Archer-Daniels-Midland Co (ADM) 2009 Q4 法說會逐字稿

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

I'll be your audio coordinator for today.

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

We'll facilitate the question-and-answer session at the end of the presentation.

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

I would now like to turn your presentation over to Mr.

Dwight Grimestad, Vice President of Investor Relations.

Please proceed.

Thank you.

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 this presentation on our website, ADM.com.

The replay will also be available at that address.

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

The statements are based on many assumptions and factors, including availability and prices of raw materials, market conditions, operating efficiencies, access to capital and actions of 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 in our conference call today and I will now turn the call over to Chairman and Chief Executive Officer, Pat Woertz.

Thank you, Dwight.

Good morning, everyone.

I will begin with safety.

This year we extended our record of year-to-year improvements reducing lost workday frequency by 10% and our recordable incident rate by 20%.

During May, ADM colleagues around the world celebrated our third annual global safety week and May was our best month on record for recordable incidents.

It's clear that attention to safety does bring improvement.

Turning to our financial results, I'll start with a few brief comments about the quarter and the year and then Steve will describe the quarter in more detail.

In the fourth quarter, we felt the impact of the global economic downturn as we concluded a year of good performance overall.

Net earnings for the quarter were down 83% to $64 million, for the year net earnings were $1.7 billion, down 5% from 2008.

Revenues were in line with last year at just over $69 billion.

This really was a year of mixed performance with weak results in corn and other processing and very strong results from oilseeds and ag services.

Weak second half results and strong first half of the year.

As I've said before, our unparalleled assets and great people put us on a strong footing to identify and pursue market opportunities and last year we pursued those opportunities where possible.

As the global economy slumped and demand slackened, we leveraged a different set of opportunities.

In this downturn, we used our strong balance sheet and cash flow to make strategic investments and build long-term value.

I am proud of the work that we did in 2009 to expand the size and global reach of our core model.

Let me just summarize a few.

The first of our big seven projects is now online with most of the rest of them nearing completion.

We expanded our processing operations and made selective acquisitions in key markets.

We grew our South American packaged oil business, our European oil seed operations and our European chocolate business.

We expanded US oilseed processing capacity, Brazilian biodiesel operations and our fertilizer blending capability in South American.

We expanded our global origination and transportation network, adding barges, silos, ocean going vessels.

We formed strategic joint ventures, one with Associated British Foods to enhance the value of our North America packaged oil business and another with Grupo Cabrera to add sugarcane to our feed stock base.

That JV is building two sugar ethanol facilities in Brazil and we expect the first to begin production this fall.

As we look ahead, we do see signs of improving demand in the various food, feed and fuel markets that we serve.

We see discretionary blending in the US ethanol market.

We also see opportunity for increased sweetener sales to Mexico and we've moved through the higher priced net corn that diminished our margins this year.

We see more forward protein meal demand, Brazilian demand for biodiesel remains strong and we're optimistic that as we can be -- about as optimistic as we can about at this time about the size of the US crop which should benefit our ag services businesses.

And lastly, we remain financially strong and well positioned to capture value as global markets recover.

Longer term, we will continue to serve the world's vital needs for food and energy and we do remain committed to delivering long-term value for our shareholders.

So that's the recap for the year, now I'll turn it over to Steve.

Thanks, Pat, and good morning, everyone.

Starting off at slide five, you will see our financial highlights for this quarter.

Segment operating profit decreased 73% for the quarter to $208 million.

We'll discuss these results on a segment by segment basis in a few moments.

Quarterly net earnings and earnings per share both decreased significantly as lower segment operating results were partially offset by decreased corporate expenses and by an income tax credit for the quarter.

Speaking of income taxes, our rate was impacted by a number of items this quarter.

As we analyzed our actual foreign tax expense for the fiscal year as compared to our estimates, we trued up several items, including the impact of a more favorable geographical earnings mix and a currency related item from the remeasurement in dollar terms of our tax liabilities in South America.

We also had reductions in both provisions for our FIN48 contingent tax reserves and our allowance for unusable foreign tax credits.

Partially offsetting this list of positive items was the additional $61 million of tax charge related to the Wilmar reorganization that I spoke to you about last quarter.

As we look forward to fiscal year 2010, we're currently projecting a tax rate in the 29 to 30% range and that's subject to any additional taxes we may need to accrue related to the Wilmar reorganization.

This chart also shows the after-tax charge related to the year-over-year change in our LIFO based inventories as we recorded a $0.05 after tax charge in the quarter compared to a $0.19 charge a year ago.

At the bottom of slide five, we have our waterfall chart that shows the after-tax impact on our quarterly net earnings and earnings per share of our share of Gruma's foreign currency losses, the Wilmar tax item and for LIFO.

