Archer-Daniels-Midland Co (ADM) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the first quarter 2006 Archer Daniels Midland Company conference call.

My name is Jackie, and I will be your call coordinator for today.

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

We will be facilitating a question-and-answer session towards the end of today's conference. [OPERATOR INSTRUCTIONS].

I would now like to turn the presentation over to your host for today's conference, Mr. Allen Andreas, Chairman and Chief Executive.

You may go ahead, sir.

Thank you, Jackie.

Good morning, everyone, and welcome to ADM's first quarterly conference call with respect to the earnings release for September 30th.

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

And I think you all have seen the news this morning about our earnings, and so with that I will turn over the discussion to Doug and if you would please take us through the numbers, and then Brian will give us an update on the different operating divisions, and then we'll be happy to take any questions you might have.

Doug?

Okay, thanks, Allen.

As you know some of today's comments do reflect management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results.

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

As reported, our net earnings for the quarter ended September 30, 2005 were 186,388,000 or $0.29 a share.

That compared to net earnings last year of 266,297,000 or $0.41 a share.

This year's quarter includes the noncash aftertax charge of $19 million equal to $0.03 a share, as a result of the Company's adoption of FAS 123R requiring the acceleration of share-based compensation expense into this quarter related to grants issued to retirement eligible employees pursuant to the Company's incentive compensation plan.

In addition, declining commodity prices on LIFO inventory valuations resulted in aftertax income of $5 million or $0.01 a share in the current year's first quarter, and that compared to aftertax income of 72 million or $0.11 a share in last year's first quarter.

I'll now take some time and just discuss the changes quarter-over-quarter and some of our line items of our consolidated statements of earnings, and we'll discuss the changes in our segment operating results a little later.

Fiscal 2006 first quarter net sales and other operating income declined 4% to 8.6 billion primarily due to lower commodity values in this quarter.

Our gross profits decreased 81 million or 12% to 583 million for the quarter due primarily to the impact of commodity price level changes on LIFO inventory valuations, increased energy-related costs and the negative impact of the hurricanes on our North American commodity origination and export operations.

Although commodity prices declined in both the current and prior year's first quarters, the impact on the current year was LIFO income of 9 million compared to LIFO income last year in the first quarter of 116 million or a reduction of 107 million affecting our gross profit.

These negative factors were partially offset by improved operating profits of oilseed processing and our corn processing operations.

Companywide selling, general and administrative expenses increased $53 million to 304 million for the quarter due primarily to the increased employee wages and benefits including the $31 million charge from acceleration of share-based compensation upon the adoption of FAS 123R.

Both interest expense and interest income increased approximately 7 million resulting in net interest expense of approximately equal to last year's quarter.

Interest expense for the quarter was up slightly compared to the fourth quarter ended June 30, 2005, that was due to increased interest rates and also additional long-term debt issued during the quarter.

Gains from the sales of our marketable securities were $5 million for the quarter.

Equity and earnings of unconsolidated affiliates for the quarter increased to 36 million from 21 million last year primarily due to improved earnings of the Asia oilseed affiliates.

Our effective tax rate for the first quarter of fiscal '06 was 32% compared to 31% last year.

The increase reflects the projected reduction in ETI benefits pursuant to the American Jobs Creation Act of 2004.

Our total segment operating profit for the quarter increased $12 million to 351 million from 339 million last year.

I'll now turn the discussion over to Brian Peterson, who will review the business fundamentals of our agricultural operating segments.

Brian?

Thank you, Doug.

And good morning.

In Oilseed Processing the operating profit for the first quarter 2006 was 99 million versus 91 million for the first quarter 2005.

We showed improvements in oilseed processing in Europe, Asia, and South America.

Our North American operations declined due to the short-term impact on our business from Hurricane Katrina.

The recently harvested soybean crop was the second largest in U.S. history.

Crop projections in South America based on planting intentions also point to an adequate soybean crop.

We are very optimistic that we will have an ample supply of soybeans for our global operations as we move forward through this fiscal year.

Regionally we see the following: North America's operations declined due to lower crush margins, higher energy costs and market disruptions from Hurricane Katrina.

Industry capacity utilization was around 85% for the quarter, and we see good -- continued good demand from meal and oil.

Spot crush margins show an improvement versus last year's quarter, and these higher margins are needed to compensate for today's higher energy costs.

South America's operations improved in grain origination, transportation, and soybean processing, but declined in fertilizer.

We continue to see challenges in soybean processing in South America.

Industry capacity utilization was in the mid-70s in Brazil for the quarter, but may continue to fall as processing margins remain weak.

The announced planting intentions in South America are similar to last year, and government estimates are for a 60-million ton crop in Brazil, a 40-million ton crop in Argentina.

Our grain origination system is well-positioned to handle this crop and to supply our processing needs in China and in Europe.

European processing operations improved and capacity utilization is high at over 90%.

Meal and oil demand in Europe are strong, and we see growing profits from our biodiesel operations.

Asia operations improved from the weak results last year, but processing margins are still unsatisfactory.

Capacity utilization in our joint-venture plant in China improved to more than 65% from about 60% we saw last quarter.

We read of several regional competitors experiencing very difficult financial conditions, and we believe rationalization will come to this market soon.

We are well-positioned for the long-term growth of the oilseed business in China, but expect challenges here over the short-term.

Turning to the Corn Processing segment, profits in this segment were 136 million versus a year-ago period of 103 million.

In the Sweeteners and Starch segment of corn processing, profits were 92 million versus 55 million, and in bioproducts profits for the first quarter '06 were 44 million versus 48 million in 2005 first quarter.

The USDA estimates the current corn crop to be 10.86 billion bushels.

This U.S. corn crop is the second largest ever and assures ample supply for the industry needs.

In Sweeteners and Starches, profits improved as lower net corn costs more than offset higher energy costs.

Industry sweetener capacity utilization has also improved.

Starch profits were up on lower net corn costs and improved pricing.

We are seeing continued solid demand across a wide range of products coming from our wet milling plants and recently announced price increases for our sweetener, starch, and modified starch product lines effective January 1, 2006.

Bioproducts profits declined by $4 million due mainly to lysine -- excuse me, lower lysine selling prices, higher energy costs and poor operating results with the citric acid operations.

These factors were partially offset by the impact of lower net corn costs and increased ethanol volumes.

In ethanol, profits were up versus last year on increased volumes and lower net corn costs.

The demand and supply of ethanol continues to grow in light of the favorable economics for both producers and buyers.

Ample supplies of corn give the producer an excellent cost basis, and demand for ethanol remains strong.

A number of East Coast refiners are pulling MTBE out of their formulations and replacing it with ethanol.

Specialty feed ingredient profits were down primarily due to lower lysine prices.

