will be good I think you could see it still in very high levels soft seed utilization in Europe may dip just a bit.

In South America of course we have the new crop situation and I would expect the capacity utilization there would be pretty good.

Does that start in June or does that start in the September quarter, that the conditions you have just said?

I mean is it starting now or is it really going to be a September story?

I was talking now.

Moving on just a little bit, clearly we are going to have ample supplies even though the crops -- and you have said that -- are we seeing any type of change in the buying patterns of the users of soybeans oil in North America have they slowed down their purchase compared to last year when they thought we were going to run out of soybeans?

Or is it anything unusual year-over-year?

Well, going back to what I said before in the question about the margins a year ago when we had the perceived shortage, yes, there was more aggressive buying a year ago and that contributed to better margins.

But the buyers are more relaxed now but in terms of usage, the usage volumes are still very good.

And, of course, the big thing the edible oil the US industry is working on is the trans fat area and that is creating some mix some changes in the mix of products that our customers are taking but overall the volumes remained very good and it is a growing business.

Okay we know that -- the one area, what obviously frightened me off in February was the concern that the replacement cost of ethanol was actually down a dime.

You were contracting in February new contracts at $1.32 a gallon.

What are your current contracts running at?

For ethanol?

In terms of what is our price we are delivering at?

You are signing new contracts as some the old ones cycle out.

You had gone for a $1.42 to$1.32.

What are you currently writing contracts at?

Currently at the present time we aren't having particular heavy activity in writing contracts.

I suspect that will start in the near future.

But at the present time, I wouldn't have anything to report on that.

Would you expect the price to be above or below $1.32?

Hard to say.

Really hard to say.

It is a dynamic market.

If situations change on a daily basis and we are not doing it at the present time.

We don't have contracting activity.

So, when we get to it is hard to say what it will be.

Lenny, I would just like to add on this conversation that we are really optimistic about our renewable fuels business and ethanol our business.

We see these markets expanding; the prices were previously at a substantial premium to gasoline prices and with the current excess capacity in the industry they have dipped substantially below with prices in the $1.20 a gallon area.

Our contracts are at much higher levels but they ran out to September; the oil companies will not be coming back in for substantial supplies until we get closer to the end of the year.

So what they are doing as they expand capacity, they are taking delivery under our contracts and they are buying in the spot market for their additional needs and we are only delivering against our contracts because we sold up most of our production.

Now as we get closer to the period of time when they are looking for new contracts, there will be another reevaluation of where everyone is going to price their products and the $1.20 is a spot price today given the circumstances in the industry from those who really don't have the ability to store it or put it in a place where they can't deliver it to their customer.

As a result, you have an increase in the margin for the oil companies to use Brazil -- or to use ethanol and then Brazil for example the usage is expanding dramatically with the introduction of flex fuel vehicles and in a government that has been very supportive of renewable fuels down there not only for the environmental reasons but also for costs.

And in today's market with e-85 selling at a very advantageous price in relationship to the gasoline markets, there's the potential for substantial expansion and we anticipate that there will be a better supply and demand balance coming forward as our contracts are used up.

Well, what percentage of your contract at now versus your capacity? 75%? 50%?

Basically all of our capacity is booked up on contracts.

We are returning our factories and not increasing our inventories and not selling any more because we are delivering against the existing contracts that run out till September.

Okay I'm 62 and 5/8.

Long term is next Wednesday.

I want to make sure that we get on the same page.

The way I look at this I think we have got, you know, we have a tough quarter coming up in June I would think with some of, while the trends are improving whether they improve in time is each analyst's guess but I am just trying to figure out again I am getting back to Dave Nelson's question are we talking touch comps and we have to wait for the comps to roll over or is it just the operating conditions that have changed and I'm inclined to think it is tough comps and I want to make sure I'm on the right track.

You are on the right track.

Thank you very much.

The next question comes from the line of Christine McCracken with FTN Midwest research.

Please go ahead.

Good morning.

Thanks for taking my call.

I guess my only concern is currently with 20% additional capacity or 18 or whatever the number is today coming on in the next year and how do we get all of that absorbed by the market that is basically fighting it seems like the, I guess, expanded as of ethanol given current energy policy?

Well, first of all I think that -- I mean there's a lot of things going on out there and there is -- going back to what I said before, looking at the people who just are in a position to take advantage of the strong economic incentives to use ethanol, I put that at more than a couple hundred million gallons.

If you look at the other things that are going on right now where discussions are taking place either in legislatures or courts or whatever, there is, in Atlanta there's the potential for 250 million gallons.

New Jersey is 60 million gallons.

The Boston area is 65 million gallons.

Philadelphia is another 60 million gallons.

California right now, which is discussing allowing a 10% blend is another 700 million gallons.

