Archer Daniels Midland Company Q3 2008 Earnings Call Transcript

Nov. 4.08 | About: Archer Daniels (ADM)

Archer Daniels Midland Company (NYSE:ADM)

Q3 2008 Earnings Call

November 4, 2008 9:00 am ET

Executives

Dwight Grimestad - VP IR

Pat Woertz - Chairman and CEO

John Rice - EVP, Commercial and Production

Steve Mills - EVP and CFO

Analysts

Christina McGlone - Deutsche Bank

Vincent Andrews - Morgan Stanley

Robert Moskow - Credit Suisse

Kenneth Zaslow - BMO Capital Markets

Christine McCracken - Cleveland Research

Diane Geissler - Merrill Lynch

Ann Gurkin - Davenport

David Driscoll - Citi Investment Research

Ian Horowitz - Soleil Securities

John Roberts - Buckingham Research

Operator

ADM Earnings conference call. My name is Nora and I’ll be your coordinator for today. At this time, all participants are in listen-only mode. If at any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I’d now like to turn the call over to Mr. Dwight Grimestad, Vice President of Investor Relations. Please proceed, sir.

Dwight Grimestad – VP of IR:

Thank you, Nora. Good morning, and welcome to ADM’s first quarter earnings conference call. Before we begin I would like to remind you that we’re webcasting our call, and that you can access it at ADM’s Web site, www.admworld.com. The replay will also be available at that address.

Slide two had the company’s safe harbor statement, which says that some of the comments constitute forward-looking statements that reflect management’s current view 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 different results.

To the extent permitted under applicable law, the company is through no obligation to update the forward looking statements as a result of new information, or future events.

Slide three rests matters we will discuss during our conference call today, I will now turn the call over to Chairman and Chief Executive Officer, Pat Woertz.

Pat Woertz – Chairman and CEO:

Thank you, Dwight, and good morning everyone. As is our custom I would like to open with a safety comment. We will remain intensely focused on achieving our goal with zero injuries, zero incidents. And we have made further progress and steady progress since our last call. We’ve reduced lost workday frequency by 3% and total recordable incidents by 6%, from our full year 2008 fiscal results. Our global lost workday injury rate is now less than half the US national average. Of course, safety is not about numbers, it’s about people, and our results mean that more colleagues than ever before are going home safe every day .

This morning we reported record quarterly net earnings of $1.63 per share, or just over $1 billion. This exceptional performance demonstrates again the acumen of our people and their ability to leverage our global network and our strong financial position to recognize and act on opportunities when they arise. In a moment Steve will walk through the financial results and the current business conditions for each segment. I would just like to highlight a few factors influencing our performance this quarter.

Last quarter on our conference call we described current conditions as we saw them. And we did see some flowing trends starting to emerge. Then market volatility continued, and what was new was the even later than expected harvest in the US and the shifting supply sources as crop conditions improved significantly outside the US. Now while to some this may have posed a challenge, to us it posed an opportunity. In fact, a lot more opportunity than we thought at the time of the call. And we have the balance sheet, the cash, the credit rating to act on those opportunities.

Of course, results don’t come automatically even with financial strength. This was a quarter to be vigorous, to move fast, and to capture value, and I think it was very well handled by ADM’s management team. We have been positioning our company to take the most of opportunities when they arise. As you’ll recall, last year we reorganized, we eliminated some positions, we flattened our structure, we put in place new controls on some discretionary spending, and we continued to operate our company very tightly and very resourcefully. And to execute, in a range of environments, and that’s what I think we did very well.

What a great way to kick off the fiscal year with the strong quarter that illustrates all the underlying strengths of our company. Now in Cedar Rapids during an investor and analyst day last month we recapped our long term strategic positioning and our value chain and how we’re executing against this value chain. And the three growth areas: diversifying feed stock, expanding the geographic scope of the model, and growing our bio energy business, we continue to execute against this strategy, and we’ve completed several important transactions recently.

