Archer-Daniels-Midland Co (ADM) 2009 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Archer Daniels Midland third quarter 2009 earnings conference call.

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

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

(Operator Instructions) As a reminder this conference is being recorded for replay purposes.

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

Dwight Grimestad, Vice President of Investor Relations.

Please proceed sir.

Thank you Noellia.

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 this presentation this morning on our website, ADM.com.

The replay will also be available at that address.

For those following the presentation, please turn to slide 2.

The Company's Safe Harbor statement 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.

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 governments.

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 I will now turn the call over to our Chairman and Chief Executive Officer, Pat Woertz.

Thank you Dwight and good morning everyone.

First I will begin with safely.

During our third quarter, we reduced lost work day frequency by 8% and total recordables by 18% compared with the fiscal 2008.

We continue our program to implement values-based safety at our facilities globally and also next week, ADM holds our third annual global safety week during which we recommit ourselves to keeping safe ourselves and our colleagues.

Turning to our financial results, this morning we reported quarterly net earnings of $8 million, or $0.01 per share down 98% from the same period a year-ago.

Adjusted for specified items including two very significant unusual items, which we will discuss in a moment, our earnings were $225 million, or $0.35 per share.

Results were negatively impacted by two large charges related to equity investments.

First, as we expected, we recorded a $132 million noncash after tax charge for our share of the currency derivative losses incurred by our Mexican affiliate Gruma.

And then due to a restructuring of a Wilmar holding company we had to incur a $97 million deferred tax expense.

And Steve will talk about each of these stems in more detail in a moment.

Overall operating results were generally weaker and all of our segments were down compared to last year's exceptionally strong third quarter results.

However, we do feel we performed relatively well given the global downturn, the tough economic conditions, weaker demand and reduced volatility.

A few brief comments on the business this quarter.

Oilseeds Processing had lower North American demand that benefited from export disruptions in Argentina and delivered strong European and South American results.

Foreign processing saw continued challenges in the ethanol industry as over capacity, lower gasoline prices and minimal incremental blending depressed ethanol margins.

Higher sweetener earnings only partially offset the losses in bioproducts.

The Agricultural Services segment delivered its second highest third quarter results in face of significant contraction of market opportunities as the global crop supply increased and demand weakened.

Going forward we do see some promising signs in a few key markets.

There have been drawdowns in cold storage inventories of beef, pork and poultry and we see steadying demand for gasoline.

And, of course we're monitoring the H1N1 flu virus and related developments to understand any impact on our markets.

On the strategic front, this quarter we continue to execute our South American growth strategy as we acquired an oil bottling facility in Lima, Peru, converted a retired oilseed processing plant in Paranagua, Brazil to a fertilizer blending plant and expanded our elevator network in Paraguay.

We reported for the first full quarter our recently acquired rapeseed processing plant in [Straving], Germany.

The additional capacity helped us capture value in the face of reduced overall margins.

Integration efforts continue at our Stratus Packaged Oils joint venture with associated British foods.

We had our first productions and deliveries of biobased USP glycerin at our new Glycols plant here in Decatur.

And, we expect regulatory clearance for our acquisition of cocoa and chocolate producer Schokinag during the fourth quarter.

While these quarterly results were adversely impacted about the two significant unusual items, our underlying performance was solid in view of the global economic conditions, and the associated challenges faced by our industry.

Our financial condition is strong.

And we remain focused on managing risks and costs, as we execute our long-term strategy.

Now I will hand the call over to Steve.

Thank you, Pat and good morning, everyone.

Starting off on slide five you will see our financial highlights for the quarter.

Segment operating profit decreased $659 million or 72% this quarter and we will discuss the results on a segment-by-segment basis in a moment.

I do want to mention however that included in the segment operating profit line is the $212 million Gruma currency derivative loss that we did discuss with you on last quarter's call.

This loss accounts for about a third of the overall decrease in segment operating profit.

Quarterly net earnings and earnings per share decreased as a result of the lower segment operating results and the tax item of approximately $97 million related to our Wilmar holdings.

Which caused our effective tax rate for the quarter to jump to 94%.

As we look at our effective tax rate and exclude this unusual item, our tax rate for the quarter was about 31% which is in line with last year's third quarter and generally in line with our fiscal '09 quarterly rates.

As to the unusual tax item during the quarter, the majority shareholders of one of the companies in which we hold a portion of our Wilmar investment, initiated a process to modify the overall ownership structure of Wilmar.

This process involved converting the underlying Wilmar investment from indirect to direct ownership.

As a consequence this conversion created a significant tax event for us here in the US and we're required to record pieces of this tax expense in several different quarters.

In this quarter, quarter three, we saw the first impact, which caused us to book tax expense of $97 million.

In the fourth quarter, we expect to see a further tax charge of approximately $60 million, and when the liquidation is complete and we expect that to be 12 months to 18 months from now assuming the reorganizes crosses all the regulatory hurdles, we will see a final tax charge.

This final tax charge will be based on the fair market value of Wilmar shares at that time.

It will be difficult to estimate what that precise amount will be but if we base the calculation on yesterday's Wilmar's stock price, and exchange rate, and assuming the current US federal tax rate stays at 35%, and assuming regulatory clearance for this reorganization, the additional tax charge would be about $318 million.

We didn't see much in the way of a LIFO charge this quarter.

Just a penny charge after tax as commodity price levels were generally stable.

At the bottom of slide five we have added a waterfall chart that shows the after-tax impact on our quarterly net earnings and earnings per share of the Gruma FX loss, the Wilmar tax item as well as LIFO and other items.

The appendix has a bit more detail on these items for the quarter as well as similar data for the nine months.

Turning to slide six -- slide six shows the summary of our operating profit by segment, detailing the changes and operating profit for the quarter and nine months.

Let's turn straight to slide seven to begin the review of each individual segment in more detail starting with Oilseeds Processing.

On a year-over-year basis, quarterly operating profit for the Oilseeds Processing segment fell $13 million and as you will see from the volume information in our appendix our process volumes declined about 8% principally in North America as we adjusted our plant run rates in response to the slower demand.

Crushing and origination results declined to $100 million for the quarter due principally to weaker North American margins as a slowing economy put pressure on crushing margins as product demand declined.

We did see some increased demand in South America, and better crushing margins in Europe, both in part due to opportunities arising from the disruptions in Argentina.

North American soybean meal demand was down compared to last year as year-over-year animal numbers are lower.

In South America, results improved, driven principally by increased grain merchandising volumes and margins which overcame losses and fertilizer.

Results in Europe were similar to last year, supported by our -- our ability to shift some production capacity among feed stocks to capture the best available margins.

