Archer-Daniels-Midland Co (ADM) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to second quarter 2008 Archer Daniels Midland Company earnings conference call.

My name is Eric.

I will be your coordinator for today.

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

We will facilitate the question and answer session at the end of the conference.

(OPERATOR INSTRUCTIONS) I would now like to turn your presentation over to your host for today's call Mr.

Dwight Grimestad, Vice President, Investor Relations.

Please proceed, sir.

Thank you, Eric.

Good morning, and welcome to ADM's second quarter earnings conference call.

Before we begin, I would like to remind you that we are webcasting our call, and that you can access it at ADM's website, ADMworld.com.

The replay will also be available at that address.

For those following the presentation, please turn to slide two, the company's Safe Harbor statement, which says that some of our comments constitution forward-looking statements that reflect management's current view and estimate of future economic circumstances, industry conditions, company performance and financial results.

The statements are based on many assumptions and factors including availability and prices of raw materials, market conditions, operating efficiencies, access to capital and actions of government.

Any changes in such assumptions or factors could produce significantly different results.

To the extent permitted under applicable law, the company assumes no obligation to update any forward-looking statements as a result of new information or future events.

Slide three lists the manners we will discuss in our conference call today, and I will now turn it over to Chairman and Chief Executive Officer, Patricia Woertz.

Pat?

Thank you, Dwight.

And good morning, everyone.

ADM today did announce record second quarter earnings of $473 million up 7% from last year.

Over diluted earnings per share increased 9% to $0.73 per share, and it was a quarter which we successfully, I think captured and enhanced opportunities to expand our margins and we did grow volumes.

For some key business, that demonstrated the value and strength, I think again of our diversified, broad asset base and product portfolios.

I am pleased with this performance and particularly the positive momentum that we have recently built in these volatile market conditions.

These earnings reflect outstanding capability of our talented people and the unique global asset footprint to deliver long-term value for our shareholders.

Before I turn the call over for our financial discussion, I wanted to comment that we wish Doug Schmalz the best in some recovery, he had knee surgery on Saturday evening and he is recooperating at the moment.

So John Stott, our Vice President and Controller, will cover the financial discussions this morning in the slides, and then John Rice, John Stott, and I will return for Q&A.

So over to you, Mr.

Stott.

Thanks, Pat.

Good morning, everyone.

And thank you for being on call today.

Turning to slide four, you will see a summary of this quarter's financial highlight.

Net sales and other operating increased 50% to $16.5 billion.

Approximately 3/4 of this increase is attributable to increases in commodity selling prices particularly grains and oilseeds and approximately 1/4 is attributable to increased sales volumes of mainly grain, ethanol and soybeans.

Gross profit grew to 4% to $948 million as operating margins in oilseeds, agricultural services and wheat processing improved.

Partially offsetting these improvements was a decrease in bio products operating products and LIFO charges more than doubled to $225 million, reflecting the major increases in commodity price levels.

Excluding LIFO charges, gross profits increased 16% to $1.2 billion.

Selling, general and administrative expenses increased $40 million or 13% this quarter from a year ago, due mainly to three factors.

First, we incurred costs of $9 million related to a consolidation project of our European operations, which should provide cost and tax savings and efficiencies going forward.

Secondly, overall personnel costs increased $15 million.

And third, the effective foreign translation primarily from the Euro currency increased by $10 million.

Financing costs net which comprises interest expense less investment income was $44 million in the quarter, similar to last year, but substantially higher average debt levels used to finance the increases in working capital liens were offset by lower interest rates due to the capital market transactions we completed during the last half of fiscal '07.

Our effective tax rate this quarter was 31%, up slightly from last year's second quarter and down just slightly from our 2007 full fiscal year rate of 31.5%, due principally to shifts in our geographic mix of earnings.

Net earnings and earnings per share increased 7% and 9% respectively representing a new company record second quarter and building upon last quarter a very positive first half of fiscal '08.

Turning to slide five, we will focus on certain items impacting our second quarter's results and as usual these amounts are stated on after-tax basis.

Commodity prices continued their substantial rally throughout the quarter resulting in an after tax LIFO charge of $139 million or $0.21 per share compared to $67 million or $0.10 per share last year.

We also had some gains on securities and abandonment charges that are shown here to help your analysis.

Net earnings excluding these items were $614 million, $0.95 per share in the second quarter '08, compared to $505 million, $0.76 per share last year, an increase of 25% in per share earnings on this basis.

You will find a normal schedule showing the full breakdown of these amounts by segment for the comparable quarters and year-to-dates in the appendix of this presentation.

Slide six gives an update of our current performance against our targeted long-term performance objectives.

As expected, return on net assets for the rolling four quarters ended December '07 has decreased to 13.6%.

This decrease was impacted by the significant increases in working capital and capital expenditures, but is still tracking ahead of our 13% on average long-term target.

Turning to our cost per metric ton of production objective, our rolling four quarter costs came in at $111.17, slightly over our target of less than $110 per ton processed.

Cost incurred in support of the additional crop volumes handled by agriculture services, cost related to our European consolidation project, and abandonment and realignment charges were included in this calculation.

The impact of currency translation and in particular this strong Euro also increased costs in the first six months of fiscal '08.

As a commodity processor, we are committed to running our businesses in the most cost-effective ways, to be the low-cost producer as we identify ways to build shareholder value from the many opportunities we see.

We track all costs carefully to insure that every dollar spent supports our profit opportunities or creates cost efficiencies going forward.

