Bunge Global SA (BG) 2016 Q1 法說會逐字稿

Hello and welcome back to the first quarter 2016 Bunge earnings conference call. My name is Vanessa and I will be your operator for today's call. Please note that this conference is being recorded. I will now turn the call over to Mr. Mark Haden.

Great. Thank you, Vanessa and thank you everyone for joining us this morning. Before we get started I want to inform you that he we have prepared a slide presentation to accompany our discussion. It can be found at our website at Bunge.com under Investor Presentations. Reconciliations of non-GAAP measures disclosed verbally on this conference call to the most directly comparable GAAP financial measure are posted on our website investors section as well. I would like to direct you to slide 2 and remind you that today's presentation includes forward-looking statements that reflect Bunge's current views with respect to future events, financial performance and industry conditions. These forward-looking statements are subject to various risks and uncertainties. Bunge has provide additional information in its reports on file with the SEC concerning factors that could cause actual results to differ materially from those contained in this presentation and encourages you it review these factors. Participating on the call this morning are Soren Schroder, Chief Executive Officer and Drew Burke Chief Financial Officer. I'll now turn the call over to Soren.

Okay, Mark, thanks a lot and welcome to everybody. Bunge started the year on a solid note. Our Agribusiness team managed markets, margins and logistics very well in a challenging environment. Our food and ingredients business has stabilized and we're seeing positive signs in Brazil with gains in both volume and market shares. We remain confident that we will be deliver earnings growth over last year. Markets are certainly changed since our last update to investors. Both Brazil and Argentina are experiencing weather related crop reductions in corn and soybeans respectively. This will impact our second quarter results but with continued strong global demand, the new environment could result in interesting dislocations in the second half of the year suiting our well balanced global footprint. At the same time, soy and (inaudible) cross margins should improve in the second half of the year which will provide benefits to our Northern Hemisphere operations.

We expect our food business will show earnings growth in the second half of the year and finish above last year's result. We're making solid progress in improving our cost base, added valuable capabilities and key account management. These improvements which have been masked by the adverse effects of the economic headwinds in Brazil, Russia and the Ukraine are fundamental to the future growth of the segment and the expansion of the value-added share of our portfolio. It took an important step in this direction with the announced acquisition of Walter Rau Neusser. A highly regarded oils and fats business in Germany.

The company is strong products and capabilities in the B-to-B customer segment and fits perfectly into our existing soft seed crush supply chains. In Sugar and Bioenergy the market environment is constructive, the strong global demand and better prices matching up against the record king crop and sugar production in Brazil. And remain focused on reducing cost and improving efficiencies across all segments in our performance improvement programs delivered $24 million in the first quarter and we are targeting $125 million for the full year, so in short, we have a strong team, excellent footprint and a business which continues to perform. Our strategy is clear and we are confident that our earnings growth going forward. And now I'll turn it over to Drew who will give you more detail on our performance and outlook.

Thank you, Soren. Let's turn to slide 4 in the earnings highlights. Total segment EBIT for the quarter was $322 million. Agribusiness EBIT was $282 million in 2016 versus $330 million in 2015. As a reminder, 2015 results included profits of $70 million from market-to-market reversals on contracts related to oil seed processing and bunker hedges. Oil seed results were lower due to weaker soy processing results, results in Europe and the United States were negatively impacted by increased export competition from Argentina. While our Argentine business benefited from increased volumes, the negative impact in the Northern Hemisphere more than offset the improvement in Argentina. Soy processing results in Brazil were good and comparable to last year. Oil seeds distribution and risk management strategies performed well and in line with prior years. Grains EBIT was $144 million versus $88 million in 2015. Our trading and distribution and port service businesses performed well as we benefited from strong South American export flows. Risk management strategies also performed well in the quarter.

Food EBIT was $52 million versus $72 million in the prior year. These businesses continue to be impacted by difficult macro-economic conditions and currency translation particularly in Brazil, Russia and the Ukraine. Our Brazilian businesses showed improvements as we moved through the quarter. Margins in local currency moved higher in both edible oils and milling. Additionally the integration of the Pacifico acquisition and construction of our new wheat mill in Rio de Janeiro continue on track. Our North American food businesses continue to perform well with results in line with prior year. The quarter did benefit from a $12 million market-to-market gain that will reverse over the remainder of the year. Sugar and bioenergy reported a loss of $14 million versus a loss of $23 million in the prior year. The improvement in results was primarily driven by higher volumes in margins in our trading and distribution business. Our sugarcane milling business performed as expected. First quarter is the inner harvest period for the Brazilian sugarcane industry. The mills are not operating and sales are from inventories carried over from the prior crop. Fertilizer EBIT was $2 million in 2016 versus a loss of $6 million in the prior year due to higher volumes and margins in Argentina and higher volumes in our Brazilian port operation. The prior year was negatively impacted by a strike in our manufacturing facility in Argentina.