The price of lysine remains low but we are seeing very strong demand and high inclusion rates and we are optimistic about the situation improving.

Recently we permanently closed our citric acid plant in Ringaskiddy, Ireland due to unfavorable economics.

Our bioproducts group continues to investigate opportunities to use our fermentation expertise to expand the value of our corn wet milling operations by making renewable starch-derived products to replace petroleum-based products.

Our joint development project with Metabolix to produce a biodegradable plastic is progressing well.

Bottom line, we believe we are in a period of strong demand for products made from our corn wet milling and starch stream supportive in part by high petroleum prices.

We expect this strong demand will lead to improved demands from our corn processing operations.

In Agricultural Services profits for the first quarter 2006 were $20 million versus 51 million in the year-ago period.

Results declined from last year due to the negative impact of the hurricanes on North American origination and export operations, and the decline in the global merchandising results.

These declines are partially offset by improved operating results of river transportation operations from improved barge rates due to the tight capacity situation resulting from the disruptions caused by the hurricanes.

The second largest U.S. corn and soybean crop on record means our storage income should be strong over the coming quarters.

The barge shipping business should also enjoy strong demand.

The availability of all forms of transportation continues to be a major challenge.

ADM's network -- ADM's transportation network becomes more valuable in these times as we have the ability to generate good returns from our transportation asset base, while we at the same time improve our value to our customers.

In the "other" segment profits were 95 million in the first quarter 2006 versus 93 million in the year-ago period.

Food and feed ingredients of this segment were 69 million versus 89 million in the year-ago period.

And the financial was 26 million versus 4 million in the year-ago period.

Doug may have further comments on the financial part, but I'll now talk about the food and feed ingredients part of the "other" category.

Results -- or food and feed ingredients results declined with lower results in natural health and nutrition, as well as weaker comparisons with last year's very strong results in wheat and cocoa.

Natural health and nutrition declined primarily from weaker results in Vitamin E due to lower volumes and reduced selling prices.

Sterols and isoflavones also reported lower earnings.

In their wheat milling group, wheat declined from last year due to reduced processing margins in both the U.S. and the U.K.

Capacity utilization for the quarter was in the high 80s compared to 90% last year.

We are now entering the peak flour demand season, and capacity utilization today is over 95%.

Cocoa operations were down from last year's strong results.

Processing margins, however are solid, and we have very good balance in both our butter and powder demand with current production levels.

Our customers continue to request quotes for high-quality finished and semi-finished chocolate products, and we believe we will have opportunities to build our chocolate business as our customer base continues their move of outsourcing manufacturing while they focus on packaging and marketing.

I would like to make just a few comments about the impact of higher energy prices on ADM.

As we look forward, we know the high -- we know the ag processing industry, like many others, will be challenged by higher energy costs.

We feel that the ADM model utilizing large coal powered processing complexes gives us a strong, competitive position.

Additionally, high energy prices offer us the opportunity to replace petroleum-based products with renewable crop-based materials.

The ethanol business is strong and growing in North America and is enhancing the value of the farmer's corn crop.

Our biodiesel business is growing in Europe, and we are starting to build a biodiesel business in the U.S. and also in Singapore.

Biodiesel adds value to the world's vegetable oil crops and offers attractive economics at today's high petroleum prices.

We know that energy costs for production and transportation are going up and that processing margins must reflect these higher expenses.

However, our model differentiates us in the industry and our bottom line should benefit from decisions taken years ago to power large ADM plants with coal.

Additionally, ADM's investments and the manufacture of renewable fuels gives us an additional benefit compared to others in ag processing as we have the best opportunities to participate in energy markets with ethanol and biodiesel.

The market fundamentals of our major business segments are strong, and we are confident in our ability to deliver value for our shareholders despite rising energy costs.

With these comments I'll now turn it back to Doug.

Thanks, Brian.

As Brian mentioned, the operating profits of our financial operations increased to 26 million from 4 million for the quarter, as all of our financial operations improved over prior year levels.

Much of that increase or the largest component of the increase was due to the improved results of our captive insurance operations.

Corporate reflected expense of 77 million compared to income of 47 million in the first quarter of 2005.

That was due principally to the 107 million year-over-year impact of commodity price level changes on LIFO inventory valuations.

In addition, the other unallocated corporate expense increased 17 million due to the impact of the acceleration of the share-based compensation upon the adoption of FAS 123R.

I'd now like to take some time and discuss the more significant factors affecting our financial condition and our cash flows.

During the quarter working capital increased 618 million to 5.6 billion at September 30th.

This increase reflects cash received upon the issuance in September of a 600 million 30-year bond carrying a coupon rate of 5 and 3/8% The positive cash flow from operations was adequate to fund capital expenditures, acquisitions, cash dividends as well as long-term debt repayments.

Our total interest-bearing debt short- and long-term as a percentage of invested capital was 32% at September 30th compared to 30% at June of this past year.

The increase reflects the additional long-term debt issued during the quarter.

The Company's liquidity continues to improve as net debt equaled to our total short- and long-term debt less unrestricted cash decreased to 3.6 billion from 3.7 billion at June 30th.

In addition, our working capital includes readily marketable inventory, which has a carrying value at September 30 of approximately 2.6 billion.

Our cash flows from operations for the quarter ended September 30th equal to our net earnings of 186 million, plus depreciation and amortization of 164 million was 350 million.

This cash flow was used principally for capital expenditures of 157 million, acquisitions of 57 million, dividends of 55 million, and to reduce debt levels.

With that Jackie that concludes my remarks, and we'll now open it up to questions.

[OPERATOR INSTRUCTIONS].

And our first question comes from John McMillin from Prudential Equity Group.

You may go ahead, sir.

Good morning, everybody.

Good morning, John.

Doug this 19 million, and I'm not an expert at FAS 123R, but it looks like this is a one-time --.

Well, John what it is, is when 123 came out there's some ambiguities in that thing that says that if you have people that are eligible for retirement and your plans call for vesting upon retirement, then you have to accelerate that into the time period when the stock is issued.

Before it would have been vested over a three-year period and expensed over a three-year period.

So really what we've done is we've pulled some expense that would have gone forward over the next three years back into this quarter.

So in effect it really reduces expense going forward by an equivalent amount.

Yes, so there won't be a $0.03 hit next quarter --?

No, there will not.

It will really kind of hit every first quarter in our business, because that's the time period in which we normally have that, if we do have it and it's achieved.

Now, I don't mean to talk about retirement vesting out, but there was a significant announcement a month ago regarding your long-term intentions.

Are you committed to hiring somebody from the outside as your President and CEO apparent, and just what kind of timetable could investors look for here?

The answer is no, were not committed to hiring from the outside, John.

