Archer-Daniels-Midland Co (ADM) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2006 Archer Daniels Midland Company earnings call.

My name is Colby and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation to your host for today's call, Mr. Allen Andreas, Chairman of the Board of Archer Daniels Midland.

Please proceed, sir.

Thank you, Colby.

Good morning, ladies and gentlemen.

Welcome to ADM's third quarterly conference call.

Joining me today are Patricia Woertz, ADM's new President, Chief Executive Officer and a member of our Board of Directors;

Doug Schmalz, Senior Vice President and Chief Financial Officer; and Brian Peterson, Senior Vice President of Corporate Affairs.

Before we begin the discussion of our third quarterly results, I'd like to introduce you to Patricia.

Patricia was chosen for her new position with ADM and assumed her responsibilities on May 1.

She's an outstanding executive with a proven track record leading complex global commodity-driven businesses.

She most recently served as Executive Vice President of Chevron Corporation, where she managed the company's downstream operations, including refining, marketing, lubricant supply and trading businesses in 180 countries with more than 100 billion in annual revenues and a global workforce of 30,000 people.

She is distinguished by her reputation for integrity and her record of building shareholder value.

Patricia was selected by our Board of Directors to provide the leadership essential to sustain ADM's strong performance and lead the company to the next chapter of its history.

She brings a breadth of experience relevant to our businesses and an additional perspective highly valued for our future growth.

I look forward to working with her to achieve a smooth, rapid and successful transition to her new challenges for our future.

Thank you, Allen.

Good morning, everyone.

I am honored and quite excited to join ADM and lead this company.

I look forward to working with a very talented group of executives and employees as we work together.

The Board of Directors, I believe, and ADM's leadership team and I are aligned in our view of ADM's tremendous potential.

We are a company in excellent shape, as you will see this morning.

I think you will be, as I am, pleased with the value our company is delivering to shareholders and in a moment, we will talk about this quarter.

And I will continue to focus what I thought was a very important, in terms of leadership, on a particular passion for people, world-class performance, and certainly delivering performance and value to shareholders.

I welcome this exciting opportunity and I now turn over the discussion to Doug for our third quarter financial results.

Doug?

Thank you, Pat and good morning, everyone.

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

Any changes in factors such assumptions or factors such as oil seed crop crush, prices or crop values could produce significantly different results.

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

As reported, results for quarter ended March 31, 2006 were $347,796,000 or $0.53 a share.

And that compared to net earnings of $269,095,000 or $0.41 cents a share last year.

If you recall, last year's quarterly results included a gain of $114 million or $74 million after-tax, equal to $0.11 per share, which was from the sale of the company's direct interest in Tate & Lyle stock.

I'll now discuss changes quarter over quarter in the components of our consolidated statements of earnings.

Our fiscal 2006 third quarter net sales and other operating income increased 8% to $9.1 billion, due principally to increased sales values.

Our gross profits increased 34% to $771 million due primarily to the improved operating results of the oil seed processing segment as improved global market conditions led to increased operating profits in all locations.

In addition, corn processing margins improved as increased sweetener, starch and ethanol selling prices, combined with lower net corn costs, resulted in improved operating results of the corn segment.

In addition, improved transportation results of the agricultural services segment also contributed to the gross profit improvement.

Our company-wide SG&A expenses increased $17 million to $297 million for the quarter, due primarily to increased employee-related costs.

Our interest expense increased $10 million to $90 million for the quarter, due to higher levels of long-term debt and increased interest rates.

Investment income similarly increased $12 million for the quarter due primarily to increased interest rates and also higher levels of invested funds.

The equity and earnings of our unconsolidated affiliates increased $19 million to $55 million for the quarter from $36 million last year, due principally to the improved earnings of our Asian oil seed joint ventures, partially offset by a decline in earnings from private equity fund investments.

If we exclude our tax credit that we had last quarter of $36 million, our fiscal 2006 9 month-- and also last year we had, if you recall, a $45 million gain on our CIP sale of it's Tate & Lyle interest, which is also tax-effected.

If you exclude those two, our effective rate for this first 9 months of fiscal 2006 was 32% and that compared to 33% last year.

We anticipate our effective rate for the fourth quarter will be in the 32% to 33% range.

I will now turn the presentation over to Brian Peterson, who will cover results of our operating segments.

Thank you, Doug, and good morning, everyone.

I will start with the oil seed processing segment.

In oil seed processing, the operating profit for the third quarter 2006 was $177 million versus $61 million for the third quarter 2005.

Oil seed processing results improved in all regions of the world.

Harvest is underway in South America and a record soybean crop is expected.

Also planting intentions in North America call for an increase in soybean acreage over last year.

All indications point to an excellent supply of soybeans for our global operations.

Regionally, we see the following -- North America's operations benefited from improved crush volumes and margins.

Meal demand has been strong, although oil inventories have been building.

The past utilization for the industry was around 85% for the quarter. [Flat board] crush margins today are slightly better than last quarter and as we have noted previously, these higher margins are needed to compensate for the higher energy costs we are incurring in our processing operations.

Vegetable oil inventories have been building.