First, as we focus our resources on the most significant opportunities for ADM, our announced divestiture of our malting business to Malt Europe closed on August 1st. We received regulatory clearance for the acquisition of the Campa crush plant in Southeast Germany. We closed that transaction last week. We also announced a packaged oil joint venture with Associated British Foods. This is a great move for ADM. It will improve our plant capacity utilization, it will leverage our origination and processing capabilities while we build on our partners’ access to higher value markets.

I’m also pleased to announce this morning a new joint venture with Grupa Cabrera to produce sugar cane-based ethanol in Brazil. You’ll see a press release on that later this afternoon. We’re very pleased about this venture. Let me give you just a little background:

We believe we have the right opportunity and the right partner. The partnership brings together the Cabrera organization’s deep knowledge of sugar cane and expertise in regional agriculture, and our expertise in ethanol production and marketing. The investment by the joint venture will be around $500 million over seven years, about 370 of that will be ADM’s share. And we expect to reach about 6 million metric tons

of sugar cane crush per year. With about half of that cane used to produce about 70 to 90 million gallons of ethanol per year.

Overall I’m very pleased with our quarter. While around us we see uncertainty and change, we remain well-positioned and confident because of the fundamental strengths of our company. Our global network, our business model, our strong financial position, and driving it all the infight and expertise of our people to capture the opportunities and create value.

So I’ll turn it over to Steve now, and we’ll be back later with John, Steve, and I for Q and A. Steve?

Steve Mills - EVP and CFO:

Thanks, Pat, and good morning everyone. Moving to slide five, you’ll see the statements of earning highlights for this quarter. Net sales and other operating income increased 65% to $21.2 billion for the quarter ending September 30, due principally to higher average selling prices, resulting primarily from year over year increases, and underlying commodity costs.

Sales volumes were comparable overall, with increases in sales quantities of merchandise oil seeds and ethanol being offset by decreased sales quantities of vegetable oil and protein meal, as well as merchandise wheat.

Gross profit this quarter more than doubled to nearly $1.9 billion as operating margins expanded significantly and oil seeds processing, ag services, and coca, wheat, and malt. In addition, the steep decline in commodity market prices between June 30 and September 30 resulted in a large decrease in our lifo inventory reserve, which positively impacted gross profit by approximately $450 million. And I’ll talk in more detail about lifo later on during the call.

Selling general administrative expenses increased 16% to $409 million for the quarter, due principally to higher employee-related costs, increased provision for capital accounts, and the impact of foreign currency translation.

Our financing cost net, which consists of interest expense less investment income, was $75 million for the quarter, up from $25 million last year, principally due to interest expense related to increased levels of long term debt. Our effective tax rate for the quarter was 29.7% down nearly 2% from last fiscal year’s tax rate, due principally to changes in the geographic mix of pre-tax earnings.

We expect our full year rate to be in the 30% range. And as Pat mentioned and as you’ve read, our net earnings for the quarter increased 138% to $1.05 billion, and earnings per share increased 140% to $1.63 per share, due principally to record segment operating profits, and to the decrease in our lifo inventory reserves.

Slide six shows certain items, shown here on an after-tax basis, that impacted the comparable fiscal 2009 and 2008 first quarter results. With the steep decline in commodity market prices between June and September, our LIFO inventory reserves have decreased approximately $453 million for the quarter, to $283 million after tax. Compared to a pre-tax charge of $83 million, or $51 million after tax for last year’s first quarter.

There are a few other less significant items laid out here on the chart, and a more detailed bi-segment summary of these items has been included in the appendix to this presentation.

A comparative overview of our operating profit bi-segment is shown next on slide seven. Total segment operating profit for the quarter increased 48% to a new quarterly record of $1,176,000 million. And we can turn straight to slide eight to begin the review of each individual segment.

