Archer-Daniels-Midland Co (ADM) 2008 Q4 法說會逐字稿

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

My name is Frances, and I'll be your coordinator for today.

(OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Mr.

Dwight Grimestad, Vice President of Investor Relations.

Please proceed.

Thank you, Frances.

Good morning, and welcome to ADM's fourth 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, www.admworld.com.

The replay will also be available at that address.

For those following the presentation, please turn to Slide 2 for the Company's Safe Harbor Statement, which says that some of our 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 ability -- 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 3 lists the matters we will discuss on our conference call today.

As you turn to Slide 4, I would now like to turn the call over to Chairman and Chief Executive Officer, Pat Woertz.

Thank you, and good morning, everyone.

I'd like to offer a few comments on the year, and then I will turn it over to Steve.

I'll begin with a safety moment.

In 2008, we continued to make safety improvements.

We reduced our lost workday frequency by 22% in 2007, and we reduced our total recordable incident rate by 12%.

We introduced a behavioral safety program and we brought additional new leadership to further improve our safety processes, standards and metrics.

We still have some progress to make and will continue to work toward our goal of zero incidents and zero injuries.

Turning to financial results, this year, net earnings decreased 17% from 2007 to 1.8 billion, due to the absence of last year's one-time gain; and Steve will discuss this in a moment.

Revenues increased 59% to 69.8 billion, and we achieved record segment operating profit of 3.4 billion.

These results reinforce that we have great assets and great people.

Given the exceptional set of global opportunities this year, they delivered an excellent year, highlighted by our third consecutive year of record segment operating profit; in fact, all three of our key segments, I think for the first time, earned around $1 billion.

Our results reflect our team's ability to execute our core business and use our global network to meet market challenges amid very fluid and very diverse conditions.

During this past quarter, our ability to do this was tested when sliding disrupted the water supply and rail service throughout the Midwest.

It affected our Cedar Rapids plant for much of the month of June.

Despite a complete shut down for seven days, at the plant our team quickly leveraged our processing and transportation network; it used our trucks to stand in for rail service, and we supplied uninterrupted supply of product to our customers.

By the 1st of July, Cedar Rapids was back safely, fully online.

Throughout the year, we faced changing market dynamics.

We took sensible, focused, short and long-term actions that strengthened our integrated business portfolio.

We strengthened our balance sheet and increased our financial flexibility.

We continued to rationalize our non-core assets, and we reorganized internally, creating a more aligned and performance-driven culture.

Looking ahead, we continue to have great people and great assets.

Today, they're deployed against what we do see as a very different set of opportunities; and we'll talk about current conditions as we go through each segment.

As you know and we know, these factors can change quickly; so while we describe current market conditions, what we do know is our assets are well-positioned and our people are prepared to seek out and capture value as crop supplies and market needs evolve.

Overall, I'm extremely pleased with the progress of our Company this year; and certainly as we look to our long-term opportunities and strategy, we remain very optimistic.

Now I'll turn it over to Steve.

Thanks, Pat and good morning, everyone.

And I'll start with Slide 5.

I'd first like to take a look at a couple of key items that impacted the comparability of our 2008 and 2007 full year's net earnings.

As Pat mentioned earlier, net earnings for the year declined as compared to last year, due to the absence of last year's one-time gains on sales of assets, which you will recall were Agricore United, our (inaudible) Bakery business and several marketable securities.

And we also recognized a non-cash gain on the contribution of several of our Asian joint ventures in exchange for Wilmar Limited shares.

In addition, the impact of this year's rising commodity prices on our LIFO based inventories created an after-tax charge of 358 million for this year compared to a LIFO charge of 129 million last year; and as you can see, the resulting net earnings after specified items is $2.2 billion in 2008 compared to 1.7 billion for 2007.

Moving to Slide 6, you'll see our statement of earnings highlights for this quarter.

Net sales and other operating income increased 78% in the quarter to $21.8 billion.

Following the trend we have seen in recent quarters, nearly 90% of this increase was attributable to increases in selling prices, primarily resulting from the significant increase in underlying commodity costs.

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

Gross profit grew approximately 12% for the quarter to 807 million, as overall operating margins improved.

Partially offsetting these margin improvements were increased manufacturing costs, especially for energy and fuel.

Selling, general and administrative expenses increased 54 million or 18% this quarter from a year ago.

Approximately 1/4th of this increase relates to the effects of foreign currency translation on expenses incurred outside the U.S., and the remaining increases being a variety of lesser factors, including additional bad debt reserves and increases in employee-related expenses.

In the fourth quarter of last year, the gains of non-core sales -- of sales of non-core assets and securities and the gain resulting from the exchange of our Asian joint ventures for shares in Wilmar International were 967 million.

Financing cost net, which consists of interest expense less investment income, was $73 million for the quarter, up from $46 million last year, reflecting the higher average debt levels that were used principally to finance our additional working capital requirements.

Our effective tax rate this quarter was 31%, which gave us a full year rate of 31.3%, in line with our estimates and just below the fiscal year 2007 rate of 31.5%.

As we look at fiscal '09's tax rate, we're estimating rates to be down slightly, approximately in the 30 to 30.5% range.

And the resulting net earnings and earnings per share both declined compared to last year, due principally to the absence of after-tax gains on asset sales that we recorded in the fourth quarter of fiscal '07, partially offset by the increased segment operating results.

Turning to Slide 7, you'll look at certain items for the quarter shown here on an after-tax basis that impact the comparability of 2008 and 2007.

And as I mentioned earlier, during last year's quarter we recognized gains totaling 616 million related to asset and business disposals, and the reorganization of our interests in Wilmar International; and additionally, the after-tax charge related to the year-over-year change of our LIPO based inventories increased to 125 million this quarter from 38 million last year.