In the appendix we have more details for the quarter as well as similar data for the year.

Turning to slide six, slide six shows a summary of our operating profit by segment detailing the changes in operating profit for the quarter and fiscal year.

Let's go ahead and turn straight to slide seven to begin the review of each individual segment in more detail starting with oilseeds processing.

Following last year's strong fourth quarter oilseeds processing results, operating profits this quarter fell $227 million due to the impacts -- to $227 million due to the impacts from a weaker global economy.

As you will see from the volume information in our appendix, our total process volumes were down about 2.5% as we decreased North American crush rates in response to weaker product demand.

This North American decrease was partially offset by increases in both Europe and South America.

Crushing and origination results declined $135 million to $141 million.

North American results decreased as industry crush volumes and cash margins fell as compared to last year's fourth quarter.

European results also decreased as we saw lower soy crush results and reduced grain origination volumes and margins.

In South America, results were down less significantly as continuing strong soy bean exports partially offset reductions in fertilizer and crushing.

In refining, packaging, biodiesel and other, results decreased $13 million to $21 million for the quarter due primarily to weaker European biodiesel margins and to some restructuring charges that were taken related to the rationalization of production assets of our recently formed Stratas Foods packaged oil joint venture.

We're optimistic about Stratas as we integrate these operations.

Our oilseeds results in Asia were materially unchanged quarter over quarter as our investments in that region principally Wilmar International Limited continue to perform as well.

As a note, the current market value of our Wilmar investment currently stands at about $4.4 billion.

Taking a look at a crop update for soy and oilseeds, last year's US soy bean crop was 2.96 billion bushels and the projected carry out is 110 million-bushels.

Soy bean supply is fairly tight given the smaller South American crop.

The USDA June acreage survey indicated that farmers planted 77.5 million acres of soy beans up from 75.7 million acres last year.

The overall soy bean crop is in good condition, but it is in the early stages of development.

August tends to be the critical month for determining soy bean yields.

USDA is projecting yields of 42.6-bushels an acre, which would ease the tight soy bean supply situation.

With last year's South American soy bean harvest well below normal, a more typical harvest in South America next spring would bring the carry out back to more comfortable levels.

Current market conditions, stock prices are down from their highs, but with the current tight soy bean supply situation, the potential for price volatility remains.

We've seen global protein meal demand stabilize and demand is now projected to increase.

For the crop year '09, '10, USDA projects growth in the 3% range, bringing consumption back to slightly above '07, '08 levels.

Vegetable oil inventories have declined slightly from their recent high levels.

Biodiesel demand in Brazil remains strong.

Brazil moved to a B4 requirement in July and a mandate is s slated to increase to B5 in 2010.

In Europe, palm-based and imported soy biodiesel are currently displacing EU produced biodiesel.

We do see improved demand going forward as Spain and Italy start biodiesel programs and northern Europe switches to a winter higher rate seed oil blend.

Moving to corn processing on slide eight.

Throughout fiscal 2009, higher priced net corn had a significant impact on our margin.

For the quarter, corn processing results fell as we moved through our higher-priced net corn and a weak ethanol environment.

Operating profit fell $273 million to a loss of $11 million for the quarter as improved results in sweeteners and starches only partially offset the losses in bioproducts.

Sweeteners and starches operating profits for the quarter increased $10 million over the prior year to $149 million.

Principally due to higher average sweetener selling prices and lower manufacturing costs.

These increases were partially offset by the higher net corn cost and by reduced sales volumes.

Bioproducts recorded a loss for the quarter of $160 million, resulting from lower selling prices for both ethanol and lysine and the higher net corn cost.

These were slightly offset by lower manufacturing costs.

Crop update for corn, USDA June acreage survey indicated that farmers planted 87 million acres of corn, up from 86 million acres last year.

Again, at this point in time, the overall corn crop is in good condition.

The USDA is projecting yields of 153.4-bushels an acre, which would provide an ample supply of corn to meet all needs, including the corn needed to meet the higher RFS requirements.

For current market conditions, for ethanol, we are seeing some discretionary blending above the levels required by the RFS given the current favorable economics.

We also see increasing demand for gasoline.

Spot ethanol margins are positive even as the industry has dealt with new ethanol production coming online.

Industry sources now show 10.5 billion to 11 billion-gallons of ethanol capacity online, 2 billion to 2.5 billion gallons of capacity idled and 1.5 billion to 2 billion-gallons of capacity under construction.

And the RFS for calendar 2010 will add 1.5 billion-gallons to the mandated blend volumes.

Lower year-over-year levels of US carbonated soft drink consumption have resulted in reduced corn sweetener volumes industry wide.