Slide eight looks at the operating profit of oil seeds processing group. The oil seeds processing operating profit was very strong this quarter, increasing 144% to $510 million, up for $209 million last year. We continue to benefit from our global footprint and our product line diversity in oil seeds, including soft seed, and refining and packaging operations. Crushing and origination results improved $208 million to $339 million for the quarter. As global crushing margins improved across all of the major processing businesses. One key factor was our North American raw material positioning coming into this quarter, anticipating generally tight soy bean availability and allowing us to generate very good margins.

We also benefited from the elevated volatility in both commodity and freight markets, the tight carry out of soy beans in North America from old crop to new crop, and the better, early harvest conditions in Europe. Additionally, year over year fertilizer results improved in South America, as sales volumes increased on strong demands.

Refining, packaging, bio diesel and other results improved globally, increasing $44 million to $106 million for the quarter. Generally reflecting better margins due to good demand for vegetable oil and increased average selling prices for value-added soy products, such as isolips concentrates and vitamin E. Results improved in North America, reflecting improved margins on slightly lower sales volumes, and also due to positive impacts from plant rationalizations, and optimization steps we have taken over the last 12 months.

Bio diesel results have improved, especially in Brazil, with our new bio diesel facility at Robinopolous, Brazil. Oil seeds results in Asia increased $49 million due principally to increased earnings related to our equity investment and Wilmar International, Ltd. As a reminder, we record results from this investment one quarter in arrears. So this quarter, we are including Wilmar’s June results, results which showed significantly-improved palm and soybean merchandising and processing income.

Taking a look at current market conditions for oil seeds processing, the soy bean harvest is nearly complete in North America, and soy bean carry-out stocks have been growing in the US. There is a good supply of soybeans today, but farmers have been reluctant to sell at current price levels. South American farmers are planting a similar number of soybean acres as last year, and we are seeing a slowing global rate of growth for protein meal, as the larger supply of world wheat is displacing soy protein meal in some feed rations.

Globally, USDA projects protein meal demand for crop year ’08- ‘09 to slow to a 2% to a 3% growth rate, down from last year’s 7% to 8% rate, and down from an historical 4% to5% growth rate. In the US, crushing rates are down in response to the slowing protein meal demand. The USDA projects that the ’08- ‘09 North American soy crushing rate will drop slightly from 1.18 billion bushels to 1.76 billion bushels.

Global vegetable inventories are similar to last quarter end. We see robust bio diesel demand in Brazil, driven by the implementation of the B3 mandate, and while we adjust our oil seeds crushing rates as necessary to balance supply with demand, we are competent in the long term growth of both meal and oil demand, and we’re continuing with our previously announced incremental North American capacity expansions.

And as Pat mentioned, this quarter we bought a rapeseed crushing plant in southeast Germany to meet growing needs in Europe, Eastern Europe, and we’re excited about our recently announced joint venture with ABF, which will be a premier vegetable oil company, giving us new opportunities as we serve the packaged food and food service markets.

Moving to corn processing on slide nine, overall this was a difficult quarter for corn processing as we were faced with the multiple challenges of very high corn and energy costs, and significantly weaker ethanol margins. Sweetener and starch operating results decreased 61% in the quarter to $65 million. And bio products results decreased 37% to $53 million. Net corn costs were sharply higher for the quarter, and were also negatively impacted this quarter by mark to market losses on corn futures and option, used to economically hedge sales obligations.

Production rates were good, increasing about 6 million bushels, or 3% from last year’s first quarter, and we have recovered well from the fourth quarter this past year’s problem caused by the Midwest floods. However, manufacturing costs have increased year over year due principally to significant price increases for natural gas, and to a lesser extent, electricity, coal, chemicals, and enzymes.

Average selling prices increased for sweeteners and starches, due to price increases this calendar year versus 2007. And sales quantities also increased, mainly due to industry supply problems caused by the June floods. In bio products, average selling prices for both ethanol and lysine increased. Sales quantities for both these products also increased. Our ethanol sales volumes are up, due principally to our growing US and foreign ethanol merchandising program, and additional marketing agreement volumes.