We expect oil values to improve over time, however, as a developing U.S. biodiesel market adds incremental demand for vegetable oils.

In fact, our first U.S. joint venture biodiesel plant in Mexico and Missouri should be operational in October while we just broke ground last week on a second facility in [Velma,] North Dakota.

Our two plants will have a combined total capacity of 115 million gallons per year.

The biodiesel industry in the U.S. is projected to have a total in annual capacity of over 600 million gallons by the end of 2008.

The development of a U.S. biodiesel market should benefit the U.S. agriculture sector as it has benefited the agriculture sector in Europe.

Crush margins should improve with an increase in oil demand.

South America's results improved also.

We continue to focus our South American efforts on originating soybeans to supply our processing plants in China and in Europe.

European results improved on strength in our [rafe seed] processing and biodiesel operations.

We are running our soft seed crushing and biodiesel operations at full capacity in Europe.

Going forward, we expect continued strength in our soft seed and biodiesel operations in Europe, but expect imported meal and vegetable oil from Brazil and Argentina to continue to pressure soybean crushing operations there.

Asian operations delivered good results in the quarter in spite of low capacity utilization.

We are well-positioned for the long-term growth of the oil seeds business in China and are pleased with our position in these important markets.

Just to comment on global biodiesel.

As you know, ADM has been a leading supplier of biodiesel in Europe and we are continuing to explore opportunities to invest in this renewable fuel around the world.

We are reviewing new potential investments in Asia, Europe, South America, in addition to the new U.S. plants discussed earlier.

Turning to the corn processing segment, profits for the quarter were $219 million versus $178 million in the year ago period.

In the sweeteners and starches part of this segment, profits were $113 million versus $80 million a year ago.

And in the bioproducts part of this segment, profits were $105 million versus $98 million a year ago.

In sweeteners and starches, profits improved as higher selling prices, higher volumes and lower net corn costs more than offset higher energy costs.

The price increases we announced last quarter have been coming into effect and will be fully implemented in the current or fourth quarter of 2006.

We are seeing solid demand for our sweetener and starch products.

Turning to the bioproducts part of corn processing, in ethanol profits were up versus last year on increased prices and lower net corn cost.

As we have discussed, our April and September contracts are at improved values and will have a positive impact on our next quarter's earnings.

We are substantially booked through September and have a good start on contracts for the October and March period.

The U.S. auto industry is increasingly advocating the use of ethanol as a renewable friendly fuel as they've continued to promote E 85 Flex Fuel vehicles.

We announced recently the Board approval of a 275 million gallon ethanol plant in Columbus, Nebraska, and the Board will review plans for the next dry mill plant later this week.

In specialty feed ingredients, profits here were down primarily to a lower year-over-year lysine prices.

However, lysine volumes are solid as global demand continues to grow.

ADM continues to explore opportunities to expand the value of our corn wet milling operations by making renewable, starch-derived products to replace petroleum-based products.

Our recently announced acquisition of Lysac brings technology to ADM, which will enable us to produce absorbent polymers from starch, replacing a petroleum-based feed stock.

As we've discussed in recent presentations, investment in bioproducts enhance our existing corn processing assets by adding market and product portfolio options.

Expanded downstream product options leverage the value of the entire corn wet milling asset base and improve our ability to maximize shareholder value.

The bottom line is that we believe we are in a period of new demand for products made from the corn and wet million starch stream as we find opportunities to replace products derived by high-priced petroleum.

The strong demand should lead to improved long-term returns from corn processing operations.

Turning to the agricultural services segment, profits here were $79 million versus $55 million in the year ago period.

Improved earnings from storage and barge operations were partially offset by a decline in our global merchandising operations.

ADM's transportation network is performing well in light of challenges associated with the availability of all forms of transportation.

We continue to find ways to use the ADM network to create a competitive advantage in the marketplace.

Turning to the other segment, profits in this segment were $76 million versus $83 million in the year ago period.

In the food and feed ingredients part of this segment, profits were $35million versus $44 million a year ago.

Doug will comment later on the financial part of the other category.

The decline in food and feed ingredients was attributed to costs associated with exiting an underperforming feed business.

Excluding this cost, results were flat for the quarter.

Looking at wheat, wheat results improved from last year on improved volumes.

Industry capacity utilization for the quarter was around 85%, which was improved versus last year.

Looking at cocoa, cocoa processing results were similar to last year's results and continue to deliver solid returns on invested capital.

We announced approval of a new plant in Hazelton, Pennsylvania, which will improve North American cocoa processing efficiencies.

I'll now turn the presentation back to Doug, who will continue with a review of the financial component of the other segment.

Thank you, Brian.

As you see, our results of our financial operations in our other segment were $41 million compared to $40 million last year as a decline in earnings from our equity funds were approximately $18 million was offset by improved operating results of our ADM Investor Services and our captive insurance operations.

The corporate results were a charge of $57 million for the quarter.

That compared to income last year of $32 million.

As you recall, last year's results included the $114 million gain on the sale of the Tate & Lyle interest of the companies.

Also, the current year's quarter was positively impacted by increased interest rates on inter-company interest charges and higher levels of invested funds.