Other items set out on this chart include some asset impairment charges and a charge related to early debt retirements in 2007; and a more detailed summary of these items by segment has been included in the appendix to this presentation.

Turning to Slide 8, we have a comparative overview of our operating profit by segment.

Total segment operating profit for the quarter decreased 33% to 777 million; and we can turn straight to Slide 9 to begin the review of the major changes in each individual segment.

Slide 9 looks at the operating profit of oil seeds processing.

The oil seeds processing profit decreased 37% to 375 million for the quarter, from 592 million last year.

Crushing and origination results improved 196 million to 276 million as both processing margins and merchandising opportunities improved globally, reflecting good demand for vegetable oil and protein meal.

Refining, packaging, biodiesel and other results declined $11 million due to comparably weaker biodiesel margins in Europe and several small asset impairments that we booked this quarter.

These reductions were partially offset by improved North and South American refined oil and biodiesel margins.

Oil seed results for Asia declined 402 million, due principally the one-time $440 million non-cash gain recognized in last year's quarter related to the exchange of our joint venture interest for shares in Wilmar.

As we look at current conditions, we're seeing demand for protein meal and vegetable oil slowing globally, and we have begun to reduce crush rates in response.

Looking at current oil seed crop conditions, harvest is progressing well in Europe; South America has had a good harvest; and here in the U.S., the final size of the crop remains to be seen.

Overall, soybean supplies could remain quite tight.

Current margins for biodiesel vary significantly between markets, but overall demand continues to grow, especially in Brazil, as their B3 mandate commenced July 1.

Moving to corn processing on Slide 10, sweetener and starch operating results improved 14% in the quarter to $120 million, and bioproducts results improved 15% to 142 million.

Our net corn costs were not materially different from last year's fourth quarter.

Production volumes declined approximately 2% for the quarter, due principally to the disruption to our Cedar Rapids facility from the severe flooding in June.

Manufacturing costs increased year-over-year, due principally to significant cost increases for energy-related inputs.

Average selling prices increased for sweetener and starches, and sales quantities were down slightly.

In bioproducts, average selling prices for ethanol decreased slightly, while selling prices increased for lysine.

Sales quantities increased significantly for ethanol, lysine and other food ingredient products.

Our increase in sales quantities of ethanol in the fourth quarter included both ADM produced product and merchandised ethanol, ethanol we sourced from both the U.S.

and internationally.

There's still uncertainties about the size of this year's U.S.

corn crop, although market estimates have increased as weather conditions have improved.

Crop prices have declined from the record levels seen in mid-June, but remain historically high and volatile.

We currently expect to see higher selling prices for ethanol in this current quarter that we're in compared to last quarter, and shipments should remain at a good pace as current market pricing for ethanol remains very attractive relative to unleaded gasoline; however, margins are being challenged by high corn costs, as well as increased energy and transportation costs.

Let's now turn to Slide 11 and look at the operating performance of our agricultural services segment.

During our fourth quarter last year, we sold our investment in Agricore United and recorded a $153 million gain, which was recorded in the merchandising and handling line.

Excluding this one-time item and despite the disruptions caused by the spring flooding and the slow down in export activities, results improved 11% for our merchandising and handling businesses and approximately 14% for the segment as a whole.

The USDA is currently forecasting decreased U.S.

grain exports this year, as larger supplies of wheat out of Europe and Australia will most likely not allow a repeat of the U.S.

export volume and margin opportunities that we saw last year.

High fuel costs remain challenging for our barge business.

Turning to Slide 12, Slide 12 is an operating profit analysis of the other segment, reflecting a $51 decline quarter over quarter.

Wheat, cocoa and malt results declined by 21 million, due principally to weaker March '08 earnings reported by our equity investee, Gruma SA, and weaker cocoa earnings due to relatively high cocoa carrying costs, along with margin pressures in our chocolate business.

Current conditions for wheat, cocoa and malt reflect adequate wheat supplies, which in fact could reduce opportunities for the milling division.

Demand for cocoa and cocoa products continue to grow, and just last week we closed on the sale of our malting division to Malt Europe.

Financial earnings decreased $30 million, due principally to reduced income from our managed fund investments, as these investments continue to wind down.

Moving on to Slide 13, Slide 13 looks at the main components of our corporate line, which turned from a net gain of $242 million last year to a net change of -- to a net charge, excuse me, of $238 million this quarter.

As shown on this slide, our LIFO charge increased by 138 million to 198 million this quarter, due to further price escalation related to our LIFO-based inventories, and the $363 million gain on security transactions in 2007 related principally to the liquidation of marketable securities investments that we've previously discussed.

I'm going to turn to Slide 14.

Slide 14 shows our condensed balance sheet as of June 30, 2008 and the comparison to the prior June.

The most significant change to our balance sheet continues to be the increase in our working capital levels, due principally to the impact of higher commodity prices.

The working capital amounts include our readily marketable inventories, which have a carrying value of approximately $7.8 billion at June of '08 compared to approximately 4.4 billion at June of '07.

Spending on our seven major capital expenditure projects that we updated you on during our last call has continued, in addition to our normal plant sustaining spent.

As a result, PP&E net of depreciation has increased 1.1 billion for the year.

And as you will note, this balance sheet expansion has been financed from both earnings from operations and by a combination of short-term and long-term debt.

In late May, we successfully completed a $1.75 billion equity unit offering, adding additional financial flexibility.

Slide 15.

Slide 15 lays out our cash flow highlights for the current and prior years.

Cash generated from operations before the impact of changes in working capital was $2.4 billion for the year, up 24%.