Looking at current market conditions, harvest is well under way in North America, and the USDA is projecting the second largest crop at a little over 12 billion bushels. Crop prices and co-product values are down from their highs, and of course we typically benefit from lower corn prices in the longer term.

Ethanol margins remained under pressure, as the industry deals with new ethanol production. More ethanol margins have caused some suppliers to close their plants and others to delay construction of new facilities. In addition, ethanol selling prices are now above unleaded gasoline prices, which may also slow the expansion of ethanol into new markets.

Lower year over year carbonated soft drink consumption levels have reduced US corn sweetener volumes for the industry, although volumes in Mexico are growing. We see good demand for our entire portfolio of corn products, and have an incrementally expanded production for lysine, threanine, and yeast.

We’ve recently announced a list price increase for sweeteners and starches. And we’re approximately half way through our 2009 contract negotiations with our customers. These price increases will cover our increased production and raw material cost. Our major corn processing construction projects continue on schedule, and as have added a slide in the appendix giving you the latest timeline and total estimated cost.

Let’s now turn to slide ten and look at the operating performance of our agricultural services segment. Operating earnings for the quarter were $428 million, up nearly $200 million or 87% from the first quarter fiscal 2008. In merchandising and handling, we began this quarter anticipating that the US would be facing tight inventory carry-outs from old crop to new crop. And that the US harvest would be delayed. This, coupled with our market intelligence, global network, and financial strength, provided us with excellent volume and margin opportunities.

Flooding on the Illinois rive, made operating conditions for our transportation group very challenging during the quarter and in the circumstances we are pleased with the results that are comparable on a year over year basis. Large freight rates have increased, while volume rates decreased, reflecting restricted barge availability, and substantially higher logistical operating costs, particularly fuel prices.

Looking at the current conditions, we have had strong operating services and agricultural services created by market volatility, global shifts and sources of grain supplies, and the late US harvest extending the enhanced opportunities that we saw last year.

Barter supplies of wheat, from Europe and Australia will displace a portion of US exports. World wheat production reached a record $680.2 million tons. We are optimistic about the size of the US corn crop, which is protected to be the second largest crop on record. The US soybean crop is projected to be approximately $2.9 billion bushels.

The unparallel ADM global network continues to meet customers demands and we are incrementally expanding through the capacities across our network, also looking for selective acquisitions, we adding barges to our South American operations, and modernizing the North American barge fleet. .

Slide eleven, is at operating profit-analysis of the other segment, showing substantially improved wheat coco and malt results, partially offset by decreased financial earnings. Wheat processing results improved as margin and origination results improved on broadly comparable sales and production volumes.

In addition, earnings attributable to our annual equity investment in Gruma which we’ll report with a one quarter lag increased approximately $11 million dollars. Cocoa results increased, principally due to increased sales volumes and margins for chocolate and semi-finished products and improved market structure, which improved our cocoa-bean carrying costs.

Our malt result this quarter reflect one month’s worth of operations, as we completed the sale of this business on July 31, which we disposed of for a small one-time gain. Financial earnings decreased $51 million for the quarter. As interest rates decline, increased income earned by our investment services was reduced, and as we mentioned on previous calls, our investment in managed funds have been winding down, and the course binding income was down accordingly.

Current market conditions in the cocoa group presently were enhancing our global origination and processing footprint with our Gnay in operations and we have our ongoing Hazelton, Pennsylvania construction project of which the warehouse at that new facility is in our operation. We continue to enhance capacities and cost efficiencies in wheat as we demodel.

Now I’d like to take just a second to update everyone on our investment in Gruma. As many of you know, we own 23% of Gruma, SA, a large Mexican-based corn flour tortilla maker, and carry this investment on our books for approximately $330 million. Gruma has recently made several public announcements regarding several significant unrealized losses it had incurred, related to derivatives trading.