Refining packaging biodiesel and other results increased $13 million for the quarter to $52 million due principally to strong edible soil protein demand.

Additionally refining and packaging results were generally steady.

And the global biodiesel market acted in anticipation of a change in the duty structure in Europe, driving some short-term oversupply which pressured both volumes and margins in Europe.

This weakness in European biodiesel was largely offset by strength in South America as shipments and margins there rose to meet the growing Brazilian market as the biodiesel mandate there increases.

Oilseeds results in Asia increased $53 million to $72 million for the quarter, due primarily to improved earnings of our equity investee Wilmar International Limited.

We also recognized a gain in Asia for the quarter of $18 million related to the sale of an equity investment.

Looking at the crop update as we sit here today, last year's US soybean crop was about 2.96 billion bushels.

As of April 9th the USDA projected a carryout at about 165 million bushels and we're expecting crop updates next week.

Current projections call for a smaller South American crop.

And the global soybean supply is projected to remain tight, as reflected by the low stocks to usage ratio.

In Brazil soybean harvest is virtually complete.

And Argentina is about 75% done.

US planting intentions reports indicated that farmers expect to plant about 76 million acres of soybeans up slightly from last year.

Current oilseeds market conditions show that global protein meal demand has slowed.

Oil World reports for the crop year '08-'09 that there will be a global decline in protein meal consumption of about 1.2%.

That is made up of a decline of 5% in the US, a 5% decline in the EU, 2.5% growth in Brazil and an increase of 5% in China.

And to put these projects in -- projections in context, the crop year '07-'08 protein meal demand grew at about a 3.6% rate.

And historical growth rate has been in the 4% to 5% range.

Vegetable oil inventories are declining from very high levels which makes us cautiously optimistic on crush margins going forward.

At this point in time, it is too early to tell the ultimate impact of H1N1 on pork demand.

Moving to corn processing on side eight.

Corn processing operating profits fell $123 million to $49 million for the quarter, as losses and bioproducts were only partially offset by improved results from sweeteners and starches, as we continued to work through higher net corn costs and we faced a very poor ethanol margin environment.

As a reminder our sweeteners and starches line included the activities of corn sweeteners, syrups and starches and it benefits from the transfer of starch at a market price to the bioproducts group.

Bioproducts results includes ethanol, both the ethanol we produce and merchandise, lysine as well as other specialty food and feed ingredients and it includes our new industrial chemicals business.

Bioproducts also shares in its proportional share of the net corn costs incurred by the corn processing group including the related hedging results.

Sweeteners and starches operating profits increased over the prior year to $146 million, primarily due to higher average sweetener selling prices partially offset by a decrease in sales volumes and a higher net corn cost.

This quarter, bioproducts losses of $97 million resulted from lower selling prices for ethanol and lysine versus the higher net corn cost.

Looking at the crop update, last year's US corn crop of 12.1 billion bushels was the second largest crop on record and the current estimated carryout of 1.7 billion bushels is considered to be ample.

Foreign exports from the US are projected to be 1.7 billion bushels for the crop year compared to 2.436 billion bushels last year.

US planting intentions report issued on March 31, indicated that farmers expect to plant 85 million acres of corn, down slightly from the 86 million acres planted last year.

Farmers are making good progress and planting corn in the western corn belt, while wet weather has delayed planting in the eastern part of the corn belt.

Assuming the anticipated corn acres are planted and that we have normal weather through the growing season, we should have an ample supply of corn to meet all needs, including the corn required to meet the higher renewable fuel standard.

Current market conditions show ethanol spot prices somewhere between $0.20 to $0.35 a gallon over unleaded gasoline.

And with the $0.45 per gallon tax credit the, the blender currently has an incentive to buy additional gallons and we're seeing some discretionary blend above the levels required by the RFS.

Ethanol margins remain weak as there is excess capacity relative to RFS requirements.

And if we look with today's -- at corn prices and spot ethanol prices, ethanol margins are cash-flow positive.

We see lysine demand steady.

Sweetener volumes were down last quarter but we were in a seasonally slow period for soft drink demand.

We will have a much better sense of end market demand in the next few months as we get into the warmer weather.

Let's now turn to slide nine and review the operating performance of our Agriculture Services segment.

AG services earned $121 million for the quarter due principally to a decline in merchandising and handling results compared to an extremely strong $366 million that we reported in the prior year.

Even though we were down, this was a strong third quarter.

The second largest third quarter -- second only to last year's results.

In prior quarters we were able to leverage global crop disparity and volatile commodity prices to capture excellent results.

This quarter, reduced global demand and increased crop supplies, limited opportunities overall.

US exports are still low compared to last year, even though soybeans are up, but the corn is down.

Operating earnings from our barge and truck transportation operations increased $5 million for the quarter, principally driven by reduced operating costs.

Specifically fuel costs and our barge operations.

We're currently monitoring the progress of US planting, the eventual crop size in South America and the trade activity in Argentina.

All of which will have an impact on global crop supply and demand going forward.

Slide 10 is an operating profit analysis of our Other segment.

Our Other segment reported an overall loss of $140 million this quarter.

A decrease of a $278 million from last year's third quarter.

The Other processing businesses had lower results due principally to the $212 million noncash loss related to the currency derivative losses from Gruma.

And we do record our share of Gruma's results a quarter in arrears.

So our March results reflect Gruma's December 2008 quarter.

And as an update to Gruma, in March Gruma announced they had reached agreements to terminate the majority of their currency derivative positions and were entering into financing negotiations with its counterparties.

And that represented about 87% of its total losses.

Also, last week, Gruma announced a $34 million net loss, now that is in Mexican -- using Mexican GAAP -- for their 2009 first quarter.

Our share of which we will record in our June quarter.

Right now it looks as though we will report something close to break-even on a US GAAP basis.

In our wheat and cocoa processing operations results remain largely unchanged in spite of some slow down in cocoa demand that we saw in the quarter.

Other financial was down for the quarter as we booked losses in our managed funds portfolio compared to gains last year as valuations of the underlying fund investments were negatively impacted with by the global financial turmoil.

Like Gruma we do record our share of the managed fund activity a quarter in arrears.

Our commodities futures merchant operation was negatively impacted by the low short-term interest rate environment, and by the absence this year of gains on securities sales that we saw last year.

Current market conditions -- for wheat, we still see steady demand, and it appears we will have a good winter wheat crop here in North America.

And we will be monitoring spring wheat planting.

As I mentioned, demand has weakened in cocoa and we have slowed our production to better balance our operating rates with market demand.

The cocoa bean crop is similar in size to last year, but with reduced demand, appears to be sufficient.