Net income for common share diluted and adjusted was $1.41 in 2016 versus $1.58 in 2015. 2016 unadjusted net income per share is higher at $1.60 a share due to the positive impact of notable tax items. Let's turn to slide 5 and our return on invested capital. Our trailing fourth quarter return on invested capital from Bunge limited at March 31st was $7.9% and above our cost to capital of 7%. Our integrated foods and agribusiness had a return of 9.4% which is 2.4% above our cost to capital . The reduction and return on invested capital from the trailing 4 quarters ended December 31st primarily reflects a lower EBIT in the first quarter of 2016 when compared to the strong 2015 first quarter.

Lets turn to slide 6 and our cash flow highlights. Cash provided by operations was $77 million in the quarter. Funds from operations was $491 million comprised of net income of $232 million, depreciation, depletion and amortization of $113 million and other non-cash items. Funds used for working capital was $414 million due to the seasonal impact of the South American harvest and higher volumes and receivables in our grains business. Our liquidity position remains strong and March 31st we have $3.3 million of credit available under our committed credit facilities. Let turn to slide 7 and our capital allocation priorities. Our first objective is to maintain an investment grade credit rating with a target of triple B. We currently are rated triple B stable by all three credit agencies and manage our business to maintain that rating.

After that, we allocate capital based on creating the highest long-term value for our shareholders. In the first quarter we returned $243 million to our shareholders through dividends and share repurchases. In 2016, we have repurchased $200 million of shares. $181 million of purchases were settled in the first quarter and $19 million in the second quarter. We did not complete any acquisitions in the first quarter as Soren indicated we have just announced the acquisition of an edible oils producer in Europe that continues to build out of our food portfolio. Capital expenditures in the quarter were $110 million for the year we expect capital expenditures including our $150 million for our sugar business to be approximately $850 million.

Lets turn to slide 8 and the outlook. Given the strong start to the year and the recent developments in agribusiness, we're confident that we will achieve our anticipated earnings growth through the year. Having said that, recent developments in agribusiness have decreased our expectation for the second quarter while strengthening our conviction about the latter part of the year. Weather in South America has not been favorable for crops in Brazil and Argentina during the early part of the second quarter. This will likely result in lower crush activity in Argentina and lower origination in export volumes in both countries. While this will have a negative impact on second quarter results, it is strength in margins in North America and the Black Sea for the third and fourth quarters and oil seed processing, grain origination, distribution, and port elevation. This trend should continue into early next year.

Overall, the soybean processing environment is improving. The USDA is forecasting global consumption growth of 7% for both meal and oil and capacity is tightened due to the reduction in the Argentine crush volumes. In the grains business, South America will remain a key exporter. The volumes particularly corn in Brazil will likely be below initial expectations due to the weather issues. That reduction should benefit both our North American and Black Sea volumes and margins. On balance, this change in environment is good for our business and should result in increased profit through the cycle. However, the timing will be dependent on South and North America farmers selling in the second half of the year. In foods, we expect 2016 results to be higher than 2015, driven by performance improvement initiatives and recent acquisitions. Our businesses should continue to grow volumes in increased margins on a local currency basis as we move through the year.

This is already happening in Brazil and India. The North American business should continue to perform well with more of an orientation towards value-added products. The food profits will be oriented towards the second half of the year. And sugar and bioenergy, our crops are growing well and considering our sugar price hedges and Brazilian ethanol price outlook, we expect 2016 to be a year of earnings and cash flow growth. As in the past results will be seasonably weak until the second half of the year. I will now turn it over to the operator, Vanessa, to take your questions.

And thank you-we will now begin the question-and-answer session. If you have a question. (Operator Instructions)

We have our first question from Vincent Andrews with Morgan Stanley.

Hi, good morning. This is (inaudible) calling in for Vincent. I was wondering if you could give us an update on Brazilian Farmer Credit. Are you lending more or less than you thought and are conditions easing and how does the recent strength of the Brazilian real play into this.

