Archer-Daniels-Midland Co (ADM) 2008 Q3 法說會逐字稿

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  • Operator

  • Good ladies and gentlemen and welcome to the Archer Daniels Midland Company third quarter fiscal 2008 earnings conference call.

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

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

  • We will facilitate a question-and-answer session towards the ends 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.

  • Dwight Grimestad - VP Investor Relations

  • Thank you, Eric.

  • Good morning and welcome to ADM's third 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 ADMs web site, www.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 the comments constitute forward-looking statements that reflect management's current views and estimates 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 matters we will discuss on our conference call today and with that, I will turn the call over to our Chairman and Chief Executive Officer, Pat Woertz.

  • Pat Woertz - Chairman, CEO

  • Thanks, Dwight and good morning everyone.

  • I would like to first start with a safety moment.

  • In April, ADM held its Second Annual Global Safety Week where all of our colleagues, our contractors, employees, everyone took the time to stop and discuss safety.

  • This fiscal year, we do have total recordable injuries down 12% and logged workday rates down 24%.

  • And while that is an improved performance, we do remind ourselves that it's not about statistics, but indeed, about people and we will continue to work hard toward our zero injuries, zero incident goal.

  • This morning we announced third quarter earnings of $517 million, up 42% from the third quarter of 2007 and diluted earnings per share of $0.80, up 43% over the same period.

  • Last quarter on our call, I did highlight the significant positive momentum we were seeing and our third quarter results today I think demonstrate the ability of our balanced operations, our global network and our strong balance sheet to deliver shareholder value amid these very fluid markets.

  • Volatility in commodity markets did present some unprecedented opportunities as we said in our press release and our team leveraged those opportunities through our financial flexibility, our global asset base and, once again, I think the combination of the physical assets and intellectual assets combined to capitalize on market conditions.

  • There is a reason for some optimism in the supply fundamentals of world crops.

  • South American farmers are gathering a good harvest.

  • In Europe, we are seeing a better crop condition than we've seen in a few years and globally, wheat supplies look to be rising.

  • Here in the U.S., the USDA predicts increased soybean production in 2008.

  • However, of course, planting is just getting started, so we will wait and see.

  • These changing supply dynamics will present, as every year does, different challenges and different opportunities going forward.

  • I am confident, however, that we have the right portfolio, the right network and the right people to capitalize on these opportunities and deliver value to our shareholders.

  • I would like to turn the call now over to Steve Mills who took on -- took over as CFO the first of March.

  • Steve is a veteran here of ADM and most recently he held our lead role in strategic planning efforts.

  • Many of you already know him well.

  • I hope you'll join me in congratulating him in his new role.

  • Steve, if you will take us through our third quarter results.

  • Steven Mills - CFO

  • Thanks, Pat, and good morning everyone.

  • You will see that we've updated the slide desk a bit to help bring some additional clarity to our numbers so I would like to move to slide four where you will see our statement of earnings highlights for this quarter.

  • Net sales and other operating income increased 64% in this quarter to $18.7 billion.

  • Nearly 90% of this increase was attributable to increases in selling prices, primarily resulting from the significant increase in underlying commodity prices.

  • The remaining 10% of this increase in sales revenue was due to higher volumes.

  • Gross profit for the quarter grew 55% to $1.2 billion as overall operating margins improved.

  • Partially offsetting these improvements in gross profit were significantly higher net corn costs and rising energy prices.

  • Selling, general and administrative expenses increased $84 million, or 29% this quarter from a year ago due principally to higher global personnel costs including the effects of foreign currency translation, accruals and further organizational realignment expenses.

  • Our financing costs net, which consists of interest expense less investment income, rose to $66 million for the quarter.

  • This increase reflects higher average debt levels that were used principally to finance our additional working capital requirements.

  • Our effective tax rate this quarter was 31.5%, down about 3% from last year's rate for the quarter, but in line with the rate we've been estimating for this fiscal year as well as being in line for the full year rate from 2007.

  • Last year's tax rate included a cumulative catch up effect related to updated estimates of geographical mix of earnings back in 2007.

  • And as Pat mentioned, net earnings and earnings per share increased 42% and 43% respectively, reflecting strong underlying industry fundamentals together with some exceptional merchandising opportunities that we were able to capture this quarter.

  • Turning to slide five, we will look at certain items impacting our 2008 and 2007 third quarter's results.

  • As usual, these amounts are stated on an after-tax basis.

  • Commodity prices remained volatile during the quarter and closed higher for our LIFO based inventories.

  • These price increases created a $39 million, or approximately $0.06 per share charge this quarter, compared to $14 million, or approximately $0.02 per share charge for our third quarter last year.

  • Other items set out on this chart include gains on securities and asset sales as well as organizational realignment expenses.

  • A schedule showing the break down of these amounts by segment is in the appendix to this presentation.

  • Turning to slide six, we are giving I was comparative overview of our operating profit by segment.

  • You'll note that total segment operating profit for the quarter increased 54% to $913 million, up from $593 million a year ago.

  • We will now turn to slide seven to begin the review of the individual segments.

  • Slide seven looks at the operating profit of oilseeds processing.

  • Profit increased 28% to $237 million for the quarter, up from $185 million last year.

  • Crushing and origination results improved $78 million due to continuing strong global demand for vegetable oil and protein meal.

  • Refining, packaging, biodiesel and other results declined $16 million due principally to weaker biodiesel margins in Europe.

  • Last year's quarter for refining packaging biodiesel and other also included a $14 million business disposal gain.

  • Our Asia results principally reflect the company's share of operating earnings of Wilmar International Limited.

  • We see generally positive current market conditions for oilseeds processing due to the continuing strong global demand for protein meal and vegetable oil.

  • Capacity utilization remains high and is well-balanced with demand.

  • Current crop conditions in Brazil and Europe are looking good and the USDA is projecting increased soybean production in the U.S.

  • this year.

  • The developing global biodiesel markets, particularly in Europe, continue to be effected by excess production capacity.

  • And we believe that ADM's integrated processing model, which allows us considerable flexibility to optimize margin all along the value chain, remains a significant competitive advantage and allows to us rapidly respond to changes in global supply and demand economics.

  • Turning to slide eight, slide eight summarizes third quarter operating profit of the corn processing segment which decreased 31% in the quarter to $172 million from $251 million last year.

  • Net corn costs, which rose to historically high levels, significantly impacted both sweeteners and starches and bio products operating profits.

  • In addition, production volumes were down 3% due to both planned and unplanned downtime in several of our facilities.

  • Energy and chemical costs rose on a year-over-year basis which further dampened earnings.

  • Selling prices increased for sweeteners and starches, lysine and ethanol.

  • We also saw increased lysine and ethanol sales quantities.