I raised this issue several years ago in our annual meeting, and what we would really like to do here at ADM is to continue a strong direction of dealing with the issues of succession.

I'm 62 years old, and the Board, I think, is very concerned that we have in place a continuous system of executive management here that can transition to the new Board over the period of the next several years and to put the Company in good hands.

Now, a lot of companies don't deal with the issues of succession until they've got some kind of a crisis on their hands, and our Board has been very, very up-front with their discussions that they want to have a clean transition and a good transition and put capable management in charge of the Company.

So they have now formed a search committee and have engaged an outside advisor to look both inside and outside the Company at our executive management and to give us some guidance with respect to the selection of a new president and CEO.

And when that process was initiated, our current president and CEO decided that he would take leave for his own personal reasons and then invested those particular functions in my office.

But we've got a very solid group of executives here at ADM, presidents at each of our divisions.

We have got a good executive team and a strong executive group that I have put in an advisory capacity in a board level with an executive board this past year.

And we're looking forward to selecting a new person, possibly in the next six months, if that's achievable, to assume these responsibilities, but not over a long time frame.

And we're looking forward to transitioning.

I will then move to an executive chair role, and we'll continue to do the same things around here that we've done, and that is to focus our executive talent on building shareholder value.

And just to get the fundamentals again, if the hurricane hurt you in this September quarter, could an argument be made that it might help you in the December quarter, as corn prices have come down and to some extent soybean board margins have benefited?

I think that's a reasonable assumption to make, John.

We had a lot of disruption in our businesses this past quarter, and probably more disruption than we actually had economic consequences, because we do have some insurance coverage.

We've got -- as you noted, some little less expensive raw materials at some of our interior organizations.

And we had very, very high barge rates as a result of the tightness on the river because of the disruptions in the whole system.

The complexes is almost completely back up to operating order.

We've ended up with a lot more inventories in the interior, which should be positive for our Agricultural Services group going forward, and there's good reason to believe that there will be the opportunities for us to deliver some strong results in the coming quarters.

And just my final question.

I know you're reluctant to get into hedges, just given the nature of your business.

But given the fact that oil prices have gone up so much after your last ethanol hedges, have you gone beyond March of '06 with a significant amount of your ethanol in efforts to kind of lock in what were and what still are high energy prices?

And to the extent you can talk about some other hedges like you might have for natural gas and some other things?

You want to talk about that?

We do have some natural gas hedges, and we've got some sales forward on the ethanol complex, but not a great deal after March of next year.

The oil companies, of course, are conscious also of their position in this industry.

And gasoline prices remain fairly strong, particularly in relationship to the low corn prices that we're currently incurring at our manufacturing operations.

We've got the opportunities there for some good results going forward.

And the hedging on the natural gas runs out for several more months.

And so that will give us some protection.

But long-term it's clear that if we're going to have these kinds of high energy costs, particularly in the natural gas area, that we're going to need some -- or better operating margins to be able to achieve the same kind of results on the bottom line.

I don't think that we are particularly disadvantaged in any of our businesses and to the contrary enjoy a fairly attractive competitive position because of our coal-fired co-generation plants.

But I think overall your assumption is clearly correct and that is that we will be having some benefits going forward from the disruptions that occurred in this past quarter as a result of the hurricanes and the weather conditions.

Great.

Thanks a lot.

And your next question comes from David Trinkle [sic] from Citigroup Investment.

You may go ahead, sir.

Well, that's a new way to pronounce it. [Laughter].

Good morning, everyone.

Good morning.

How are you today?

Allen, I want to follow-up on John's question regarding the management changeovers.

I always thought quite highly of Paul, and I was a little bit startled by the rather abrupt nature of his departure.

I've had a lot of client questions about this, and so I just wanted to do it on the call here today.

Can you talk to us about, was there a disagreement in fundamental direction of Archer Daniels between Paul and yourself?

David, that's not the case at all.

Paul, as you undoubtedly know, came to work for Archer Daniels Midland in Europe back in the early '90s, so he's been with us for 15 years.

He's got a long experience in this industry, more than 30 years in this industry with a variety of different competitors of ours.

And he and I had an excellent relationship in Europe, and we worked hard to build our global operations, particularly in the European theater, but all across the rest of the world outside of the United States while we were there for almost five years.

When I came back to the United States, I felt his contribution in the international area would be invaluable to us here at corporate headquarters, and so we brought him back to the United States, and he was my choice to be president and chief operating officer.

I think that we lived through some very difficult times together, Paul and I. As you know, we had a variety of complexities coming out of the problems of NAFTA in the middle '90s and the problems of the washout in the Asia-Pacific region during that time, and then the legal difficulties that we encountered.

And he and I worked very well together through all of this period of time.

When we got here to this last December of 2004 and settled up all of our obligations and got on with a new chapter, then the Board of Directors really became more focused on the succession issues, and that's why I've spoken to them at several of our meetings in the past.

And I think when the decision was made by our Board to go to an outside committee to review all of the options that everyone might have available to them in the marketplace both internally and externally, Paul just chose to take leave for his own reasons.

I think he was an excellent manager while he was here.

He and I worked very closely together, and we built this Company today into what I'm very, very proud of.

And I greatly appreciated his contribution over the period of time, and we're very sorry to see him leave.

But we do have a strong group of management people here, and he's available to us if we need any advice and counsel from him.

So it was not a result of disagreements between he and I about the direction of the Company.

We're focused on the impact of energy on our businesses and on building the core businesses we have on a global scale.

And we both share that same view and objective and I'm sure he wished -- as he said in his public announcement, he wished us very, very well on his exit.

Great and I appreciate that.

Moving on to the corn processing business, it seems to me that the -- would you guys agree that the 2000 -- or really fiscal '06 and even fiscal '07 will be driven by corn processing results in terms of the bottom line at Archer Daniels?

That appears to me where there is just an exceptional opportunity for the Company.

I think David we couldn't disagreement with that view.

We're still very optimistic about what we see globally in the oilseed business and, particularly, in the Asia-Pacific region and the impact of some of those situations.

We also have currently some very solid results as a result of the development of the biodiesel industry in Europe in our oilseed sector, and there certainly are other elements of our business that are very strong.

Our cocoa businesses are strong.

Our wheat flour milling continues to deliver solid results on our invested capital.

So I wouldn't like to exclusively say that corn is the future for the Company.

But it is certainly the case that with the higher energy prices and all of the new technological developments that have come along both in energy and in the fermentation area generally that we have got great opportunities in the corn division, and I see them providing a real leadership role in contribution to the bottom line of this Company.

If you look currently at our CapEx programs going forward, and where our capital is likely to be expended, it's a strong indication that we see great opportunities to deliver returns to our shareholders from the corn complex and from the starch part of that model

Specifically on the ethanol business, you went into a contracting period, and I think on the last conference call you had indicated that you had signed a substantial portion of your ethanol contracts for the October period.