I would say in general the situation is not easing. Many banks have withdrawn from the farmer finance market and that is clearly one of the elements against expansion of acreage next year in Brazil. Bunge is involved in providing financing to farmers. We do it very carefully, very strong and very professional review process. We make sure that we have risk spread over a large enough geographic area that we don't have concentration risk of size. We have stepped in to some extent where some banks have pulled out. But with very known customers and we feel very comfortable with the risks that we're assuming. So, it is an issue. It is likely to let's say reduce the rate of expansion of soybeans in Brazil for a year until things normalize. We don't think that will be for this coming crop but hopefully the next one.

I would just add that our farmer financing programs are generally secure so they're secured either by the crop or by the land that the farmer owns. So it is not unsecured credit for the most part.

Great. Thanks.

And thank you. Our next question comes from David Driscoll with Citi Research.

Good morning. This is Cornell Burnette with some questions for David. Congratulations on the quarter.

Thanks, Cornell.

Thank you.

Just wanted to start off in the agribusiness and see if you can give a little bit more color in how you were able to really navigate (inaudible) crush environment in North America in the first quarter and get generally good results in agribusiness. Were there some hedges in place in North American crush or were are you just seeing a much better crush margin environment down in South America relative to maybe what we're seeing in the US board margins.

This is really I think an example of where the footprint we've got plays into our strength. Margins in general in the first quarter globally weren't particularly good. But in Argentina and Brazil we ended up with margins that were better than we had anticipated when we spoke back in February. And that outweighed most of the negative that we did see coming out of the Northern Hemisphere be it Europe or the US or China. It's really about this geographic balance that allowed us to navigate through I will say another quarter where others faced headwinds. So that was really the reason why. I say in general about the first quarter, better soy crop expectations was one element but other than that it was really pretty much all aspects of our agribusiness delivered a little bit better than we expected, just really good execution whether it was in logistics, ocean freight, distribution businesses, grain origination in Argentina had a bit of a boost so it was and I say our risk management strategies were effective across the board. So it was many small pieces that added up to really an excellent quarter relative to expectations.

Okay. And then turning to the second quarter for a bit, the commentary is a little bit negative maybe down in South America so it's like related to the crop being smaller than what was originally anticipated. But, going back to your comments on, seeing strong crush margins down there and looking at the first quarter, crush utilization rates in Argentina, seemed to be at record levels, at least absolute crushing numbers were better than anything we have seen in a while and I was wondering, with farmers, still probably eager to commercialize some of the inventories that they've had in soy, wouldn't you expect to see, kind of continued strength or year-over-year increases in crushing volumes out of Argentina and if we're seeing the rally and crush margins, why is it that, seems like you kind of guiding towards a number in agribusiness as least with the South American assets in the second quarter that's, kind of behind what you did last year but just fundamentally outside of maybe the crop being smaller, it seems like the conditions for your business in South America are much better this year than they were last year.

Yeah, and some of that was reflected in the first quarter. For the second quarter we still expect Argentina and Brazil to have good favorable crushing environment but the Northern Hemisphere be it in US or Europe, both in soy and in soft. I say soft seed crush in particular is going to be a challenge. It's remaining a challenge I would say and that's really -- those are the two big negatives. Other thing I would say is that the second quarter would typically be when we buy the larger chunk of the Brazilian safrina corn crop and that is the one that has been hurt most through the drought or the existing drought in Brazil. We're just entering now, peak pollination in many of the areas in Mata Grosso where the winter corn crop is grown and there's significant likelihood that there will be a big reduction in that crop. So we don't expect those volumes to flow through like they did last year. And in Argentina, you're right, the crush volumes in the first quarter were exceptional. But, we've had non-stop rain now for a long period of time and it has really put the whole system in Argentina at a standstill. So our crush rates are definitely down in April. Who knows how it turns out in May and June. And the quality of the crop has been impacted. It's too early to tell how big of an impact.

You know, you've got various estimates in the market between 3 million and 5 million tons of crop reduction but on top of that you have quality issues. So all those things together is what makes us cautious about the second quarter, but at the same time, creates the opportunities with flows back to both the Black Sea as Drew mentioned and to the US for both corn, beans and also products that should lead to a very strong second half and is the reason for the margin expansion, the board crush expansion that I'm sure you follow for, in the US and so the second half should be very good. And the second quarter I'll say is a transition from, what was a heavy, heavily over supplied global environment to one that is more tight and creates opportunities.