So the potential is there if all of these things and I'm not predicting that all of them will come to fruition but if all of them did come to fruition there would be more than enough demand to absorb the current production plus the plants that are on the drawing boards that are being built.

I guess my concern with the exception of California because I have looked at that debate it seems further out, is that even with the expansion or even with those markets opening up to ethanol it seems like we would still be basically, you know, satisfying that complete demand.

It seems a bit imbalanced even with the expansion of those market.

Is that fair?

I think we will just have to see, Christine.

New plants continue to be built.

The market is growing.

Congress is discussing an energy bill right now with the potential for mandated use of renewable fuels.

So I think we just have to see how it comes out.

Just looking at that bill and at least the house version at five billion gallons in a few years of renewable fuels which in my understanding includes bio diesel, and with current production of it relatively small it probably doesn't matter but generally looking at that it seems like we are already at the levels that are mandated by that policy in a few years.

So, I don't see that really improving the fundamentals in the near term.

How do you differ from that?

Well, you are right, the bill passed in the house called for a 5 billion gallon mandate.

But there seems to be in the senate a lot of strong bipartisan support for an 8 billion gallon mandate.

So we will have to see what the senate ultimately does and how the conference committee gets it worked out.

Fair enough.

Looking at the biodiesel market because there was an announcement I guess this week that you guys now are getting into that market specifically, can you talk about what your plans there are and how large that could be for you?

Here in the U.S.

Yes, well, this past week we announced a joint venture plant in Missouri.

We are looking at it as each state has interest in a renewable fuels program and creates the conditions necessary for a successful bio diesel operation.

We are looking at opportunities in a number of states.

But I think that I wouldn't expect the immediate rapid growth in that business, Christine, because with the exception of a couple of states now the conditions just are not right yet to promote a rapid growth of that business.

So there's no risk that, that market is going to explode like we saw in ethanol?

I don't see the conditions at present, although there are a number of organizations that are working on creating the opportunities and I think there's potential for significant bio diesel production in the U.S. but it's not going to happen this year.

And that should help absorb some of this soy oil here domestically I would assume.

Right?

Yes, yes.

I think that in Europe where we have a very successful bio diesel program we have seen that bio diesel operations have added substantial incremental growth to the margins in the crushing industry over there and I would expect we would see the same thing in the U.S. when we get a bio diesel program going here.

Can you talk briefly about that dynamic.

When demand for oil goes up wouldn't you have excess demand, or excess supplies that is of the meal and then wouldn't that work against your crushing margins?

I think when you look at the composition of crushing margins you have the raw material cost, of course, you have the two products that you are looking at, the meal and the oil.

In the meal markets particularly there's opportunity costs or opportunity pricing, however you look at it.

What we have seen in the soft seed business in Europe is, as the strong oil demand and strong oil prices have encouraged higher rates of crush meal prices have declined.

But the effect of that has been for them to buy their way into more formulations, as they become more price competitive with alternative feed ingredients.

So I would think you could see the same thing here in the U.S. on the soybean complex.

Fair enough.

And then just finally, I guess looking back at the ethanol business and even the cost competitiveness today, I'm wondering what happens if the corn crop is light and corn prices go up?

Would that force, in your opinion as structural change in the industry, given lower ethanol prices in the year ahead?

Basically ethanol production is profitable today.

But assuming higher corn, those economics really don't work.

What in your opinion would happen in that environment?

If corn prices go up?

Yes.

And ethanol prices don't go up?

Right.

The business would become less profitable.

You do have to, Christine, recognize the fact that--

Are you ready for the next question?

That it's a net corn cost going into the ethanol refinery.

All we are doing is taking the starch.

So usually when you have an increase in corn prices it may not correspond that you have the same kind of increase in net corn cost going into the ethanol.

So we do have room within the current projections based on by-product credits and all that for some increase in corn prices.

But the current outlook for corn across the world is very, very positive and there's going to be a lot of production and lot of availability and assuming that we continue to have reasonable weather, we will have good opportunities to have profits from the ethanol business.

Thank you.

The next question comes from the line of Ken Zaslow with Harris Nesbitt.

Please go ahead.

Good morning, guys.

Good morning, Ken.

Good morning, Ken.

I guess kind of the way I look at how this quarter has done and I'm kind of taking more of the approach how Lenny is looking at it.

Does this quarter imply anything for the next quarter in terms of, particularly in act services of food and feed ingredients?

Because those were the biggest surprises.

Does this imply anything for the next quarter or the next year?

I'm sorry, Ken.

I didn't quite get the question (ph).

Okay.

Let me give an example.

Food and feed ingredients.

The last six quarters it has been anywhere between 60 to $80 million.