As commodity prices continue to rise throughout the year, cash required to fund changes in our working capital also reached record levels.

During this past quarter, the pace of increase has slowed.

The 5.6 billion number reflecting changes in working capital for the year is up approximately 200 million from where we stood at the end of March.

The increased property, plant and equipment spending reflects the previously noted expenditures related to our construction program; and we have had no additional share buy back activity this quarter, and our dividends paid reflect our increased dividend rate for the year.

Turning to Slide 16, Slide 16 provides an update of our current performance against our targeted long-term performance objectives.

Our rolling four quarters RONA ended June 30th was 10.2%, below our targeted 13% objective; and while we've been highlighting RONA on our conference calls recently, internally we've continued to use a basket of measures, including RONA and return on equity -- ROE; and as we've discussed in our IR presentations, increased commodity costs have led to higher working capital levels for ADM, but we also find that additional earnings opportunities do come along with these elevated prices, rewarding this use of working capital in the form of increased earnings per share.

The bar chart on Slide 15 clearly shows a dramatic increase in working capital in the blue sections of the bars.

Higher working capital reduced RONA returns, but didn't impact ROE nearly as much, as can be seen by the increasing spread between the orange and green lines, over time -- of course, with the exception of 2007, where both RONA and ROE were impacted by the large one-time gains.

Our RONA target was set when market circumstances and anticipated crop price levels were different than they are today.

We want to continue to identify and communicate financial targets for our investors to assist in their analysis, and are therefore evaluating RONA and other measures in light of current and expected future market conditions.

We'll update you on our next call.

You will also see at the bottom of the slide our cost per metric ton was $119 per ton for the year compared to our objective of 110.

Like RONA, this metric was set in a time of different market conditions.

The weaker U.S.

dollar has resulted in an increase in our non-U.S.

manufacturing and SG&A costs, and we have seen the impact of higher energy costs.

Our goal here, too, is to increase investor transparency and communicate our performance relative to effective cost control.

While our team is focused on efficiencies and made progress against its specific cost control objectives this year, this external measure, as we have defined it, doesn't fully capture our successes.

Details of these -- of the calculations of these non-GAAP measures -- the RONA and cost per metric ton performance metric -- can be found in the appendix to this presentation.

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

Thank you, Steve.

Operator, you can open the lines for questions.

Steve and John and I will be here to answer them.

Thank you.

(OPERATOR INSTRUCTIONS).

And your first question comes from Christina McGlone from Deutsche Bank.

Please proceed.

Good morning.

Good morning, Christina.

Good morning, Christina.

I guess my first question has just has to do with the other division -- there was such a drop off sequentially and year-over-year.

How should we think about that business going forward?

I mean, is this a new run rate or was there a lot of unusual things happening this quarter?

Well, I'll answer that, Christina -- this is John.

When it comes to the milling division, last year, we had a lot of good opportunities in being able to take certain quality wheat from one part of the country to the other part of the world and be able to enhance margins and capture larger margins.

As far as our cocoa business, we've had a few issues on -- brought to market issues on our cocoa; and also with the carrying charges in the market, it's in an inverse right now and it's starting to become a little bit of a carry, but that's caused us a little bit of a problem also in the cocoa division.

So going forward, I think, right now, cocoa looks to be a little bit more positive next year and I think wheat milling probably will not be as good.

I'd just like to add, Christina, that this past quarter, we had -- we pick up our results of Gruma on quarters in arrears, and they had a weak quarter -- which you can read about since they're a public company -- in their quarter ended March of '08.

Their quarter ended June is better, and I think their outlook is better, which -- so we really looked at that as a one-time item.

In the financial part of that other, we are winding down our managed fund investments.

They get smaller and smaller, therefore, the -- the historic gains that have been recorded as those equity fund investments wind down -- just aren't going to repeat.

So that just gets to be smaller and smaller.

So the financial line eventually should go towards zero?

Oh, no.

Oh, no.

No, no.

Okay.

There's really a couple of components there, Christina.

Besides the managed -- the private equity funds, we have our ADM Investor Services and Hickory Point Bank both performing very well; but in the context of ADM, they're not significant numbers.

Okay.

And then, Steve, you mentioned the fact that protein meal and vegetable oil demand is slowing and you're reducing crush.

Where geographically are you seeing that and reducing your crush rates?

Well, Christina, we're seeing that a little bit everywhere.

I'll let John fill in the details.

Christina, currently, we're seeing a drop off in the crush in the North American market.

We have not seen that yet in Europe or in South America, currently.

Okay.

And so margins -- you can sustain margins in that area, you should just see lower -- like lower volumes, lower throughput -- that's the intent of reducing your crush?

Correct.

Okay.

And then just last question, the volumes for sweeteners and starches weren't bad considering the floods.

Are you seeing a core volume pick up there in sweeteners, especially given the fact that sugar prices have really risen in the U.S.?

I wouldn't attribute this year to sugar prices as much as I think just the weather got a little bit nicer and this is the time of year we usually start to see a little bit of pick up in the sweetener volume, plus also picking up a little bit more business going into the Mexican market.

And then looking into the fall and winter, do you see volumes up versus a year ago?

Historically, we usually see the volumes taper off during the fourth quarter, especially.

Year on year, I would have to say the sweetener volumes are going to be down throughout the industry.

We are seeing less -- less demand from the soft drink side.

Okay.

All right.

Thank you.

You're welcome.

You're welcome.

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

Please proceed.

Good morning.

Good morning, everybody.

Good morning.

I just want to -- on Christina's question, so it sounds like from a demand (inaudible) perspective in oil seeds, you're not seeing anything -- not seeing any real change -- any material change -- in Asian demand for protein meal or oil; is that correct?