Turning to slide 11.

Slide 11 looks at the major components of our corporate line.

As I mentioned earlier with the decrease in commodity price volatility, we have the smallest variation in LIFO that we have seen in several quarters.

A $5 million charge compared to the $64 million charge that we recorded in last year's quarter.

Corporate investment income and expense decreased $56 million primarily due to increased interest expense relating to our additional long term borrowings and to decreased interest income, both externally and in our Company due principally to lower interest rates.

The change in corporate costs and others was mainly driven by a swing in our minority interest eliminations related to the results of our non-wholly-owned consolidated subs.

Moving to slide 12, we will move away from the operating segment view to the financial statement format.

Slide 12 reflects the statement of earnings highlights for the quarter nine months.

Net sales and other operating income decreased 21% this quarter to $14.8 billion as decreased average selling prices due principally to the year over year moderation and underlying commodity costs and the impact of foreign exchange translation accounted for about 85% of the change in sales dollars.

The gross profit decrease for the quarter principally reflects the decreased segment operating profits we just discussed.

SG&A expenses decreased 8% quarter over quarter primarily due to lower personnel related expenses and the impact of foreign currency translation.

And our other expense, net, increased $127 million quarter over quarter.

This change was due mainly to the swing from gains to losses in the equity earnings of affiliates.

Again, primarily from the Gruma loss.

And we had our charge -- our change in our minority interest eliminations.

Turning to slide 13, which has our selected balance sheet highlights comparing items from our March 31 balance sheet, to the June 30, 2008 year-end balance sheet.

Similar to the past two quarters strong year-to-date earnings and the reduction of working capital requirements due to the drop in commodity prices have significantly impacted our balance sheet over the fiscal year.

Operating working capital is down $4.3 billion.

Debt is down, we have no commercial paper outstanding and our cash balances are up.

Our net property plant and equipment continues to rise due principally to the spending on our major seven capital projects.

Turning to slide 14 and our cash flow statement.

Slide 14 lays out the significant items impacting our cash flows for the nine months and I will touch quickly on a few of the larger items.

As I mentioned in the balance sheet review, cash generated from operations before the impact of changes in working capital, remains strong at nearly $2.4 billion.

And the cash flow provided from the changes in working capital requirements reflect the lower inventory and receivables levels resulting from the significant decline in commodity prices since June 30.

Our capital expenditures stand at just over $1.4 billion for the first nine months running now at the low end of our fiscal year '09 CapEx estimates.

In light of the current market conditions we're watching our spending very carefully.

And we have paid down $2.9 billion of debt so far this year.

Principally paying off our short-term commercial paper borrowings.

Again the key takeaways from slide 13 and 14, are that our balance sheet remains strong, and that we have significant financial flexibility.

Slide 15 provides an update of our current financial performance using return on equity and return on net assets and that measure adjusted for LIFO.

And both of those metrics are presented on a rolling four quarter basis.

Once again, in line with the decline of commodity prices our working capital asset base has declined.

It does get smoothed a bit by the rolling four quarter effect and our fixed asset base is rising slightly in line with the expenditures on our major capital projects.

RONA adjusted for LIFO -- and I will note we did not adjust for the Gruma and Wilmar items -- now stands at 11.1% and our ROE is at 14.9%.

Both solid numbers.

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

Thank you Steve.

John and Steve and I are now available for questions.

Operator if you will please open the line.

(Operator Instructions) Your first question comes from the line of Robert Moskow with Credit Suisse Securities.

Hi, I guess I will start with a Wilmar question.

I didn't know that this was coming so -- when did -- you guys get a sense that there was going to be this -- this tax charge, did it have anything to do with new tax rules from I guess the current administration, and -- I will start with that question, thanks.

Okay.

Sorry, Pat.

I was just going to say it does not have to do with any new tax rules but I will let Steve walk through the timing and the relationship with the majority shareholders and the decisions made along the way.

Thanks Pat.

Rob, this was mostly first -- first quarter activity.

So there wasn't a lot going on here.

And we have been spending a lot time as you can imagine researching a variety of alternatives.

And -- to see if we were able to come up with a solution that was acceptable to the other shareholders.

Third quarter, fiscal year -- first calendar quarter if I went wrong.

So this is a recent -- recent item.

But nothing as Pat mentioned.

Doesn't have anything with anything on the new rules.

And -- it was really an effort by the majority of the shareholders of the holding company structure to hold their interest directly instead of indirectly.

And it also has the ancillary benefit of increasing the free flow to Wilmar.

Okay.

And then I will ask a question about ethanol if I could.

There was an article in the journal about it today.

It is -- it is difficult to interpret how the administration is -- is moving forward on one hand the EPA is going to be more strict on CO2 levels but on the other hand it looks like some more financing is going to go faster into biofuels, producers' hands and then the inclusion rate is going to go up.

So can you give us a sense.

What is your interpretation of all these -- this new information, and how does it help or hurt your business?

Yes Rob I will start here then somebody may want to jump in.

Of course, we -- we're watching all of the discussions related to biofuels both corn-based, advanced ethanol, advanced biofuels.

And we feel quite positively that there is a recommitment of efforts associated with supporting biofuels in the market -- both first generation and second generation.

There has been further discussion about higher blend rates.

A petition for 15%, even if that does not occur, up to 12%, would allow additional ethanol to flow to the markets.

I think we will watch the announcements today.

I think it is the combination of AG, energy, and the EPA and it is on shortly after our call here, so we will see the other announcements to come.

I think there is some discussion as well, on this concept of indirect land use.

And the science is rather unripe on this subject.

It has to do with how land use maybe even in another country, effects the biofuels produced here in the US.

So I think more dialogue will occur on that subject.

It has already occurred in California.

There will be more from the EPA and we're engaged in all of that.

So I think it is positive in the overall effect that people are looking at, and having the discussions about how to continue to support not only the renewable fuel standards that are in place but to assure that they continue to grow.

Okay.

Then just lastly.

It is pretty clear and you have done a good job of signaling that the demand environment is getting tough.

What is your outlook for the rest of the calendar year on returns on capital.

Is it possible to do your normal returns on capital, in a weaker demand environment, or is it just going to be tougher than -- just going to be a tough year and then you need -- maybe you get back to normal in 2010 when presumably demand picks up.

Well, I think in -- you asked a couple of questions in there, Rob.

Let me see if I can pick it apart a little bit.

I think we are cautiously optimistic going forward.

I think the timing associated with things flattening there are some good signs in certain markets but we don't give guidance so the idea of when the pick-up takes a more advanced flow versus a flattening, is a little bit of anyone's guess.