Okay. Thanks a lot.

And thank you. Our next question comes from Ann Duignan with JPMorgan.

This is Thompson (inaudible) in for Ann. You mentioned if your release this morning a commercial decision to carry less inventory into the sugarcane crushing season. Can you give us any more color on that decision and how we should be thinking about that segment in the second quarter?

Yeah, the normal seasonal pattern in the sugar business is the mills are generally shot from mid December until sometime early April, late March, depending on the weather. So as you end each season, you make a decision on how much other product and produce you're going to sell and how much you're going to carry into the next year to sell in the first quarter. Obviously the minimum you're going to carry forward is what you need to satisfy your contracts and your customers. And how much more you're going to carry forward really just comes down to being an economic decision on when you're going to get the better returns. Is it better to sell those inventories in 2015 into cash or are you going to have more value to them in carrying them to 2016? The way last year played out and wait our business was structured and, it made more sense to sell more in '15.

That's helpful. Thank you. I'll say on a different note, given the recent supply disruptions in South America, can you share your expectations (inaudible) in the US?

Yeah, I don't know that they will be -- they certainly won't be negatively impacted. Prices have come up quite dramatically so if there was any encouragement needed to plant more, then farmers certainly have it. We expect that planted acres will be more that the US intentions came out maybe with a small shift towards soybeans but, it's a little bit too early to tell yet.

Thank you. And did you have anything further?

Sorry, I'll leave it there.

And thank you. Our next question comes from Adam Samuelson with Goldman Sachs.

Yes, thanks, good morning, everyone. Maybe take on to make sure I understand insides of second quarter weakness and taking it from a different approach. Last year the agribusiness segment did $134 million of profit and there was about $50 million of I think it was wheat hedging losses late in the quarter of corn that negatively impacted those results. Would you actually think that agribusiness would be down against either the hedge impacted on non-hedge impacted results given the landscape in South America that you see today?

Yeah, I think order of magnitude, we are looking at numbers that are closer to the as reported agribusiness numbers, so including the $50 million negative impact. That's how it looks now. It's early in the quarter. A lot of things can still change. But that's how it feels.

That's helpful. And then just on the cash flow side, I know you talked about Bunge stepping in and maybe providing a bit more aggressive financing to the Brazilian farmer. Can you give any thoughts on the working capital investment as you're over the balance of the year and given the large investment in working capital that you saw in the fourth quarter and again in the first quarter and maybe some of the cadence of some of that release over the year?

Yeah, I think as you look at the first quarter, we didn't really do that much extra in terms of farmer financing than we do in a normal course. I mean there was some in there but not a whole lot. You're probably seeing there is the increase in receivables. That was driven by our distribution business where we had a couple of vessels that weren't delivered at the end of the year so we weren't paid for them which causes, that's a timing matter whether we have open vessels or not. We had a similar situation with trade structured finance transaction where we have open balances for very brief periods of time like a week or so and we had a bit of money open there. So the receivable side really didn't jump a whole lot on from what we would normally expect upon an ongoing basis. And I don't think the amount of financing we put out is going to change dramatically over the rest of the year. I think it will stay in line with where we were. When you talk about working capital overall, it really is a question of two things. It will be a question of what are commodity prices and whether the market's in an inverse or carrier flat. Commodity prices are what they are and affects the balance and as far as market structure, we will either carry or not carry inventories based on whether we're getting a return on that investment. So I don't want to speculate how that may play out over the rest of the year.

Okay. And just this will be the last one in the prepared remarks you alluded to risk management doing well in the quarter. Any way to quantify that or if that was a particularly notable kind of benefit to the 1Q results?

No, Adam, we don't split that out. But it was effective across our various product lines, embedded in our management of the physical margins and flows that we operate. But I wouldn't want to take it out. But it was a good quarter and we saw the market trends and the cash positioning and the margins the right way.

All right. That's helpful. Thanks a lot.

Thank you.

Thank you. Our next question comes from Kenneth with BMO capital markets.

Hey, good morning everyone. Just one quick question and then a couple others.

One is on the US crush margin environment, is it now good in the second quarter or bad in the second quarter?