  • At this time, we continue to see mixed market conditions for corn processing.

  • Corn costs remain high.

  • In bio products, we see improved ethanol selling prices for the next quarter compared to this past quarter.

  • Demand continues to grow and gasoline blending economics have improved.

  • Slot prices have increased to about $2.70 a gallon on a delivered basis, but we look cautiously further out as it is still unclear how quickly the industry will absorb the additional capacity scheduled to come into production.

  • As we ship increasing quantities of high fructose corn syrup to Mexico, we look forward to the full benefit of NAFTA.

  • We are also optimistic about the outlook for lysine as recent selling prices have improved with increasing global demands.

  • We will turn to slide nine which highlights our agriculture services segments operating profit.

  • This was an exceptional quarter for our merchandising handling business which drove overall agriculture services operating profit up to $366 million from $46 million last year.

  • Our U.S.

  • elevator and river system locations continue to benefit from higher capacity utilization rates and improved storage and handling margins, particularly on export related business, as last crop year's large North American harvest continued to work through our system.

  • The volatile grain and freight markets, coupled with favorable risk management positioning, helped boost earnings in this segment to record levels.

  • Operating earnings from our barge and truck transportation operations were comparable to last year's quarter as higher operating costs, principally fuel, were priced into freight rates.

  • Current conditions for ag services remained volatile.

  • Grain origination and export flow begins its seasonal shift from North to South America where crop conditions point to ample supplies and generally good farm economics.

  • Crop development in Europe also appears to be substantially improved from the last two difficult years and global wheat production is projected to increase by 45 to 50 million tons.

  • It's too early in the season to know what North American crops will be this year as the planting season is just beginning to get underway.

  • We'll turn to slide ten.

  • Slide ten is an operating profit analysis of the other segment showing a $27 million, or 24% improvement to $138 million from last year's $111 million.

  • Wheat, cocoa and malt improved by 8 million due principally to improved margin conditions and favorable risk management results in North American wheat milling and our malt business.

  • These improvements were partially offset by weaker cocoa earnings by high, competitive cost and competitive pressures experienced in the North American chocolate market.

  • Last year's third quarter earnings for wheat, cocoa and malt included a $39 million gain from a business disposal.

  • Financial earnings increased $19 million or 66% due principally to increased brokerage services income, decreased loss provisions at our captive insurance company and improved earnings from our managed fund portfolio.

  • Turning to slide 11, our corporate costs increased $121 million, due primarily to the $41 million quarter-over-quarter LIFO variance and to an increase in other which principally reflects the effects of eliminating the after tax earnings of our minority interests.

  • Moving on to slide 12, slide 12 shows our condensed balance sheet as of March 31, 2008.

  • The most significant change to our balance sheet is the increase in our working capital due principally to the impact of higher commodity prices.

  • Our strong balance sheet and the financial flexibility it provides is critical to allowing us to grow our earnings and capture enhanced margin opportunities.

  • Net property, plant and equipment has increased $850 million due primarily to the spending related to our major construction projects.

  • And we'll discuss the status of these construction projects in more detail in a few moments.

  • And as you will note, this balance sheet expansion has been financed from a combination of earnings and debt.

  • Moving on to slide 13, slide 13 lays out our cash flow highlights for the current and prior nine-month periods.

  • Cash generated from operations before the impact of changes in working capital was $2.2 billion for the nine months, up 28% from last year, principally reflecting our strong earnings performance.

  • As I noted earlier, the increase in property, plant and equipment spending reflects the noted expenditures related to our construction program and we had no share buy-back activity this quarter and dividends paid reflected our increased dividend rate.

  • We will move on to slide 14.

  • Slide 14 provides an update of our current performance against our targeted long-term performance objectives.

  • Return on net assets, RONA for the rolling four quarters ended March 31, '08 was 13.3% exceeding our 13% long-term objective and continuing to exceed our approximately 8% cost of capital in spite of the significant increases in working capital and construction progress related to our capital spending program.

  • Our cost per metric ton of production objective of being less than $110 per ton, we were above our long-term target as our rolling average costs rose to $114.64 per ton.

  • The largest changes were in our total energy related costs, both to power our factories and our transportation equipment.

  • We also had increased personnel costs and we felt the impact of translating into dollars costs incurred in foreign currencies.

  • And lastly, we've incurred higher costs this year to merchandise, handle and process the increased volumes of grains.

  • These extra costs negatively impact this particular metric, but also allowed to us capture the higher profit margins we have been experiencing.

  • Details of the calculation of these non-GAAP, RONA and cost per ton performance metrics can be found in the appendix to this presentation.

  • And as we mentioned in last quarter's conference call, we've included a slide in the deck today, slide 15, to give you an update of our major ongoing construction projects.

  • At this time I will hand it over to John Rice to take you through this slide.

  • John Rice - EVP of Commercial and Production

  • Thank you, Steve, and good morning everyone.

  • I will be discussing the information on slide 15.

  • This period of unprecedented growth has proven to be challenging as we said before.

  • We've experienced substantial delays due to weather, steel shipments and the ability to access available craft labor.

  • We have retested these projects and we are optimistic about their investments.

  • We also believe they will be very close to our original construction costs estimate of to the $2.5 billion.

  • Our Columbus, Nebraska ethanol facility is scheduled to be on line in the third quarter of calendar 2009.

  • Cedar Rapids, Iowa ethanol facility is scheduled to be on line first quarter of calendar 2010.

  • These plants will each produce 275 million gallons of ethanol and are being built next to our existing corn wet milling operations to lower plant operation costs and to benefit from our extensive logistics network.

  • We are converting two of our plants from natural gas to coal co-generation, one in Clinton, Iowa where we are building our PHA plant and the other in Columbus, Nebraska where we are building one of our dry ethanol mills.

  • These plants will come on line in phases.

  • In Clinton, there will be three phases for the three boilers and three turbines.

  • Phase I for Clinton will be completed in the third quarter of this year and the full project will be completed by the end of the first quarter of calendar 2009.

  • Phase I at Columbus will be completed in the third quarter of next year with a full project completed in the fourth quarter.

  • Together, these plants will reduce our projected energy cost close to $200 million per year based on current natural gas and coal costs.

  • Our PHA bio degradable plant expects to have commercial PHA product in the second quarter of calendar 2009.

  • We look forward to producing commercial quantities of this unique product.

  • Our local plants first phase will be operational during fourth quarter calendar 2008 and it will be fully operational third quarter calendar 2009.

  • The state-of-the-art plant will deliver improved production efficiencies as well as offering the opportunity to expand our chocolate product line.

  • Finally, the Decatur propylene ethylene glycol plant will also be on line in the third quarter of next year.

  • This plant adds a new product to our overall product portfolio, adding an additional processing option to our value chain.