We will start to realize cost savings from our recently announced corporate realignment and European consolidation project in the next few quarters.

Also a number of our capital projects such as our investments in cogeneration are investments that will improve our cost efficiencies and build competitive advantage going forward.

Details of the calculations of these nonGAAP RONA and cost per metric ton performance metrics can also be found in the appendix to this presentation including bio commodity volume break downs for prior quarters.

Slide seven is a comparative summary of segment operating profits.

Total operating profit for the quarter increased 25% to a record second quarter, $955 million.

On slides eight to 12, I will review in more detail each individual segment's comparative quarterly earnings.

Slide eight is an operating profit analysis of the oilseeds processing segment.

Oilseeds processing operating profit increased 14% to $219 million from $192 million last year and was in fact a record second quarter for the oilseed segment.

Crushing and origination results improved $12 million due to ongoing strong global demand for vegetable oil and protein meal.

Processing margins in North America and origination income in South America both improved and were partially offset by higher manufacturing expenses, principally energy and depreciation.

In addition European operating results declined principally due to higher raw material prices.

Refining, packaging, bio diesel, and other results declined $7 million due to an increase of $13 million in charges for assets abandonments taking this quarter.

Excluding these charges, comparable operating results increased $8 million due principally to our new North American biodiesel [part] and improved packaged oil margins in North America.

Asia results reflect the company share of improved operating earnings of [Wilmar] International.

We continue to see strong global demand for protein meal and vegetable oil.

In the U.S., NOPA has recently reported increased capacity utilization in the low 90% range, the USDA is projecting a 6.5 million-acre shift from corn to beans in 2008, crop conditions in Brazil and Europe are good.

We do currently see -- continue to see overcapacity in global bio diesel.

Slide nine summarizes second quarter operating profit for the corn processing segment which decreased 18% to $275 million from $336 million last year.

Sweetness and starches results declined $5 million as increased corn costs and higher manufacturing expenses were almost offset by a higher selling prices for all key products.

Bio products results declined $56 million due principally to lower ethanol selling prices and higher corn costs partially offset by increased ethanol sales volumes and improved [licensing] results.

Current market conditions for corn processing remain mixed.

We are currently seeing higher corn costs and are expecting to see increased average ethanol and sweetener selling prices.

North American ethanol markets are continuing to grow.

Spot prices have increased to about $2.40 gallon delivered.

We look cautiously ahead as forward cash prices reflect market concerns about the industry's ability to absorb new additional capacity scheduled to come into production.

Lastly, we look forward to the full benefit of NAFTA.

I will turn to slide 10 which highlights our agricultural services operating profits.

This quarter was an exceptional quarter for our merchandising and handling businesses, which drove overall agricultural services operating profits up 140% to $315 million.

Merchandising and handling results improved $194 million as we handled record quantities of grains and oilseeds and capitalized on margin opportunities in grain origination, freight and export markets.

These opportunities resulted from large U.S.

crops, global grain imbalances, volatile market conditions, and expanding supply chain needs.

Operating earnings from barge and truck transportation declined $10 million due principally to higher fuel and labor costs and somewhat lower south-bound barge freight rates.

Rapidly changing market factors translate into facing a different set of market opportunities for agricultural services each new quarter.

We continue to see volatility in ocean freight and commodity markets and have seen that the largest part of the U.S.

crop has already moved to market.

Slide 11 is an operating profit analysis of the other segment sharing a $38 million improvement to $146 million from $108 million last year.

Wheat, cocoa and malt improved $28 million due to improved margin conditions in North American wheat milling and our malt business.

These improvements were partially offset by weaker cocoa press and chocolate margins.

Current conditions in cocoa should support a better margin outlook going forward and we continue to focus on finding network and plant efficiency in wheat processing and on driving cost efficiency improvements in our malt operations.

Financial earnings increased $10 million due to marketable security gains from the company's brokerage services business.

Slide 12 looks at our corporate costs which increased $132 million to $270 million due principally to the $118 million increase in LIFO inventory evaluations caused by significant commodity price increases.

Investment income net increased $15 million and our corporate costs were up $11 million mainly due to the cost of European consolidation project.

Other costs, principally the elimination of our minority interest increase $18 million.

Slide 13 is a summary of the company's financial condition as of December 31st.

The strengths of our balance sheet and access to liquidity in the capital markets has allowed us to support the significant increase in our working capital levels and capture the profit opportunities it provides.

Working capital increased $5 billion due principally to increased commodity price levels.

To put this into context, CBOT soybean futures prices are up over 70% year-over-year, wheat futures were anywhere up 55% to 100% depending on the delivery month and corn futures prices up 20% to 30%.

Capturing profit opportunities through prudent risk management of working capital is critical to enhancing shareholder value.

Having the flexibility to capture these opportunities was instrumental to our strong performance in these very volatile market conditions.

We understand that working capital costs can be very significant for our business and we monitor efficiency very closely.

In spite of the higher absolute dollar levels we are pleased with our overall management of working capital.

For example of receivable levels as daily sales outstanding trend has been positive.

Property, plant and equipment increased $564 million primarily due to good progress with our ongoing program.

Short and long-term debt increased $4.5 billion to support the increased working capital needs.

Slide 14 focuses on our first half cash flow highlights.

Cash generated from operations before changes in working capital remain strong at $1.4 billion reflecting our strong earnings performance.

As previously mentioned to support the higher working capital and capital spend, our total debt rose approximately $4.5 billion from June '07.