Based on results released by Gruma last week for the quarter ending September 30, we are estimating, we will book a non-cash operating loss of approximately $35 million in our second quarter. We’ve looked closely at the carrying value of our investment at Gruma and at this stage we do not believe it is other than temporarily impaired. We understand Gruma continues to work on closing out the derivative’s positions and agreeing settlement terms with the financial terms involved. It’s unclear what the total size of the loss will be or what the final impact will be on our financial statements. By the end of our second quarter, we expect a lot more clarity.

Slide 12 looks at the major components of our corporate line, which turn to a net gain of $318 million dollars in the quarter, compared to last year’s quarter’s net expense of $150 million dollars. With the significant commodity price declines during the quarter, our LIFO inventory reserves increased $453 million dollars for the quarter. Last year’s first quarter’s LIFO charge reflected the impact of increasing commodity prices. Our corporate interest, which is in the investment expense/income low on the chart decreased $65 million dollars on a year over year basis due primarily to interest expense related to the long-term bet that we have issued over the past year. This line item was also impacted by the reduction in inner company interest income that corporate charges to the operating divisions due principally, to lower short-term interest rates.

Turning to Slide 13, which shows our condensed balance sheet as of September 30, and the comparison with June 30 balances. As you would expect, the most significant changes in our balance sheet continue to be driven by the fluctuations in our working capital requirements. Principally due to the precipitous drop in commodity prices during the quarter, we’ve seen our operating working capital decrease about $4.2 billion dollars and we’ve seen a corresponding decrease in our short-term debt levels $2 billion dollars and an increase in our cash and short-term investments and our balance sheet also reflects the disposal of our malt business.

Turning to our cash flow statement, slide 14 lays out the cash flow highlights for the quarter. Within operating activities, cash generated from operations before the impact changing in working capital were up approximately 80%, to $1.2 billion dollars, due principally to our strong earnings for the quarter.

In addition, we have generated another $3.5 billion of cash flow in changes in capital requirements for the quarter, primarily due to reduced inventory and receivables levels resulting from the significant decline in commodities prices. Our investing activities reflect the continuing spending on our capital construction program and our estimate of full-year cap expending remains in the $2 to $2.5 billion range.

The increase in the other portion of this grouping principally reflects the proceeds from the sale of malt business at the end of July. The net result of these operating and investment activities with a large drop in our short-term borrowing balances and an increase in our cash and cash equivalents. Additionally, this past quarter, we bought back $3.4 million shares for about $100 million dollars and we still have approximately $71 million shares left in our previously authorized buyback program.

As to stock buybacks, we have had discussions with the credit-rating agencies and we are still in dialogue with them as to how much, if any buyback capacity we would have within our existing A/A2 credit rating. We’ll turn to the next slide in order to demonstrate why we are so sensitive to our credit ratings. Since I just spoke to our balance sheet strength, our positive cash flows, the volatility we have seen in the commodity markets, and our recent meeting with the rating agencies, I thought it would be useful to illustrate why maintaining our accredit rating is so important to us.

As an A-rated company, ADM has access to the deep and cost-efficient, tier-one commercial paper market. As a smaller chart on this slide shows, even excluding the asset-backed commercial paper market, the outstanding balances available in the tier-one commercial paper market gorse those of the tier-two paper market, thus providing ADM nearly unfettered access to liquidity, even in times of extreme market turbulence.

Even though there were minor disruptions to the tier-one CPT market during the recent financial turmoil, this market is almost back to normal. From a financing cost perspective, which you can see in the line chart, tier-one commercial paper has always provided very cost-effective, short-term funding, today more than ever.

Moreover, the tier-one rating enabled ADM to run a large-size commercial program, even in times of extreme credit market stress.

A current commercial paper program sized at $4.2 billion dollars provides us with adequate short-term funding and flexibility. A strong capital structure and the related credit rating provides us with very cost-efficient access to short-term funding through these commercial paper markets at normal times and in more volatile times allows us to capture profitable market opportunities as they present themselves. Our capital structure

and credit ratings give us a true competitive advantage.