No, we're not -- it's more of just a short-term.

It's not unusual during this time of year to see demand slip a little bit.

We feel long term the demand will still be there.

We're still going ahead with our crush expansions at our plants.

So we still see long-term growth.

I think it's just more of a seasonal time; and, you know, with the commodity prices falling every day, you know, people don't want to buy and that tends to take the market more hand to mouth.

Okay.

So that's very helpful.

So it's not an issue of economic slowdown or any of the kind of macro issues that the people have become concerned about from your vantage point; is that correct?

That's correct.

I mean, we are hearing people talk about reducing numbers.

We haven't seen large reduction in numbers, but we keep seeing Asia increase and other parts of the world increasing.

So we do not think it will be a long-term trend at all.

Okay.

And then if I could just ask you on high fructose corn syrup, I mean, historically -- you've always sort of had an annual contract that -- is there any -- what would be the argument at this point for keeping an annual contract?

Is there any thought given to volatility in grain prices to make the duration of that contract shorter?

No.

And we are we're really working with our customers.

If they want an annual contract, we will supply them with an annual contract.

We can easily hedge up the corn if we want, or not.

So it's really what the customer wants.

If they want a shorter time period, we'll sell them a shorter time period.

A lot of people are budgeting their numbers on a whole year, so we'll usually tend to sell it for a whole year -- and that's the way sugar is sold mostly.

Okay.

And I guess my last question is, this time last year there were GMO issues with the EU as it related to byproduct, and it doesn't appear that those have reoccurred this year; is that correct?

We are still not shipping our corn gluten seed over to Europe.

We have developed a lot of other markets around the world to ship our corn gluten seed.

And also, domestically, weve picked up a lot of business -- a lot more people are feeding corn gluten seed instead of corn.

So it's very price competitive.

And so it's very disappointing we lost that market, but we have found other markets around the world.

Okay, and then I guess my last question -- I'm sorry -- is -- any thoughts on the EPA waiver request and what's going to -- what that's going to amount to, if anything?

Yes, I'll take that one, Vincent.

The -- you know, the RFS schedule is part of the 2007 Energy Bill, as you know -- or the Energy Independence and Security Act -- and we remain, I would say, optimistic -- maybe even cautiously optimistic -- as the Congress left for their recess, there was no action taken.

The EPA waiver decision we expect by the middle of August, and I understand they're reviewing the many comments that were made from both the public and companies, et cetera, and that commentary will be weighed as part of their decision.

Again, we're optimistic.

Okay.

Thank you very much.

I'll pass it on.

Thanks, Vincent.

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

Please proceed.

Hi, thank you.

Can you give me a sense on the bioproducts line?

That came in a lot better than what I had thought.

You said that you benefited from merchandising ethanol, perhaps some of it from your international operations.

Are you also merchandising ethanol that is made from other manufacturers domestically in the U.S., and to what extent is your scale in ethanol helping you make money here whereas all your competitors are losing money?

John, you want to take that?

Well, yes, we are merchandising ethanol domestically produced, and then also produced in other parts of the world.

You know, our scale and size of our plants, we've already said, does, we feel, make us very competitive in the long term, and we have the logistics capabilities; so if we buy ethanol from other parts of the world and we can arbitrage our way out of that position and end up shipping it out of a domestic location, we'll end up do that.

So it gives us a lot of flexibility overall.

And then also, it builds -- we also have very good relationships with customers.

We're a very large supplier.

They know that if ethanol coming from Brazil will not make it, we can cover it with our own production.

Okay.

And just a follow up.

You know, your comments here, John, about -- and Steve -- about, you know, changing your RONA targets lower, oil seed demand slipping, ag services profits normalizing -- I mean, you're really guiding here to a lower year next year to EPS sequentially.

Can you give us a little help here on what kind of range of outcomes you think are likely for next year, and will we ever get to an earnings power again like we saw in fiscal '08?

I'll start with that, Rob.

I think, first of all, on the RONA targets -- well, let me start with the bigger point, is that, as you know, we don't give guidance and I don't think we gave guidance today.

I think as we -- as I talked about the RONA metric, when we developed that metric, it was a return that we had been earning over a long period of time.

We still -- I'm not saying we don't like that target.

We're just saying that we're in some times today with the higher working capital levels and the capital -- CapEx programs that maybe make RONA not the best reflection of what's going on in our day to day business; and that 13% when we set that out was with some assumptions that working capital would be relatively steady or growing as the business grew.

So I guess I don't want to paint too negative a picture there, other than there are some other measures that may from time to time better reflect what we're doing.

What else was on that question?

There were more that I wanted to answer and I didn't --

Well, we touched on oil seed and then also ag services kind of normalizing here because of Europe and Australia.

Yes.

It's a great question about the opportunity set because one never knows when they're going to appear.

We probably wouldn't have predicted the 2008 results a year, 18 months ago, just because, you know, they appear, we -- and as Pat articulated, we have the asset, we have the chain, we have the people that can turn and take advantage of that quite quickly.

So we continue to -- you know, to build out our model, to fill in the holes and -- that we have and, you know, we're in it for the long term; and I think Pat wants to add a little here, too.

You know, Rob, another item on your question about metrics that I think is helpful to think about, we want to continue to discuss a variety, or a basket of metrics, as we've kind of referred to.

So we'll update you next quarter with our thinking associated with that; and it does go along with sets of assumptions, as Steve mentioned, whether you assume RONA, which I think is still a very strong internal metric when you're building out capital, as we are, to keep that focus of -- we have quite a bit of unproductive capital still on our balance sheet until these plants come on stream.