Increasing HFCS volumes to Mexico should help to offset this decline and keep demand for sweeteners balanced with supply.

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

Ag services lost $17 million for the quarter.

Merchandising and handling results were down $117 million as compared to the year-ago quarter.

Merchandising margins were weaker as demand for commodities and related freight slowed with the global economy.

Results were also negatively impacted by less favorable risk management results.

Operating earnings from our barge and truck transportation operations decreased $6 million for the quarter, principally driven by high water conditions in the upper US waterways that reduced operational efficiency of our ARCO barge operations.

Looking at current market conditions, we are seeing more forward-booking in anticipating of the upcoming US harvest and as we mentioned at this point in time, we are optimistic about the size of the US crop which should benefit our ag services business.

And China continues to be a strong forward buyer of soy beans.

Turning to slide 10, slide 10 is an operating profit analysis of our other segment.

Our other segment reported an overall profit of $9 million this quarter, a decrease of $25 million from last year's fourth quarter.

Other processing had higher results due principally to improved global wheat milling margins and a one-time gain related to the finalization of the disposal of our molting business.

These improvements were partially offset by declines in cocoa due to lower sales volumes and by additional losses of our equity investee Gruma Assay.

Quick update on Gruma.

In July, Gruma announced they had reached agreements to terminate the final portions of their currency derivative positions and that their ongoing negotiations with their counter parties to structure financing terms for these losses had been extended.

And on July 22, Gruma released their second quarter results which showed positive net income on a Mexican GAAP basis for both the quarter and six months.

Comparable other financial earnings were down $33 million.

Our captive insurance business had another difficult quarter, experiencing higher than normal losses.

In addition, the ongoing low interest rate environment continues to dampen results at our investor services business and we had a loss in our managed funds portfolio for the quarter arising in further writedowns in the fund's underlying investments.

Market update on wheat flour, demand is steady and appears to be a good supply of wheat globally.

The USDA projects world wheat production of 656 million metric tons for the current crop year, which would provide ample global supply, especially given the large carry out.

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

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

Market prices for our LIFO based inventories rose during the quarter requiring an increase in our LIFO inventory reserves of $54 million compared to a LIFO reserve increase in the year ago's quarter of $198 million.

Corporate investment income and expense decreased $50 million, principally reflecting higher long-term debt interest expense and a significant decrease in interest income due to lower short-term interest rates and lower working capital requirements of the operating segments.

In corporate costs and other for the quarter were broadly comparable.

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

Net sales and other operating income decreased 24% this quarter to $16.5 billion.

The majority of this decrease came from lower average selling prices due principally to the year-over-year decline in underlying commodity costs and the foreign exchange translation impacts.

Higher sales volumes partially offset these decreases.

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

Selling, general, administrative expenses decreased 8% quarter to quarter.

After taking into account impacts from foreign currency translation and divestitures, SG&A costs were down approximately $6 million or just under 2%.

Other income and expense net decreased $58 million quarter over quarter.

This change was due mainly to decreased equity earnings of our affiliates, particularly Gruma, an increase in net interest expense and an impairment charge related to one of our marketable security holdings.

Income taxes are also shown here, but I'll just refer you back to the comments I made earlier in my presentation.

Turning to slide 13, we have called out several year-end balance sheet highlights.

Strong earnings for the year and the reduction of working capital requirements due to the drop in commodity prices have had a significant favorable impact on our balance sheet during the last year.

Operating working capital is down, total debt is down, we have no commercial paper outstanding and our cash balances are up.

Our net PP&E is up due principally to the spending on our big seven capital projects.

Charitable equity did not change materially for the year as equity has been reduced by the movements in foreign exchange rates as compared to the US dollar.

With the stronger dollar translating our foreign denominated balance sheets has reduced both the assets and liabilities side of the consolidated balance sheet.

Turning to our cash flow statement on slide 14.

Slide 14 lays out the significant items impacting our cash flows for the 12 months ended June 30.

I'll touch quickly on a few of the larger items.

Cash generated from operations, before the impact of changes in working capital, was strong again this year at nearly $2.3 billion.

Cash flow provided from the changes in working capital requirements again reflect the lower inventory and receivable levels emanating from the significant decline in commodity prices.

Our capital expenditures and business acquisitions for the year of $2.1 billion ended up being at the low end of our fiscal year '09 CapEx estimates.

Our current estimates for fiscal year 2010 spending is in the $1.5 billion range as we finish up the majority of our big seven projects and we have capital spending plan for efficiencies and maintenance.

We paid down $2.8 billion of debt this year, primarily reducing our short-term borrowings.

As I mentioned in the past quarters, the key take aways from slide 13 and 14 are that our balance sheet remains strong and that we have significant financial flexibility.