I would like to discuss a little more some of the significant factors affecting our financial condition and our cash flows.

Our working capital increased $866 million during the 9 months to $5.9 billion at March 31 and includes readily marketable inventories which have a carrying value of approximately $3 billion.

The increase reflects cash generated by our strong cash flows from operations and a $600 million, 30-year bond which we issued in the first quarter of fiscal year 2006.Cash flows were more than adequate to fund expenditures, acquisitions, cash dividends and long-term debt repayments.

Our total interest bearing debt, both short-term and long-term as a percent of invested capital, was 31% at March 31, 2006.

And that compares to 30% at June 30, 2005.

The slight increase reflects the additional long-term debt issued during the first quarter of the year.

Our cash flows from operations for the 9 months ended March 31 of $1.4 billion equal to net earnings of $902 million plus depreciation and amortization of $491 million, was used principally for capital expenditures of $533 million, acquisitions of $169 million, dividends of $176 million and debt repayments of $262 million.

That concludes my remarks and we will now open it up for questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of John McMillin with Prudential Equity Group.

Please proceed.

Good morning, everybody.

Pat, welcome and congratulations.

Thank you.

Al, you had a great run.

Thank you.

You certainly don't have soybean operations that look too out of position to me.

But you have got a competitor that likes to talk about unfavorable hedges.

It is hard to look at these soybean results because they're so much better than my expectations without thinking that maybe you had some favorable hedges in place.

Can you just talk about whether these soybean results are sustainable?

John, I think as we indicated in the prepared remarks, we had good performance from all geographic regions and all feed sector.

The soft seed crushing operations worldwide continue to be very good in both North America and Europe.

Biodiesel operations continue to be perform superbly.

I think, looking forward in the current quarter, we are seeing good conditions in North America, perhaps a slight improvement here currently.

As we look at Asia, I think that Asia probably is running into just a little bit of headwind.

European soybean crushing operations continue to be adversely impacted by the pressure coming out of South America.

Of course, I think we have discussed it before.

We have the differential export tax in Argentina, which provides a subsidy to crushers there and they're moving a lot of that product to Europe, which has an adverse consequence for our soybean operations there.

European soft seed, however, continues to look like it will continue to perform very well.

South American crushing-there's some difficulty in the processing conditions there and Brazil.

We do not expect that will change a whole lot in the current quarter.

But we are in Brazil primarily for our origination capabilities, supplier plants in Asia and Europe.

So I think that gives you just a little sense of how things might face up the current quarter versus third quarter.

Then Pat, to the extent you can talk about a company you have just been in for two days, but you clearly have studied strengths and weaknesses of ADM.

What one thing do you think they do best and what one thing do you think they could improve upon?

I will agree with you on your first comment, John.

I have been here a day.

You sound a bit like some of the employees in the Town Hall yesterday, tell me what you see so far.

I think the real strength in not only what I've studied but I would argue that it is also what I'm finding here in talking with folks, is in the talent of this team and the depth and knowledge of this business.

Not just because it's not necessarily my business, but I think there's a sense of excellence and a real nurturing opportunity to know the business well and take advantage, if you will, take competitive advantage of that knowledge as we go forward.

The interconnection of the businesses in food and feed and fuel is also very, very strong here.

So again, that's a real positive for the company going forward.

If you ask me in terms of areas of improvement, that's probably one for a stay-tuned.

I'm really interested in asking a lot of questions and learning and listening here in the early days.

I think we will have opportunities together that we find-- and you always do.

This business is changing.

The agribusiness is always on the move.

So we'll find areas of opportunity.

But there's not one that stands out as any kind of a weakness, John.

And Al, in your couple days of talking to the press, you've talked about coming to work everyday and it seems to be involved in decision making, I guess until some cut off date.

And I think, Pat, you've talked about a clear cut off date.

Can you just kind of tell us when that is?

We are trying to transition my responsibilities to Patricia as Chief Executive and President as soon as possible.

There's a lot of activity here at ADM everyday and you don't have time to try and run an organization with two people at the top.

She's got the clear responsibilities for our operating businesses.

And so all I'm going to do is bring her up-to-date on where we are to the best of my abilities and put her in the middle of the challenging opportunities we have.

And from there on out, if she needs my advice, she can call and I will be available for consultation.

I plan to spend my time focusing more on long-term strategies on the Board in South and our relationships between the management and the Board and working closely with Patricia to try and create a model that is delivering more meaningful information and allows us to make our decisions faster and better around here in order to move with the changing circumstances we're faced with.

So I'm not planning to be gone immediately.

But clearly, I am no longer in the position of Chief Executive and President as of yesterday.

And we're not going to run this business any other way than what the clear decision making process with people responsible and accountable for their areas of expertise.

That period of time should be relatively short, but I am currently serving as Chairman.

I have indications from the Board that they'd like me to stay around for some considerable period of time as Chairman and to help them develop a better, meaningful dialogue amongst the business operating people and the Board itself.

Okay, fair enough.

Just my last question-- Brian, when you talk about reviewing the plans for the second ethanol plant-I know you've only announced one so far in Nebraska.