Cyclically, it is normal to see our debt levels rise during the first half of the fiscal year, but this year's trend is more pronounced due to the significant increases in commodity price levels we have seen.

Dividends were normal and we had no significant share buyback activity this quarter.

At this time I'll turn the call back to Pat and we'll be glad to take your questions.

Thank you, John.

And thank you for filling in for Doug.

Operator Eric, if you don't mind, please open the call for questions.

(OPERATOR INSTRUCTIONS) Stand by for your audio questions.

Your first question comes from the line of Diane Geissler with Merrill Lynch.

Please proceed.

Good morning.

Congratulations on your quarter.

Just a question here on the ag services which has exceeded expectations, big crops here in U.S.

Can you just give us some idea on what we should look for on the longer-term basis.

What's the sustainable level in that business?

Let me start on that, Dianne and maybe John Rice can jump in.

Each quarter gives us a different set of opportunities to look at.

And I would suggest that the size of the crop this year, certainly our merchandising and handling this past quarter, has been something that has given us tremendous opportunity to take advantage of.

We have the opportunity to export as -- in fact maybe moreso than almost anyone.

We have the balance sheet to finance the opportunities in terms of increased working capital.

So I know that doesn't give you a lot of specifics about the longer term, but it does say we are of the size and scope that if anybody can handle these opportunities we should be able to.

John.

Diane, actually what has happened this last year too is we saw very good wheat exports out of the United States, moving those -- moving that around to different parts of the world along with corn.

Soybeans are down a little bit the this year.

But it has really been our groups effectiveness of working together in the global markets and moving crops from one area to the next.

We have the South American harvest going to be coming out here shortly.

Brazil is starting in [monagrosa].

And we have to watch the rains in Argentina here in the next two to three weeks, but long term, I think we are very well set up to be able to manage these volatile markets along with the freights.

I guess my question is if we do see the acreage switch back in the U.S.

this year as you indicated the USDA's 6.5 million acres.

Obviously it is a long time until we actually plant.

But you do see acreage switch back.

The volume coming off of soybeans is smaller than the volume coming off of corn.

So I guess, is this, is this kind of a record level and we will never see it at this level again, if we have that switch back?

If you could just maybe talk about it in volume terms, what you would expect to handle.

Well, a lot of the switch back is still up in the air.

That was the latest USDA number.

A lot has to do with how the weather proceeds here in February and March.

And also what the prices of commodities are at that time.

And a lot of the acreage we are seeing switched is really more on the fringe areas, we still see the Midwest, the Iowa, the Illinois and Ohio area still going to plant a lot of corn.

So on the total bushel acreage or total bushel number I still don't see how it will all play out, but it is not going be as dramatic as what I think everybody thinks right now.

Okay.

I appreciate that.

And then, I guess a question on oilseeds, if I look at the volume numbers you have indicated for the first six months, it looks like the second quarter, while volumes were still up in the second quarter, they were not up as much as they were in the first quarter.

Is there a timing issue there?

Could you maybe comment on your -- where we stand on capacity utilization rates, and sort of your major geographies?

I think you gave industry data but if you could just talk about particularly in North American market and the expansion plan there, just give us a feel for what is happening in the North American market.

We are seeing a very good demand for meal exported meal and domestically and also on the oil side.

We are seeing bio diesel demand as the markets move and the basis moves with it.

So people are able too move a little bit of bio diesel over to Europe.

With we are also seeing very good demand coming up here in the last month or two on exports to China.

Right now as North America sits I see good demand going forward.

The key in the North American market is an inverse in the market, July going to new crop and how actual size of the crop turns out and actually how we manage our way through that inverse.

That's really going to be the key going forward.

Okay.

Thank you.

You're welcome.

Next question comes from the line of David Driscoll with Citigroup.

Please proceed.

Hey.

Thanks a lot.

Good morning, everyone.

Morning, David.

Pat, on the last call, I think both you and Doug had commented on your expectation to see better coproduct pricing and as a result better net corn cost, given the report today that doesn't appear to be true, that net corn costs were actually higher.

Can you talk about the trend here and what -- obviously I watched the corn prices in the market, I see what has happened there.

But I would have suspected you would have been more insulated to those things with some hedges.

Can you give us a little color on what happened in the quarter, relative to those comments from last call?

And then maybe a bit of an outlook.

How worried should everybody with be with corn prices at these levels?

Well, coproduct credits for wet milling are strong.

They are roughly about 45% of corn price but spot net corn is higher and probably higher than maybe your expectations or than others for the second quarter.

I think our, our ability in the longer term to manage through the -- where we are toward the end of the cycle here or the end of the season in the U.S.

is important, and I think there's going to be kind of a mixed outlook going forward in the corn sector.

John, you might want to comment at least on the pricing side as well.

David, we are also comparing over year-over year on quarters.

So there has been a run up on the market on that, but also we are seeing very good [coal] product credits as Pat and Doug mentioned in the last conference call.

But as markets move higher, we are always going to see a little pass through come through our P&L on that.

We never have 100% of our corn bought at any given time for a whole year.

Well, can we simplify the statement and just say with the rising corn prices the net corn cost, given $5 corn, is likely to be more onerous in the last 12 months than it was in the past 12 months?

Is that a reasonable statement?

I guess, I necessarily wouldn't say that.

Wouldn't say that.

Right.

My -- could you give us some color around that?

I guess I totally didn't understand the question.

Are corn costs going to be more onerous over the next 12 months than the past 12 months.

Should we look for favorability or a negative variance over the course of the next year?