I think the idea of returns which is a different question you asked, does have to do with both the numerator and denominator.

We continue to complete our projects that are underway and most of those will be finished here within this calendar year and the earnings associated with those projects be they the cost efficiency ones like co-generation or some that are farther out as far the earnings side of that goes like our PHA and our second ethanol plant -- we have slowed -- or we have slowed our progress on completing those projects so they will come in a little bit later in the cycle.

Rob, the only thing I would add is -- we are not seeing any more plants being constructed.

We are seeing plants still being idled or shutdown.

And with the increase in the renewable fuels, entered for next year we do see that as positive signs with supply and demand balance may come more into line.

Maybe within a one billion to billion-and-a-half oversupply coming into next year.

Oversupply for next year?

Yes.

Despite the fact there is no new plants being built, John?

Yes, we still have our plants.

Right now we feel there is about $13 billion capacity and then you have our plants will be coming on line which will increase a little more capacity in the market but right now we have discretional blending going on which also increases the demand side of it.

Okay.

But you did use the term "oversupply" so does that mean that the additional plant that you're building is going to add to the oversupply issue then you have to hope that discretionary blending catches up?

Well, our plant will add to the oversupply.

But there are still more plants being shutdown throughout the industry -- the more inefficient ones.

Okay.

Well, -- I will stop there.

Thank you.

Thanks Rob.

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

Good morning.

Good morning, John.

The volumes decelerated down on the quarter in the Processing segment, particularly in the Oilseed side, are you entering the current quarter still decelerating down or have you at least seen stabilization as you enter the quarter?

We're still running our operations globally.

At a slower pace.

We have not seen a pickup in demand even though in past comments we do see some more positive signs going forward.

We have not increased the -- our crushing rates, just due to the uncertainty in Argentina.

Gives us a little bit more optimism in our European and South American crush margin and possibly into the United States, also.

So if anything, it may be more of a bottoming.

It doesn't feel like we're -- demand is shrinking any more, we're not slowing our plants down any more than they currently have been.

You were down 8% in oilseed processing volume in the third quarter.

Are you currently running down more than 8%?

The comps are still difficult as you go into this quarter as well, right?

The exact percentage I do not know but we haven't slowed our plants down any more.

And what is the size of the fertilizer exposure that you have in South America?

It is -- this is Steve.

It is not -- it is not a big number.

We had about a -- about a $20 million loss in this past quarter.

And -- again, we think those prices have bottomed out.

Thank you.

That included --

That included the inventory write downs.

Thank you.

Thank you, John.

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

This is Michael Piken calling in for Christine.

A couple questions on your sweetener business.

Just wanted to discuss your outlook for what the soft drink demand is going to look like here this summer in the United States, if you started -- see a pick up in bottle or purchases more recently and then secondly what your outlook is for Mexican exports.

Particularly there is some uncertainty with what overall demand will look like with H1N1 but your thoughts on Mexico going forward.

The sweetener demand, during January and February is usually a slow period but we have seen shipments, start picking up a little bit.

This summer is always the high volume period.

So it is still too early to tell, but -- we are very -- cautiously optimistic is maybe the best we to say that.

Demand does not seem to be down as much as early indications.

And with high sugar prices -- sugar is up to $0.15 a pound now -- globally.

So we are seeing more optimism and more shipments going to the Mexican market.

We feel during the rest of this calendar year.

Okay, great.

And then if you could talk about how you feel about the industry.

Whether you feel like it is right sized in light of Cargill shutting down a plant and -- a little bit of capacity for a few weeks here.

Have you guys been running full out and what are your plans in that segment regarding your utilization rates?

We have been running our corn plants harder but it's not been due to the sweetener.

We have been running ethanol, lysine and as Steve mentioned, many of our other food and feed ingredients.

But with the Cargill plant shutting down which represents maybe around 4% of the capacity, that will -- should have a positive effect on the ethanol markets.

I'm sorry on the sweetener market.

But right now I think the supply and demand is fairly well balanced.

We are running our plants a little slower here nearby.

But -- the big key will be the ethanol demand and then also how we see the sweetener shipments and starch shipments during the summer.

Okay, great.

Then last question, on the ethanol side.

Valero announced that they are going to start to ramp up production on three of the former VeraSun plants with the fourth one coming in the next month.

I know we're already are at an overcapacity but do you think the number of plant shutdowns by other people will be enough to offset the amount of capacity that is coming on with Valero restarting up those plants over the near term?

Yes I do believe that with Valero starting those additional plants that will be additional capacity coming into the market.

So somewhere else into the supply and demand balance we will have to have some others -- shutdowns or slowdowns I believe.

Michael maybe another thing to keep in mind is underlying ethanol demand is often just a basic gasoline demand.

And gasoline demand is just entering what used to be referred to as "the driving season" and I guess it remains to be seen whether at least Americans in this country will be driving more this summer and therefore, the pool itself will have higher demand and therefore maybe, somewhat increased ethanol demand.

Okay, thanks.

I will leave it there.

Thank you.

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

Thank you.

I wanted to ask about biodiesel.

It looks like I guess in today's rules we may see a deferral of the biodiesel carve out so that next year we will have the '09 and 2010 mandates being met.

And I am curious if that is largely expected or if that will pressure biodiesel prices lower.

We're going to -- in the US -- we are going to have to wait until after the press announcement today.

And then there is a 30 day to 60 day comment period during that.

So it is too early to tell exactly how biodiesel will play out in this.

Do you think John, though, that people expect -- I have heard it before so I am wondering if -- people expect it.

Do you get that sense?

I hate to speculate on an announcement that's going to come out in 30 minutes I guess.

Okay and then just -- Pat talked about this, but I wanted to understand more what this indirect land use inclusion in greenhouse gas emission calculations actually means and the carve ruling and if EPO -- EPA goes that way today, what does that mean for Mid western ethanol?

I mean is there -- is there a chance that you, then, will not -- you will -- you will have capacity to go off line and maybe not even able to meet RFS -- or in the grand scheme of things what does it actually mean?

It is an interesting question.

First of all, the California low carbon fuel standards which you refer to - the carb issue has two items.

The direct and the indirect.

On the direct there are numerous pathways.

None of which the plants -- some of the plants in the midwest such as ours with co-generation isn't even part of the specific analysis, or the grids noted.

So what is important there is to know that we would have a chance as other plants would -- to have a specific analysis.

We feel our plants have many more efficiencies than the standard ones as part of the grid.

That is on the directed side.

On the indirect land use side as I mentioned the both environmentalists and scientists and even CARB itself acknowledges that it is a science that is under new studies.