Might there be a chance that you might not build this plant?

Well, it's a Board decision.

And it will be presented to the Board this week.

We think we have a very strong case for another plant and so we will let the Board decide.

Okay.

Thanks a lot.

Your next question comes from the line of David Nelson with Credit Suisse.

Please proceed.

Good morning.

Best wishes, Allen and welcome, Pat.

If we could maybe start on current conditions, maybe this is hopeful thinking on my part.

Could you talk about how much higher ethanol prices for the April-September period are?

I know there are other things on current conditions.

At times, you talked about lysine pricing.

It looks like lysine is getting a little better.

And then, net corn costs, you talked about them being lower, not just year-over-year, but also sequentially.

Could you touch on that, please?

Well, I think that there is a bit of wishful thinking, there David, on your part, if you're expecting to get exact numbers are where ethanol prices are going.

But directionally, they're up.

We have indicated that our-- we generally contract ethanol in 6 month increments.

We have just, with the completion of the third quarter here, have finished a 6 month increment.

So we're now in the April-September period and those ethanol prices, as we indicated, will be higher.

We have a substantial portion of our capacity for that period sold.

So I think we're confident in stating that the results at the end of the quarter will be a price increase for ethanol versus Q3.

Looking forward to the next contracting period, October-March, again, we do not have as much sold for that as we have for the April-September period, obviously.

But again, directionally, at the present time, it is up.

On net corn, net corn for the year-on-year comparison was down this year.

It was also down sequentially, right?

No, it was not.

Okay.

It was up.

I think if you recall last quarter, we still had some benefit coming from the logistics, problems coming out of the hurricane and so forth.

And so we did have some benefit last quarter, that is the second quarter of very low corn basis.

But we did not have that in the third quarter.

So we did see an increase in net corn cost.

Okay.

And then lysine pricing?

Lysine pricing is still pretty flat.

We have seen really no change in lysine prices.

Demand is very good.

We have seen around the edges, perhaps, a little bit of an indication that some fringe markets might be moving up.

But I'm not in a position right now to predict that they will be up overall.

Okay.

Maybe I-- my other question would be for Pat, please, just to maybe be a start in helping us understand how you think.

Oil prices are-- not any revelation to you-- at historically high levels.

You've got 2012 contracts near $70 a barrel.

You being in the ethanol business, would hedging with some oil contracts against your ethanol business out five years, would that be the kind of thing you would consider to lock in some high level or at least equivalent of high level ethanol prices?

I think I will start, David, that's wishful thinking, again, that I'll probably answer that one.

There is a strong group of traders here that look at how we operate the business and what we line it up against and what kind of contracts make sense for both the short and longer term.

So I will defer answering that one, too.

Okay.

Thank you and good luck.

Thank you, Dave.

Your next question comes from the line of Eric Katzman with Deutsche Bank.

Please proceed.

Hi.

Good morning, everybody.

Congratulations to all involved.

I guess the first question I have is, one of your major competitors, CEO Staley of Cargill, came out last night, ironically enough, and made some comments about concerns regarding ethanol and investments and the pressure on this industry's ability then to kind of feed the world, which I guess was your old point of view.

Allen, do you have any outgoing comments with regard to that view of the world?

Yes, Eric.

We are very conscious about problems across the world in terms of food supply.

We've got 800 million people that go to bed hungry every night on this planet and that is a very, very sad development.

But I think any knowledgeable person in today's world would recognize the fact that the reason we have got malnutrition and hunger is not because we are turning food into fuel.

That is really not the debate.

We've got a lack of infrastructure and a lack of capital across the world and a failure on the part of our global institutions to be able to address those problems of hunger.

We have got lots of arable land in the world to supply as much as needs as we could possibly envision with a current population of about 6.5 billion people.

We expect to probably never exceed 10 billion.

We have got hundreds of millions of acres of land in Brazil that are suitable for arable development into farm land that still has not been cultivated without any infringement on the environment.

And so there is plenty of capacity to make food.

But before you even get to that calculation, the people who run our factories recognize that we are taking the food and the oils and the vegetable oils out of the corn before we ever make ethanol and fuel.

The ethanol business is made from the starch component of corn, so to think that we are reducing the food supply by taking starches, which are abundantly available-- grass and trees and all the discussion that we have had recently with the President about switch grass and other ways of improving our fuel production-- those are all very viable options for our future as a portion of the ingredients necessary to make up our energy resources that are needed to supply what our civilization will require.

So we're looking for lower cost food and better food supply and by finding enhanced uses for our starch, which is a [cull] product, we're able to sell the protein for food supply at a lower-cost.

All across the board, we're assisting in all areas of the food question.

There is no consumption versus combustion debate, except for those who really do not recognize the realities of the way this business functions.

Okay.

Next question is, I think in your comments you said that ethanol volume was down because of a draw down of the inventory buildup.

So how does that look in terms of going forward?

Is there any year-over-year issues or should volume on ethanol be up going forward regardless of price?

I think we're at more normalized levels now.

It may go up some as we go forward, as we tweak plans and what not.