It's transitioning from having been, sort of mediocre to being average I would say but it's a process that takes a little while and it is, board crush is one indicator. You have to put the physical pieces of it together as well. But we certainly hit the lows. We did that back probably just around our fourth quarter call. And having improved from there and I think the events in South America that I just spoke about, gives us confidence that we'll have a flow back of product demand to the US in the second half of the year and that should set us up for a very nice sort of late Q3 and Q4 and maybe even into Q1 next year, Northern Hemisphere crush. Q2 is a transition.

Okay. I understand that. That clears up. The second question I had is what's the prognosis of farmers selling in US and Brazil? Are the farmers selling or not or can they sell? What's the, you know, given that prices have, I thought there was more selling but maybe it's not as much as kind of, anecdotal evidenced?

In the US I think we've seen a very nice round of selling over the last as the markets have rallied, so that's the case. In Brazil, I would say it's been more modest and it's really been soybeans only and mostly old crop where the farmers are already fairly well, sold. I think that's probably 60% or 65% of the old crop has been priced so far. So nothing out of the ordinary. But what is very different is that the farmers who also typically sell nice amounts of their winter corn crop at this time of the year aren't because they're worried about, the size of the crop and, there's -- there's no doubt going to be significant damage to that crop. So in total, it is less than we would have expected earlier on in the year.

And just understanding Argentina, I understand the crop might come down three million to five million metric tons but my understanding is there's still plenty of crops there. So will this eventually come to you? Or the potential that Macri was going to lower all the taxes and devalue, that benefit has come and gone and now we're on to the regular world and now dynamics are more normal?

So, I think we will have -- I mean the crops will still be a sizable crop, whether it's 53 million tons or 52 million or 54 million. Nobody knows. It will still be a sizable crop and we will have enough soybeans to crush and we believe in good margins well into Q3 and Q4. And I think that's probably the difference between the last few years and now is that we will have a shift back to the Northern Hemisphere because we've taken the edge off the crop in both Argentina and Brazil but there should still be enough raw material left and I think a willing farmer selling it that we will have good crush rates and good margins in South America at the same time.

Okay. My very last question is, the last quarter you alluded to the idea that we're going to get modest growth in agribusiness. Does the modest become better or worse or where does that barometer go at this point? I just couldn't fully understand, I just want to make sure I fully understand what -- has the environment gotten better, worse or indifferent?

I think the environment has gotten better since we spoke in February. And our level of confidence in grown earnings is higher now than it was then. The comment about modest earnings growth was really relating to the entire portfolio, not just agribusiness so you have to be careful with that. I think we feel good about overall earnings growth in Bunge for the year. Maybe sort of put it into pieces little bit to help guide the discussion. Let's start with some of the smaller pieces. For example, fertilizer. Fertilizer is going to have a good year for us this year. You know, Argentina in particular is in a different state. Farmers are back and will be applying fertilizer at normal rates. So we expect that our fertilizer business should be up, at least $30 million so call it between, 30 million and $40 million worth of income for the year.

Sugar as Drew has indicated, we look for the segment to be solidly profitable and, in order of magnitude probably $70 million, maybe $80 million better than last year and that would be give you a 40 million to 60 million dollar range for the segment. We've got all the pieces that we can lock up locked up so sugar hedges are in place, etc. What remains of course is the harvest risk but we should have a nice positive contribution from the sugar segment this year. And in foods, what we said previously is that we will have an improvement relative to last year. 30 million to $50 million so call that food contribution of $220 million to $230 million. You add all that up, you get a range of 295 to 320. Call it $300 million for all the things that are not agribusiness. That's an improvement over last year of $125 million. We feel fairly confident about that. And then it is about agribusiness. What will it be finally?

You started out really well. You're signaling that the second quarter is going to be soft for the be reasons mentioned but that the second half should be good and we expect the year to be solidly good. Last year's record of about a billion fifty I think it was is the upper end of the range that we would expect based on what we know now and our current forecast is somewhat less than that but still a good year. So I hope that gives you enough sort of color to come up with a range that still indicates that overall we'll grow earnings for the year and feel very good about it.

I think, Ken, I obviously agree with all of that. The only portion I would add is we are early in the agribusiness season and it's the reason we don't give, precise guidance. We've still got a North American crop to get through and the recent weather in South America shows you how it can change environments. And just to go back to my comments, based upon the selling on the back half of the year will determine the profit realization somewhat. That's our range but I wouldn't hear it as a very narrow range at this point in the year. We need to get some more information but it narrows down.

I appreciate it. I truly do. Thank you.

Okay.

And thank you. Our next question comes from Farha Aslam with Stephens.