That's a pretty stable business in terms of cocoa and the businesses within that business, but yet all of a sudden you have a $44 million profit.

Is that something-- what is inherently wrong with it or is there something that was just aberrational in this quarter and how do we look at it going forward?

Maybe I will do one division at a time.

I think what we saw in the -- well, wheat milling first of all in that category was very steady.

Cocoa operations were generated extremely good returns but the comps were difficult looking at the year ago.

So there was a slight decline in profitability in cocoa but still generated extremely good returns with which we're very pleased.

I think the disappointment in that category happened in, well, one was Enova, which was unexpected expense as we launched that product nationally.

There's significant marketing expenses, the start-up costs associated with that.

The other thing I think, that was difficult was in our health and nutrition products particularly vitamin E, as you recall or may recall during the quarter, there was adverse news regarding the benefits of using vitamin E. There were some studies out, which caused the retail sales of vitamin E to drop to precipitously.

And so, I think we are seeing in a vitamin E operation the effects of dealing with that inventory, values coming down, pricing coming down.

I think that we've seen that before in the vitamin E business there is somewhat demand or somewhat susceptible to publicity that the products gets.

You have alternative studies some what show us very beneficial, others which, question the benefits.

And I think, we will just have to see how that plays out.

But your best guess on how that plays out?

Well, I think, I don't know.

I can't predict all these articles will come out in vitamin E. But I think that the thing that I would say about vitamin E is that we had a shock to the system in our third quarter.

And now, we have observed that shock.

So even if demand doesn't improve immediately, I think we have absorbed the shock.

So you won't see that $30 million fall as you did year-over-year time issue any more?

I doubt it very much.

Okay.

That's the first part of that.

Then going into act services.

You know to me -- the thought is that there is plenty of soybeans, there is plenty of corn out there.

And even in the late part of the quarter you know (inaudible) finally releasing soybeans.

So I am surprised that you only had flat earnings here.

Is it a steady state in terms of the idea that we look it like that or can we get to the more -- higher levels of the 85 to $100 million?

I guess that's what I'm kind of getting it.

Because it seems to me the drop- off -- is it something about this quarter or this kind of how it is?

Well I think first of all let me say that we are very pleased with results this quarter.

I think it really demonstrated the position that we have in positioning our assets particularly in North America in the grains business and transportation assets, facilities, storage and so forth.

I think that when we have large crops like we had this past year or like we have projected for this coming year, our assets are very well placed to generate very good returns.

What we are looking at compared to the previous year and other quarters last year, as you recall we had very volatile markets and dislocations in markets, particularly in Eastern Europe and other places, which created some very unique merchandizing opportunities for us.

These come along occasionally and last year we were able to benefit from those substantially.

However when you have those sorts of circumstances, when you have shortages of crops, our physical assets don't perform quite as well.

But I think we've got a balance a very good balance in our businesses is that we have the international capability of taking advantage of merchandizing opportunities as they come along from time to time, and when we have more stable markets, large crops, we have the physical assets that can generate very good returns.

So I think we are very, very pleased with the results.

Okay, and then the lysine pricing.

I haven't seen it come back.

It still seems pretty weak, is that fair?

Yes.

It's weak and it has come back, Ken, but we are not happy with the price still.

Okay.

I guess that's kind of it.

I am just trying to think if there are any other questions.

No, that's it.

I appreciate it.

The next question comes from the line of John McMillin with Prudential Securities.

Please go ahead.

Hello again.

This will be easier.

I just didn't get all the numbers you gave to Christine in terms of Brian and I won't interrupt you this time.

The different markets, Philadelphia, Boston, and can you talk just about the potential for these markets to quickly open by October.

I mean, is it something that can be done relatively easy to the point where these numbers that you are giving us are probable consumption increase?

I would not make such statements that all of these markets are probable by October and frankly I don't have the information available to me at present to tell you what the timing in each of these instances is.

I would happy to repeat the numbers but I would have to get back on the timing because I don't have that with me.

There is a lot of incentives for blending if again as Christine said the numbers could change corn could go up, but if you did freeze things the way they are now, there is a lot of financial incentive for lenders in Philadelphia, Boston.

And I'll let you repeat it in a minute -- to change, did they have the infrastructure to change that.

This is where I need some help.

I mean can it be done relatively quickly?

All of these markets that I was talking about, I mean California is -- I was talking several hundreds of million gallons in California.

Of course California requires some change in the laws there to permit higher blending.

And I don't know when that will happen.

I mean it's being discussed at the present time.

It looks reasonably positive, but I can't put a timing on that.

But I think, going back, you are right.

I mean, gasoline, what gasoline prices are with spot prices if you roll at ethanol in the area of $1.20 and with the credit, tax credit prices are in the $0.70 range, if you look at that as current gasoline prices there is a tremendous economic opportunity there.