But we're on more normalized -- we had some abnormalities the last couple of years, a couple of times, where we had built stocks for new markets and then as that came out, of course, it increased the sales volumes in those periods.

But we're selling at our production volumes now.

Okay.

And then just a final question.

Obviously, the market and investors recognize that pricing for a broad part of your portfolio, particularly ethanol, is very robust.

But there's isn't really much discussion on the cost side of things and I think, Allen, you had maybe it was at CAGNY or your last conference call-- I can't remember.

But you had mentioned some wariness about corn costs moving up.

I was wondering if you could update us on that.

And then also how either rising oil or natural gas or coal, which I think is what you use for a lot of your facilities, how that may affect the margins going forward?

Eric, I would just like to comment very briefly about the concept of what is happening in these markets.

As we find new uses for our components of the agricultural crops that we are using in our factories, it creates more value.

And ultimately, as to get a better balance between supply and demand, that means we're likely to see a little more of that value being passed back to the farmers in additional costs for their crops.

And so our net corn costs vary from time to time, depending on supply and demand characteristics and our coal prices are going up.

Our net energy increase over the last year was about 20%, which is a meaningful number for us.

And so if you add to the energy increases plus the increases in net corn costs, it does place some pressures on our margins going forward.

But this is all part of running successful businesses and getting a return on your invested capital and continuing to explore new uses for the ingredients that come out of the farmers' commodities.

It will benefit agriculture from the beginning of the supply chain all the way through to the end.

And we see still a very efficient ability on the part of our industry to provide low-cost products to our consumers of highly nutritious, better foods, and continue to increase our payments to the farmers for their agricultural crops.

That should bode well for the entire agricultural community, for the financial base that supports that community, and for land values across the country as we move forward into a better, more nutritious, healthy environment for people on the food side and lower-cost energy and new, renewable resources of energy available for future generations.

Okay.

I should be putting my money in land now?

Is that what you're saying?

We have got plenty of areas here at ADM to invest our capital in, so we are not investors in land.

But I think the future for the farmer looks brighter today than it has for the entire career opportunity that I've had here at ADM.

So that is very encouraging for our future.

OK, good luck.

Thank you.

Thank you, Eric.

Your next question comes from Christine McCracken from FTN Midwest.

Please proceed.

Good morning.

Welcome, Patricia and good luck.

I will miss you, Al, as you exit.

I was wondering if you could give us a little bit more color on biodiesel?

Because your operations are kind of global now, it seems like you've increased your investment there.

Can you talk about where you stand on capacity today and if it makes sense going forward to kind of breakout renewable fuels or maybe industrial products so we can better understand that business?

Or those businesses?

Christine, yes, the biodiesel business continues to grow.

Obviously, we have previously announced expansions in Europe, which are well under way.

We continue to look at additional opportunities in Europe-- not only in Europe, but also in Asia.

There is a world of vegetable oils out there which can be adapted to produce biodiesel and there is a strong interest in this all over the world.

In the U.S., we are just getting started.

I think I said that we would be starting our Mexico-Missouri joint venture plant in October and our available North Dakota plant should be operational some time probably by mid-2007.

There's also a lot of other interest in biodiesel in the U.S.

A lot of people have announced plans and we think this is born to be very-a part from a solid business in its own right, we think that this is going to be very beneficial for our oil seed crushing assets as we get a better balance of demand between the products of meal and oil, we think that there is going to be a significant benefit accruing to crushing assets.

So in terms of-I guess as a percentage of your overall oil seed business, is it relatively small?

I mean, you're clearly getting the benefits of the demand on the oil side.

But is it a relatively small piece of that overall seed business?

In terms of invested capital, are you talking--?

I guess in terms of EBIT contributions.

Yes, it is not the major component of our oil seek processing segment.

Christine, it's really not much different than when we started out with ethanol, if you think about it.

I mean, it's a part of the total complex of oil seeds.

It drives margins within the crushing side.

It can be not profitable and still be very profitable for our oilseeds group just because of the margins that's driving on the crushing side.

We see it as a total complex one and it's one component of that complex and that's more than likely the way we will report it.

All right.

And then just in terms of the support, the U.S. support for biodiesel, is it your expectation that that kind of support will be continued going forward or extended?

Yes, it is.

I think that our government recognizes the importance of biofuels to our country and we fully expect that they will bring biodiesel in line with the ethanol program.

So yes, we expect it to be extended.

In terms of the U.S. crop-- I know it is still early.

But it seems like it's going in well.

Is it your expectation that they have kind of overstated the drop in expected corn planting?

Could you comment on where we stand today and what your outlook is relative to cost?

Obviously, we have not had another planting intentions since the March 31 report, which indicated a substantial switch from corn to soybean acres.

I think the market thinks that since that, there has been some moderation of that switch.

Exactly where it is today, I don't think anybody knows.

But I think expectation is that compared to the March 31 numbers, that farmers intend to plant a little bit less soybeans and a little bit more corn.

In terms of how the crop is going in, there was a report yesterday which indicated that we are slightly ahead of average.

We have had good rains throughout the Midwest, so I think that from that standpoint, we're off to a good start.