I assumed at the time that that meant 100%, but I perhaps think that I was maybe a little aggressive with that assumption.

Did you, in fact, have -- can you give me any sense here as to what types of contracts were signed basically after hurricane Katrina, meaning to say, that the implication would be that you got a marketably higher price on your ethanol that would begin in the period from October and through that six-month period?

Let me comment on that first, if either one of you has a comment you would like to make.

We have a substantial portion of our sales booked out, so 100% is not accurate, but it is in the very, very high -- it's very close to a 100% of our total production.

It would be in the 90s of what we have sold out forward to March of next year.

Those prices are solid in relationship to what we've had in the past, but they're not the kind of spot prices you see every day in the marketplace.

If you go out past the March period, we've got about half of our production sold forward from there, and in a very limited time frame.

So we're going out not more than another three or four months from there, six months are the normal contracting periods and we've got just staggered out close to 50% of our ethanol sold.

We've got very nice prices on that portion, but they also do not reflect the same kind of spot prices you see from day to day in the marketplace.

So we've got a good book of business.

We're running the corn very, very efficiently through our plants.

Our yields are very good.

Our production is good.

And so the opportunities for us to make some solid results from that division are very positive going forward.

Brian, do you want to comment also on --?

Well, only that we continue to see strong interest from energy companies in ethanol.

MTBE continues to be phased out of production, and ethanol is a very viable replacement for MTBE.

Obviously for environmental reasons, but also for economic reasons.

So we continue to see strong interest going forward in ethanol from our major customers.

So as Allen had indicated, we do have a substantial book on for the October-March period.

We have more open capacity for the April-September period going forward.

So we are hopeful that we as time goes on will be able to take advantage of these higher prices.

Then my final question for you, Allen, is we've had some major developments going on in the high fructose corn syrup world.

It appears that we have a stronger environment for pricing going into next year, and you alluded to that or at least one of the gang did in their prepared comments.

Could you give us though your take on this?

And your perspective going back many years I think is valuable in just putting it in context versus the last almost decade of difficulties that high fructose has been in.

So how do you see this environment right now going forward into the all-important January contracting period?

And what's really your confidence level that you can, in fact, get those price increases through?

Because we've heard these stories before, and I'm just curious to hear what your confidence is this go-around.

Yes, David, I think we fully appreciate that this particular period is different from what we've faced in the past.

We've announced very substantial increases in high fructose prices and we do have a very solid demand for all the products that are coming from starch.

We've worked over the past several years to develop a broader and broader base of starch products that could be utilizing the starch stream because of the extremely competitive high fructose corn syrup markets.

But this year I think we've finally reached a point at which there clearly will be some serious consideration about higher prices than what we've seen in the past.

Not only are our energy costs up, but we have less availability of materials to go around to our customers.

And so it's clearly going to be a time of compression, and there will have to be higher prices to recognize not only our increased cost, but a much tighter supply and demand situation.

As you know, some concessions were made as a result of hurricane Katrina to Mexico, and we'll have 250,000 tons of materials available for that market.

And so that has created a tighter situation across the U.S. production model.

And there have been a couple of reductions in capacity with the closing of a couple of plants in this industry who are really not achieving the kinds of results on their invested capital that they thought was appropriate, and so the situation is becoming quite different from what it was before.

So I'm very optimistic.

We've announced price increases.

I'm very optimistic that we will have a stronger reason for increased prices this year with our customers, and I think they need to recognize that the cost of energy on our businesses has had -- has created a very, very difficult circumstance for us to be able to match the same kind of price level that we did in the previous years.

Well, we certainly all wish you the best in those negotiations.

From here I'll pass it on.

Thank you everyone.

Thanks, David.

And your next question comes from David Nelson from Credit Suisse.

You may go ahead.

Good morning.

Good morning, David.

With as much quantification as possible, could you explain the attraction to investing in biodiesel?

With ethanol the incentives are pretty straightforward with the excise tax exemption.

And could you distinguish between the incentive structures in the U.S. versus Europe?

Let me just say -- make a few comments, and then Brian if you would like to talk.

There's quite a difference between here and Europe, and that's the reason for biodiesel being of such great interest in Europe and ethanol being of such great interest in the United States.

As you know, in the United States ethanol comes from the starch and from the grain business, and that's what we are very efficient producers of here.

And it's the area of agriculture that has the most interest to all portions of the ag community and including the political base.

So there was initially in order to reduce our dependence on OPEC oil back in 1978, President Carter was very responsive to the agricultural interests.

And so ethanol became a commodity in the United States.

Over in Europe you've got a substantial portion, more than 50% of your automobiles, that are diesel-based, and so diesel fuel is a little different option when it comes to blending with cleaner, renewable resources.

And so the emphasis there with rapeseed being the primary crop in Europe was on the possibilities for biodiesel as opposed to ethanol.

There is some production of ethanol in Europe going into the ETBE Business in France where the cereal grains are grown, but the real emphasis is on rapeseed and on biodiesel.

This past energy bill in the United States gave us an incentive in the United States to begin to look at biodiesel of $1 a gallon.

And so we put together an incentive based model for the construction of a plant in Missouri together with the farm co-ops, and we will be minority participants in that.

But that is a step forward in biodiesel for the U.S.

And then just strictly as a result of high diesel prices and a shortage of diesel capacity, the markets have become very tight.

And so we've been urged by those companies who are operating in that business to give serious consideration to complementing their ability to produce diesel fuels for the markets.

Not only because of their renewable nature and their clean air impact, but in addition to that because of the need for volumes in the diesel area.

The same shortages because of a lack of building of new capacity in Europe have materialized, and so there's a lot of reason from an economic viewpoint why people are considering diesel and biodiesel as an alternative to the straight diesel petroleum-based fuels.

In Europe, if a fuel, diesel fuel, is sold that is derived from mineral oil, which is petroleum-based, it has a certain tax status, and that tax status is not applicable to biodiesel that is produced from renewable resources and from ag resources.

So as a result there's a substantial financial incentive in addition to the ordinary situation in Europe.

Brian, do you want to add to that?

Well, I think that pretty much covers it.

Let me just go on to say just that in Europe the EU has set as an objective for the -- I believe it's by 2010 -- to have 5.75% of transportation fuels supplied by biofuel sources.

And so they have -- the various companies have instituted various incentives with varying degrees of effectiveness in promoting the use of biofuels.

Germany has been probably -- Germany and France have been the most aggressive companies -- or countries there in trying to meet this EU objective.

And, of course, our capacity is all located in Germany where we're able to get integrate them or our new biodiesel capacity we're able to integrate it into our crushing and refining assets there.