Turning to slide 15, slide 15 provides an update of our current financial performance using ROE and RONA adjusted for LIFO.

Both metrics are presented here on a rolling four-quarter basis.

As would be expected with the decline in commodity prices, our working capital asset base has also declined this year.

Our fixed asset base has risen primarily due to the expenditures on our major capital projects.

Our four quarter rolling average RONA adjusted for LIFO now stands at 9.3% and return on equity is at 12.6%.

Both solid numbers in light of the volatile market conditions we have seen and the significant amount of preproductive capital that is currently on our balance sheet.

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

Okay.

Thank you, Steve.

Operator, if you could open the lines, Steve Mills, John Rice and I are here to take your questions.

Thank you.

(Operator Instructions) Your first question comes from the line of Vincent Andrews with Morgan Stanley.

Please proceed.

Sure.

Good morning, everyone.

Good morning, Vincent.

I guess, maybe the first thing I want to focus on is just, as far as I can tell, you've never lost money in ag services in a quarter.

Is that true prior to this?

Well, that's a good question.

Some of us have been around a long time.

I don't recall -- I don't recall specifically.

It hasn't been recently, then.

So I guess what I was probably most surprised by that, so maybe we could just delve into -- is that purely hedging or is there something else we should be thinking about there?

I'll start with this and see if one of my colleagues wants to add on.

I think hedging -- I think I like to refer to it that we manage risk and of course we use many tools to manage our risk and our positions and we follow the appropriate accounting rules, including marketing instruments to market a period in.

So I think as we mentioned in the call, we also saw much weaker demand during this past quarter.

Right.

It's -- in ag services, it's a mix of opportunities and activities and a mix of results.

So is there -- were you intimating that there's some chance that some of the unfavorability this quarter could reverse in later quarters?

Well, what I mentioned is that we do -- in not just this quarter, every quarter we mark our position to say market, so to the extent that we've recorded those at June 30 at June 30 levels, there will be changes from June 30.

Right.

Well, a lot changed right around June 30, with the crop report, that's why I asked.

Okay.

And then maybe, next on ethanol, it seemed like sequentially based on -- my take on your comments on the last quarter was that there was going to be a sequential improvement in ethanol and things seemed to go the other way.

So what -- if that was -- if that was an incorrect -- what happened during the quarter and was I -- my assumption correct in the first place?

Vincent, let me just make one other comment about ag services.

To Steve's point, you were also -- you have to look at we're taking a point in time.

When you look at the whole year, we had a very great year when you look at ag services.

So when we mark things to market at the end of any given month can also have an affect on how that quarter is going to look.

The ethanol market, as Steve said, our high net corn caused us to have some larger losses this month.

Also in the ethanol as you recall from last conference call, we do charge our ethanol division a charge to buy the corn from the sweetener and starches area.

Looking forward, we see the ethanol market looking very good going forward.

We see the supply and demand being very close to balanced and right now the market is in a backwardation which means there's very good demand versus a nearby supply.

Thanks very much.

I'll pass it along.

Thanks, Vincent.

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

Please proceed.

Yes.

Just to follow up on the previous line of questioning and your expectations around, I guess, the impending decision around the higher blend, curious to see what your thoughts are as we head into the back half of the year and expect a decision on that?

Okay, Christine.

Maybe I'll start with that.

As you know, the EPA received an application back in March to allow E15 blends and there was a public comment period, I think about 3,000 comments were in.

That closed toward the end of July and as expected, the EPA will have a response by December 1.

So even if it does not respond to go all the way to 15, it's our expectation or hope that E12 on the way, say, to E15 is one of the likely outcomes.

So that would be next year.

That would be in place next year in 2010.

So we'll wait to see on December 1.

We'll, of course, know that closer or maybe even have a better feel for that by our next call.

But structurally, you would think that if we were to move to an E12 blend, you would be obviously increasing at least the blending levels in some parts of the US and then, therefore, driving incremental demand in pricing along with it?

Right.

As economics allow, you would have increased blending and most of the data that -- or all of the data we've seen says that it can be safely and effectively done without adding, additional infrastructure costs, et cetera, so that's a positive thing with respect to the infrastructure being able to easily absorb the additional blends.

And your two new dry mills then are scheduled to come online, I believe, within a relatively short period of time.

Can you give us an update on that?

In the appendix this time we did the update on the projects.

I think it's on page 20 or the update is on page 26 and it shows our Columbus plant coming on in the fourth quarter of '09 and Cedar Rapids the third quarter of 2010.

Thank you.

I'll leave it there.

Thanks, Christine.

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

Please proceed.

Good morning.

Good morning.

I guess turning to oilseeds, I was a little bit surprised that it was -- it was weaker given some of the competitor performance and I'm wondering how to reconcile what other people have said versus the results that came in for ADM?