I think that we're very-with the outlook that we see at the present time, we're very optimistic about a very good supply of both corn and soybeans- and all oilseeds for that matter-for our processing operations.

Is there any negative impact of the smaller corn crop in Argentina?

No, not really, not on our processing operations.

I would expect that there would be no impact.

Okay.

And just one final question on mill demand.

A lot has been said about bird flu and the potential impacts on mill demand and yet it still looks very good.

Can you talk about if you are seeing any impact from these flock reductions or if you expect to see any big changes there?

So far, no.

We have seen very modest impacts.

We seem to recover from them quite quickly.

I would say at the present time, we are really seeing any impact.

But it is a story-- it is sort of a stay-tuned story.

I can't predict that there won't be any impact down the road.

We'll just have to see how this situation develops.

I know that in some areas, there has been a reduction in poultry consumption.

But there seems to be an increase in other types of protein consumption.

So the effect on mill demand really has been negligible.

Good to hear.

Thank you so much.

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

Please proceed.

Good morning, everyone.

Welcome aboard.

Pat or Patricia, which one do you prefer to go by?

Actually, I'm called both.

Pat is fine, thank you.

Do you see a change -- maybe it's a little early.

But do you see a change in the strategic direction of ADM going forward?

And how do you expect to put your footprint on ADM as a company going forward?

I thank you for the question.

It probably is a little bit early.

I want to reaffirm the strategic direction that I have already seen here is quite strong.

Maybe there will be some further opportunities in growth that we'll get a little more granular about overtime.

I guess it's more of a stay tuned.

Is there any-and again, this may be early.

Is there any cost restructuring or any major overhauls that, on an operational level, we could expect to see?

A lot of times CEOs come in and they redo or kind of go through the structure like that, restructuring.

Is that possible or not probable?

Well Ken, know that this isn't a turnaround situation.

So it's not something where you see some out of line cost structures here.

In fact, I have already observed some very purposeful and ongoing cost management in a very strong way here.

So my priority is not in a restructure mode.

Great.

Getting to the business itself, one of the comments that were made was that, going back to the ethanol plant, when you present the ethanol plant to the Board, is there any change in the way the ethanol plant will be presented to the Board?

Or is that still, from a business standpoint, still focusing on going forward very aggressively on that?

I think it is very much in line with already our announced plans of increasing from a 1 billion gallons a year to 1.5 billion gallons.

It's not only supportive of that strategy, but it's just executing it right along the way.

Just also, asking Allen and the rest of the crew there-- in terms of the high fructose corn syrup double digit price increase during the quarter, was this quarter's operating performance in the sweetener side a little bit lower than you would have expected?

Or is this more in line what you would expected given the double digit?

Just how did that play out for you this quarter?

I think it was in line with what we expected.

Our contracts don't all end at exactly the same time, so there was going to be a phase in of the price increase over the first 6 months of 2006.

So we will see the full price increase come to the bottom line by the end of this quarter.

And let my last question is-- I think somebody addressed it in the beginning-the oil seed, if you compare yourself to a competitor, the results were vastly different, particularly [Bungey] being the competitor.

What do you think that the main differences between the performances in the oil seed was between the ADM and the Bungey's performance?

Again, I think we commented on our results.

We were very pleased.

We had, as I said, a very good performance on a diverse geographic basis.

We think that we executed extremely well, the opportunities that were presented to us.

And I think that is frankly all I can say about that.

And the last thing, Allen, we will definitely miss you.

Take care.

Thank you very much, Ken.

You're very kind.

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

Please proceed.

Good morning.

A couple of questions on ethanol.

There have been some reports that maybe there is some difficulty transporting ethanol to the end user.

I wondered if you could comment on that?

And then secondly, as we see a number of capacity going on stream, what is the outlook for the total U.S. ethanol production in 2007?

On the transportation, I do not think there is really any particular difficulties in transporting ethanol.

I think the market is well-supplied.

I think that there has been some talk of, in some isolated areas, some service stations shutting down.

I think this is really the result from the closing -- let me rephrase that.

They need to clean their tanks when they switch over to ethanol, so I think it has caused some very momentary, very short-term, very localized disruptions.

But I think the market is well-supplied with ethanol and I do not think that there are any real difficulties in transporting it to the areas where it is needed.

And then, I'm sorry, the second part of your question was on?

With all the capacity being brought online, what's the outlook for the total U.S. ethanol market in 2007?

Right.

Well as you know, there are 97 plants right now with a total capacity of about 4.5 billion gallons.

With what has been announced, what's under construction right now, that is expected to increase probably another 2 billion gallons in the next 12 to 18 month period.

The market, I think, is going to expand to fully absorb this as capacity comes on.

I think there is a tremendous amount of interest in ethanol right now for a variety of reasons.

I think that it could be used for environmental reasons, for octane reasons, for blending-just straight blending purposes for extending fuel supplies.

And I just think that the demand, from our perspective today, over the next 12 to 18 month period, we're going to see a very good balance between supply and demand.

Okay.

And then can you give me the capacity [inaudible].

I'm sorry, I didn't hear you, Ann.

Capacity utilization in China?

Capacity utilization in China?