But Germany has the biggest incentive right now, that is with no taxation on fuels, on biofuels.

So they escaped the tax totally in Germany at the present time.

Other countries in Europe have various other tax regimes providing varying degrees of incentives.

Also, David, as you know, we've announced the construction of several new plants.

Two now in the United States, an additional one in Europe, expansions in Europe, and one in Singapore.

And so as a result we really will be adding some additional capital to this industry, and we're quite confident that it has a very excellent future ahead of it.

Okay.

Thank you.

If I could just add one other.

On the -- I think the phrase may have been in China the utilization had improved from 60 to 65%, and that you expect improvement or rationalization there.

I thought I heard the words "very soon."

What do you see triggering improvement there very soon?

We'll what -- as we've -- I think we've been talking now for a long time is that there's a lot of redundant capacity and inefficient capacity in China.

And I think that the ongoing poor economics there will just hasten the redundancy or the elimination of this redundant capacity.

We're --.

Well, what's changed recently?

Just a gradual, if you will, erosion of the capital base of these inefficient companies.

We've actually seen several companies looking at bankruptcy and considering the possibility of selling their facilities.

I think really, David, this just reflects what we have said all the way along.

When we entered into our discussions with the Chinese government with the Costco group and with our partners Wilmar early in -- or in the middle '90s, we knew we would be constructing and we decided intentionally to construct facilities that were in excess of what the capacity would be needed there given the existing balance between supply and demand.

We added very large plants, particularly, in the port so that they would be in a position to import into that market, because we knew that their ability to grow soybeans and create their own protein in China was not going to meet the demands as the people moved from the rural areas into the cites on the coast.

And so we built those plants in anticipation of markets that were really not there at the time.

So it takes some time for that process to unfold, and usually when you have that kind of excess capacity available, everyone operates at less-than-full levels.

And we've been operating as you know at -- sometimes lower levels, but more recently at 60 and now at 65% of capacity.

And as these smaller less efficient interior plants close, over time there will clearly be an increase in our ability to be able to maximize utilization of our factories.

And when we get up into the higher areas we expect our returns on invested capital to begin to show vast improvements.

Not only will our costs come down, but our volumes will go up.

And so we'll have much, much better opportunities to earn profits there.

And this is just part of our calculated endeavor.

It takes some time to move into a market of that size with the kind of capacity we added.

We've put on the ground there now more than a billion dollars worth of factories and that's a substantial addition to their capacity and we look forward to very good times from that market.

Okay.

Thank you.

You're welcome.

And your next question comes from Ken Zola [sic] from Harris Nesbitt.

You can go ahead.

Good morning, everybody. [Laughter].

Good morning, Ken.

Good morning.

Can you quantify or give us an order of magnitude of what the hurricane did for the earnings this quarter?

Just order of magnitude.

I know you did it for Asia, what is it? three or four quarters ago.

That would be helpful.

Yes, I think from just a strictly financial bottom line impact it was pretty nonsignificant to our operations.

There was some disruption.

We did incur some costs, but really we're not going to say that it had a significant financial impact on the bottom line, because we had a lot of it covered by insurance.

We do have some large business interruption-type claims, and so forth, but we think our coverage is fairly adequate there.

And the ag services group, of course, you could say you've got a drop there from 50 to 20, and yes, there was some impact there.

But exactly how much of it is that versus other factors, it's very difficult to really -- to quantify that.

I think, Ken, the point of my comment on the earnings release was that it caused a lot of disruptions, and it's going to be a period of time before we see the net bottom line financial results of all those disruptions.

But particular losses, we had less than 10 million really physical damage to our businesses there, and we did have business interruption coverage.

And so as a result as Doug pointed out the bottom line implications for most of the divisions was relatively neutral with the exception of agricultural services.

And then as a result of the tightening of the river and the increased inventories coming from a very, very substantial crop, both corn and pretty solid oilseed crop across this region, the dynamics of our business going forward look quite different from what they would have without the hurricanes.

The financial implications are more likely to be coming in the future as opposed to in the past.

And there's no reason for me to adjust ag services going forward based on hurricane, that's all past?

Is that a fair way of looking at that, or is it still disruptions on the river or anything still disrupting the ag services?

I think ag services is pretty much up and running now 85, 90% of maybe where they were before.

What's happened now, of course, is you've gotten large backups into the interior, so we have got lots of crops sitting around.

That's going to benefit us from a storage income and drying, and so forth.

So from that standpoint we have larger crops in our elevators, and that will be positive.

And one other implication, I think, Ken, is that we moved in anticipation of the hurricane coming, because we had several days notice before then or a weeks notice before then.

We moved about 70% of our barge fleet up the river, but we did have almost 30% still in the New Orleans area.

And many of those barges had their covers blown off and had disruption and problems.

And so as a result those barges are still kind of out of capacity as we go through those inventories and clean them out, and some of them had a lot of water in them and so the grain had some deterioration of quality.

And so that whole -- the impact of all of that was to tighten the river up, and we still have very substantially higher river rates than we had before.

So to the extent that our operations are back into running fairly capably and are operating, we're getting better revenues.

And so all that tight situation is not finished yesterday.

It's still a problem for the railroads as well.

And so all the way around there's a very tight transportation factor involved that is involved in our businesses right now currently.

The next question I have is on the North American soy crush margins, I know there's been an intense focus on your corn business, and in your commentary you did say that this quarter was a little light on the margin side.

But is that really indicative of what's going to be happening over the next, call it, two quarters or so?

Because capacity utilization rates seem like they're increasing pretty significantly and then crushing margins seem to have very easy comps going into this year and things look pretty positive.

Is that not a good way of looking at it?

I think that is a good way of looking at it, Ken.

The margins -- of course, the margins have to be higher this year, of course, to cover the increases in energy costs.

But I think that's providing a strong impetus to the industry to achieve higher margins.

You've noticed Board margins have gone up.

We need higher Board margins to help cover the increase in energy costs.

But no, I think your basic assessment is correct.

We're seeing strong demand for the products.

We're seeing renewed interest in the oil, in soybean oil and other vegetable oils as energy sources.

This is help tightening the oil markets, improving the return to the crushing margins in the oil segment, and of course, it's been pointed out we have ample crops this year.

So I think your assessment is basically correct.

So we shouldn't just focus on the corn business there is another business that's working pretty well going forward?

Well, I think in my comments I tried to state that our -- that the business fundamentals of our major business segments are really quite strong, and our major business segments, of course, are corn and the oilseed processing business.

Great.

Thank you very much.

You're welcome.

And I do apologize for the mispronunciation of your name.

And your next question comes from Eric Katzman from Deutsche Bank.

You may go ahead.

Good morning, everybody.

Good morning, Eric.