So maybe it is not necessarily ripe for exact standards but what they have included in the standard in California is an accelerated review of this science around indirect land use.

So it would mean how many megajoules for example would be applied to your plant that would be related to what hypothetically under an assumption would mean a grasslands or other land would need to be taken out -- taken down from another part of the world.

So there is work underway and there is dialogue with CARB that will -- and dialog that will come with the EPA, depending on what their rule making and decisions are related to this subject, so I think we're engaged with them.

We're having good discussions and the whole idea of what -- committed to doing our part in carbon capture and sequestration.

That is something else we have going.

We believe this whole idea of having low carbon fuels is a positive step.

We just need to work on the science to get there.

So we're optimistic on the ability to work with them.

And sugar ethanol does really well in that pathway allocation.

So does that put the import tariff at risk or does that -- given your cash flow and your financial flexibility -- does that make sugar acquisitions in Brazil even that much more interesting to you?

Keep in mind much of this would be farther down the line than the immediacy.

So in California it might be 2011 or 2013 before arguably -- due to your assumptions -- that Brazilian ethanol would find its way to California because it would be the one that would have the lowest carbon footprint so to speak.

I think in general to your point, we believe sugar investment in Brazil is good for an ADM because it will have global opportunities as well as local domestic opportunities.

So Brazilian ethanol continues to be of interest to us.

Our sugar investments that we have underway there now are proceeding and we continue to be interested at the right prices, et cetera for any growth.

The only thing I would add is our plant should be operational along about September or October of this year.

And last question, John, can you explain why you said Argentina's crop reductions is helping crush margins in South America and Europe.

And you said maybe the US.

Why would it help the US?

It would be -- if I said crop reductions -- but anyway, if Argentina does have a smaller crop, they will have less to crush down there, which would allow us to be able to crush more and pick up some of that export market into the Latin America countries, and also into the European market.

Just less competition.

But why isn't it going to help the US crush margins?

Because crush margins have gone up sequentially in the US.

Yes, I'm sorry.

It will help the US.

Oh it will.

Okay.

All right thank you.

Thanks Christina.

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

Good morning, everyone.

Hi Ken.

What did you say was utilization rates in high fructose corn syrup?

I don't think we did.

Oh.

What is it, then?

We don't necessarily look at it as a utilization rate in high fructose corn syrup.

We will look at a utilization in our whole corn operation with all our different crops.

Okay, what is that utilization rate?

As you can tell from the Beverage Digest and other things, demand is lower in the soft drink market but this is going to be the summer period where we feel that demand could pick up and then also what we're seeing in Mexico just because of high-priced sugar.

Okay.

So is utility -- I am assuming utilization rates are lower than last year but are they -- is it exceedingly lower?

Can you give us some parameters?

And I guess what I am trying to figure out is also what does it look like for 2009 -- I mean 2010?

How do you see it playing out?

The demand is not as bad as what I -- the perception is.

I think people have been throwing out numbers somewhere around a 3% to 4% reduction.

But -- that is early in the year.

And it is really going to be more how the summer season goes.

And along with the exports to Mexico.

Okay.

How are the exports to Mexico going?

We're starting to pick them up.

We're starting to see more interest down there just because we have $0.15 sugar.

Even with the H1N1 virus?

That is still too early to tell exactly how that will all play out.

Okay.

So, let me understand this.

So -- the demand is not as bad as 3% to 4% but not sure if it is going to get better but we don't know about the H1N1 is that what you're saying.

Exactly.

Okay.

That's clear.

It is still in the future and how the summer looks and how the H1N1 plays out.

Okay.

If I go to H1N1 for a second, how do you care if -- or to what extent how do you see the switching if they were switching between chickens and hogs and hogs and chicken how does that change soybean meal demand and do you care one bit?

Well, we care, just because we don't want to see the demand for any of the products go down.

But it is still too early to tell how this will all play out.

If people have swine out in their -- whatever they call them -- yards or fields or whatever -- they have not been reducing the stocks in the United States.

So right now we have not seen any dropdown in demand.

And it is going to all depend on what happens here probably in the next two to three months and what happens at the grocery store level.

Let me rephrase the question.

If overall protein demand does not change and they are switching from hogs to chicken and -- does that -- how does that affect you guys, are you neutral, do you care about protein?

Do you care about the switch?

What is the rule of thumb?

How do you think about that assuming that protein demand does not change.

That somebody -- a consumer will change from hogs to -- pork to chicken or pork to beef, how do you see that shifting around and how does that affect soybean meal demand?

Well, we work with all our customers and we have all the different proteins.

So in the case of -- if soybean protein demand is lower and rapeseed meal is better we can switch our operations and proceed more rapeseed.

We are always working with the customer -- what makes the best ingredient for them to be able to feed their animal.

It is more of a total animal number as opposed to -- I would say poultry or hogs -- because lysine can be used in certain animals and how cattle comes into play.

Agricultural.

There's all kinds of of animals and fish we're feeding around the world.

This is Steve.

The other complicating factor in the formula is that each of those animals converts protein at a different rate, so you'd have to go through those hypotheticals.

But there is no question that pork uses more protein in its diet than chickens do.

But -- it is just -- I think it is all speculation as to how it would all work out.

The good part for ADM is that we do supply all the ingredients and all the products.

So we will just have to see how it plays out.

And I'm not even asking about how it plays out.

I am saying, if pork demand goes down by 5% and chicken demand goes up by 5% do you care?

I am not asking about your forecast for the H1N1 impact.

I am trying to figure out what the is sensitivity to what you guys think about if things happen and -- you gave two different answers depending on who answered it.

It sounds like it doesn't matter but it does matter.

I think -- it's interesting, we usually say it depends around here.

It does matter to the extent that we are concerned about our customers and it will influence -- what -- which products go to which place.

It depends on where the demand is down as well.

So it depends a little bit on geography.

I think we're looking at each other saying it probably depends Ken but maybe we're a little more neutral than we are biased towards one animal or another.

That -- I would have thought you would have said neutral.

All right.

And -- that -- that is it.

That's all I have.

Okay, Ken.

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

Thank you very much.

Good morning, everyone.

Good morning, David.

In the AG services business, John, can you make a couple comments here about how the last couple years I think what we have seen is just tremendous tightness and dislocations in the agricultural markets and it is the absence of that factor, much more so than the change in volumes, that has affected profitability within AG services and to a lesser extent oilseeds.

Generally would you agree with that and then secondly following on that point, do you see a return to very tight conditions any time soon?

Well, volumes do come into play.

What we did have the previous year was good volumes, plus a dislocation.

Volumes always help in the AG service areas.