Well, Christina, I can't help you reconcile to other people's results.

But what we saw in this quarter was weaker demand in biodiesel in Europe, Argentina was shipping more biodiesel to Europe during that period of time, United States was not able to, but what we do see going forward in oilseeds is a better biodiesel market because we have France, Spain and Italy going to be blending next year.

We're also seeing better demand going forward and we're also seeing more forward interest in purchasing of product.

So we still have a tight period right now to work through in our -- in the soy bean supply situation, but going forward, I feel very positive and, also, when you look at this fiscal year, like our ag services, this was a record year in oilseeds, so.

And, John, as we head into the fall, do you think that -- I mean South America is going to be largely out of beans by that point and the US will have to supply the world, so I mean that seems to fit right into -- in your backyard.

I mean how do you see that playing out?

Exactly like you said, as the crush rates go down in Argentina and Brazil, we see more opportunity to run the North American assets at full -- at higher capacities.

Okay.

And can you just update on US biodiesel?

I mean I think utilization is running at 15%.

There's a lot of uncertainty with respect to regulations.

How is that playing out with respect to soy bean oil values and inventory?

Well, it's an unknown right now.

There's still discussion in the legislation on how this will all come into play right now.

It's mostly tallow that works.

With the situation we have globally right now with Argentina, shipping the biodiesel to Europe, we'll end up picking up more vegetable oil sales in the food side in other places around the world.

So when you look at the whole supply and demand for oil next year, it's looking very positive.

Now, we have a higher palm production, but right now it looks like with the increased demand for biodiesel especially coming in Europe and the food demand increasing, it can be a very positive year for oil we feel.

Okay.

And last question, just to follow on Vincent's questioning, can we think about ag services with a clean slate right now or how do we view the future given these positions that are on the books?

I mean is it any differently than we normally do?

Well, it's hard to say.

We have some positions every quarter end and we bring things to market and so I -- I guess, again, like John, I won't tell you how to model it, but this -- this -- we didn't have any changes in accounting methods or procedures here, so --

But going forward, with the expectations on this crop, it should help our ag services with very large corn, very large bean, it will help our transportation assets.

Now, we still have a ways to go before harvest, but right now things look fairly positive going forward.

Thank you.

Christina, I also might just add that you think about the network, it's built to handle a large crop, so with an expectation of optimism around the crop, that should -- that should help.

Okay.

Thank you.

Thank you.

You're welcome.

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

Please proceed.

Hey, good morning, everyone.

Hey, Ken.

Hey, Ken.

Just, Steve, I think you said something that was interesting about the corn side.

Just to make sure because if I look at sweeteners, they sequentially improved this quarter while bio products obviously sequentially did not improve yet, ethanol prices went higher and I think you just said that the reason for that is because the sweeteners actually gets charged the -- I'm sorry, the sweeteners charge the bioproducts the higher net corn costs, is that what you said?

Well, both sweeteners and bioproducts share in high net corn costs.

They each are paying for their corn and then on top of that, bioproducts is paying the sweeteners and starches group a processing fee to move that corn over there.

So there's no question that there's some inter subsegment movement there.

Because the discrepancy, sweeteners and starches sequentially -- if you're saying that higher net corn costs ran through both corn processing, sweeteners and starches actually sequentially improved, bioproducts did not.

I'm just trying to figure out how that works.

It doesn't make sense.

Why, if they're both having a higher net corn cost going through, why would one sequentially -- both sweeteners and starches prices increase and ethanol prices all increase, you would think that the relative magnitude of the sequential drop would be similar.

Am I missing something?

Well, the other factor is selling -- absolute selling price levels.

So sweeteners and starches being up and ethanol not and those comparisons as we look -- as we lay this out, we're doing it on a year-over-year basis.

Yes, but I -- I usually look at year on year, but if -- again, ethanol prices sequentially improved, high fructose corn syrup prices improved a little bit, but both of them would have the impact of negative corn cost, why wouldn't there be a similar impact on both of their businesses?

I'll take it off line.

I hear you, but--.

It doesn't make sense.

Well, it makes sense from our end here, so we're not connecting here, Ken.

I'll ask offline.

It seems like you would think that would be -- there's such a discrepancy between the two, sweeteners and starches improved and bioproducts decreased, but yet the selling price didn't diverge by that much.

I'll kind of figure it out afterwards.

I'm assuming China bought soy beans from the US and ADM sells soy beans to China.

Where would that be reported?

It depends on where the sale is.

If it's out of the United States it would be in ag service, if it comes out of Brazil, it would be in oilseed processing.