Hi, good morning. Following on to Ken's question, just try to understand your confidence in your back-half with the crush margins. Could it be that Argentina having crop issues is net better for Bunge? Because that's what it sounds like from your last answer. That you're feeling net better about your business even though a significant portion of your assets are in Argentina.

It depends I would say. We still don't know exactly what the impact of the Argentine crop is. But the way that I look at it, even with a reduction in the crop, people still have a crop that's big enough that we will be able to run our assets at high utilization rates and the markets should want the products both meal and oil and yet we will still see a shift to the Northern Hemisphere for supply because we've taken the edge off both the Argentine and Brazilian crop. So if we end up in that sort of sweet middle point we could actually see a situation in which margins in South America remain fair and we get a good, late Q3 and Q4 run at US margins which essentially is the same as southern Europe. I think the scenario is too early to tell but I think the scenario could be favorable for us overall.

That's helpful. Just on a follow-up on the Brazilian Real, it's been moving around a bit. The recent strengthening, does that help your edible oils business and milling business?

It's on the margin at this point because the profits we're translating are yet not significant. The real improvement in Brazil in our food business will come when the economy stabilizes and consumer confidence comes back. And the prospects are still for a reduction in economic activity in Brazil by 3% or 4% this year. So we don't think that's coming any time soon but it is certainly not a negative. In reality for the food business to get back to its sort of normal state will probably take us well into 2017.

The current economic weakness is factored into your numbers that you just gave when you answered Ken's question?

Yes.

Okay, great. Thank you.

Thank you. Our next question comes from Sandy Klugman with Vertical Research Partners.

Good morning. I apologize if this has been asked. I jumped on a little late but I way hopping you could provide an update on how you're thinking about the prospects for the sugar business and any implications this has for the potential monetization of these assets?

There's nothing new to report, frankly. But the business or the sector as such I think this year will go through, a good year. We've got record cane production in Brazil. We've got very strong global sugar demand and other parts of the word have had crop reductions such India and Thailand. So the margin situation in Brazil in producing sugar is favorable and that will be reflected in our results and the results of the industry and ethanol demand continues to look strong. So I think this will be a year of stabilizing sort of the whole sector in Brazil. But Brazil as such is still considered to be a bit of a risky place. So I don't expect any near-term action relative to the assets we have in the reality is probably more like, next year. But we are a good path and we expect a solidly profitable year.

That's helpful. Thank you very much.

Okay.

And thank you. Our next question comes from Rob Moskow with Credit Suisse.

Thanks. I was hoping to understand what soft means I guess for second quarter for agribusiness because, last year was a very soft quarter also. Maybe because of some pull forward. But, you know, is it as bad as last year or is it something a little better? Like hard to say?

Yeah, I think Adam asked a similar question, just a little while ago and sort of last year's number is a good indication of the way we currently look at it but as I also said it's early in the quarter, many things can change but in this point it's something in the order of magnitude of last year's numbers.

Okay. Sorry, we're on several calls at once.

No problem.

Sure.

I understand also when you say there's opportunities for more dislocations to emerge, is that specifically a function of the crop in Argentina being, you know, a little weaker because of the weather and that means that North America might find I guess arbitrage opportunities for exports? I guess the reason I'm asking is it wasn't that long ago, maybe a few weeks ago where your company and ADM and Cargill, everyone was talking about this environment as being as bad as it's ever been in terms of the lack of dislocations. Do you feel like, you know, has something really changed for everybody or is it really Bunge because of your global footprint?

I think Bunge's global footprint is advantageous in situations like this. So that is true but I think the conditions are the same for everyone. I can it just tells you how quickly things change. You know, that's the one thing that I would say. You know, when you think things are set in stone, they change and they typically do in our business. Two things that are impacting, you know, our view that there could be dislocations coming up is on the soy side, reduction in the Argentine crop but also the fact that we've taken the top off the Brazilian crop as well and the combined effects will likely mean a slightly reduced crush overall for South America but a shift of soybean exports to the US for the August through January period next year. So that's one piece. And the second piece which probably has more impact in terms of the shifting supply and demand is the reduction in the Brazilian winter corn crop and there are a lot of estimates out there on how bad it is and we probably won't know yet for another few weeks because we're in the peak of the pollination.