The larger the crops the better the demand.

It just fits our model very good.

Now going forward, we're coming into our growing season here, so on a daily basis is it too much rain, not enough rain, are we going to plant corn, not enough corn?

So it's always a constantly moving target and what the other areas of the world and how their markets are doing -- and how their weather is doing also.

I suppose what I am looking at is -- the year-ago -- if you look at slide nine on the AG services operating profits -- a $250 million reduction in merchandising and handling is not a blip.

It is not just a small thing.

There was something special that happened in those year-ago -- in that year-ago period, and other periods.

And it is always a question of -- almost, did you catch lightning in a jar, back then and that is the principal factors that are -- we need a repeat of those types of factors in order to see those results again, number one, or -- and is there any evidence that we have the potential to see that in the near term going forward?

Well, one thing David let me add here -- you used the lightning term.

Lightning is shaped a little like a volatility chart.

Volatility was at its peaks in those periods that you refer to.

And I interrupted.

John you were going to add.

Every day we come in and look at the different opportunities we see globally taking it all the way from the farm to the end consumer.

We have freight we're handling through our elevators.

Last year we also had -- what another factor was was that we had it so concentrated in part in the United States and it also helped the elevation of our operations -- that the whole world had to come to the United States -- to source a lot of their grains.

So then the absence of that condition going forward would generally be a negative factor, agreed?

I wouldn't say that as we keep expanding as Pat said in her notes that we have expanded operations in Paraguay and looking at more operations in Europe.

We keep expanding more globally -- keeps giving us other opportunities.

I will just add to that, David.

The way we look at it around here you never know what the new factors are going to be tomorrow or the next day.

So -- today you may say you don't see some of those same signs but -- that is why John and the team and the rest us come in here every day -- to see what is going to happen.

Certainly makes it easy to forecast from our perspective.

We understand that.

Thanks David.

Well, can I -- Pat can I ask you one more question on this California deal, the low carbon fuel standard.

The one point that I just want to explore a little further, is my read on this -- the passage of this new standard, the implementation, I believe, is set for 2011.

And so when you said that this was off a little ways.

Yes, it is -- 2011 -- but it feels to me like, with John's comments, which I agree with, overcapacity, in 2010, combined with an outlook that -- that potentially there is a major problem for corn-based ethanol in the California market, something -- what that is a 1.5 billion-gallon market for the US?

This is -- I was amazed at what the California folks did and it seemed extremely negative regarding corn-based ethanol and then what the outlook would be in 2010, 2011, you pick your year -- and it just feels horrible.

So -- temper my negativity on this if you believe so -- and please tell me why -- because I just can't believe what California did right here.

Well, there are a couple questions in there so let me pick it apart David.

When I was responding to a question earlier about Brazil, ethanol, that is why I brought the 2013.

There is a step up in the California plans between 2011 and then 2013 where it would be more likely in 2013, for that specific question, that Brazilian ethanol would meet more of the California low carbon fuel standards and other ethanols produced in the US.

Other than maybe the advanced ones produced in California.

Out of different biofeed stocks that are not food related.

So that was the comment on 2013.

While I won't say that I can -- that this isn't a concern of ours or a discussion that is ongoing with CARB or that we didn't have good dialogue with them going into it.

I think the key issues, are the ones I referred to about, the indirect land use science, that review needing to take place, and to have good science contributing to it.

And I believe that is what will continue to happen.

And -- secondly, that California understands the market implications of some of this -- some of the standards so that you don't have maybe the unintended consequences of no ethanol in the US -- or very little ethanol in the US could enter the California market -- and California gasoline is already the highest priced in the country.

It would even get to a greater extent if you had to fill its need with imported ethanol, for example.

So I think there is more work to be done to have the dialogue with California.

And so that is where my optimism comes from is that we are in that dialogue but you're right.

It has taken a very rapid path to support its low carbon fuel standard efforts and biofuels produced in California.

That is the direction that it was headed.

On balance, if this thing goes through as is, this is -- this looks like a disaster for ethanol.

And/or, if your efforts prove fruitful and you can get back to where we were it is simply back to status quo then we look at the oversupply of ethanol in 2010 relative to the mandate.

Would you agree with that frame-up?

Well, I think that is a general frame-up, yes, maybe I wouldn't use the word "disaster" because I think there is always the idea of how you have these discussions and I have more optimism that we will be positive in the discussions.

But you are correct that under a certain scenario, American ethanol would not find its way to California, and imported ethanol, in fact, would replace it in the years post 2013.

Thank you very much.

Thanks David.

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

Hi, good morning, everyone.

Steve can you just go over -- one more time I missed it.

You went over current conditions for meal demand globally down 1.2%.

Can you just go over that -- you did a US, EU, Brazil and China.

Can you go over those numbers one more time?

Sure, Ian, no problem.

The US was with down 5%, the EU looked for a decline of 5%, China was going to have an increase of 5% and Brazilian growth was projected at 2.5%.

That is all based on crop year '08-'09 which will take us fall-to-fall.

Okay, great.

And can you remind me again, what the fiscal projections are for CapEx?

Total year, full year?

If you're talking -- Ian if you're talking about CapEx for 2009, fiscal year, we had said between $2 billion and $2.5 billion, and we will find ourselves on the low-end of that.

In fact, maybe just bouncing up against or slightly under $2 billion.

Okay and should we expect a project update lined out on the next quarter's call?

I mean I thought we would be getting something --

Yes, we had said we would only update it if there were changes to it.

Any approved changes in both spending and/or completion.

And there have not been.

So you can refer to the last one.

So, in fact, if there are any for the next quarter we will certainly include that.

Steve?

Well, I think we will also update you when -- because we are in this -- in the stages where some of these plants are coming online.

As Pat mentioned earlier we have the glycol plant the first step to make USB glycerin took place and we should be seeing some of that literally every quarter here over the next -- of some things happening on each of these projects.

So we will keep updated and again as Pat mentioned if we have anything that takes us off schedule, off our schedule, either ahead or back we will let you know.

Okay, great.

And with the new information that we have out, anyone care to take a stab on [REN] availability for calendar '09.

Well, the RENs are -- there are two different RENs out there trading right now -- '08 and '09 -- because you can carry it over to the following year.

So '08 is at a discount.

'09, due to -- if there is an increase blending, we have more -- we have a higher renewable fuel standard, so people will want to probably come into the year with more RENs available for 2010.

Until all the rules are set.

So -- there is a -- I guess I don't know exactly what the number is right now but -- it is a constantly moving target and people are cognizant of those, also.

Right.

But the economics right now are to blend ethanol.