Assuming China did buy soy beans from the US and they bought from you guys, how come that wasn't really recognized in the ag services business to any extent?

You lose $17 million, it seems -- why wouldn't that be in that business?

Bunge had a nice quarter on selling to China, do you not sell as much to China, is there an issue there?

I don't know exactly how much Bunge sells to China, but there's other things than just China soy bean sales that's in the ag services, we also have global businesses, we have businesses in Europe that come into ag services, we're trading wheat, we're also trading corn and there were not as much sales out of the United States during this last period as maybe Brazil just because they were coming through their harvest period.

Okay.

So you think it was more because of maybe -- it was more weighted to the Brazil transport than the US transportation?

That could be it, but I guess I would have to look back, but looking at the prices and the price spread and the freight spread, I would say that more soy beans would have been shipped out of Brazil last quarter than out of the United States.

Okay.

And my last question is, if I think about high fructose corn syrup negotiations, can you tell us where we are on that, how utilization rates are and is it possible to have a price increase in line with inflation or how do you think about how that's going to play out for 2010?

That will all be based on utilization.

We are -- it will depend on how much more Mexico picks up with the high price of sugar.

We are seeing more people with the high price of sugar in the United States buy more fructose.

So it's really too early to tell, but it will be a utilization rate, a big part will be on the starch business.

We're starting to see the starch business come back in June.

That helps people's utilization, that could have a positive affect on high fructose.

But like I said, it's still too early to say.

There's a long ways to go between now and October and we have to see how the crop comes out.

All right.

Great.

Thank you.

I may add to that, John, did talk about the levels of sugar overall affecting it.

Net corn values, if they stay below where they were last year as a pricing discussion, we may have lower pricing in 2010, but again, our focus is on maintaining, as John said, sort of similar improved margins.

That's the point in at that business.

It's a margin business.

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

Please proceed.

Thanks a lot.

Good morning, everyone.

Good morning, David.

I just wanted to follow up on the starches and sweetener question.

John, can you give us a figure for where individual utilization rates are for starches and sweeteners US?

No, I cannot.

I can just tell you that our plants are running harder, but we're also producing more ethanol right now and less sweeteners.

But I could not give you a good indication right now on the industry just because I think starches are -- have been dramatically down more than high fructose corn syrup.

Okay.

So when you give your volume numbers for that particular segment, I believe it's just all combined together, both ethanol and then the starches and sweeteners.

What I'm -- what I tried to -- would like to get a sense for is the pacing of what you've seen in terms of volume declines.

So the first half of calendar '09 versus your expectations for the back half.

Can you just give some commentary for starches and sweeteners and how the volumes are moving here?

Was it dramatically more negative in the first calendar quarter and in the back half of the year could you actually see this flat or would you still expect year-over-year volume declines?

It seems like the volume decline, like we mentioned earlier, has flattened if that's the proper way to say it.

But with the increase that we expect the shipments to Mexico, we see a positive increase in shipments in our high fructose and like I mentioned earlier with the increased shipments in our industrial starch business in June, we expect that to also go forward at a better pace than what we saw in the first half of the year.

Can you quantify your estimate for shipments in the back half of the year to Mexico, either ADM specific or industry shipments, either way you like?

No, I can't.

Just because it's -- we're starting to see more of that come into play and people have their sugar bought earlier in the year.

Now we're getting more requests to increase our shipments.

So it's still a little bit too early to say exactly, but we are seeing much more interest.

All right.

Steve, you mentioned in your prepared comments and in the press release that there was a decline in fertilizer profitability in your oilseed processing segments, I believe that's where it showed up.

Can you talk a little bit -- I'd like just to hear more color here, how large was the decline in profitability specifically related to fertilizer and can you just expand on the reasons why we don't often hear about fertilizers specifically from ADM which is really the underlying nature of the question?

Okay.

Well, just a couple of thoughts on that.

First of all, as you point out, we do have a fertilizer business in South America.

We principally use it to enhance our origination operation and we're buying bulk fertilizer and blending it to specific pharma needs and we talked about it on, again, a comparable basis, a year ago it was an operation that had done better.

It's not -- in the grand seem of oilseeds it's not a big number and we probably look at it different than other folks.

It's really just a -- it's just a tool.

So we went from -- I'll just -- it's a relatively small gain to a relatively small loss, but there's enough that we thought we'd mention it.

Right.

Because usually it's a materiality issue in terms of why you mention it or why you don't which is why I'm asking because it's something I haven't heard before from the Company.

Last question here, just on Wilmar, can you just give us any guidance here on further increases to tax expense related to the Wilmar restructuring?

Well, we've got one more potential payment and that will -- will happen when the reorganization is complete, which is on its -- kind of its own time line.

It's got -- kind of out of our control.