So we won't give up on the RONA look, it will just be in a bit of a different environment, and maybe our calculations -- as we'll share with you -- will have some assumptions set out with them.

Okay.

Well, thank you.

Thanks, Rob.

You're welcome.

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

Please proceed.

Good morning, everyone.

Good morning, Ken.

Just a couple of questions.

One is, how does the recent correction in the commodities -- you know, corn -- change anything that you would be doing going forward in terms of your working capital needs, as well as, you know, your margin structure outlook going forward?

You want to answer that working capital?

Well, the working capital is the arithmetic right now; and of course, the lower commodity prices takes a little pressure off, which is a good thing, at least from our -- what our treasury folks think, and it gives us just a little more flexibility.

And in terms of the, you know, corn prices going down, I think since the first of June we've had corn prices go down 12%, sugar prices go up about 23%.

So as that spread keeps widening, depending on what the time -- or what the spread is at the time of our fructose pricing, it should be more positive for next year's fructose pricing.

And if the corn goes down, does that change your ability to negotiate the high fructose corn syrup?

It doesn't sound like it does.

That's a misnomer, right?

Correct.

I still feel that -- you know, like this last year, we ran into some areas of the country where we were competing with sugar on a price level.

So as sugar keeps going up domestically and internationally and corn keeps coming down, I think some of these fringe areas, these smaller users, we may be able to pick up some of that volume again next year.

Okay.

And could you give us an update on your capital projects?

I didn't see a slide -- I may have missed it -- but I thought you used to give a slide of your capital projects and the timing of that.

I thought that was very good, and I didn't see it, so I apologize.

Yes.

No, Ken.

We update it when we have any changes, and we have no changes to the last update we gave you.

So we still believe from a schedule and a cost perspective we're in those same parameters and we will -- are we planning to update next quarter?

Is there anything new?

Let's see.

We did the slide last quarter.

Well, I think -- we're -- we'll update it -- or at least verbally, if there's anything significant to change.

And some of these plants will come on stream within the -- you know, next calendar year or at the end of the next calendar year.

My last question is, it is interesting you made a comment in the corn business that net corn prices were no different than last year year-over-year.

Can you give us a reason?

I mean, obviously, we see corn prices where they are.

Is it because of the hedging that you did, is it because of the byproducts or is it just simply a timing that it takes three months before corn gets into your income statement?

How about all three of those?

(LAUGHTER).

(inaudible) you guys too long.

Yes, yes.

I mean, it's a factor of all three -- when we buy the corn, how the byproducts work through on the P&L, and so I mean, you hit the nail right on the head there.

Can you give a little weighting to which ones were bigger factors and which ones will be a bigger factor going forward?

That's tough to do, just because with the byproduct credits always coming into -- you know, we're seeing corn oil prices coming down now just because we have got a bigger sunflower crop -- (inaudible) is a little weaker, so corn oil comes down.

Corn gluten feed is usually slower this time of year, but we're seeing a lot of interest -- people are holding up on purchases there.

So it's a little tough to say just because of the timing on a lot of these -- a lot of the variables there.

Great.

I appreciate it.

Thanks, Ken.

You're welcome.

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

Please proceed.

Good morning.

Hi, Christine.

Just on the expected incremental capacity in ethanol coming online here over the next couple of months, as you look ahead and try to, you know, estimate where demand might be for the fall, is it your expectation that pricing can hold at these levels, or is it that we should see incremental price pressure through the second half?

I would like to think we should see some support, but ethanol prices seem to be following corn more than anything right now -- when a new plant starts up, ethanol plants are fairly easy to start and stop.

So as a new plant can make a cash flow margin, they are starting up and operating and making sales.

I think going forward that will change a little bit, just because of the cost of capital -- the cost of building these plants is becoming so much higher; so I think a lot of plants that were supposed to be built are not going to get finished and are not being built.

So I think we'll have still a little bit of a growth period here, but I think in the long-term we're still looking very positive on this business -- and especially with the discount to gasoline.

We keep picking up more and more volume and business in the whole industry.

And just in terms of your capital projects, I'm not -- sorry if I missed it, but did you mention exactly, you know, what your plans are for your delayed plants or when that might come online?

We haven't changed any of our startup dates at all from our last conference call.

Okay.

And then just with the mandate going up next year and, you know, obviously that's going to force quite a bit of land -- incremental land -- into corn for next year, if you look then at where we are in soybeans, you know, what that might mean for soybean stocks and soybean prices?

And again, this is kind of looking into the future; but given no expected change to the mandate, let's say, for the next year, how do you kind of position your business for the next 12 months knowing that there is likely to be a fairly sizable shift of acreage into corn and out of beans?

Well, there is a lot of points to that whole question; but when we look at the world situation as it sits today, we're seeing very good crops, we're seeing expanded acreage out of the Ukraine, Russia, the EU 2.

We're having larger corn crops, larger wheat crops out of there, so that is having an effect on the corn demand here out of the United States, and it's also effecting a little bit of the protein demand.

We still don't know what our cr0ps are here in the United States; people are raising the estimates now, but we still will not know until harvest starts here at the end of September, first of October.

But I guess the point is, yes, we still need good crops in the future.

The corn carry out, depending on what this crop is, can have a wide variance on how much acreage we will need next year or not.

And then also, with the acreage in South America -- how much they increase, how much they don't increase.

So there's a lot of variables still coming.

A lot of it is still price related and input related.

But I understand the question.

We're looking at it, but we still believe in the long-term that we'll be able to reap ample harvests around the world and keep expanding more land and yields.

Just one point of clarification, too.

On that bad debt expense you mentioned as part of the increase in SG&A, was there anything specific behind that?