  • We are looking forward to completing these projects and capturing additional value to our shareholders.

  • Thank you.

  • I will turn it back over to Pat.

  • Pat Woertz - Chairman, CEO

  • Thank you, John.

  • And, Operator, we will be happy to take questions if would you open the call line for questions.

  • Operator

  • (OPERATOR INSTRUCTIONS) Your first question comes from the line of Eric Katzman with Deutsche Bank.

  • Please proceed.

  • Eric Katzman - Analyst

  • Hi, good morning everybody.

  • Pat Woertz - Chairman, CEO

  • Good morning, Eric.

  • Eric Katzman - Analyst

  • I guess my first question, John, has to do with the project delays.

  • I mean, you kind of noted some shorter term issues, but how much of the ethanol delays, coupled with the comments about capacity in the industry, I mean how much of the delay is a function of all that excess capacity coming on line versus kind of the short term stuff you mentioned?

  • John Rice - EVP of Commercial and Production

  • It was all the short term stuff.

  • I mean, we still look at the returns on these two ethanol plants we are building and we feel very positive just because of the cost advantage we feel and the logistics advantage.

  • But we did experience a lot of cold weather delays.

  • I think I mentioned in the last call that I was up in one of the plants and the wind was blowing 40, 50 miles an hour with a 50 below wind chill and it's just tough to operate.

  • And also our steel shipments from China were delayed and it was just not production from the Chinese plants, but also just the shipments and getting them through customs ending up delaying the projects also.

  • Eric Katzman - Analyst

  • Okay.

  • And then to switch to a second to the ethanol business, did you say that -- I think you said that volumes overall for the segment were down a few percent, but did you also say that ethanol volumes were up?

  • Did I get that right?

  • Steven Mills - CFO

  • Volumes, volumes are up.

  • Eric Katzman - Analyst

  • For both?

  • Steven Mills - CFO

  • For ethanol.

  • Eric Katzman - Analyst

  • Okay.

  • But overall in the quarter, I thought you said that the volume -- production volumes were down three.

  • Steven Mills - CFO

  • Overall production, and when we speak to that, it's about the corn grind itself for the whole complex.

  • So ethanol was up, but the overall segment volumes were down.

  • From a production perspective.

  • Eric Katzman - Analyst

  • Okay.

  • And then I guess the last question, Pat, I mean as the industry kind of moves its focus from North America to South America, when you say that the ag service results were kind of unprecedented, are you kind of signaling to us that because of the natural shift and where your assets are more concentrated that the opportunities are reduced given the volumes that flow through your system in the move from North to South America?

  • Pat Woertz - Chairman, CEO

  • Well Eric, first of all, it's not a signal, it was a statement that these had been -- the volatility this quarter was unprecedented.

  • It was higher than we had ever seen before in any crops.

  • What I was trying to say about the world crops situation, while sometimes you read that a panic associated with crops I think the supply fundamentals of world crops are improving and as we move to a South American harvest and a large soybean crop, et cetera, that opportunities present themselves differently in different regions.

  • So John, do you want to add anything to that?

  • John Rice - EVP of Commercial and Production

  • The only thing I'd add, Eric, as everybody is well aware these are unprecedented times in the commodity market.

  • We've seen wheat go from $5.05 and you get to the Minneapolis exchange on a synthetic basis got to $25.00, now it's back to $10.00.

  • Chicago wheat is around $8.00.

  • We are always going to have a little bit of disruptions which we have seen this last year so it's always tough to say what the next quarter is going to look at because a lot of different government policies can come into play and growing conditions also.

  • Eric Katzman - Analyst

  • Last thing and then I will pass it on.

  • I think you had kind of stated in your prepared remarks that the health of the South American farmer is pretty good, but Christina went down there recently and I think that it doesn't -- they look pretty good, but not -- isn't it that break even level on soybeans, price isn't that much above kind of break even, so are they, in your opinion, they are actually in better shape or how do I judge that comment?

  • John Rice - EVP of Commercial and Production

  • Well, I was just down there also about two, three weeks ago and the big issues down there right now are obviously currency and then the input costs.

  • But I guess my read was that we did not see anybody talk about not expanding.

  • I still believe there will still be a little bit more expansion on the crop for next year.

  • And also, I'm hearing a lot more talk about people growing more double crop corn and even single crop corn.

  • So, I think we'll have to see what commodity prices look like when their planting season comes, but I guess I'm not looking for any decrease in acreage at all and looking at, actually a little bit of an increase in acreage.

  • Eric Katzman - Analyst

  • Okay, thank you.

  • I'll pass it on.

  • Operator

  • Your next question comes from the line of David Driscoll with Citi Investment Research.

  • Please proceed.

  • David Driscoll - Analyst

  • Thank you.

  • Good morning everyone.

  • Pat Woertz - Chairman, CEO

  • Good morning, David.

  • David Driscoll - Analyst

  • First off, congratulations on a great quarter.

  • A couple of questions.

  • Can you tell us what the average selling price was for ethanol during the quarter?

  • John Rice - EVP of Commercial and Production

  • No, we do not give that information out.

  • We usually just talk about it on a spot basis and right now, the demand is -- there's more demand than supply.

  • We see that going on until probably about the middle of third quarter calendar year and then we see more supply coming on.

  • David Driscoll - Analyst

  • Well, is it fair to say that the results should be improving because the spot market curve has continued to improve?

  • So from our seat, the only thing we know is that you guys are contracting your volumes ahead of time.

  • So it seems logical that it's hard to say where any one quarter where your numbers exactly were, but yet these prices in the spot market have moved up materially.

  • So again, given where the corn costs are versus where the ethanol prices are, does it stand to reason that ethanol profitability should sequentially improve?

  • Is that true?

  • Steven Mills - CFO

  • No, I think your description is pretty accurate there, David, that spot prices have been moving up and it's a good way to think about it.

  • David Driscoll - Analyst

  • I appreciate that.

  • John Rice - EVP of Commercial and Production

  • David, one thing you said, there isn't a lot more spot business.

  • Going forward we are not seeing -- we are seeing a little bit more contracting going forward but still, the majority of the business seems to be spot within a two to three month period.

  • David Driscoll - Analyst

  • Okay.

  • On ag services, Eric was trying to get after this a little bit, but this result here was, it was extraordinary, I mean almost $370 million, there's nothing to say about that other than that's just absolutely fantastic.

  • It always leaves everybody out there wondering, what happens next.

  • Can you give us, do you have any visibility on the next, on this next quarter or is the volatility -- Pat, maybe you can just simply comment on the characteristics that drove these results, do they continue to exist right now?

  • Pat Woertz - Chairman, CEO

  • It's always a hard question, David, as you know.