That's really hard to say, David.

That's one of those that gets really close to guidance.

I mean --

The market trends is really going to dictate a lot of our corn cost.

That's maybe the best way to say it.

Now how things going from quarter-to-quarter, you always have variance just on timings of our shipments, just on timing on how the bushels are slotted at any given period of time, and just on how it goes through the accounting book.

So I think the best way to look at it is, going forward, if corn prices go higher, yes, our corn prices -- our net corn prices will show increases.

Okay.

Thank you.

Two more quick questions on the corn side.

Ethanol prices, Pat you made a comment about this.

Can you just give us -- some times in the past you have given us a little color, the difference between contracted volumes and spot volumes.

Were spot volumes a significant component of your sales in the quarter?

And really the heart of my question is here is, should we look for a significant step up in ethanol pricing in the next couple of quarters, given what we've seen in the spot market, or is ADM substantially contracted out, thus you wouldn't see a movement reflecting spot changes?

Actually, spot is higher and higher amount, I think each quarter.

Or maybe another way to look at sit there are shorter contract periods than there have been in the past, so a little of the inverse of what you were saying, not long-term contracts on 100% basis, there for going forward in the full year.

I do think that spot prices are higher, but we expect ethanol prices to be up versus the second quarter.

When you look out many quarters, you see a little question mark about the markets, see some question about whether or not the full capacity as it comes on stream will have a home.

But we do see much more spot activity.

And if I could just -- sorry, go ahead.

That's exactly right, Pat.

As everybody sees the same data you are looking at, David, they see a lot more capacity coming on.

We see the South America crop coming on and sugar harvest along about April/May.

So everybody's just really playing it more hand to mouth.

Some people go out two, three four months just to make sure they have a supply if they're opening a new market.

But right now everybody sees a lot more supply than the demand going forward.

And it has everybody on just going on a month to month basis.

If I can sneak in a final question.

Did you see any shipments to Mexico pursuant to an opening of the border on January 1st?

Did that actually start to happen?

We have been shipping to Mexico over last two to three years because we've had a -- I forgot the word not a quota but allocation on shipments down there.

To say there was any more before the first of the year opposed to after the first of the year, no, but we see what NAFTA shipments going to keep increasing to Mexico, we feel over this next year.

Thanks for the comments.

And congratulations on a nice quarter.

Thank you, David.

Your next question is from the line of Vincent Andrews with Morgan Stanley.

Please proceed.

Good morning everybody.

Morning, Vincent.

John, just to follow up on Diane's question, I think what you were eluding to and tell me if I am wrong but it sounds like the switch back from corn to soybean if one takes place will probably take place on acreage that yields well below the 150-bushel per acre average and therefor the volume effect would be lower than we would think on a weighted average basis.

Is that about right?

Yes.

That's what our thinking is right now or a lot of the market is thinking.

It is really more of the fringe acres or fringe areas that will see more of the dramatic switch.

Okay.

And then just following up on that.

Obviously, it would be hard to imagine that the volume increase from more corn acres this year regardless of which ones they were didn't help, but was it volume that really drove the out performance or was it price and supply dislocations or just higher overall prices in ag services?

Can you give us any greater color on that?

It is great comment.

It's all of the above.

Just the different -- this is one of the first years in a long time that we exported a lot of wheat out of the United States.

With we saw a lot of corn export, a lot of soybean exports, in different parts of the world had -- Australia had a bad crop.

So the normal shipping changes were not the same.

We were able to take -- we were able to execute on that very well this last twa quarters or actually the last year.

Okay.

Can -- are you gaining market share versus the local player due to your global reach and I would imagine the local player could be strapped from a working capital perspective.

Has that been an opportunity for you?

I wouldn't know the answer to that question.

Then I guess I won't --

We are in all parts of the world.

I am sure our people do, but I actually don't know the answer to what our volume is at any given region of the world, whether we gained a lot or not.

Okay.

But you don't generically disagree with the idea that's possible.

The premise that we have the strong balance sheet to use these working capital increases is a right premise.

Okay.

And just in the transportation components of ag services, what's going on there?

It wasn't large, but I think most people would have expected you to be able to do better in that segment and not worse.

Well, fuel costs were higher than in the transportation sector, that's our trucking and also barge line.

We also saw a downturn in exports in the United States just because of the construction industry.

So barge freights were not as high --

Okay.

-- as they were the last couple of quarters.

And Vincent you may recall that that's off have a very good quarter in '07.

Okay.

So it is still a good quarter in transportation, it's just off from a very high one.

Okay.

Thank you very much.

I will pass it along.

Thank you.

Your next question comes from the line of Christina McGlone with Deutsche Bank.

Please proceed.

Good morning.

If I look at sweeteners and starches on a sequential basis, I was a little surprised to see that it was down, because I would assume pricing is relatively the same sequential, volumes are probably lighter, but you had the benefit of the new crop coming in.

So I thought your net corn costs would be lower.

But then bio products is higher than we expected.

Was there any shifting maybe of capacity out of fructose into ethanol, because maybe ethanol spot prices ran on you in the quarter?

We are trying to follow your question here, Christina.

John, you --

Christina, I guess, you are correct, the net earnings were down or earnings were down sequential.

I don't think it was a really a very significant decline and obviously similar to the quarter a year ago.

No one single factor really caused that, it is a lot of things that go in there.

As we mentioned there's an impact from higher corn costs that's offset by higher selling prices, it is difficult to break it down for you.