No, there wasn't, Christine.

It's somewhat general in nature, but I think it reflects -- and we haven't -- you know, I'm sitting here looking -- knock on some wood, that we haven't had much of any problems here.

But in these times of volatile pricing, both up and down, it puts both contract performance and credit more in question, and we've done a great job around here of managing that.

We did -- it was a -- in the grand scheme of things, it was a relatively small amount, but it was a -- it was on that list of lesser items on the increase.

All right.

I'll leave it there.

Thank you.

Thank you.

Thanks, Christine.

Your next question comes from the line of Dianne Geissler from Merrill Lynch.

Please proceed.

Good morning.

Good morning, Dianne.

I wanted to talk about what has happened with your stock price here recently over the last couple of months; and I realize you're -- you know, due to the constraints of the build and working capital, you haven't been able to be active in the market, but I guess if we look at crop prices coming down and you reversing some of this, you know, extraordinary build in working capital, what would be your priorities for any free cash that you might generate?

Your debt piece has ballooned with the working capital.

Could you just give us some commentary on share buy back versus debt pay down -- what are your thoughts there?

Great question, Diane.

We've talked about this.

Steve, you want to comment?

Well, sure, Diane, this is something we think about.

Of course, our credit rating is important to us and it allows us access to that tier one commercial pay-per market, which provided us with the flexibility -- especially in this last year -- to do what we did and take advantage of the opportunities that were out there.

And when we had discussions with the rating agencies when we issued our mandatory units -- the agencies, of course, discourage share buy backs -- but, you know, we still have some commodity volatility, we have got our ongoing CapEx program that's got a little more than a year to kind of run out.

We're kind of at the peak spending period as we stand here, and we see some good M&A opportunities out there that we're evaluating each and every day.

So, you know, we'll have to see about buy back as -- you know, as the market conditions change; and as you pointed out, we've seen commodity prices change.

But I think, you know, it's in the basket of mix of things, but we see again with the -- you know, with the commodity volatility and the others that that's where it stands.

Okay.

Great.

Thank you.

And then I just wanted to clarify on your comments about the reduced demand for meal and oil, was that -- I think you said it was limited primarily to the North American market?

I may have misheard that.

Well, in the meal demand, we're seeing a little bit of that, but it's really more of a short-term.

I guess I wouldn't be that -- since we see this every year a lot of times, we have normal down time maintenance at the plants and we are -- you know, some people are talking about reducing animal numbers.

The oil -- we have very large palm stocks in Asia.

We're also seeing China, they were buying oil and then subsidizing and selling into the market at below market prices, so that's had an effect on oil.

And, you know, oil prices got very high and biodiesel demand fell off a little bit; but as oil prices come down, we're starting to see that pick back up.

So I think it's just more of a short-term aberration than it is a long-term trend, like I mentioned earlier.

Okay, but would you take it as limited to the North American market?

Well, all markets tend to globally effect each other eventually.

So if it's just North America now, if we're cutting back here on animals in South America, you know, depending on currencies, may be adding animals in Europe accordingly; but, you know, we're seeing a slight slow down.

But like I said, I don't think it's going to be a long-term effect, especially when harvest comes here in another two, three weeks -- or two, three months.

Okay.

And then I guess just on ethanol and your build out, you sound like you're right on plan with the expansion, et cetera; but I wonder, you know, however you handicap the waiver thing, if they're -- if they grant a waiver this year, would that -- would your plans change?

Would that make you rethink, okay, gee, the political wheel doesn't seem to be behind ethanol anymore, therefore we need to, you know, reevaluate where we are?

And I guess if you could also comment on what you're hearing about the industry in total.

You know, I know that there have been plant slow downs as economics have deteriorated here with the very high corn prices earlier this summer, but are you hearing of sort of, you know, plans that you thought that were on the board from smaller players just, you know, going away and those plants never getting built?

Some of that is happening just because of the cost to build plants these days with stainless steel, labor costs and everything else going up; and they don't see the margin out there right now -- and the cost in finding capital is also very tough.

So I see a lot of that happening.

I think long term, we'll see more plants slow down or not be built.

In the nearby situation, we're not going to change ours.

We're already blending over the mandate right now.

Ethanol is a lot cheaper than unleaded gasoline, so everybody is going to be trying to expand and blend as much as they can.

So even if there is a waiver, which really doesn't make much sense, we still do not see the ethanol demand slowing down at all, just because it is very price competitive.

And you're satisfied with the new market development?

Yes.

In terms of picking up the incremental supply that's scheduled to come online over, say, the next 12 months?

Yes.

We keep seeing new markets come in; and as ethanol is, you know, $0.60 to $1.00 under unleaded gasoline, more and more people keep blending it and using it.

Okay.

Perfect.

Well, thank you.

Diane, if I might add to that, just one thing that we are going to do, as I'll mention at the end of the call, is have a tour of our Cedar Rapids plant and corn processing.

You'll be able to see the integration of the both construction and dry mill facility being integrated into the full wet corn processing process.

Steve, John and I will be there, as well as our corn processing management; so sort of a deep dive into that and be able to see it, you know, sort of firsthand.

All right.

Terrific.

Thank you.

Thank you.

Thank you.

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

Please proceed.

Good morning.

Good morning.

Hi, Ann.

Hi, Ann.

Wanted to ask you about your recent announcement about the investment in sugar-based ethanol.

I was wondering, I know you all have identified your interest in moving into that space.

Was this the right value equation -- was this the right time?

Do you see perhaps this as a strategic move because the U.S.

might open?

Can you just comment a little bit on that?

Sure, Ann.