John do you think there is a chance we would get into calendar 2010, virtually -- not literally but virtually -- zero RENS available out of the '09 vintage?

I wouldn't think so.

Because I would think people just want to carry some of those over.

Just --

For insurance?

Due to the flexibility of being able the use them.

Okay.

And then, last question -- to go off David's and Christina's questions on the CARB standard.

First of all, I think the wet mills -- the Midwestern wet mills definitely got the worst scores out of the group, either the different pathways strictly from a direct -- not even from an indirect score.

How does that impact your business?

And second part of that, do you envision a scenario where we're going to have two different -- or multi-tiered ethanol pricing CARB complaint, nonCARB complaint.

If the 11 northeastern states do decide to piggyback on California's rulings, we could see a significant amount of the fuel consumption market, being under this low carbon fuel standard compliance and only a small -- a much smaller percentage available for nonCARB compliant fuel.

You see that there is going to be a dual quote?

Well, I think that is part of the -- part of the risk and the discussion going on is -- does CARB really want to have that.

As, do the markets really want that.

I think markets in general have wanted to go to more common fuel standards not create yet another -- for a blending component that is even this similar.

But obviously if you enact legislation that creates a second tier or different type of tier of ethanol that is one of the possible outcomes.

But -- my personal opinion is I can obviously be wrong, is -- part of the program for the renewable fuel standard was to have a source of fuel, grown domestically.

And by putting these different CARBs in, we're just replacing part of where our energy supply comes from.

Whether you bring it from the Middle East or whether you bring it from Brazil.

So, the main reasons we did part of this was for energy security.

I think in the long-run it makes more sense to make sure that there is a good domestic corn or cellulosic ethanol production.

Well, there is one element or one angle you can take on this, is to argue the policy, but another angle to take would be to actually try to comply, and -- and I mean, the ethanol industry in general.

Not necessarily ADM specifically.

Can you see that -- a situation where Midwestern producers try to do as much as they can, to their plants to their actual facilities, to improve their scores?

I mean if you look at the -- if you look at the pathways, simply turning off your dryers, from what I remember, it is about 10 points in score improvement.

Is there anything that -- do you see that happening and is there anything that ADM can do, to improve the scores on the wet mills as well?

Well, maybe I will start and John wants to add to this.

I think -- absolutely, and you're hitting the point of some of the objective of the legislation is to have lower carbon emissions from any production.

And, if you can compare production, running dryers for DDGs is one of the energy intensive activities.

Some plants in the midwest will comply to a different extent than others.

It is uncertain the calculation of that intensity -- that carbon intensity at the moment -- and that is why a lot of caveats in some of these comments -- plants will qualify under different criteria.

We believe very confidently that ADM's efficient plants will have positive calculations, but we have work to do to get that accomplished.

Any idea where your new two projects will layout in this score -- they are co-located so they should have -- I would assume have a better score than gas-fired stand alone gas dryers, correct?

Well, there are efficiencies to the new plants but it has to do with -- how you get your co-generation, what your feedstocks are, what the composition of the -- the percentage of different feedstocks that you can run whether it is biomass or coal, et cetera,.

There are calculations to do.

We're not part of the grid so we have to do the individual accelerated review which is how CARB defines it.

Okay, thank you.

Thank you, Ian.

Your next question comes from the line of [Chris Bledsoe] with Barclays.

Good morning,.

Hi, Chris.

Just a point of clarification.

The ethanol oversupply reference -- with that for calendar 2010 or fiscal 2010.

I am just wondering by the end of calendar 2010 we should expect a tightening up of supply.

Calendar 2010.

And fair to expect some tightening is that --

Yes.

Okay.

And it seems to me just looking at ADM today you're a much more pro cyclical Company than you had been maybe five or 10 years ago -- pre-ethanol.

So if I just wanted to grossly oversimplify the positive inflection -- the driver of the positive inflection for ADM as a whole -- would the key be that comment that you made about steadying gasoline demand and watching -- watching the geological recovery take place -- and the timing of that and the demand it drives for gasoline?

Let me see if I understand your question.

Or is that so much simplification?

Let me see if I understand your question, Chris.

I think you were talking about cyclicality as it relates to the ethanol business or that piece of our corn processing that relates ethanol.

Is that correct?

Well, for the Company as a whole -- really just looking at how ethanol demand has driven your other operations within the Company including AG services and the pull-through it has created in AG services.

Really just for the Company as a whole.

I wouldn't say the ethanol component, had an effect on the AG services side of our business, two different parts of the business.

But the overall economy will have a great demand poll for our whole system.

So as the economy gets better, people start eating more, people will start driving more.

We will start seeing more overall demand.

That is really the underlying positive outlook I guess.

I guess I just -- recall a few years ago when the discussion was, how big a player ADM is going to be and why is ADM going to be in the ethanol business.

I remember at that time the discussion was focused on the pull it creates in the entire system for biomass and for ADM's assets and the utilization rates of assets -- whether it be merchandising and transportation assets or procession assets.

Which is why I ask, and I realize ethanol is a different business than your other units -- but the demand for ethanol being driven by the demand for gasoline creates this pull through and I thought that was the reason you were in ethanol in the first place.

I'll take stab at part of this Chris and let the others join in.

But as we look at our -- from a strategic perspective, volume and scope is what drives us.

We have to expand that volume and scope.

What biofuels has done -- with being an additional demand pull and adding to the general scope -- has been a good thing for ADM in many ways.

It has helped leverage part of our different businesses, and as John pointed out, the underlying macroeconomic factor that we continue to follow is just this general trend to get demand back up in all of these places.

So, the --it is not wrong what you said because the ethanol and biofuels has been an important customer of our products which has helped the volume and scope.

I think Pat, --

Yes, I would support what Steve said I guess it does, link on Chris to your theory.

If you think about the longer term, the world's going to need need more food to feed a growing population that is continuing to eat better.

The world will need more energy from alternative sources -- lots of different sources to feed that population.

What the slowdown in this global economy has caused this blip in that trend line, that you would argue is that trend, are we no longer on that trend line or is it one of these slowing effects.

And, I would say it is one of these slowing -- or you use the term cycle.

One of these slowing effects.

But I think the world based on demographics, et cetera, will get back on that trend line of greater demand, longer term.

Okay.

And then if I am just looking across at some of your peers -- or at least one of your peers -- it seems to me that there is an anticipation for a pretty positive back-half of the calendar 2009.

Not just stabilization, either, a full-on-recovery.

And so, I would love to ask you if if that is premature but I I know you're not going to give me guidance.

I will just ask if you're concerned instead.