People are looking at taking advantage of it.

I can't give you the timeframe.

But I think, that people are moving very quickly towards that.

And as I said, I think the potential layers is more than the couple hundred million gallons that come into the market relatively quickly.

And just to repeat those areas, I think I got but Boston, Philadelphia, could you just give me again quickly?

What we are talking about is Atlanta, -- Atlanta is 250 million gallons;

New Jersey roughly 60 million gallons;

Boston 65 million gallons.

And there is bigger potential in these markets.

This is where we just it think might come on in the relatively near future.

Philadelphia 60 million gallons then of course, California if they get to the 10% blend, it's an additional 700 million gallons.

And basically the industry went up about 500 million gallons 3-2 to 3-7 as more iscoming on.But basically you don't need all of this to happen to kind of get the traditional pricing to gasoline to return?

No, that's correct.

I think one thing that has helped your turnaround in recent years even though this is a step back, has been a agricultural environment aided by some of your competitors like Cargill that certainly would be a more financially oriented and disciplined, you know that's happening today and your quote kind of suggests that the discipline has gone?

But I think basically the only undisciplined area and I know there's additional oilseed capacity, but the only real area that kind of seems out of control is ethanol, is that right?

I think that's fair generalization.

There has been a lot of capacity added in a couple of markets and that had a significant impact on this quarter's results which is why I mentioned it in my quote.

And that relates to lysine softness in lysine pricing coming primarily out of China.

It relates to the continued expansion of ethanol facilities although there is a new discipline being thought about in the ethanol business as well.

And then the addition of a couple of oilseed plants just means, we need to go through a small period of rationalization again.

But in China we have built capacity that really impacts the entire world need for oilseed processing and so because it's a very global market.

Some of these solid visions and capacities have had significant impacts on a couple of our markets.

But I believe that there is a very serious consideration of our returns on invested capital not only at this company but in the industries that were engaged in.

And over the next period of time we expect to see return to more substantial returns on invested capital in a number of areas that did not perform so well in this past quarter.

In this, Ithis lysine capacity that is coming out of China, -- obviously they have low labor rates.

But is that made with the petroleum feed stock?

No it's made with corn.

So they are making it the same way you are.

Yes, that's correct.

The Chinese marketplace has surplus corn and they are net exporters into the world market.

So they got relatively low cost corn there, and they can compete in the world marketplace.

And as long as the Renminbi continues to be tied to the US dollar and you know there is a lot of discussion about that currently as to whether the Chinese need to revalue their currency, it allows them to have an advantage not only in Europe but also in the United States with respect to the sale of lysine.

So some changes in that environment might affect this business positively going forward.

Great, thanks again.

You are welcome thanks, John.

The next question comes from the line of Ann Gurkin with Davenport.

Please go head.

Good morning.

Just wondering if there's any other discussion on Mexico.

I guess some bottlers have received a tax credit or relief on non sugar sweeteners there.

Any update as to that might do for HSCF?

I think that's correct, Ann.

We have had information that some of the bottlers in Mexico have received decisions that caused that soda tax to not be applicable and so there is some improvement in the utilization of fructose in the soft drink industry in Mexico.

The discussions about the WTO and the issue with respect to the tax and its impact on trade are still open; there is still discussion going on, and they remain unresolved.

But we continue to do whatever we can to try and improve that situation and we are somewhat optimistic that there might be a resolution before long.

We are expecting before the end of this summer to have some kind of a decision and in the meantime there is continued increase on the part of the sugar users there to utilize our product which of course is lower cost and more efficient and better for them to utilize.

Okay and then secondly, can you help me a little bit with, you have been talking about China, can talk about projector capacity utilization in China looking out a year for your plants?

Well we have built a lot of capacity there and in anticipation of future needs, we're running at about 65% now.

We have been substantially lower than that, sometimes in the past and we continue to see rationalization as well as good growth.

That past year was impacted by the Avon influenza and so we have a little less demand for meal, but there is a solid growing demand for protein in China and also for vegetable oils.

And so we are hoping to have better utilization of our capacity going forward.

We have a well-located plants and China has become a substantial net importer of oil seeds in order to meet their protein demands from maybe 4 million tons in 1999 to some more than 20 million tons last year.

And we expect an improvement again this year and better utilization going forward.

All right, thanks very much.

You are welcome.

[Operator Instructions]

Okay, if there are no other questions, thank you very much for joining us.

We look forward to a solid year for ADM, despite this weakness in this particular quarter and we thank you for your interest.

Ladies and gentlemen, thank you for joining today's conference.

This concludes your presentation.

You may now disconnect.

Good day.