  • And we try to describe the current situation as continued volatility.

  • And depending on how one takes that word, what it means for us is that markets continue to move and we see that we are still seeing quarters where we have not seen them like this before and as we said in the same conference call last quarter, we said we can see continued volatility, but frankly, we didn't know how high or how much.

  • So I think we are trying to describe our current conditions as certainly describing which crops have already come to market, which ones are continuing to fill out and that global, globally our network and certainly our intellectual capability should be able to capitalize on whatever opportunities we see and they should be -- we should be good at doing that.

  • David Driscoll - Analyst

  • So is it fair to say that conditions are good, we just don't know how good until the results play out?

  • Pat Woertz - Chairman, CEO

  • I think that's a fair way to say it.

  • I think that's a fair way to say it.

  • David Driscoll - Analyst

  • And then the last question and I will pass it on here, I wanted to go back to Brazil.

  • John, you made an interesting comment only about somewhat of a little acreage increase or just a slight acreage increase, I forget exactly the word you used, but the global ag prices really do seem to indicate that farmers around the world need to increase production.

  • Inventories are very tight.

  • My basic gut reaction on these things is that the market signal should indicate the farmers for massive increases in production because of grain stocks.

  • Brazil seems to be the major linchpin on how we are going to do this if we want to see acreage expansion.

  • How firm are you, or how convinced are you that acreage is just going to expand slightly?

  • And kind of, could you give us a little bit of your rationale to this and maybe some bigger broad picture color on the global grain market?

  • John Rice - EVP of Commercial and Production

  • On the Brazil side, it's more led to how we feel fertilizer prices and the real is going to be at any given time.

  • And also, just watching the corn soybean spread, with the acreage report on the United States, we are expecting a lot bigger stocks in the U.S.

  • and also Brazil.

  • So, I wouldn't be surprised to see the southern hemisphere actually expand a little bit more corn and/or wheat acreage.

  • So I think the soybean supply and demand next year looks very well-balanced.

  • I don't think that's going to be the issue and I think it's just going to be what other crops they can grow.

  • They are also looking at expanding a little bit more sugar down there.

  • When you look at the total crops, oilseed looks to be very good, wheat looks to be very good and we have, as everybody is well aware, we are behind on corn plantings this year.

  • David Driscoll - Analyst

  • Okay.

  • Appreciate the comments everyone.

  • I'll pass it on.

  • Thank you.

  • Pat Woertz - Chairman, CEO

  • Thank you, David.

  • Operator

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

  • Diane Geissler - Analyst

  • Good morning.

  • John Rice - EVP of Commercial and Production

  • Good morning, Diane.

  • Diane Geissler - Analyst

  • Congratulations on your quarter.

  • John Rice - EVP of Commercial and Production

  • Thank you.

  • Diane Geissler - Analyst

  • Just a question on the ethanol side.

  • It seems like the volume has been ratcheted up here, kind of the food versus fuel debate, obviously not new to our space, but I guess with the current iteration of the farm bill and some of the changes made in the tax incentive there, could you talk a little bit about how would you view changes in the tax incentive, a temporary removal of the RFS standard this year and kind of current economics with where crude is versus the demand picture you have?

  • Could you just comment on that?

  • Pat Woertz - Chairman, CEO

  • Diane, let me kind of take that from a little bit of a higher plane and then come down to your question a bit.

  • This whole debate we hear about, first of all, I emphasize with the consumers who are paying way more for certainly fuel at the pump and more for food.

  • However, the food prices are driven, as we know, by record energy costs.

  • It's the major contributor for higher food costs, energy, the dollar, demand for food in China, et cetera.

  • And I actually find it sad and maybe even a little ironic that these misguided attacks on biofuels is directed at the one alternative we actually have today to transportation fuel.

  • We have other alternatives that people are working on for other types of energy, but for transportation fuels, biofuels is the only thing that exists today and it's actually increasing fuel supplies and by doing so, reducing the price of fuel and improving energy security.

  • So biofuels are really a real solution to real problems and I think retreat, which is what you are asking about in changes, retreat from biofuels is wrong.

  • It's foolish.

  • I think it's dangerous.

  • It's a mistake.

  • Retreat from biofuels is just an empty gesture.

  • People talk about it that won't fill anybody's stomach and won't fill any gas tasks.

  • Having said that, if you think about some of the debate that's going on, again, I think it's misguided.

  • Some day, some day with the base of corn ethanol, for example, in this country and the base of biofuel from food feed stocks which most go to food any way, 90%, 95%, when we move from the base today to second-generation and third generation, farmers will plant more, we'll have more food, we'll have more fuel.

  • I just think it's misguided to think about changes in the energy bill or retraction or retreat in any way.

  • Again, I think it's an empty gesture.

  • John, you want to add anything?

  • John Rice - EVP of Commercial and Production

  • Couldn't agree with you more, Pat.

  • In terms of the market you had you asked about and the volumes, we do keep seeing the volumes increase and keep seeing more demand, more markets opening up.

  • Ethanol is very cheap compared to gasoline right now, so it makes sense for the blenders to be adding ethanol at as fast a rate as they can.

  • And I see the market keep growing.

  • We will have the Brazilian sugar harvest in ethanol coming in the United States probably right around June.

  • We are starting to see a little bit more coming now.

  • Even with the tariffs, that works coming into the United States.

  • So as far as the -- you asked about the tax on the tariff, it works now.

  • I don't know why we need to take it off while we are trying to expand our industry here in the United States.

  • Diane Geissler - Analyst

  • Could you comment on at what level the economics would know longer work?

  • And here I'm really talking about the tax credit.

  • John Rice - EVP of Commercial and Production

  • I guess I really don't know how to answer that question.

  • It's all relationship on the price of gas, the price of corn, the blender.

  • There's a lot of different scenarios in there.

  • So if you have $2.00 gas, it's going to be one scenario as opposed to $3.50, $4.00 gasoline.

  • Diane Geissler - Analyst

  • Okay, but given the current environment we are in, and here I'm really speaking to the change that's in the current farm bill and to be honest with you, it seems like the farm bill is changing day-to-day in terms what have they intend to do with the tax credit.

  • But that seems to be the focus that I have from clients, so I was wondering if you could comment on the proposed change in the farm bill.

  • John Rice - EVP of Commercial and Production

  • I guess as to the proposed change, since ethanol prices can still go higher relative to gasoline, I could see that happening and the margins staying the same.

  • Pat Woertz - Chairman, CEO

  • And Diane, I think you're right that daily we see the house and senate leaders are working to determine the final, both the cost, the scope of the final farm bill.

  • So I think the debate is ongoing and the current state of flux is probably -- to think about what it is today wouldn't be as fair to comment on what it is yesterday and what it might be tomorrow.