A lot of questions have been asked and answered, but I am hearing that lysine pricing has kind of bottomed out and starting -- it sounds like it's starting to move up.

I think you kind of made comment to that effect; is that true?

And I think in the past you've kind of given absolute numbers on pricing.

Can you share that with us this time?

Ken the -- or Eric, excuse me, the pricing for lysine remains in the $0.70, low $0.70 area.

Our assessment is that the market has bottomed and has turned.

But I can't say that we've seen much a recovery in the prices yet.

We are seeing with these prices and I think you understand the economics of what drives lysine demand.

It's very favorable right now, so inclusion rates are high.

There's a strong incentive for people to use the maximum amount of lysine.

And so I think we'll see the demand base grow at an accelerated rate.

It will take a while, I think as we've indicated, because we have had excess capacity in this industry.

It will take a while for the demand to catch up with this capacity, but we see an improving situation going forward.

Okay, and then kind of following up on Ken's question about the soybean crush margin, it seems like the market is crushing quite a bit to capture higher oil prices, and that's not necessarily a good thing, given that meal is the bulk of the by-product.

Maybe you can make some comments on that, because it does worry me a bit?

Well, I mean that is an issue.

If we start crushing for oil, and oil demand exceeds meal demand that will put some pressure on meal prices.

However, we do see very good meal demand right now.

We've got for the export market served by the United States right now, demand is good, and so we see for the near-term anyway good demand for meal.

Okay.

And then --

Eric could I just add on that because the shadow price is really what you're kind of concerned about there.

And I wonder with the increase in production of ethanol and that -- we've got probably a little over 4 billion gallons of capacity in place now.

By the end of next year, it's going to be more than five, and by the year after it's going to be more than six.

So we've got a lot of ethanol capacity coming onstream, almost all of it from dry corn milling expansions, and as a result you've got a lot more distiller's grains in the marketplace.

And I think the existence of more distiller's grains is what's really driving the strength in lysine.

Because we do have surplus capacity.

And the prices have not yet demonstrated any shortage of capacity.

But they do -- the volumes are increasing all the time, and so as a result even with meal prices perhaps under some pressure as a result of the increased interest in oil, we still expect to have solid margins in oilseed processing and to improve the operating ability and profitability of our lysine division going forward.

So on both fronts I think the fact that we're increasing our ethanol capacity all the time during this period is going to drive some additional opportunities for us in both of those areas.

Okay.

And that's a good follow-up.

You've talked publicly about a -- kind of expanding CapEx in ethanol and maybe later on in biodegradable plastics.

Can you kind of update us from the 650 number, give us some guide over the next few years as to kind of how, at least initially, you think that that ramp-up is going to occur?

I don't think we can be really specific at this point in time because of the uncertainty of the biodegradable plastics expenditure.

But we've committed to build substantial additional ethanol capacity on the dry side, and that's an announcement of a 500 million gallon addition of two dry corn mills at our wet corn mill locations.

And you're talking there always about some number around $1.50 to $1.60 a gallon.

And so depending on how we work these out and how we integrate them into our businesses we're probably going to have expenditures of maybe 800 or 850 million there.

We've got a number of these expansions in biodiesel.

That's going to add a couple of hundred million to that number over the next two years.

And I think all of these projects are maybe six months away from all the appropriate approvals and licenses and permits, and then about an 18-month construction period as just a general rule.

So we're looking out over the next couple of years, and I think that right now the prospects for biodegradable plastics are very position.

We've done the fermentation test up to the 20,000 gallon fermenter stage.

We're working on the recovery systems now, and everything at this point in time looks quite positive.

And I'm relatively confident that our Board is going to go ahead and approve our expending that money, but we won't know that until probably the end of this year and maybe even early in 2006 before we get the recovery site all worked through.

So if that materializes, I think our expenditure there will be in excess of 100 and maybe even closer to 200 million.

And if it really all materializes in a positive fashion, we could spend another billion dollars on biodegradable plastics, just depending on what decision we've made as to what size market entry we want to make.

We're looking for an initial product that has a great deal of potential and high value in the marketplaces compared with conventional biodegradable plastics that are available.

And this plastic is from renewable resources.

And I think we'll have a particular advantage from biodegradable products from nonrenewable sources in that the marketplace is very sensitive on certain products to the application of the plastics.

So we could be looking at something in the neighborhood of $2 billion total over the next couple of years.

And you could add that to our 600 million almost per year maintenance CapEx requirements to get some idea for modeling as to where we're headed in the future.

I hope that's helpful to you.

That is.

And just one last question and I'll pass it on.

Doug, what is the roughly 200-plus million swing in other net in the cash flow statement?

Most of it would be in the deferred tax area.

Some of the things that we had last year, if you recall, we had the -- we had a flop last year because of the payment that we made on the fructose settlement.

We booked it in 2004, paid it in 2005, so that impacted last year by quite a substantial amount.

So most of it is deferred tax.

Okay.

Thank you.

And your next question comes from Christina McCracken from FTN Midwest.

You may go ahead.

Good morning.

Good morning, Christina.

Thank you.

Wanted to -- I guess, dive a little deeper into those ethanol volume numbers that you talked about, because only -- because we've looked at the renewable fuels data and clearly there have been a number of announcements over the past several months including, I think, some indications by you that ADM was looking at expanding capacity.

So I guess just revisiting the numbers that you talked about in terms of what's likely to come on line, because the numbers that we look at are far greater than what you've indicated.

The numbers of capacity?

Right.

I'm sorry.

The 6 billion gallons that you're talking about in terms of, I guess, production over the next couple of years?

Well, we had about 4 billion at the end of last year.

We expect at the end of 2005 we're expecting about a capacity of about 4.2 billion gallons.

By the end of 2006, about 5.2, and by the end of 2007 in the area of about 6 billion gallons.

I mean, obviously, all that is, is announced to some degree, speculation, but that seems to be our best guess at the present time, is to capacity growth.

And then our capacity will come on after that, Christine, so that immediately adds to the numbers.

So if you're looking at the minimums from the energy bill, we're not looking on that as any kind of a [constrictionist] to the availability of market and market interest in this business.

The demand is very solid from an economic viewpoint and is not going to be driven by the legislation.

Without a doubt.

I guess I'm more concerned about the availability of corn and really supplying those plants from a raw materials standpoint.

I think you always got to keep in mind that we're -- the industrial capacity for corn consumption is about 20% of the industry, so 80% is still free out there as feed.

So when you begin with that small percentage and if you double the capacity, which is what's contemplated by 2012, that we double the interest in this business.

And we think there's a good chance you'll see double the interest in ethanol consumption if you go out that period of time, you're still only at 40%.

But I'd also like to point out that ethanol is a little different from some other commodities that we're talking about.