Or give you one thing that's really deeper than that.

So sequentially corn costs were higher?

Sequential corn costs were a little bit higher, yes, just a little bit higher.

Okay.

But the volume was just normally how it is, there wasn't any kind of swinging back into ethanol.

No, volumes were very normal.

Okay.

And you had mentioned higher manufacturing costs, what were those?

Principally, energy, fuel costs were up from a year ago.

We had a little bit more repair maintenance type cost activity going on too, but principally energy.

And keep in mind, Christina, that our fuel costs which are in the transportation sector are also including in that manufacturing cost.

Okay.

And then next question, the -- if you look at production of ethanol versus or use of ethanol last year versus the mandate, we were say 1.5 billion to 2 billion gallons above.

And I understand that those credits carry forward into '08, but expire at the end of this year.

So is there a way that ethanol demand in '08 could be lower than nine-billion gallons because of the use of these RINs?

Yes, that is correct.

I think there's -- I don't remember the exact number but I think it is an 800-million gallon number of the RINs, but a lot of it has to do with can whether the customer have the infrastructure in, whether they want to go buy the RINs, whatever the RINs are trading at.

I think they're about a $0.05 right now, or if they're going to start blending ethanol, if they're just better off because of the discount or the value of ethanol to RBOB, if it makes more sense for them to blend ethanol.

So, yes, that could be a factor going forward.

Okay.

Thank you.

You're welcome.

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

Please proceed.

Hi, don't mean to tag team you here.

I guess I have just kind of a quick follow up to Christina's question on the RINs, John.

Yes.

The -- but I thought that those expire by the end of this year, and therefore wouldn't it be really to the advantage of the refiner to use them because otherwise they go away.

Well, it is going to be a financial decision.

Are they better to pay $0.04 or $0.05 per RIN, are they better off doing that, or if they can blend ethanol at let's say it's $0.30 over and they get $0.51 tax break and they get to $0.20 that way, are they better off blending ethanol?

A lot of it has to do with their refining capacities and logistics and everything else.

So I wouldn't say necessarily it is automatic on that.

Okay.

And then, just to -- I guess a question to Pat, the -- I am a little bit -- I guess first of all you have overly the disclosure versus years ago is fantastic.

And I have to thank you for that.

But I am a little bit, I guess, surprised on slide five, that you would use LIFO as kind of an extraordinary item, because in reality the ag service business benefits from the rising volume and pricing of the commodity markets, and so to a certain extent the offset is the LIFO charge.

So I think it is -- there's a little bit of apples and oranges there or cherry picking, let's say.

Can you kind of respond to that?

Yes, it is a great observation actually, Eric.

We have had some of the same discussions of ourselves, if you will of what is an unusual item anymore.

And with the higher commodity prices as we have seen over the last couple of years, LIFO is more of a usual charge in a quarter than an unusual one.

And it dwarfs the other things on the page.

So as we continue to want to disclose more you are always going to hear about the LIFO charge.

Now whether or not it turns up on a page, earnings are earnings are earnings, you know that as well as we all do.

I think both numbers at the moment are important to look back and see our historical way of reporting, but I think you are right about how unusual it is.

Okay.

And then, it is too bad about Doug and his knee.

I have been through knee surgery.

But I guess kind of just -- you own a bank that's buried into the financial numbers, and I assume that it is doing quite well given farmer income and land values.

But given everything going on with banks is there anything on that bank balance sheet that we need to worry about?

I mean maybe because he's out it is too specific of a question, but any thoughts there?

Yes.

I think since you asked the question about worry, I would say it is not, no, it is a very normal transaction.

There's work that the bank does for us and fits into our scheme, you'd argue it is not necessarily a strategic asset but one that we have held a while.

John, do you want to comment at all on the financials?

Yes.

I would just add from a numbers point of view, the results were very normal this quarter, and from an analysis of the closing position, we don't believe that there's anything to worry about in the bank's balance sheet.

So nothing to worry about going forward.

So no subprime stuff that has been killing every bank on the planet?

We are not really a big city here, Eric.

Yes.

I have been there.

-- same credit issues maybe on the subprime of elsewhere.

Okay.

All right.

I will pass it on.

Thank you.

Thanks.

Your next question comes from the line of Christine McCracken with Cleveland Research.

Please proceed.

Good morning.

Hi, Christine.

Just wanted to get an update if I could on your new ethanol capacity and when that might be coming on line.

Actually it is a great question about all of our projects, and one thing we wanted to mention is that next quarter we would give an update on all of those projects, after we get through the winter here, which has to do with a major piece of the construction period, particularly the weather, steel delivery etc., we will give you an update on both the projects and the timing.

Having said that, there is one -- the two projects, one is expected to come on at the end of '08 and the other at the end of '09.

And that's pretty close -- actually maybe pushed out just a tad from our original estimates.

I can't add a lot to that.

I was up visiting one of the plants during this cold weather with 20 below and about 30 mile-an-hour wind it is very tough to work outside.

So, like Pat said, we will update that, once we get through the winter months and we will have a better indication on when the completion dates will be.

You get the sense that cold weather, freezing temperatures is having any impact on when other plants might come on line?

When you look out at the scheduled capacity additions that I guess a lot of the industry is looking for, is it your expectation that maybe some of that will come on later than is currently planned for?

If it it is having an effect on us, it is having an effect on everybody.

But also working capital is an issue for a lot of these smaller companies when they have to -- once they actually get their plant built they have to go out and source the corn.

They have to be able to carry inventory.