First of all, I'll say we have made no announcement; and as you might know, when we're ready -- or if we plan to make an announcement of such type, we would certainly add some detail to it and be able to communicate with you in a press release and so forth.

There's been rumors of that; and of course, we don't comment on rumors.

What I can say is we have been interested and continue to stay interested in investment in sugar and ethanol processing in Brazil, and we have talked with several potential partners as well as green field, brown field, further investment.

So it remains inactive, and if we have something to say, we'll sure add some clarity to it.

I apologize.

I thought you had made an investment in South America.

There's been some rumor about things, so it's kind of been covered in the Brazilian press and translated in the U.S.

a bit, so we'll comment on it if -- when we have something to say.

Okay.

And then I also thought I read a story about China perhaps looking at opening up restrictions on GMO grains, and particularly corn.

Do you have any information on that or any perspective on if that might change there?

I guess I haven't heard anything new on that at all.

So I can't comment on it.

Okay.

Struck out twice.

Thanks.

Thank you all.

Thanks, Ann.

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

Please proceed.

Thank you.

Good morning, everyone.

Good morning, David.

John, you mentioned a couple of times on different questions about the softening o slight softening you're seeing in the American market.

If I could just push a little bit on this one, the chicken people have been extremely negative in terms of where their margins are, and certainly their losses are real.

They're projecting something like that they need to see almost a 60% increase just to get back to break-even levels.

You seem to indicate on this call that you feel like the demand softness is very temporary.

Can you expound on your thoughts a bit more in terms of why the situation in the protein market isn't very concerning for demand for soy meal?

Because I really look at this as more of a global market.

You still have issues down in Argentina.

The Brazilian crush will be slowing down here.

We're still seeing demand in Central America and other parts of the world.

We're still seeing growth.

So as the world keeps growing, we may see little pockets here in the United States that have issues, but as long as the animal numbers keep expanding, population keeps expanding, I think protein demand will keep rising.

Moving on to kind of -- I have another big picture question here.

We had very, very tight conditions in global ag last year, coupled with record U.S.

tonnage for ag production.

Given your asset mix and how the bulk of your assets are still in the United States, it's my opinion that this was an enormous benefit for ADM.

When I look forward, you actually see U.S.

tonnage down because of the shift back into soy; and then also big picture, you've got the global wheat crop coming in and looking pretty good right now.

It feels as if this should result in a more difficult environment for ADM and profit generation in the coming 12 months.

Would you all agree with that statement?

Well, without giving guidance, David, I think the factors that you described are accurate in terms of where most of our assets are, where most of our opportunities were this year -- this past year.

I guess what the uncertainty around sort of then the reason why we don't give guidance are things change all the time and different opportunities present itself each quarter.

But your overall description of where we sit, where our assets are and how our infrastructure and opportunities present themselves, I think, is accurate.

One final question here.

Just a couple of items.

Would you -- would it be possible for you to give us any outlook on interest expense for F'09, and did you give a CapEx expense for F'09?

If you did, I missed it.

No.

We didn't do either one of those.

I'm just thinking -- on the CapEx side, we're going to be up some from where we're at to finish the projects.

The peak here will be in '09 and we will probably be -- probably just a little north of 2 billion would be my guess, where we stand today.

Interest expense -- of course, that's a hard one.

Of course, interest expense was up this year with the additional borrowings.

We're just going to have to see where the world takes us.

So -- I mean, we'll -- we can either get back to you or we'll figure out a way to get people some help on that.

Really appreciate it.

Thanks for all the comments.

Thanks, David.

Your next question comes from the line of Ian Horowitz from Soleil Securities.

Please proceed.

Good morning, everyone.

Good morning.

Just a quick question.

We talked about this a little bit around this time last year, about the -- kind of the physical mid-stream constraints on ethanol blending and transportation.

Do you see that now in the system, and where specifically do you really -- if there is, where specifically do you see this tightness?

I don't see any constraints in the system at all.

People keep expanding their handling of -- so they can handle ethanol.

And we'll actually seeing the market, a lot of times, that people will buy Brazilian ethanol and shipments will be delayed just because of the infrastructure down there, and so we'll see a lot of opportunities where we can fill in and sell some additional gallons in the short-term.

But overall in the U.S., I don't see any constraints in growing the market at all.

And do you think that the capacity is there -- if the RFS does increase for the '09 year, do you think that there's the capacity there to handle that kind of volume?

Yes, I do.

Okay.

And then on another -- on the same ethanol vein, have you guys received any of the Mexican sugar with this new HFCS agreement and processed it through to ethanol?

No, we have not.

Okay.

And then, you know, I think Vincent commented -- asked a little bit about the EPA, the waiver request; but I think the other question has to do with the tariff.

There's been a lot of discussion on what to do with this tariff, and now that kind of Doha has fallen apart again, there's discussions of Brazil taking us to court on the tariff.

I'm wondering if you guys can comment a little bit about the odds of this actually happening with Brazil taking us in front of the WTO and what that could mean for domestic corn-based production?

Yes, I'll take the sort of government question here, Ian.

We've read some of the same things about the Brazilians bringing an international trade case against the ethanol tariff.

It's our understanding, and we believe this tariff is allowed under the current WTO rules, and the current level of this -- $0.54 a gallon -- doesn't exceed the boundary.

So it's our experts' opinion that this would survive any kind of case like that.

Of course, depending upon whether or not a case is actually brought is a whole different story.

It could be just discussion and rhetoric, as Doha discussions often have discussions of things that aren't really in the mix.

So we look at that as the tariff is allowed under the WTO rules.

Ian, if I could just add another thing, there's a lot of talk about the tariffs; but logistically, Brazil is just not set up to handle and ship any more ethanol than they already are.