And on slide 16, we’re presenting a chart showing ADM’s long-term debt profile and the fact that it is very well balanced with less than $800 million dollars in maturities in the next five years. Beyond the five years on this chart, we’re only reflecting the calendar years that have maturities exceeding $15 million dollars.

Turning to slide 17, we’re providing an update of our current performance against our long-term performance objectives. As we mentioned on last quarter’s conference call, we have been evaluating RONA and other measures in light of the volatility we have been seeing in the energy and commodity market and to ensure that we continue to use the most appropriate metrics for the remainder of our business.

Our analysis is ongoing, and I’ll speak to this in just a minute, but we continue to believe that fundamentally RONA and NROE represent meaningful performance measures over the long-term. But as we have seen, they can be skewed quite dramatically by changes in LIFO inventory valuation reserves, when commodity prices swing significantly from quarter to quarter. So we have chosen to modify the RONA metric on this chart to exclude the after-tax impact of LIFO.

In addition, our asset base contains a variety of classes of assets each with different return dynamics. We have fully depreciated assets, generating higher levels of return, new capital, including construction and acquisition with a certain set of returns. Through origination and transportation assets, with potentially longer return expectations, construction and progress with no returns until we put those assets in the server, and working capital assets, including short-term working capital assets opportunities, with narrow returns.

So, point in time returns will depend somewhat on where the company is in the business cycle and in the mix of opportunities. Even with this mix, the RONA returns for our entire value chain have averaged about 13% over a long period of time, a period of time containing a variety of business and investment cycles. We have been conducting our review with eye towards integrating enhanced return measures into the more robust planning process we have recently initiated. One of my goals coming into the CFO job this year was to ensure that we take a measured approach as we establish performance measures performance and objectives so that we have the confidence that they will remain useful over a long period of time and in a range of market scenarios, including the recent market volatility.

When we complete this process, we’ll present our insights to you. In the meantime, we will continue to report on RONA, X-LIFO, NROE, which, by the way, remain at levels significantly above our weighted average cost of capital. Now we’ll turn the call back over to Pat, and we’ll open up the call to questions.

Pat Woertz - Chairman and CEO

Thank you Steve. Operator, if you’ll please open the line up for questions.

Question-and-Answer Session

Operator

(Operator instructions). And the first question comes from Diane Geissler of Merrill Lynch. Please proceed.

Diane Geissler - Merrill Lynch

Good morning. Congratulations on your quarter.

Unidentified Company Representative

Thank you.

Diane Geissler - Merrill Lynch

In your press release and you touched on this in your coverage on the oil seed results, you said you had improved global crush margins, primarily related to favorable raw material positioning, is that physical positioning? In another words, you had enough to run your plants at higher utilization rates or was that a financial positioning? Could you just elaborate on that?

Steve Mills - EVP and CFO

I’ll start and John can add on, but I think for the most part, this physical positioning, we’d like to emphasize that our financial physical strength allowed us to own inventory , both physical inventory and good price levels.

John Rice - EVP, Commercial and Production

Earlier in the year and even later, when you’re looking at the supply and demand balance sheet, globally, we saw that potentially we had a real possibility for very tight bean supplies, so as Steve said with our financial wherewithal we’re able to buy more soybeans in a hedge position and carry it and then when the harvest became late we had some rainy weather. We’re really one of the few companies available with the raw material supplies which really helped our oil seed crushing assets globally.

Diane Geissler - Merrill Lynch

It’s also about having the product available for sale as well, in addition to higher utilization rates?

John Rice - EVP, Commercial and Production

I wouldn’t necessarily say its higher utilization rates, as much as it is just having the raw material supply available, because we also had some soybean plants shut down during that time period.

Diane Geissler - Merrill Lynch

Perfect. And then I guess on the corn where you mentioned in corn processing you had a mark-to-market loss that negatively impacted the quarter. Could you quantify that and then I guess to what extent would that be realized at some point- I’m assuming that’s a non-cash, at this point, but would that be realized on a cash basis later or could you just talk a little about that please?