We are hearing plants not being able to start up because of working capital issues.

So I think it is a little bit of everything for everybody, but long term I still think we are going to have over -- we're going to have enough capacity on the market once April/ May gets around.

The market is still very tight during the -- I would say through March, April.

We have heard lately that there's a possible proposal coming from the administration to pull the Brazilian ethanol tariff off.

Have you heard anything like that and what kind of impact do you think that would have on the market assuming that came on about the same time as all of this additional capacity?

We have -- I have heard talk of that, but I have not seen anything concrete right now.

The tax goes through 2010, and what happens is, if all of the sudden the tariff is reduced or taken off, I think what will happen is we will just reduce the price of corn and it will end up coming back in the margin.

Okay.

Great.

And then just on the changes in the Florida market, obviously that's a huge potential market for ethanol, can you give us an update on where that proposal stands?

Is it your expectation that state in fact will be a much bigger market for us here in the short term?

Yes, we are seeing a lot of interest in all of the southeast, we are shipping to a lot of the southeast destinations.

So I feel that market will come on very strong here in this next year.

Would that help with that kind of glut of ethanol we might sere here in the spring?

Well, I think what will happen is we have probably 11-billion gallons of capacity coming on.

It will be here about May, June.

We have the South American crop coming in.

We've got a nine billion mandate.

We have the RINs which could take the demand back to about an [8-3].

So it is going be a supply-and-demand situation.

And , but there's a lot of factors and a lot of issues that always tend to come up.

I mean, with the last conference call, the conference call before, we were talking $1.50 ethanol we were never going higher and all the sudden at $2.40 again.

So there's a lot of volatility in these markets, just like a lot of other

Alright, we will leave it there.

Thanks.

Thanks, Christine.

Your next question comes from the line of Robert Moskow with Credit Suisse.

Please proceed.

Hi, thank you.

I would like to focus in on ag services again.

Forecasting where the profitability is going to go is very meaningful to us here because it gets us a little closer to what normalized earnings could be considered.

And so I'm going to ask you about two comments you made in your prepared remarks.

You said that with the crop ending now in North America, the largest amount of volume has already moved.

And since you are largely in northern hemisphere company, in terms of your assets, does that mean that the next six months we should see lower volumes and lower profits in ag services just because of your -- the way your assets are balanced around the world?

And secondly, you also said that, it is becoming more and more important to capture profit opportunities as they come up within ag services.

Does that refer to actually moving physical grain around the world, or does it mean like your traders are seeing discrepancies in the market and that there's -- that there's ways to capture them just using the futures market?

That's a very good question.

It is a little bit of everything in that.

We went through a big volume period during harvest that were handling a lot more grain.

But there's still a lot of grain around.

When you drive through the midwest you will see a lot of corn sitting on the ground.

So that still has to come to the market.

We are moving soybeans.

We're seeing very good soybean demand out of the United States, and we are also still shipping wheat.

So, we are able to move that around, and this next quarter I still feel it will be very good volumes.

I don't see a slow down in volumes at all this current quarter we are in and then also we're going to have the South American harvest coming on.

We're going to be handing grain out of Argentina, we're going to be handling grain out of Brazil.

Those plants will be up and running.

So I guess I don't see any --, it is always hard to answer the questions and not give guidance.

So I guess at times -- I don't see the volumes dropping off I guess is the best way to say that.

Another may be build on that, Rob is to, these opportunities that present themselves are global.

So it is not just the U.S.

crop.

You asked about traders actually moving grain, our international trading continue to be there and keep in mind the globality of it all.

I appreciate that.

And one last question, there's been an article the "Journal" today and lots of reports about some countries instituting price controls as a way to protect consumers in those markets.

If price controls become more apparent, does that have any effect on you, or do you just not care?

Well, I wouldn't say we don't care, but depending on the size and the scope, it can, but also the world supply and at the demand of grains is going to be the deciding factor in all this.

So if some country net importer and puts in price controls and world demand for meal and oil and poultry and everything is up, I don't know exactly how they will have that go into their own country.

But the law of supply and demand is playing very well into the declining markets right now.

And everybody is looking at the great demand we are seeing globally and for both meal and oil.

And so I -- putting price controls can have an effect.

If we can move other places in the world for more money, people are going to be doing that.

I just think theoretically, longer term price controls always seem to collapse and hurt the economy.

But shorter term I imagine you could make the argument that it would just keep demand high in these emerging markets, and therefore keep the demand for the grain and oil that you are exporting to those markets high.

Is that a fair statement?

Well, we're -- China is a great example.

They put on price controls we're still see them buy soybeans, come in and buy a lot of vegetable oils, they're trying to build up their reserves in those commodities.

Okay.

So I --

Great.

Thank you.

Thank you, Rob.

Your next question comes from the line of Ken Zaslow with BMO Capital Markets.

Please proceed.

Hi, good morning, everyone.

Morning, Ken.

I guess not harping on this ag services, but I guess the question that comes out is, have you seen the dislocation of commodity get resolved and therefore there's no more opportunity.

Is that seemingly what you are implying or is that not true?

Harp away, Ken.

No.

That's not what we are implying at all.

Okay.

So again there's no reason to believe that this dislocation should continue and the margin opportunity should continue, maybe not at this level but maybe at the quarter or so before?

Is that fair?

Every quarter looks different.

And while they blend into one another, I think we tried to tell you a little bit about the current market conditions in January as we sit today.

But there are still opportunities, and as John talked about this quarter we are currently in, those opportunities still exist.