It's in the regulators' hands and that could be as much as a year ahead and it's going to be based on the market price of Wilmar shares, the way the tax calculation is made, and that continues because Wilmar share value continues to rise, it means the tax number will rise and I think it's in -- it's in the $0.5 billion range at this point in time.

We'll have a final number when we put out the 10-K.

I appreciate the color right there.

Thanks for all the answers.

Thanks, David.

Next question -- your next question comes from the line of Terry Bivens with JPMorgan.

Please proceed.

Good morning, everybody.

Good morning, Terry.

Good morning.

Pat, just a question on capital allocation.

I know it's been a debate for some time in terms of buying capacity versus buying stock.

I guess one way to look at things is it does seem that from this point you are looking towards improvement going forward in your base businesses.

Is that going to change the way you look at the share buy back here?

I mean clearly the level of repurchase has been -- you know, given your size, I would say somewhat minimal and I know there's been a lot of debate on this, but what is your current thinking on share repurchase?

Well, Terry, as you know, when we had discussions with the rating agencies back last spring when we issued our mandatory converter, our equity units and again last fall, we talk with them every quarter, there is a discouragement on the part of the agencies for us using cash for share buy backs.

Now, that doesn't mean that discussion won't continue or can't change and if we want to maintain our credit rating, which is very important in our business, it allows us cost efficient, access to tier one commercial paper, et cetera, we do value that rating and that strength and flexibility.

We will be meeting with the agencies again this fall as we do, we will have those discussions and commodity price levels are always part of that discussion and our balance sheet and our strength and so forth, so I think it is perhaps less of an issue as it might have been before when we had very significantly different working capital level needs, et cetera, but again, we keep our powder dry and we reserve -- we always are talking about driving for acquisitions that add value, be they small or medium sized and in this environment, we continue to see more of those.

So I think we have options.

We have good options, even better ones than ever for our shareholders so we'll continue to have the discussion about how to best use that cash.

Okay.

Thanks very much.

Thanks, Terry.

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

Please proceed.

Good morning.

Good morning.

Hi, John.

Is it fair to assume the decline in ag services was more in the merchandising area than in a drop in risk management?

Yes, it was a slow -- it's normally a slow period.

We did not see the world trade as active as it has been.

Many people were just being -- staying out of the market using their inventories.

We have seen that slowly start changing and people have started coming back to the market with more purchases and also more forward purchases.

Okay.

So more of that decline was in merchandising.

John, hold on one second.

Let me jump in just a second and I guess I'll just add to John's comments that it's hard for us to differentiate risk management from merchandising because risk management is part of that and we talk about risk management, it's about commodity risk management positions, freight, not -- we don't have any real issues with counter party risk and that kind of thing, but I guess I'd -- it's all -- to me it's all integrated.

I'm not here to argue -- it's all part of the program.

Okay.

The reason I started down this path here is that while processing volumes were down, the release said sales volumes were up, which I guess the merchandising tons were up, at least enough for you to comment on that.

So I'm trying to understand the drop in income with the increase in volume.

Was there a lot of high-cost inventory going out with the merchandising volume during the quarter?

Well, it's a margin business and that's what really drives the P&L and I don't think there's much more than those stats.

So it's -- it's volumes, margins and then we have to -- as we talked earlier in the conversation, there's a brought to market piece to all of this.

Okay.

And then second question is if I remember correctly, return on equity is the largest component of the incentive compensation program and you're below the cost of equity now or cost of capital?

The incentive -- well, Pat, do you want to take that?

Our compensation program relates to earnings, to return on net assets and smaller component of performance metrics and safety and then, of course, a discretionary piece for the compensation committee of the Board of Directors.

Did you meet your objectives for the year or did you have to have some adjustments at year end because of the weak fourth quarter?

We have those discussions yet to take place with the Board.

So you might have met them or you might have not or--?

It's based on an annual performance and those will all go into a model that the -- that's described in our compensation disclosures in the proxy and that the Board will look at this week.

Okay.

I'll get back in the queue.

Thank you.

Thank you, John.

(Operator Instructions) You have a follow-up question from the line of Vincent Andrews with Morgan Stanley please proceed.

Hi.

Thanks for taking the follow-up.

I just wanted to ask, in prior quarters you had talked about the credit environment being tight and your commercial paper access being an asset in ag services and perhaps giving you some leverage and some opportunity that the smaller players did not have.

Has that opportunity set run its course?

Well, I personally -- this is Steve.

I don't think that it ever runs its course.

I think there's always a value there, but as business conditions have weakened here, it's made probably less of a difference and as the credit markets have loosened up some, it's probably made less of a difference.

But I don't think I'll ever acknowledge that it doesn't have any value.

Fair enough.