I mean, you have the infrastructure issue -- we are very involved in Brazil infrastructure.

Over the long term, that can change; but it also comes down to just a revenue issue, by doing away with the tariff there's just less revenue in the United States, because X amount of gallons will come to the United States one way or the other.

No, I mean I understand that, but I feel like right now we're seeing the marginal gallon, which is Brazilian sugar ethanol setting -- you know, at least putting a level into the pricing of the domestic markets.

And first of all, I'm wondering why there wasn't a quick response to get this $0.54 tariff back in line with the credit, which is -- which is what it was supposed to do, you know, as far as I know.

And then, you know, if we do -- if we allow -- if we get a negative decision out of any kind of WTO or policy standpoint and drop the tariff dramatically, it can still be that -- I agree that there's no real excess capacity coming in from Brazil, but it can still set quite a pretty destructive price, don't you think?

Well, right now, corn-based ethanol -- I mean, ethanol in the United States produced is cheaper than Brazilian ethanol coming into the U.S.

So I mean right now, corn-based ethanol is setting the market.

As sugar goes up or -- and corn goes down and vice versa.

It can have an effect over the year -- yes, I do agree with that.

Okay.

But as far as you guys are concerned, you think -- you think that this is a pretty baseless complaint and you feel that the tariff is defensible?

Yes.

Okay.

Great.

Thank you.

Thanks, Ian.

Thanks.

(OPERATOR INSTRUCTIONS).

Your next question is from the line of John Roberts from Buckingham Research.

Please proceed.

Good morning.

Good morning, John.

Is your interest in Brazil in biofuel or ethanol only, or do you have a broader interest in the sugar production there as well?

It's broader interests.

We're looking at sugar, and then we make a lot of products from dextrose here in the United States, so we feel that we could be able to expand and make the products out of sugar.

Okay.

So I mean, we're looking at this as a whole range of new opportunities for ADM.

Because at least the -- the press stories so far out of Brazil have been on ethanol only.

I'm sorry, we missed a question.

I think we were talking over you.

I think the rumored stories, at least, that have come out of Brazil have been ethanol only?

Well, again, we don't comment on the rumors.

So as John just mentioned, we're interested more broadly.

Okay.

And during the quarter, Dupont and Genencor announced a commercial plant for cellulosic ethanol, and I think (inaudible) also has been going forward with cellulosic.

Do you have any update on your thoughts about that technology?

Well, as you might recall, John, we've had discussions about two particular areas of interest to us.

One is on a joint venture that we have with Conoco Phillips on a biobased crude, which you could argue is also second generation biofuels.

So -- and then we also have the corn stover project, which is a cellulosic conversion stover to ethanol.

And both are proceeding on path -- we're optimistic about them in part of our technology efforts in the next generation, yes.

Is the infrastructure in your current project sort of oversized, or at least laid out for additional expansion activity that wouldn't require more utilities and so forth should you need it down the line?

A little hard to say.

John?

I don't understand the question.

I mean, if you talking dry mill plants, are they sized and is the utilities and rail and so forth or infrastructure sized to take on more capacity, was that your question?

Correct, yes.

Yes, I think they're sized appropriately, and we always have an eye for the right kinds of expansion when we put these projects together if they're not overbuilt; but sharing infrastructure is a key part of why our low cost production is part of our objective.

It's still too early to tell on the -- you know, what kind of expansion might be possible.

Thank you.

Thank you.

Your next question is a follow-up from the line of David Driscoll from Citi Investment Research.

Please proceed.

Great, thanks for taking a follow-up.

Just a quick question on ethanol pricing in the futures market.

The pricing looks a little weak to me, and I was hoping that, John, you might have comments on number one, just any indication on how far you guys have booked out your prices in ethanol -- how far you've contracted it out?

I know you don't give exact numbers here on this, but just give us some level of guidance here.

Are the contracts as short as they've been in the past here -- you know, one month to three months -- or has it lengthened out a little bit?

And then again, just to comment on the futures pricing for ethanol.

It's pretty much the same -- it's one month to three months.

Every now and then if somebody is expanding into a new market, they may want a longer term contract.

But the futures contract is a little tough to follow, too, just because, you know, the volume isn't there.

So there -- you are seeing a difference between the futures market and the cash market more here in the last three to six months, I'd say.

So what are you saying there?

Do you not believe that futures price or -- ?

I'm sorry, I

I'll believe it because we'll buy it and sell it accordingly, but, you know, it -- it's tough to just take that futures market, is what I'm saying, and try to equate it to what the West Coast is worth, what the East Coast is worth and what you're able to sell ethanol for at any given time, because there's not a lot of volume in it.

I understand.

It does seem to be that it's been fairly weak, though, in that this does not feel to be like a positive.

That's one of my big concerns on the ethanol piece.

Do you feel the same way or do you just -- ?

No, I -- the trend right now is -- seems to be lower.

I don't disagree with you.

As corn prices are falling, you know, the mills -- a lot of these start-up mills -- if they can buy cheaper corn, they're just looking for a margin to be able to cash flow.

I don't disagree with that.

That's real helpful.

Thanks a lot, everybody.

Thanks, David.

Thanks, David.

And there are no other questions in queue.

I'd like to turn the call over to Pat Woertz for closing remarks.

Okay, thank you.

Well, thanks, everyone, for the interest.

If I could turn your attention to Slide 18, it does note our upcoming events, including some investor relations presentations, our next quarter earnings call, but also the October 7th Cedar Rapids plant tour, which I mentioned.

I believe invitations will be going out this week.

So mark your calendars for that, and look forward to our future discussions there.

Thank you all.

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

This concludes the presentation.

You may now disconnect, and have a good day.