And can you remind us how LIFO charges actually impact your cash flow and your tax rate and how do they get resolved in the future?

Well, yes, there's no real effect on the cash flow.

And there is an effective deferral of tax payments.

I think how they get resolved in the future is a difficult one.

The way LIFO works is to the extent prices go down and start to -- continue down, we will start to see the recovery of some of the reserve we have created up until this point.

Is that specific enough for you?

Yes.

And then there's no cash flow impact and it should potentially lower your tax rate going forward?

Yes, correct.

Okay.

And then the other question that I had is, the wheat, cocoa and malt business, I know it is small, it's not the key driver, but the performance seemed to have been pretty good.

I know there was a lot of restructuring, a lot efforts being put there.

Is there a new -- is this a sustainable level or is this something that just seasonal in timing?

Well actually we hope for it to even improve over time because I think there's still margin improvement to be seen in the cocoa area.

Wheat was the largest driver of the improvement this time, I think that -- as we have said.

And what was the cause of that?

Was it just the higher pricing being able to be passed through?

And is the lag over, or is this just a timing issue?

It was also a combination of some efficiencies that we've had in our plan.

Sorry, John, you were going to answer.

I was just going to say, it is really moving a lot of the North American wheat crop around.

There are some areas that had good crops and other areas did not have very good crops.

And we have plants located throughout North America and our transportation is excellent in this area.

And we are able to bring wheat from one area to the other area and work with our customers to be able to come up with our products.

So I think that's really the driving force behind that.

Great.

I appreciate.

Thanks, Ken.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Ann Gurkin with Davenport.

Please proceed.

Good morning.

Good morning, Ann.

Just want to touch on the supply and demand globally for grains, the tremendous demand for the grains and the types, particularly what we saw the wheat and soybeans.

I guess a question I wrestle with a lot is what can throw off demand?

What are the biggest risks?

What do you worry about the most?

To me it looks like supply will stay tight for some time, but demand could change.

We are seeing the acreage higher in wheat, in Europe.

So we are -- and that wheat crop is looking very good right now.

South America is having a very good crop coming in.

So I mean, I feel globally the supply looks like it should be a little bit better this year over next year.

And I -- the demand side is always is $64,000 question, how does that come in.

I feel the food side of the market will always maintain.

We are seeing growing economies throughout the world.

So I see the food side coming.

Now if all the sudden energy prices drop that can have a major effect on what happens to commodity prices.

But right now we are in a very good demand-driven market, along with a couple of short supply areas that really started the run off.

But it is always going to be the weather, what's happening at any given week or day on how these markets are going.

Okay.

And then as you look out into the second half, have you, can you all comment on what you expect the Euro to do, are you giving any kind of currency outlooks?

No, we are not, Ann.

Okay.

And then, third, I think you opened a palm oil facility in Germany.

Can we get an update on is that meeting facility meeting expectations?

I think I read somewhere that palm oil prices are up significantly.

Yes.

That's meeting and actually exceeding expectations.

As a matter of fact we are looking to put another expansion in here in the next two quarters.

Great.

Seeing that is, the demand for oil and bio diesel and food in Europe has been very good.

Great.

Thank you.

Your next question is a follow-up question from Eric Katzman with Deutsche Bank.

Please proceed.

Hi.

Thanks for taking the follow-up.

Just one quick on the LIFO again and the working capital.

Isn't it a -- it is a temporary cash flow negative, right?

I mean you are borrowing $5 billion on CP to kind of pay for the inventory -- the higher cost inventory, you have to pay something on that, right?

And I guess you get it back, but at least it is a temporary cash flow issue?

That is -- I mean I agree as prices have run up we have to borrow more money to finance that inventory, but, Eric, we would have to do that irrespective of what our inventory accounting basis is.

So we don't make the same direct connection between cash back -- the cash flow in that respect and LIFO.

Right.

Okay.

And then, okay, I will let that be.

And then I think you had mention capacity utilization globally and oilseed processing was around [90%].

Was that right?

I think the comments were -- it was North American.

North America.

Where, I think Diane may have asked this question earlier, where do you see that in terms of global utilization?

And how comfortable are you, Pat, with the the big four including yourself obviously in terms of how they -- how you look out over the next few years with let's say pretty good demand versus what I think is fairly high utilization rates?

Wee try to report the U.S.

notebook, because it is one that you can look up yourself.

But I think the point there is trend wise, there are higher utilization from last year's quarter and even last quarter.

I think globally, they're -- it is moving up, but we still have some capacity in our China operation.

So we still have the room to grow and have looked at making that strategic plan so that we can absorb the growth as it continues to occur.

So kind of matching growth with expected market is our look.

And do you, do you think that, I mean you obviously have a better view into companies like [Cargill] and [Dreyfuss] than certainly we do.

Is it your sense that their utilization rates based on what you hear is that they're comfortable where they are, they are creeping up to the point where they have to add more capacity, or we could keep on this great run for a while?

Well, I can't comment on my competitors operations, Eric.

You know better than that.

But I can say we are can comfortable with the additions we are adding as well as the growth that we see.

And obviously with meal -- protein meal and vegetable oil demand being where it is, I think there is continued opportunities here, and those that operate with scale will benefit from this.

Okay.

Thanks for taking the follow up.

Okay.

Thanks, Eric.

Your next question comes from the line of Pablo Zuanic with JPMorgan.

Please proceed.

Morning, everyone.

Hello.