But it could be, you know, anywhere from 5 million to 10 million tons of reduction and that goes straight out of exports and will therefore have to be supplied by the US and/or the Black Sea, Ukraine in particular. So those two things added up is enough to shift the balance in both soy and corn towards the Northern Hemisphere and has priced, you know, commodities soybeans in particular in anticipation of not running out of them this year but, 2017, that's how far the market looks out. So it is an opportunity. How big it is it's too early to tell. It's evolving and emerging as we speak, but, it's a real possibility that we'll see some interesting shifts.

Okay. And I guess my follow-up is is your view here, I don't know how to say this, but is it shared by most people who are watching this? Or is there -- is it kind of a conflicted kind of view because I guess I've been to some industry conference where people are still saying that there's way too much inventory out there and customers are not in a -- do not have a sense of urgency to buy right now. You know --

I don't know. I don't know what others think and I can -- as I mentioned you the transition is happening as we speak. So how much and how big is still something we won't find out for a little while, and that's probably why you have still slightly differing views as to the impact of this. But what we're describing is the potential and that's what it looks like now. We're not saying it's going to happen.

Sure.

It's in the process of happening. And, making you all aware of that. So as it happens, if it happens, it's something that we, we believe we can benefit from by having assets and footprint and all the corners of the world and therefore able to supply our customers under really wide variety of circumstances.

That's great.

Rob, we are also seeing the underlying demand. It's part of the picture that shouldn't be lost. Demand is there.

Demand is very strong.

Understood, thank you.

And thank you. Our next question comes from Brett Wong with Piper Jeffrey.

Yeah, thanks for taking my questions. Soren, you had mentioned that you don't really expect the food business to get better without obviously an economic improvement down in Brazil. Could you talk to that happening and maybe (inaudible) discuss a little bit on what that's predicated on?

It's predicted on whatever economic data we were all reading. This year it's a contraction of roughly 4% in the Brazilian economy and I think currently the projection for 2017 is about scratch. So it's just a returning to normal and hopefully by then there will be some clarity as to the political, future which, which look like should happen by the end of this year, one way or the other. Really returning to more stable conditions and having hit the bottom and I don't think that's going to happen until 2017. In the meantime, we're doing everything we can of course to put ourselves in the best possible shape give the circumstance. So a lot of the improvements that we expect for this year are really created by ourselves. It's not that the market is giving us any particular break so the market share gains and the volume gains and the reduction costs is something that we are all working very hard on and will pay us some benefits as the year progresses. So a large part of the

Okay. And I guess I guess when you're looking at the economy improving down there, do you expect that to come on changes in the current political regime?

I don't know how this will all end up. I don't think anybody knows how the current political, situation will be resolved in Brazil. We all know about the impeachment and so forth. How that plays out exactly I don't think anybody knows but it's unlikely to lead to any sort of new policy clarity this year, maybe next. Brazil has a lot of domestic fiscal issues to deal with for sure and I would expect that whoever ends up sitting in the presidential chair at the end of this will have to deal with it. The impacts of those unlikely to be felt until 2017. But more than anything else probably it's not getting consumer confidence in place that, the situation has stabilized and, the country is in good hands. We probably won't see that for another, six months, maybe more.

Okay. Thanks. And then you mentioned or you spoke about the recent real swings and how they've impacted or haven't really impacted the food business. Can you just talk about how it's impacting farmers selling down in Brazil?

Farmer selling is typically very sensitive to moves in the Real so a stronger Real usually means that farmers shot off and a weak one means a boost in selling. And so lately the Real has been mostly on the strong side. Some of that has been compensated by the move in underlying commodity prices and that's kept soybean selling at an average pace. As I mentioned corn is a little bit different because the crop is hurt. So, farmers will continue to be very sensitive to swings in the real and a stronger Real or quickly strengthening Real is likely going to shut off selling. At the same time a quick move towards 4-for-1 is likely going to release a lot of selling and most likely more and more of the selling will transition to the 2017 crop which is a big piece of let's say our second half earnings equation. How much of that 2017 crop will be commercialized in 2016. And in that context, a weaker Real is going to encourage that and will be good for us.

Great. Thanks so much.

And thank you. We have no further questions at this time. I will now turn the call back over to Mark Haden for closing remarks.

Great. Thank you, Vanessa and thank you everyone for joining us today. I just want to point out that on December 15 we will be hosting our investor day which will be in New York City so please Mark your calendars accordingly and details will follow. Thank you for joining us.

And thank you. Ladies and gentlemen. This concludes today's conference. We think for participating and you may now disconnect.