Are you concerned that their views being rather optimistic about the back-half, if their views will lead to -- irrational production decisions and prevent a better balance between supply -- supply and demand, for some of your key businesses.

I think as we mentioned, during the call today, that we look for those signs of recovery, and that we're cautiously optimistic.

I don't think that -- I think -- we're almost going to have to leave it at that because no one really knows.

I think your question about, well, will there be some unusual behavior in the marketplace because of that --- I can't speak for the competitors but -- you would think that we're all going to react to similar signs and the demand that is out there.

So we will have to see.

Okay.

And I guess I just -- I am wondering if there are decisions that are made today based on an outlook, three or six months from now -- if there are decisions made today that -- by competitors or others in the industry that are -- irreversible and that could -- that are -- that require more of a runway to reverse.

And therefore, could put us in a situation where if we don't see a V-shaped recovery, instead we see something more like an L-shaped recovery or stabilization, if those decisions being made today, on the expectation of a V-shaped recovery, put the industry in a potentially worse off situation or if this is just a flip switch you can just flip off, in the industry to slow production in response to slowing demand or demand not materializing as robust as you might have expected or competitors may have expected.

Long-term we still feel very positive about our business.

We are increasing our oilseed plants as we have mentioned before.

We are running them slow currently.

But we believe, things will get better, in the long term, which will make those assets pay.

Short term, we're running our business on a day-to-day looking at the opportunities that we see, that we may -- that can give us signs of what we feel is a long-term opportunities and short-term opportunities we see.

Okay.

I will leave it at that.

I will just maybe add to that, Chris, it -- you were starting to sound like you were asking questions will there be huge new greenfield projects to be built in this time because people feel optimistic.

We're not seeing signs of that.

I think we are able in our business we can speak for ourselves to slowed production to meet demand, but invest for the longer term.

In areas that make sense for us longer term.

So, we feel good about the long-term and again cautiously optimistic here as we proceed through the rest of this fiscal year.

Got it.

Okay, thank you.

Thank you, Chris.

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

I just waned to get an update on South America, particularly what -- what do you think the farmer environment looks like.

Coming out of the smaller fall crop and the drought environment, the credit environment, how does the Farina crop look?

John if you have any overall thoughts there, that would be great.

With the higher soybean prices and cheaper [re-al] it looks very positive.

Currently for the Brazilian farmer.

Now the Argentine farmer has different issues so I guess that is the best way to answer that question.

What about from a credit extension perspective have your policies changed at all over the last quarter?

No, they have not.

You're extending the same amount of credit today as you were three, six, nine months ago.

Yes.

Thank you, I think we all want to get on the biofuels call.

Thank you.

(Operator Instructions) Your next question is a follow-up question from the line of John Roberts with Buckingham Research Group.

Thank you, you said the ultimate tax on Wilmar will depend on the stock price of Wilmar?

So you have a somewhat of a natural hedge there I guess if this stock moves up, the -- well, actually the stock moves up you have the benefit having higher values but you're paying more tax.

Do you think you will hedge out, or lock in some certainty on what the tax will be by hedging the Wilmar stock?

I think there is still a lot of uncertainty there and we have got more than one variable.

It is more than just the Wilmar stock price.

It is also US tax policy, which is in flux, we have got exchange rates, and it is a little -- the other piece of that is that the way we record our earnings here on our -- for US GAAP is we're going to take our percentage of their underlying earnings.

It doesn't necessarily reflect what is going on with the stock price.

So you're right.

We could take some steps there but we're going to continue to monitor and we're also looking for ways to help mitigate this tax if possible.

So lots going on here.

Thank you.

Okay.

John.

Your next question is a follow-up question from the line of Ken Zaslow with BMO Capital Markets.

Hi, guys.

With all this disaster talk of ethanol, why -- I consider you guys pretty smart.

Why build the facilities?

Well, we have got -- your question is why continue to finish the ones we have started?

If you -- you're making it out to be like there is a gloom and doom scenario and maybe it is but if you believe that why continue building your facilities?

I must be missing something.

I hope you didn't hear doom and gloom.

I think what you did hear was concern and discussion about what California has done recently but we're engaged and the industry is engaged and we think we have very efficient facilities including those that are under construction that would meet CARB low carbon fuel standard intensity requirements.

So I hope you didn't hear gloom and doom.

You probably heard some responses to folks that painted a downside picture that had some percentage of being possible.

But you did say ethanol margins are positive.

Those are cash flow positive.

And then my understanding is you're saying it is still oversupply next year, but -- would you expect it to be positive margins or negative margins?

With a billion gallons, maybe a billion-and-a-half gallons of overcapacity, that -- I feel is getting us very close to balance supply and demand.

You're going to always have a period of time where some plants are not going to be operating.

Out of locations, down times.

So, within a billion gallons right now, and the discretionary blending, I think we're getting closer to supply and demand balance.

And our plants are going -- we feel, are going to be some of the most cost effective if not the most cost effective in the industry, which should help.

And -- I think to your beginning question, one of our facilities is nearing completion, and we have taken steps on the other one to be prudent as we spend out to try to be as cost effective as possible.

Great.

I appreciate it.

Okay.

Thanks Ken .

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

Can you hear me, I'm sorry to prolong but you still have losses in your financial segment, are we going to lap those, at any time soon, or -- or see some kind of an improvement any time soon?

It is hard to tell, Rob, but we certainly hope so.

The hit this past quarter was principally from the managed funds, which -- to the extent they are underlying investments declined in the October to December quarter -- would have been expected just because of the general market turn down.

We're hopefully going to get those rebounded.

As we mentioned before those on a total basis are down under $100 million and winding down.

So it seems like over the last few quarters it has been a variety of things, we have had managed funds, we have had the (inaudible) from insurance, when we had a loss, so it has been a -- it has been a -- been a mixture of things, but we certainly want to get it back on the positive track.

Okay.

Thank you very much.

You're welcome.

Your final question is a follow-up question from Christina McGlone with Deutsche Bank.

Thank you.

Steve, just a point of clarification.

The Gruma losses are noncash but the Wilmar tax item issues are cash.

Is that correct?

They will -- yes that is correct.

They will be cash during the calendar year.

It's not just we're going to write a check at one time but it will be cash in the relatively short term but you're absolutely right, the Gruma is noncash.

Okay, thank you.

You're welcome.

Ladies and gentlemen, this concludes the question-and-answer session.

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

Thank you everyone.

I won't delay any more.

We appreciate your questions.

If you see the upcoming events we have several investor conferences and we look forward to talking to you at our next call in August.

Bye now.

Thank you for your participation in today's conference.

This concludes your presentation and you may now disconnect.

Have a great day.