In oil seed crushing?

Yes, it was in the neighborhood of 70%.

Great.

Thank you.

Your next question comes from the line of David Driscoll with Citigroup.

Please proceed.

Thank you and good morning, everyone.

)) Good morning, David.

Well, Allen, I would say that back in 2000, it seems like you couldn't give the stock away.

And now it is the hottest thing out there.

You're certainly leaving at precisely what may turn out to be the right moment.

Pat, welcome, good luck.

Thank you.

Going back to oil seeds, if I could just ask a question here on this.

It's been asked a couple of times, but Allen, you reported $181 million in operating profits.

According to my historical data, that is an all-time record results on a quarterly basis for that operation.

Can you just give us a little bit of color on where the variance was?

I still don't think, even with all the comments, that I'm precisely sure.

Was it China that was the single biggest variance or was it biodiesel in Europe that was the biggest variance for the oil seed operation?

I think, David, the biggest variance was a combination of the things that you mentioned.

Biodiesel, as we said, did very well.

European crop seed crushing did very well.

We saw a good variance in China.

And also I would point to North America.

So then this really goes back to an earlier question, that the results, as best as you guys can tell, look sustainable?

Is that accurate?

We are not point to make projections on what the earnings will be.

But as I indicated or tried to indicate before, North America looks slightly better.

Asia, soybeans crushed in there might be under a little bit of head wind because the supplies of soybeans there seem to be increasing.

We have the soft seed business and the biodiesel business in Europe, look like they will continue to do very well.

And of course, as you look forward in the U.S. or in the North American situation, as these biodiesel plants start coming on stream this fall, we expect a significant marginal increase in demand for vegetable oils, which we expect will have a very positive effect on North American oil seed crushing margins.

Allen, would you say that these results are really a vindication of the strategy that South America, for quite a while, was looking like the most dominant market to be in.

But now, with the currency movement of the real, it seems like the worm has turned.

Do you think it is a permanent change in that the Chinese market and the North American market and the western European markets are really the place to be?

Or would you be suggesting to Pat that she take a more serious look at increasing the asset exposure in South American oil seeds?

David, I think we have seen over the last year a vindication of our policies and our strategies here at ADM that are very, very interesting.

We have constantly said that our focus, as long as the purchase of facilities in South America was as extensive, our focus needed to be on origination for our needs for raw materials in Europe and in China.

We believed very strongly that despite the fact we were building substantial additional capacity in Asia, that the markets were there.

The markets would come, and that we would be on the cutting edge of the lowest cost operations there.

So on both biodiesel in Europe and on South America, our strategies there have proven to be correct.

And so I'm very, very pleased at this point in my career to have called this in a way in which the history books actually made it unfold.

I would not change our strategy going forward.

I think Patricia and I have spent some considerable time already talking about our global strategies in oil seed.

At this point in time, she has only heard one side.

So she's listening to me.

But I'm very optimistic about the oil seed business.

And I think as Brian points out, if we can get the proper balance between the use of the end coal products coming out of oil seed, skewed appropriate fashion between the needs for energy and the needs for food, we will see some very nice results in the coming future years in oil seeds.

And maybe we will have an opportunity before then to expand our base in some of these areas to meet that increased demand that's coming.

But I think the oil seed business has a very bright future and it will be a major component of our business.

As you know, currently, it is the largest segment of our business.

It's profits are beginning to show the kind of results that we would hope to achieve from our investment of capital in that industry.

Allen, a few minutes ago you made a comment on ethanol, and really more broadly speaking, types of products that you can extract from carbohydrates and how it improves the value across the chain, including that for farmers in terms of the value of corn.

However, USD planning and [inaudible] support indicated that corn acreage was actually going to be down this year.

So quite frankly, I get this question a lot, that there really is a de-linkage in the perception.

Yes, everyone hears about the ethanol boom.

However, the fact that corn acreage is going to be down almost seems ridiculous to those people who are not intimately involved in the business.

Can you comment on really what has been driving this?

Is it something that you see as a major negative factor, at least coming up because of the fact you actually see corn acreage down and all these uses are rising, it seems incredibly logical to expect net corn costs to be rising throughout the calendar year 2006?

I could comment briefly on that and perhaps Brian would like to add to it.

But from my perspective, the acreage in corn reflected the increased energy costs and so fertilizer and the costs of planting the corn and everything have gone up considerably.

As a result, corn became less valuable to the farmers when they started to indicate their planning intentions.

Since that has occurred, there's been a reversal of those relationships between corn values and soybean values.

We don't, here at ADM, really feel that we're going to see a significant reduction in corn acreage as what has been indicated.

And so far, although we're a little delayed in planting and getting the crop in through this area, it looks very promising.

We have a solid base of moisture, the crop land looks very good.

The farmers are not far behind schedule in terms of putting their crop in.

We're looking for a very nice abundance of corn this year.

If you look across the globe, we see adequate, ample supplies of raw materials for all of our businesses.

We may see some increase in the net corn and maybe the farmers have not yet been able to focus on the future.

We all have to go through an adjustment.

These are cyclical businesses, and so temporarily we may see some depressed planting of corn while we continue to develop additional products markets.