Just a couple of follow ups, but I want to go back to the comment you made regarding these Brazilian sugar ethanol imports.

You are making the argument that clearly you have to buy less corn so as a result corn prices will go down but I suppose it would be a big lag there.

At the same time if you buying less corn, you're producing less ethanol, because you'd be losing share to Brazilian.

That would probably create a lot of operating inefficiency.

I want to be clear that Archer Daniels did not say that sugar imports from Brazil will be noted to earnings to --

Well, we don't comment on that, but --

Well, but you said just now on the call -- can I -- I feel the way you answered the question that Christine asked was that import of Brazilian sugar ethanol came into the U.S., you said it will not affect our spread because we probably buy less corn so corn prices will go down.

So I want to make sure that Archer Daniels today said, for those listening in Washington D.C., that if Brazilian sugar ethanols were to come into the U.S., it would have no effect on Archer Daniels earnings.

Is that you what you guys said?

No.

Let me elaborate a little bit on this.

What I said, or I felt like I was saying is, that we will have more capacity coming on in the United States, and the opportunity for Brazilian ethanol to come into the United States will have an effect on the ethanol demand usage here in the United States.

We -- our plants, we feel, are very efficient, very cost effective.

We plan to run our operations very hard.

We feel we are very cost competitive.

During the summer months we also tend to run fructose plants harder which will -- can produce less ethanol.

But that's a swing capacity we can't have.

And there's a lot of factors into the price of corn, it's the exports out of south America, it's going to be the weather coming in here in March, April, May, are we getting good rains, are we not getting good rains.

So there's a lot of factors that affect the price of corn, the ethanol demand, the ethanol usage, if the discount gets high enough we will see a lot more people start blending.

But what I was trying to say is, yes, Brazilian ethanol coming into the United States can have an effect on the U.S.

market.

Thank you.

And just a follow up if I may, but when you were surely a lot of variables affecting ethanol prices in the coming months, but in earlier remarks did you tell us you expect ethanol prices in the second half to be above what you experienced in the second quarter?

Was that as close as you get to giving us guidance on ethanol prices there?

Can you comment on that?

Our ethanol prices we feel this next quarter will be higher, third quarter will be higher than second quarter.

Okay.

Thanks.

And then just on the sweetener side, in the last conference call you talked about on the contract side on the fixed-price contract side that you were looking for about 10% increases.

Now that we're end of January, can you comment in terms of what has been a generated earnings against those contracts?

And related to that I think [PPG] recently in recent conference call, PPG in Mexico said they will not use HFCS, so how does that affect your outlook for shipments of HFCS to Mexico?

We -- our 10% is accurate.

It is a timing -- some contracts started in January, some contracts started in February, March, April, all the way through.

And we have seen demand pick up in Mexico.

The relationship with the price of HFCS to sugar will have an impact on how much more we are able to ship down to Mexico.

So, I don't see anything -- we have not heard from any customers down there that they will not be buying HFCS.

r

And one last one.

You were commenting that some of your clients on the ethanol side more hand to mouth, because of what they see as a potential over supply situation, how about on the corn side?

Since you are hedging on corn change in any way, given where corn prices are, you are not as long as you normally would be.

Can you give us some color there?

We are constantly daily looking at how we run our risk management throughout the -- our global assets.

So I guess I had just as soon not comment or get into much detail on that.

But our strategies the last couple of three years has not changed.

When we buy our corn, how we hedge it on and up, philosophically has not changed.

Okay.

And for me, just one very last one, I guess the last one on the Q&A, so -- When we talk about the volatility and price inflation and grains, I am just wondering, on the cultural services side, is it really about volatility?

Is that what has been helping you, or is it just about inflation, the fact that you buy and then a few days later grain prices continue to go up and you make your profit that way?

When to me, inflation is different from volatility.

I am just trying to understand.

It would seem to me that inflation would help you more than volatility.

No.

It is moving our global asset base and being able to source crops in different parts of the world, handle, put them through our transportation assets throughout the world, put them on vessels and be able to ship customers is really been the driving force.

And we can -- we are working with customers on a lot of different commodity, we can switch commodities for them, we give them a lot of flexibility.

It is the whole value chain that's really -- is really the effect on that, I would say, it is really not just the pure price.

Okay.

Thank you.

Your next question is a follow-up question from the line of Robert Moskow with Credit Suisse.

Please proceed.

Just a follow-up from Eric Katzman's question for John.

In order for all of that cash to come back out of working capital, do corn prices and all the other grain prices, do they have to come down, or can that cash come back even if the grain prices are now at a new threshold?

It is a great question.

I think just to be clear, LIFO is basically a bookkeeping exercise, it doesn't really affect cash.

Clearly, either increases or decreases in commodity prices do have a impact on working capital.

So really what would make some of that cash come back would be lower commodity prices and that there may be a direct impact on lower LIFO to.

You've got to think about volumes too.

Increases and decreases in volumes have arguably a more dramatic effect on working capital needs than do the absolute price changes themselves.

Okay.

Thank you.

Thank you, Rob.

This concludes our Q&A.

At this time I would like to turn the call over to Pat Woertz for closing remarks.

Very good.

Well, thank you, everyone, for the interest in the company.

Some times you ask are we happy with the quarter.

And the answer was a big yes.

I think we had, again, demonstrating our strength and diversity of our global network, we were able to capture opportunities.

So thanks for your interest.

And we will see you next quarter.

Thank you for your participation in today's conference.

This concludes our presentation.

You may now disconnect.

And have a good day.