  • It's still in

  • Diane Geissler - Analyst

  • Okay, alright, well I appreciate that.

  • Thank you.

  • Pat Woertz - Chairman, CEO

  • Thank you, Diane.

  • Operator

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

  • Please proceed.

  • Ken Zaslow - Analyst

  • Hello?

  • Pat Woertz - Chairman, CEO

  • Ken.

  • Steven Mills - CFO

  • Hi, Ken.

  • Ken Zaslow - Analyst

  • Just two questions, one is on the crop conditions, it seems like a planting in the U.S.

  • on corn seems to be a little bit behind history.

  • Does that worry you at all or does that create more opportunities and how do you look at it going forward?

  • John Rice - EVP of Commercial and Production

  • Well, that's a good question.

  • It's always -- whenever crops are delayed, whether it's the United States, South America, you always do get a little bit concerned, but we always seem to be able to get the crops in the ground.

  • We are 10% behind last year on corn.

  • If we get some good dry weather here in the next four, five days we have the equipment everybody has, it's amazing how fast we can get crops in the ground.

  • It won't really be a concern until you get to the end of May.

  • You get to the middle of May, there's talk that maybe you lose a little bit of yields, but with corn prices, I think everybody is going to make sure to try to get a corn crop in the ground.

  • The only area that I hear that's real wet is eastern Iowa.

  • Ken Zaslow - Analyst

  • And does it create opportunity given the volatility again?

  • Does this extend the, I guess the spread between corn here and around the world and how does that play out or does it not have an impact on ag services?

  • John Rice - EVP of Commercial and Production

  • Sure, it can.

  • We can look at last year with wheat prices.

  • Nobody fed feed wheat around the world.

  • They started to use it in flour and they fed more corn.

  • This year, with what we are seeing in the wheat, we can actually see more wheat being fed and less corn.

  • It's really, like Steve Mills always says, it's really Econ 101, the supply and demand scenario on everything, but it does create a lot of opportunities for us, yes.

  • Ken Zaslow - Analyst

  • And then the other question I have is on the crushing environment, do you see any inflection point, any changes on the meal side or the vegetable oil side that would either be positive or negative?

  • Can you give us some clue on any deltas coming down the pike?

  • John Rice - EVP of Commercial and Production

  • On the protein meals side, we hear talk, but you keep looking at the layers in the swine and cattle.

  • We are starting to see a little cut back in cattle that's going to affect corn more than it does protein meals.

  • But worldwide demand, we are seeing very good demand on that.

  • And the oil demand, even though we have very large oil stocks, just because of the biodiesel, it's keeping the demand strong also.

  • Ken Zaslow - Analyst

  • Great.

  • I appreciate it.

  • Pat Woertz - Chairman, CEO

  • Thanks Ken.

  • Operator

  • Your next question comes from the line of Pablo Zuanic from JP Morgan.

  • Please proceed.

  • Pablo Zuanic - Analyst

  • Good morning, everyone.

  • Pat Woertz - Chairman, CEO

  • Good morning Pablo.

  • Pablo Zuanic - Analyst

  • Just a very specific question maybe for John.

  • When I think of ag services, in very simplistic terms is high prices, are high prices by far the main driver the earnings growth in that division?

  • Because you keep using the world volatility and dislocation but isn't it just the fact that prices are just so much higher that are driving earnings there?

  • John Rice - EVP of Commercial and Production

  • I'm sorry, go ahead.

  • Pablo Zuanic - Analyst

  • Go on.

  • John Rice - EVP of Commercial and Production

  • It's really more of the opportunities globally, because of our global footprint of being able to move crops from one area to the other.

  • You also get into our barge freight, our elevation at the gulf.

  • Vessel freight and being able to deliver to our customers and giving our customers flexibility on whatever products they want and give -- if they buy wheat and they want to switch over to corn or corn gluten seed, that's really what drives it and gives us a lot of opportunities, just not just purely high flat prices.

  • Pablo Zuanic - Analyst

  • But on that point, John, if we compare the environment say, to a year ago or two years ago when your earnings in that division were much lower, I could make the argument that your footprint, your global footprint was already there.

  • But the main difference in the meantime is really prices.

  • The volatility and dislocation, we had droughts back then and we also had some form of volatility.

  • Has that really changed or are you are gaining volume share, is the high price environment resulting in working capital paying for smaller traders and that also gives you opportunities?

  • I'm just trying to understand what has changed, because your global footprint was there two years ago also, right?

  • John Rice - EVP of Commercial and Production

  • Higher volatility and our strong balance sheet obviously comes into play into that.

  • We are able to buy more crops, be able to use our capital to be able to not back out of markets when the volatility is high and be able to take on more ownership at any given time and then being able to sell them to our customers.

  • But, like I mentioned earlier, we saw wheat has gone from $22.50 in the Minneapolis or $25.00 down to $10.00.

  • It's not just all price, the volatility also plays into the profitability there.

  • Pablo Zuanic - Analyst

  • And then in terms of volumes, again in that division, that's -- you don't disclose volumes for ag services, but roughly, how important is volume growth there or it's not really a relevant piece?

  • John Rice - EVP of Commercial and Production

  • Volume is very important.

  • I mean, as we pick up volume in South America, we had a huge corn crop here in the United States.

  • We handled additional volume there, it affects our barge line and also affects ocean freight.

  • So, yes, volume does come into play.

  • Pablo Zuanic - Analyst

  • And just a couple of follow-ups, moving on to ethanol.

  • Given that the ethanol business, now you're saying there's more to a two to three-month support basis compared to, I understand, six, nine months before.

  • Does that mean that you also have changed your corn hedging policies, that perhaps you were longer corn on ethanol before ethanol before and now you're short of corn, only two or three months positions given the type of contracts you have?

  • John Rice - EVP of Commercial and Production

  • No, we haven't changed on philosophy on corn hedging.

  • And on the ethanol side, just looking at the supply and demand scenario which is always constantly changing as long as ethanol is very cheap to gasoline, we may see markets expand quicker than what we see.

  • But right now, it looks like we will have excess supply in about the third or fourth quarter of this year, but it's not just the U.S.

  • supply it's also the Brazilian supply coming into the United States.

  • Pablo Zuanic - Analyst

  • Right.

  • John Rice - EVP of Commercial and Production

  • You know, these markets are constantly changing.

  • It can be, all of a sudden some of these new ethanol plants can have working capital issues and not be able to start up.

  • We've seen that, those problems.

  • Pablo Zuanic - Analyst

  • Right.

  • On that point, besides you announcing the delays of these two plants today, are you aware of large (inaudible) are being delayed because of the credit crunch, is that something you can talk about that you know?