In the production of ethanol, what we basically do is we first grind up the corn and then we separate out the protein and the feed and the oils and all the food-related materials from the starch.

And so the only component that's really going into ethanol production is the starch, which we then refine through a refinery into a dextrose or a sugar, and then the yeast bugs convert that into ethanol.

So as a result when you use ethanol, all you're doing is taking the starch out.

So you've maintained all the feed that was previously available.

So the actual impact on the feed markets is quite different from saying that your corn is actually going to disappear from the marketplace.

So starch is everywhere.

You know, trees, grass, lots of other things there's starch, and it's in surplus everywhere.

The key component is if you've got the available enzymes to be able to break through the cellulose to produce the sugars, and currently with conventional technology where it is, they can't yet do this on an economic basis from wood pulp and other kinds of sources.

And so clearly the most efficient source for us here in the United States -- and in other countries it differs -- but it's corn here and sugar in Brazil.

And so that's why you've got this production of this starch being turned into sugars being turned into ethanol for energy purposes from those resources.

So you're making the assumption that if we doubled corn use from 20 to 40%, there would be no impact on corn prices only because you can convert these distillers into feed, but are you then making the assumption that distillers can be fed to chickens and hogs efficiently?

As a matter of fact, that's correct.

But currently there's not a developed industry there in any large way because they're only beginning to see the economic benefits.

But everyday we see more poultry and more swine production being fed from the distillers' grains, and that's really a part of the solid increase in the demand for lysine, is meeting those feed demands.

So over time that's going to be an interesting formula, to see what the impact of all that is on a global basis.

And the energy is driving the production of more distillers and so that's changing the feeding ingredients when you go to formulate what's the most economic way to have your animals produced.

Okay.

I guess then just touching on the pricing in the quarter, I guess I'm a little bit surprised that you didn't see as much of a benefit, I guess, in ethanol, but it was more volume-driven.

Can you talk to that, why you didn't see -- as I understood it, you did do some spot business in ethanol this quarter?

Yes.

I think you should keep in mind always that the way we account for our fermentation businesses is to segregate the fermentation's assets from the basic corn grind.

So as sweetener markets and dextrose markets and the other starch markets improve and tighten, the ethanol component is paying a higher price effectively for its raw materials.

And so that does place some restrictions on the way we account for it because of the way we have our segments structured.

But it doesn't mean that we don't have solid ethanol demand and that across-the-board we're not making good returns on invested capital in those businesses.

Okay.

And then I guess just on high fructose, clearly you and everyone else are facing higher energy costs and with the high utilization rates it seems logical that you would be able to get pricing, but at the same time you're looking at a pretty significant decline in corn costs.

How does that factor into the psyche of bottlers when they look at your total cost structure?

Well, they have got to take into account not only the opportunities we have for a little less expensive corn, but also the dramatic impact of the higher gas prices and energy prices on that division.

And so when you put those all through the equation and then you look at the supply and demand balances that we've got.

We clearly believe that we're going to need to have higher prices coming into this next period, and that's why we have announced some price increases already to our customers.

All right.

Thanks.

You're welcome.

[OPERATOR INSTRUCTIONS].

And you have a follow-up question with David Driscoll from Citigroup Investment.

Hi, Doug, just one fast question on interest expense going forward.

Can you give us the year projection for the full-year fiscal '06 interest expense given the changes to the debt balances?

Yes.

That will impact us, oh, about 30 million plus on the expense side.

Of course, some of that is being invested right now, so you'll have an increase also in investment income on the other side.

But the net differential on that right now is what? 2 or 300 basis points maybe of negative spread on that.

And the determination here, I believe, when you filed that issue, it was to pay down short-term debt.

What's your basic logic here by that?

Obviously, you've got strong cash flows.

I know you've announced many, many new capital projects.

But I suppose when I looked at the bond issuance I was a little surprised by it just given where rates are and the fact that it didn't appear to me that you really needed this amount of cash immediately.

Well, we think it was an opportunistic.

I mean, I think we felt the rates were good.

We thought the spreads were good.

We did utilize some of it as a part of paydown -- or we actually paid some additional pension in this year, and that's another item you had asked earlier on the changes of cash flow.

That's another thing that impacted that other number.

We made a substantial payment into the pension plans.

We have bought back some debt.

So we're utilizing the cash, but as of right now based on overall cash flows, we are sitting with excess cashing and so --.

Our short-term debt, David, in May of 2004 was 2,750,000 and today we have got solid cash balances in the bank.

So our net -- our total interest costs will be reduced quite substantially on the short-term side while they are increased somewhat on the long-term side.

And when we looked over the whole portfolio of some of our higher cost long-term debt and our other obligations, as Doug pointed out, we felt we should place some of it out longer.

And we also could see clearly that we might have some substantial capital expenditures coming up as a result of these new shifts into increased production of energy products.

So on the fuel side we knew that we were going to be spending some money, and we just wanted to take down some long-term debt to keep our balance sheet in good focus as we move into the next year.

But the final answer in terms of 2006 interest expense, Doug, was basically a net increase -- or net interest expense of 30 million?

No, what I'm saying is, is you have got part of that invested so if you net-net it out, on the expense side that would be correct, you could say.

But you're also going to have interest income coming in net on the other side.

And we're saying that the net differential there -- depending upon where rates go -- is in the 2 to 300 basis points.

So figure that on the 600 million.

So 12 million to 18 million impact.

Very good.

Very clear.

Thank you.

Pretax.

Thank you.

And your next question comes from Leonard Teitelbaum from Merrill Lynch.

You may go ahead.

Well, I was in fear in trepidation, if they can't get Driscoll right I didn't what the [expletive] they were going to do with mine.

But we'll take that as a win. [Laughter].

Good work, Lenny.

Just a couple of things.

Now to the extent that you can do it, I know that it's legislated and I know all that.

But under the presumption that if they were to eliminate or reduce the subsidy to ethanol, given the fact where it stands today, what do you think the market clearing price would be?

Well, we don't get the subsidy.

So [multiple speakers].

We understand that.

That goes to the blender.

But I'm just saying if the blender were to have that reduced or -- and let's starts with zero.

Have you guys done any work on what the economic value of this would be now that it's permanently in the mix or in the mix until 2010?

Yes, we do.

We calculate that every single day.

I'll bet.

But that spread is split really between the buyer and the seller depending on what the marketplace is.

But, Brian, do you want to comment on that?

Well, right now at the present time gas -- or excuse me, ethanol is finding new markets replacing MTBE.

MTBE right now as I understand is about $1 over gasoline.

So as a -- I mean, that's not -- the whole market isn't replacing MTBE, but there is demand from that market.

So what's the value if you have something that can replace something that costs $1 over gasoline, what's the value of it?