Thanks so much.

Next question is a follow-up question from the line of David Driscoll.

Please proceed.

Great.

Thanks a lot.

John, I just wanted to go back to some of your comments on ethanol.

I think in the prepared comments you all indicated that there was still a fairly significant amount of idle capacity out there, something like 1.5 billion to 2 billion-gallons -- I'm sorry, 2 billion to 2.5 billion gallons of idle capacity and 1.5 billion to 2 billion gallons of capacity under construction.

Wouldn't that put total ethanol capacity still well above the mandate even for next year?

That's kind of the first point.

And a lot of this is in response, John, to your comment that you said that the ethanol business looked, quote unquote, Very good.

Very good to me felt like 2006.

It doesn't feel very good right now and -- but I think you feel differently.

So can we just discuss this a little bit further?

Sure.

The -- many of these plants will not start up just due to working capital.

We're -- we get many calls still on plants that are under construction that are not going to finish construction.

Working capital is still going to be an issue.

This is not going to be an easy business.

Some plants are just built in the wrong location.

If I said very good, maybe that was too strong of a term.

I feel it's going to be better going forward with the supply and demand situation.

If we have a very good corn crop, we should have lower net corn.

We are seeing incremental blending above the mandate.

We have a 12 billion-gallon mandate starting in January and I feel the supply and demand should be somewhat balanced coming into that period.

Okay.

So the comment -- and this makes sense to me -- is that we were not long ago, three months ago we were looking at a whole industry that was -- that was losing money.

The margins have now gone positive and so things feel better, the balance feels better.

Does that characterize really what you were trying to get at?

Yes.

I also might add, David, even just basic gasoline demand is up.

It's higher reported IA data is higher in May than it was in any month during the summer last year.

So people are buying a bit more and therefore blending -- and when blending economics are good and overall gasoline consumption is up, there's a little room to move again.

Just one final point on this.

Just in the last few weeks we've seen corn really turn around and start to move higher on perhaps the expectation that the acreage number from the government was a little optimistic on June 30.

Number one, can you make some comments here on how these higher corn prices affect your -- the margins today?

I hate to be so short-term oriented, but it just seems like four, five, six weeks ago I had $0.20 margins in ethanol and now today those numbers look like they've come down in half because of the rally in corn prices.

If corn continues to go higher, I'm more nervous about the ethanol business simply on that front.

Does that logic make sense to you or do you see it differently?

Well, also, ethanol prices have increased and we still have very good blending economics.

Without the tax credit, ethanol is $0.25 a gallon currently less than unleaded gasoline and you put in another $0.40 on top of that, you're at $0.60.

Blending economics are still there.

Ethanol prices can still go higher.

We always do like large corn crops and the larger the corn crop, the more beneficial I think it will be to the ag services and also to the ethanol industry.

Are you worried about the corn acreage relative to the June 30, estimate or not?

It's going to be more of a yield and just with the latest reports that have come out even yesterday, people are anticipating very high yields, a lot higher than what the government said.

Now, this is also August and we will not start harvesting this crop for another month, month and a half, so there's still other things that can play out, but according to the data, according to what they show for the supply and demand and the carry out for next year, things are currently looking positive.

Great.

I really appreciate the comments.

Thank you.

Thank you, David.

Thank you.

You have a follow-up question from the line of John Roberts.

Please proceed.

Does the oilseeds processing volume normally seasonally decline as you move from the June quarter into the September quarter or does it seasonally normally increase?

It declined 3% last year, but we had kind of a -- we were going into the decline in feed demand last year, so it's hard to separate normal seasonality here.

I'm sorry, what quarter to what quarter?

Going from June to September, so as we look forward to this coming September, would it be normal to have a sequential increase or a sequential decrease?

Decrease during this time period.

We are seeing more in the industry, more down time coming during this period and then also there is a very tight soy bean situation.

So the USDA is anticipating a smaller crush in North America during the next three-month period.

And any guidance on LIFO affect in the near term here?

Has the volatility been low enough that in the prices of grains it will be minimal here in the next quarter or two?

We're not down to -- we're down to just a couple hundred million in the LIFO reserve total and it's all based on prices at point and time, so we're -- and the last time we struck that price level was June 30.

So I can tell you what I thought today, but we'll have to see where September 30 comes.

So it's really that relative value between June 30 and September 30.

Okay.

Thank you.

Thank you, John.

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

I would like to turn the call over to Miss Patricia Woertz, Chairman and CEO.

Please proceed.

Thank you, everyone, for your questions and attention today.

We look forward to talking with you on our next quarter call which is noted there as November 3.

Bye bye now.

Thank you for your participation in today's conference.

This concludes our presentation.

You may now disconnect and have a good day.