  • Pat Woertz - Chairman, CEO

  • Just for clarification, Pablo, ours is not due to any credit crunch.

  • These are delays as we talked about.

  • We have seen some other announcements of delays, but any future ones, I can't say.

  • Pablo Zuanic - Analyst

  • Okay.

  • One last one, I mean, given all this discussion of the (inaudible) sugar ethanol, can you give us an update in terms of your plans to try to expand there?

  • (inaudible) is doing it on a greenfield basis, a smaller scale basis, how do you think of that market?

  • If you go in would you go in on a large scale or would you start from a, on a greenfield basis, piecemeal basis, were you talk about that, Pat?

  • Pat Woertz - Chairman, CEO

  • Yes, it's probably the -- all of the above are opportunities for us, which means we can go in with a partner, I think we would, what we do think about is something that could grow to the scale to be a significant contributor to ADM's shareholder value.

  • So weather that's greenfield with a partner, expanding some production that already occurs today, looking at the markets, we have established a trading operation.

  • We do understand the infrastructure and the ability to move in the region.

  • So stay tuned.

  • We are evaluating all opportunities there.

  • Pablo Zuanic - Analyst

  • One very last one and I'll pass it on.

  • I'm surprised on the sweetener side your earnings are not tracking as well as those of say, corn products international and I'm just wondering, can you talk about your model there?

  • I mean, there's one that's on a trolling basis, right, that's cost plus, so there, I suppose, corn is not a factor.

  • And then on the fixed price side, I always made assumption that in the fall, would you hedge most of your corn so your margins on the fixed price contracts would be much pretty much set for the year and the only variable there would be coal products, but corn prices have moved up, so earnings on corn production would be up.

  • I'm just surprised about the weakness in sweetener earnings.

  • I could conclude from it that maybe you are not hedged as aggressively or you don't (inaudible) some fixed price corn (inaudible) and you leave corn unhedged there.

  • Can you comment on that?

  • John Rice - EVP of Commercial and Production

  • Most of our business is flat price.

  • We do have tolls and they are, some people have two to three-year tolls, also.

  • But the majority of our business is flat price.

  • Coal products can also have a timing issue on when they are actually sold and when they are shipped and how that affects the net corn price.

  • But our basic philosophy is always stay hedged on corn.

  • So that has not changed.

  • Pablo Zuanic - Analyst

  • Thank you.

  • Pat Woertz - Chairman, CEO

  • Thank you, Pablo.

  • Operator

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

  • Please proceed.

  • Vincent Andrews - Analyst

  • Good morning everyone.

  • Pat Woertz - Chairman, CEO

  • Good morning, Vincent.

  • Vincent Andrews - Analyst

  • Just kind of follow up on one of the things from earlier, isn't it reasonable, there's just kind of a lot of, maybe too much attention being played to the mandate in ethanol relative to the fact that it's -- blending is really, we are going to blend above the mandate again this year as we did last year and that's really a function of economics, in other words the oil price, the (inaudible) price and the ethanol price, rather than a government mandate.

  • Pat Woertz - Chairman, CEO

  • Yes, and that's kind of resupporting again that it's swelling supplies and good economically, yes.

  • Vincent Andrews - Analyst

  • Okay.

  • And on -- what happened in Asia in oilseeds this quarter that it was down?

  • Steven Mills - CFO

  • I think, this is Steve, Vincent.

  • We do pick up our share of Wilmar and it's somewhat an apples and -- apples and oranges comparison.

  • As you know, Wilmar has been transitioning with its combination with (inaudible) oil and grain.

  • So there's just a combination of what was available to pick up to report last year and this year.

  • It's going to take a few more quarters to A., to get apples and apples, and also, we are always a quarter behind in picking up their results.

  • So it's kind of a mix and we just had a different ownership mix a year ago than we do today and that's going to sort itself out.

  • Vincent Andrews - Analyst

  • Okay.

  • And then on corn costs in corn processing, is there any relation to ag services there?

  • In other words, is there some scenario by which you have higher corn costs in corn processing because you see more opportunities to move corn around in ag services and there's some offset there because you are just kind of picking a bigger pieces of the value chain to earn a better margins in?

  • Does that make sense?

  • John Rice - EVP of Commercial and Production

  • Yes, but we don't really look at it that way.

  • We -- I mean --

  • Steven Mills - CFO

  • The question makes sense but --

  • John Rice - EVP of Commercial and Production

  • But ag services has their own, they will look at it more on the global basis on the corn and moving the corn from the elevator system.

  • Now, they will sell to the corn processing division, but really, that's how we manage our business that way.

  • Steven Mills - CFO

  • And we sell it over at market prices.

  • So the, the question was good, but we run them separately and there's no offset here.

  • Vincent Andrews - Analyst

  • Okay.

  • And lastly, I think, what are you seeing in terms of Mexican high fructose corn syrup?

  • John Rice - EVP of Commercial and Production

  • We still see that market coming around this year.

  • We are making shipments down there as the first three months of this year, domestically, just because of the weather, fructose demand was a little lower, but we still feel very positive that any loss we have in the United States in volume will be picked up in Mexico.

  • Vincent Andrews - Analyst

  • So in other words, it's early days on that line at that point.

  • Okay.

  • I will pass it along.

  • Pat Woertz - Chairman, CEO

  • Thanks, Vincent.

  • Operator

  • Your next question coming from the line of Christine McCracken of Cleveland Research.

  • Please proceed.

  • Christine McCracken - Analyst

  • Good morning.

  • Steven Mills - CFO

  • Hi, Christine.

  • Christine McCracken - Analyst

  • Just want to check, too, on the impact that the strike in Argentina might have had on the quarterly results.

  • It didn't get mentioned, and I was just wondering if it actually helped you during the quarter or hurt you.

  • John Rice - EVP of Commercial and Production

  • Well, we have operations and we are exporting corn and soybeans out of South America.

  • That was really right before the harvest started.

  • We did see some other opportunities in other parts of the world because people were worried about getting their ships loaded in South America.

  • So, you may have little blips that help you in that kind of situation.

  • But long-term, it's not very good to have Argentina not exporting into the world market.

  • Christine McCracken - Analyst

  • Do you see that situation getting resolved?

  • Do you have any additional color from your visit or otherwise?

  • John Rice - EVP of Commercial and Production

  • I don't, no.

  • Steven Mills - CFO

  • I think -- I mean, I'll just jump in briefly.

  • Exporting grain in Argentina is important for that country.

  • It's one of their critical currencies.

  • So, just kind of go back to the fundamentals of why I think it will sort itself out down the time, but I don't think we have much additional color than what you read.

  • Christine McCracken - Analyst

  • Alright.

  • Then, just in terms of the other countries, several other countries have put similar protection as to policies in place, kind of hoarding grain as it were as things get tight.