But long term, this is a very encouraging model that we're looking at.

Very good.

Well, I will leave it there.

Congratulations on the results.

Thank you, David.

Your next question comes from the line of Leonard Teitelbaum with Merrill Lynch.

Please proceed.

Good morning.

Pat, welcome.

Allen, I don't think this is goodbye.

I look forward to working with you continually in the future.

Thank you very much, Lenny.

I do as well.

You made a hell of a run, I tell you.

I do not think people remember what the company was like when you took over as Chief Executive.

You're certainly handing it off in definitely different circumstances..

I've had a lot of great execution on the part of a good group of people here at ADM.

So I'm thankful that my career as CEO and President has turned out so successfully and I wish the same to Pat.

And we look forward to watching the progress.

I just want to make sure I understood this right- you said there is a build-up of edible oils in the system?

Did I hear that right?

Inventories of vegetable oils in North America-- I am speaking here of North America-- have been increasing really since August last year, Lenny.

There was a better oil content in the soybean crop.

I think that, combined with the switch to non-transfats, which has resulted in some increased in imports of palm oils into the U.S., I think the combination of those two factors has resulted in a continued buildup of soybean oil stocks in the U.S.

Just as an extension of that, how do you as probably one of the largest holders of that inventory, how do you go about reducing that?

I mean, is it going to be a price concession?

Obviously, you want to feed it into the biodiesel part of the business.

But this is a consequence of the crop, not crushing for meal, correct?

Well, yes.

It is a consequence of the crop.

It is a consequence of increased imports.

It will take the market a little bit of time to adjust to this.

Right now, frankly, the market fully pays the cost of carrying these inventories.

Also as we have indicated, there's a lot of activity right now in building biodiesel plants.

As we see those starting coming on stream-- our first one will be coming on in October, which isn't very far from now-- the market will be anticipating this marginal demand and I expect that we will see an increased off take even prior to the advent of the biodiesel plants.

But certainly once the biodiesel plants get going, there will be an increase in demand and we will see what happens to the stocks at that point.

Okay.

If we take a look at-- how many pounds of oil do you produce a year? 150 billion?

I have got 15 billion pounds is what my notes say.

Is that correct?

I would have to do the calculation.

Of the top of my head here, if you give me a few minutes, I can do it -

That's what I'm trying to figure out here.

And I know it is a lot of large numbers.

But if it's 15 billion, if you can get the price of whether it's or not biodiesel price up a penny, and you're talking and150 million more dollars on the same investment.

Is that one way to look at this thing, or is that too Pollyanna-ish?

First of all, we did a quick calculation here while you were asking the question and it's probably just slightly under 15.

So 15 would be a slight overstatement.

But just use maybe a couple of billion pounds less.

Well, I think it remains to be seen what the price impact will be, but I think in Europe we have seen substantial improvement in rafe seed oil prices relative to other vegetable oils because of the development of the biodiesel industry in Europe.

There, we've seen price relationships probably change by more than one penny, substantially more than a penny.

Now whether that will happen in the U.S. or not, I certainly can't predict that.

And where do you stand on producing, whether it's either [dag] oil or [inaudible] oil for the food industry?

What's the status on that?

Well, the transfat issue, we continue to invest in our ability to produce the [intersterfied] oils.

The U.S. food industry made the significant switch over at the beginning of this year.

There were still other customers now coming to the non-transfat oils.

I think the consumers are interested in this product.

I think that ADM has probably the best portfolio of solutions for food manufacturers in the industry.

So we are seeing a really a very good demand for our products, Lenny.

Two final questions.

Are any of the of the new plants going to be switch plants?

I know they're dry mill is what's on the books.

What about putting up some switch capacity between fructose and ethanol?

I know you have got some.

But is there any contemplation that any of the new plants going on in would be that?

Well, the new plant that we announced so far in Columbus, Neb., is a dry mill and that will not be making fructose corn syrup.

The one that will be in front of our board will be again be another dry mill.

It will not be producing high fructose corn syrup.

However, in our existing wet mills, Lenny, we do have the capability of switching some capacity between the two products, that is ethanol and --

About 10% now, right?

Yes, you could use that as a ballpark.

And Pat, I have one project I would like you to work on.

What the hell is switch grass?

Maybe you could write us a paper on that.

Thank you very much.

Thanks for the advice, Lenny.

We appreciate all the efforts, Allen.

Thanks Lenny.

[OPERATOR INSTRUCTIONS]

At this time, there are no further questions appearing in the queue, so I will now turn over the call to Ms. Pat Woertz for closing remarks.

Please proceed.

Well, thank you everyone for your interest and your questions, certainly your interest in the company.

I have the distinct pleasure of thanking Allen yet again and I know I will be going forward for his many contributions and major ones, some of you which recognized over the phone today and this absolutely great company and great resource that he has done so well to grow.

ADM is on track again for another terrific year.

I think all of our core businesses are performing well, as you heard.

I look forward to meeting you in person.

It was a pleasure to meet you all on the phone today, either at your location or when you come to visit us.

Thank you very much for your interest today.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.