The value of it is very close to a $1 over gasoline.

There is, however, production of ethanol, which exceeds the demand just purely from an MTBE standpoint.

So it has to find it's way into the market just as a -- for varying reasons.

Some of it is environmental.

Some of it is pure economics.

But if you look at just the pure economics right now, with gasoline currently, what? about a $1.60, $1.65 something like that.

For that market just on a pure economic basis ethanol should be worth just a very slight discount to that to be able to work it into the refiners and the blenders P&L where they pick up a little bit of profit.

So the economics vary a lot depending upon the market.

So I don't know if that answers your question, but it's --.

Well, I think it's a start.

We'll push -- we obviously have done our own work here, and I'll follow-up offline on that.

Doug, just one thing.

I thought that you guys had been including some stock-based comp normally.

Can you quantify how much that would be under the new rules every quarter going forward?

Is it going to be a penny a share?

Is it going to be insignificant?

What's it going to be?

It's basically [multiple speakers].

Not the accelerated part but normal.

I'm going to say it's going to be insignificant -- I mean, as you've seen in the past our total comp under that type of program has been relatively insignificant.

Our options outstanding are relatively insignificant, so it's not going to have any material impact quarter-by-quarter going forward.

And Al just to clarify one thing, I know you have raised the price of dex and some other stuff to your customers, but would I be wrong in characterizing your statement that you've raised the price of fructose to your customers or announced a price increase?

Isn't that your opening bid or is there an actual list price increase going through on fructose right now?

Well, we have a list price that we put out, and so do all of the other members of this industry, to ordinary customers.

But when you have customers the size of many of the companies that are engaged in the beverage industry or the soft drink industry, then they're talking substantial volumes.

And so they come in and they look for some kind of a discount from that list price that's put out to the customers.

So do we expect to get the same increases that we have announced from all of our customers?

The answer would be no.

But it certainly will be negotiated on an individual basis with each of our customers.

Sure.

And no, we understand that there's going to be volume discounts, et cetera.

But it was my understanding from the past that these negotiations begin now and hopefully you settle out for the year.

Is there going to be a change in that pattern, or is it about the same?

No.

I think the pattern of negotiation will be the same.

The question is whether we will get an increase, and we face this every year.

And we're looking because of our increased energy costs and all the other factors impinging on this business to have some increases from all of our customers this year.

Yes, I think you answered -- my question was really to timing, whether it was going to be --?

Yes, timing is going to be the same.

We have got negotiations already beginning now for next year's business, Lenny.

Now, for those of us who lived through biodegradable plastics round one. [Laughter].

And I'm -- I was almost sorry to see it come up again.

But if we take a look at -- what makes the product different this time around?

And if you're talking about investing a billion dollars, you've got to get a [expletive] of a return on that.

And I guess I'm just asking the question, what makes this product different this time from last time?

And are we going to go after the styrofoam market that's now paper in many cases?

And I guess I'm having a -- maybe I'm just stuck in the past here.

I'm having trouble seeing the growth of that.

Well, let me just comment briefly on that.

The product that we came up with 15, 20 years ago was a new concept of weaving starch molecules through plastic in a way that it would decompose when it went into the landfill so that whatever contents, the leaves, or grass or whatever were in the grass bag, would then deteriorate at a more rapid pace.

So although it was discussed as if it were biodegradable at that time, that's not the product we're talking about here.

This new technology has been under development for a number of years.

We were first approached by Dow and then by Dupont.

They respectively went to some of our competitors and made joint ventures, and they've been in and out of those businesses.

And so there are really two competing products in the marketplace today.

The PLA products that is made by the Cargill Group and their NatureWorks, and then the 3G materials that are made by the Dupont/Tate & Lyle joint venture.

Our new joint venture with Metabolix is a product called PHA, which has a great deal of versatility.

It has some very specialized markets that it's designed for, and so, it's an entirely new concept and a new idea.

There are some biodegradable plastics out there, but those that are made from renewable resources are under considerable interest by several of our large customers who can see special applications where they could really have increased consumption of their materials if they had a package like this.

Recently Wal-Mart has entered into an agreement to use certain quantities of the PLA product.

So there's a growing marketplace across the world with the development of Kyoto Treaty and all the other issues that are involved with plastics made from petroleum.

There's a whole renewed interest in this product.

And so we're looking for some very specialized markets.

And I think it has great potential going forward primarily because of the radical increase in petroleum prices and raw material prices for those specialty chemical divisions that are currently in the production of plastics.

Yes, that's what happened last time.

I think it was the chemicals from carbohydrates, I think was the theme back then.

I may just need to dig out some old reports. [Laughter].

Yes.

What we're really going to do now is to move away from the hydrocarbon environment to more and more products made from carbohydrates.

And so that general theory is probably true.

But this is a great new product, it has a lot of interest in the marketplace.

And so we're hopeful that it has some good forward potential for us.

So do we.

Thank you very much.

You're welcome, Lenny.

And your next question comes from Eric Katzman from Deutsche Bank.

You may go ahead, sir.

Allen, I just had a follow-up.

In terms of the CapEx that you're going to be spending over the next few years, I think you said it's possible 2 billion.

When you look through kind of the cash flow statement now, it seems like your funding is adequate enough.

I know some analysts have been concerned about your ability to repurchase stock in that scenario.

But would you be willing to monetize the Tyson shares and the equity -- the private equity ownership to help fund some of the CapEx boom in the next few years, or do you just kind of see it primarily coming from operations?

As you know, Eric, we've in the last six months or a year are really, really evaluating our entire balance sheet structure.

And we clearly will be emphasizing the liquidity of -- the monetizing of many of our liquid assets as we restructure the Company into a more powerful energy-related production system.

And we have had strategic reasons in the past that we've carried a number of different investments.

As you know in this past year we divested of our interest Tate & Lyle's publicly owned securities, but continued to have excellent relationships with them on a joint venture basis and some solid businesses across Eastern Europe and Mexico.

And so across-the-boards we are looking at more and more monetization of our existing portfolios.

Our total investment of more than $1 billion in investment funds is now down to about 250, a little less than 250 million.

And we're continuing to let that run off without any substantial reinvestment.

And our stock portfolio we assess from day to day looking for good opportunities to find places to monetize those instruments and put them back into solid investments.

And some of these new assets that we see have great earnings potential for the future.

Okay.

Thank you.

Your welcome.

[OPERATOR INSTRUCTIONS].

And at this time you have no further questions, so I'll turn the call back over to Allen Andreas for closing comments.

You may go ahead, sir.

Thank you very much, Jackie.

We appreciate your interest and look forward to seeing you again in three months, if not before.

Thanks.

That concludes today's presentation.

We thank you for participating.

You may now disconnect, and have a good day.