  • How do you manage, I guess, your trade flows?

  • Do you kind of anticipate a political disruptions and dislocations and how do you work around that when historical trade flows are disrupted?

  • John Rice - EVP of Commercial and Production

  • Well, those are always very tough, at least for me, to anticipate.

  • Just like last year, the Ukraine quit exporting wheat.

  • So that gave some other opportunities around the world.

  • Now, here in the last week, the Ukraine is going to export wheat again because they feel better with their supply and demand.

  • So, it's always a moving supply and demand scenario around the world.

  • Pat Woertz - Chairman, CEO

  • One of the things I might add, Christine, is that's the benefit of our global system, is that even though you might not be able to anticipate and I think it's hard to anticipate who is going to pull a new, introduce a new export ban or a tariff or something of that sort but with a global system that we have, we have the ability to react quickly and react to support both the customer and the markets that are needed.

  • Christine McCracken - Analyst

  • Fair enough.

  • And then just secondly, Pat, with all due respect, I do take modest exception with your comment that ethanol has had no impact on food cost inflation because --

  • Pat Woertz - Chairman, CEO

  • I didn't say no, I just said it wasn't the major contributor, like energy or the dollar or the demand for food.

  • But go ahead with your question, thanks.

  • Christine McCracken - Analyst

  • I'm just wondering, when we look at the losses in the livestock industry that we are seeing right now and realizing that they are your major customers here domestically, how do you go to those customers and say to them that your other major business is having a limited impact as it were, on their cost of production when in fact ethanol has increased its consumption of corn and there are limited supplies?

  • Pat Woertz - Chairman, CEO

  • It's a great question, Christine, and I think it's helpful to have the intellectual debate that you're asking the question about.

  • What I was trying to get to and particularly is not only do I emphasize with the consumer, but those that are paying higher cost for feed as you mentioned for ultimate packaged food, et cetera, but to those that think about retreating from the policy is a way to fix that.

  • It won't fix the problem and in fact it may have higher energy costs as a result of that or it may have higher even short term costs let alone the long-term impact of sending signals to the market where you want to encourage more growing of food and more growing of crops that could produce energy, et cetera, buy retreating from biofuels policies that can help for the long-term by making some short term gesture as I called it that I don't think would solve that problem, is what I was trying to address.

  • So I think it's worth having the debate about what we can do and what people can do to help both with increasing the supplies of food and fuel and products that lead to both.

  • I think that's where the discussion and the debate should happen.

  • So I appreciate your question and asking it in a way of there is some short term issues and then there is some longer terms to focus policy on, and I was trying to address that policy focused to long-term should be important to keep the trend and keep the faith and keep the force.

  • Christine McCracken - Analyst

  • I'm sure there will be years of lively debate on that.

  • Thank you.

  • Pat Woertz - Chairman, CEO

  • Thank you.

  • Operator

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

  • Please proceed.

  • Robert Moskow - Analyst

  • Hi, thank you.

  • You mentioned that Europe wheat conditions are much better this year, that the crops should be very, very strong.

  • My perception of one of the biggest drivers of the ag services outperformance was that a lot of grain got shipped from North America and South America into Europe because they didn't have wheat so they needed to substitute corn to feed their animals there.

  • So, I keep thinking about the sustainability of what ag services is doing and you yourself are describing it as exceptional.

  • So I guess the question is, if wheat production is back to normal again in Europe and maybe some of these countries are going to stop like the Ukraine, they are going to stop the bans they put on exports, doesn't that mean that you have fewer opportunities, fewer exceptional opportunities for profit in ag services?

  • Thank you.

  • Pat Woertz - Chairman, CEO

  • There's a lot of ifs in there, so if this, if that, and I think there's some scenario kind of planning that could take you down a line of less opportunity and another that could take you down to more or about the same.

  • And I guess what we are trying to say is, it's hard to tell and every time you think one part of the crop or the globe is normal, something else seems to have a blip.

  • So whether it's weather related or other, I think your example of something is obviously away -- one of the scenarios that could unfold.

  • Robert Moskow - Analyst

  • John Rice, do you have any opinion on that?

  • John Rice - EVP of Commercial and Production

  • Yes.

  • I mean --

  • Robert Moskow - Analyst

  • Probably the same.

  • John Rice - EVP of Commercial and Production

  • I totally agree with what Pat was saying and you always have different opportunities.

  • This year we have an inverse in the soybean market here in the United States, but South America a very large crop.

  • So I mean, there's always world dynamics that are constantly changing nowadays and we are always looking at those different opportunities.

  • Robert Moskow - Analyst

  • Okay.

  • And let me ask one question on biofuels.

  • If blenders are now finding it economically viable to blend ethanol because ethanol is now priced below wholesale gas, what is the necessity then in your opinion of the $0.51 blender credit?

  • I mean, do we need that credit any more and do we also need the $0.54 import tariff on sugar ethanol?

  • John Rice - EVP of Commercial and Production

  • I think as long as we are building this industry, we are still in the early stages of building this industry, it's very important to keep the import tariff.

  • The import tariff, they are already shipping ethanol with it and then also through the Caribbean they are ship it without the tariff.

  • But I think it's really, to really help with more corn production and building of the industry.

  • So, yes, I do think it's important.

  • Robert Moskow - Analyst

  • Thank you.

  • Operator

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

  • Please proceed.

  • Ann Gurkin - Analyst

  • Good morning.

  • Steven Mills - CFO

  • Good morning, Ann.

  • Ann Gurkin - Analyst

  • Most of my questions have been answered.

  • I just wanted to get an update on GMO grains getting shipped to Europe.

  • Can we just get an update on that, any changes?

  • John Rice - EVP of Commercial and Production

  • I'm not aware of any changes here in the last two, three weeks.

  • They haven't asked the question but they are still going through the process, it's just a slower process.

  • There's nothing new that I'm aware of.

  • Ann Gurkin - Analyst

  • We didn't have to process (inaudible) given the still tight supply of grains globally.

  • John Rice - EVP of Commercial and Production

  • You would think so, but we just haven't seen that happen over there, especially with the better crop in Europe, they may not have the need to speed that process up to make sure they can have more imports.

  • Ann Gurkin - Analyst

  • That's all I have.

  • Thanks.

  • Steven Mills - CFO

  • Thanks, Ann.

  • Operator

  • Your next question comes from the line of John Roberts with Buckingham Research.

  • Please proceed.

  • John Roberts - Analyst

  • Good morning.

  • Pat Woertz - Chairman, CEO

  • Good morning, John.

  • John Roberts - Analyst

  • Pat, I think you've earlier said that ADM would be interested in substantially increasing its presence in Brazil including the possibility of a transaction.

  • Could you just maybe characterize the deal market there in light of the credit conditions, the sugar cane market changes and so forth?

  • Pat Woertz - Chairman, CEO

  • I might start but ask Steve to add to it in his role of strategy work, I guess, has the most updated information.

  • But, we've been able to look at several possibilities of which we are open to a variety of transactions.

  • But again, waiting as well for the right market conditions, the right partner, the right infrastructure work and our own evaluation of those opportunities.

  • As far as the deal market, Steve, do you want to comment there?

  • Steven Mills - CFO

  • Well, I think in this particular area with Brazil sugar ethanol, we've been, as Pat mentioned, we've been looking for sometime, had a lot of discussions.

  • And I really don't see the credit side of the world having much impact here.

  • I think there is still good opportunities and I think there is still real interest there.

  • We talk to people, I won't say every day, but on a regular basis.

  • So I don't see this really changing much.

  • John Roberts - Analyst

  • Is the value gap between buyers and sellers large, has it increased over the past year or decreased?

  • Pat Woertz - Chairman, CEO

  • What did you ask, John?

  • John Roberts - Analyst

  • In negotiations or discussions, is there a large gap between -- is there just an unwillingness to do transactions or is there a large value gap?

  • Steven Mills - CFO

  • I think, for us it's always a value discussion.

  • We are looking to make a long-term investment, get good returns for the shareholder.

  • We are also sitting here in a time of moving markets and just like any negotiation in a market that has some heat to it, which the sugar ethanol has had, you sometimes get some differences of opinion of values, so I would say it's more the value side.

  • Pat Woertz - Chairman, CEO

  • Thank you, John.

  • Operator

  • Your next question is a follow-up question from the line of Eric Katzman with Deutsche Bank.

  • Please proceed.

  • Eric Katzman - Analyst

  • Thanks for taking the follow up.

  • Pat, I guess I just wanted to go back to the comments that you've made on ethanol.

  • I mean, it just seems that the corn lobby and the ethanol lobby has really dominated in Washington.

  • On the one hand, you have Grassley jumping out of his seat when the $30 billion gallon mandate was first talked about and you have Dick Bond and Tyson talking to Cagney that it's criminal what's going on.

  • And so there's a lot of politics and everything and there's a lot of lobbying going on.

  • George Bush is talking about a food and fuel 1030 this morning.

  • But I guess as shareholders, why shouldn't we be just much more concerned about this business if things are coming up for debate, whether it's the level of the mandate, the amount of tariffs, sugar coming in with billions of dollars of capital that you have on the line in building these dry mill dedicated facilities?

  • I mean, it just seems to me that as a shareholder just, we just have to be more concerned about that stream of profits with the understanding it's just -- it's part of the business, it's not everything.

  • Can you comment on that?

  • Pat Woertz - Chairman, CEO

  • Yes, Eric, thank you for the question and as a shareholder and as shareholders, I think one should always be challenging and questioning both the investments and the philosophy and the operations of the business.

  • A quick correction, it's not billions for the ethanol business, it's millions and I think what -- why I bring it up as a good intellectual discussion to have is that while there is debate and while there is challenge about energy policy, energy itself is quite a complex set of discussions about what drives $110, $120 crude oil prices, let alone what drives gasoline and diesel margins, let alone what drives agricultural products and commodity prices.

  • And I think having, if people worry about unintended consequences and policy for the longer term, I think having a lack of certainty versus some certainty, and certainly this last round of this energy bill allows some certainty for investors like ourselves, particularly those that can do large scale projects and provide significant amounts of fuel to the system, that certainty is important for investors to count on and to have in the longer term.

  • And so, it's worth asking the questions as you're doing as, can I have that certainty and why we are commenting about how that certainty is even more important, even under some challenging short term conditions.

  • It's important to stay the course.

  • And the course will provide in the longer term the bigger volumes that come from, whether it's second-generation, third, et cetera, which is why policy makers put it in place in the first place.

  • So, retreating on it, again, is something that I think is misguided and misinformed and again, high energy prices and high energy costs incorporated in food prices is one of the things that actually, again, ethanol or other biofuels can mitigate.

  • Eric Katzman - Analyst

  • And then, just as a quick follow up, maybe somewhat related in terms of capital allocation is the lack of share repurchase this quarter a function of the working capital usage and not a function of your view on the value of the stock?

  • Pat Woertz - Chairman, CEO

  • No, we consider our use of cash every quarter and as you know, this quarter a large amount of it went to not only increases in working capital but our continued capital projects.

  • Dividends, share repurchase is always one of the items in the mix, so it always will be.

  • Eric Katzman - Analyst

  • Okay.

  • Alright.

  • I will pass it on.

  • Thank you.

  • Pat Woertz - Chairman, CEO

  • Thanks, Eric.

  • Operator

  • (OPERATOR INSTRUCTIONS) Your next question is a follow-up question from the line of Ken Zaslow with BMO Capital Markets.

  • Ken Zaslow - Analyst

  • Thank you very much for taking the follow on.

  • Were you profitable in lysine?

  • Steven Mills - CFO

  • Yes.

  • Ken Zaslow - Analyst

  • So, if I kind of do a calculation of your ethanol business as a percentage of your overall profitability, it would probably be less than 8% or 9%.

  • Is that fair?

  • John Rice - EVP of Commercial and Production

  • Don't know the answer to that off the top of the head.

  • We haven't looked at it that way.

  • We are always looking at what opportunities and products we can make, and right now we are seeing with the feed demand globally, we are seeing a lot better returns in lysine so we are, as a matter of fact have an expansion going on in our lysine plant, a smaller expansion.

  • Ken Zaslow - Analyst

  • As I look forward, I mean, do you expect ethanol to be going out even three to four years?

  • By my back of the envelope calculation again, I see it as being less than 10% of your profits this quarter, but even going out, is it -- do you ever expect it to be more than a quarter of your earnings or do you still expect to be doing other business besides ethanol?

  • Steven Mills - CFO

  • It's always a mix.

  • So at least it's one of the great things about our franchise that we make it all across the board and I would never say that it wouldn't be a certain percentage or not a certain percentage.

  • We are hoping the whole pie gets bigger.

  • Ken Zaslow - Analyst

  • Great.

  • I appreciate it.

  • Thanks.

  • Pat Woertz - Chairman, CEO

  • Thanks, Ken.

  • Operator

  • We are showing no more questions in queue at this time.

  • I would like to turn the call over to Patricia Woertz for closing remarks.

  • Pat Woertz - Chairman, CEO

  • Okay.

  • That's it for our end.

  • Thank you so much for your interest and your great questions and we will see you next quarter.

  • Operator

  • Thank you for your participation in today's conference.

  • This concludes our presentation.

  • You may now disconnect and have a good day.