John Rice - EVP, Commercial and Production

Sure, Diane. As we said, we did have a mark to market loss which by definition is a non-cash at the time loss and the fact that we had corn futures and options that we’d love to market that were in place to economically hedge sales volumes that we had on our books. We just ran into, to get into the nitty-gritty of the accounting a little, some hedge ineffectiveness, which is an issue, but to answer your first question, we’re not going to give you the quantity, but, and as you’ll also recall, we can’t mark to market our sales, aside of that, so it ends up being a timing issue.

Diane Geissler - Merrill Lynch

So, presumably this would unwind as you make the sales later the quarters, because they were hedges that were put in place to set up a true classic hedge on revenue later in the year. Is that how I should look at that?

John Rice - EVP, Commercial and Production

That’s how you should look at that. The accounting rules sometimes don’t help us in matching up those costs with those sales.

Diane Geissler - Merrill Lynch

Then just staying on corn processing, in the fructose, you said you were 50% down on your contracted volumes is there, but you expected prices to be up to maintain your margins. Should we be thinking mid-single digits, high single digits, low double digits, is there a range for us to think at this point?

John Rice - EVP, Commercial and Production

Diane, we do not want to give a range yet. We’ll wait until our February call, when we normally do and then we’ll pass on that information at that time. It’s too early to say.

Diane Geissler - Merrill Lynch

Great. Thank you very much.

Operator

The next question comes from David Driscoll of Citi Investment Research. Please proceed sir.

David Driscoll of Citi Investment Research

Thank you. Good morning everyone.

Unidentified company representatives

Good morning David.

David Driscoll of Citi Investment Research

First off, congratulations, these results are quite fantastic. I want to come back to oil seeds again, can you just explain for us the longevity of this types of benefit that you’ve seen. John, is it something that we should think about here that it was related to benefits that kind of accrue to ADM in prior to the harvest, the harvest that we are currently in right now? So when you’re in those months right prior to that, there’s very very tight bean conditions that we saw and it was in that particular period of time, that generated these excess substantially above-average profits for that particular division. Is that characterization accurate?

John Rice - EVP, Commercial and Production

Yes, David I would say you’ve clarified that very well. It has to do with just the timing on the purchases, the timing of the crops, and it also, just because the crops has to do with the timing of the purchases, the timing of the crops, and they’re also, just because the crush was lower demand that we hit, that’s an export demand on soybean meal so we’re just able to realize a few of the same benefits that just happen because of that.

David Driscoll of Citi Investment Research

The big picture, the way that the year folds, because now that we are in the harvest, the conditions within that business are completely different than they were in fiscal 1Q, fiscal 2Q and beyond, we should expect, because I think in your prepared remarks, I forget who said this, but I think you are making the statement that all seed crushing volumes are expected by the USDA to be down year on year, thus the expectation would perhaps be that we would see weaker margins, year on year from Gs 2 to 4 , is that again directionally accurate?

.

John Rice - EVP, Commercial and Production

We keep talking about last year was such a very good year in terms of world demand for protein meals, 7-8%, this year, we are in a slighter increase in the demand, maybe about only 2-3% increase. The crash rates are going slower now, with farmers selling their soy beans so, by just taking the absolute numbers, like I said, the poultry placements are down over last year. We’re seeing less feeding maybe a little less exports, looking at that, you could say that crush margins could be a little less than last year, yes, I agree to that, for the last quarter.

David Driscoll of Citi Investment Research

Just going back to the quarter processing segment, I want to make sure that I did understand Diane’s question, it’s an important question. Can you just tell us what the actual size of the dollar loss was on the mark-to-market corn futures and options positions?

John Rice - EVP, Commercial and Production

No, we’re not going to do that David. It’s embedded in the numbers that you see there, we also signed higher commodity prices, so it’s not all of it, which is something that we don’t necessarily want to disclose.

David Driscoll of Citi Investment Research

Could you maybe just rank for us into this business according to your press release, $118,000,000 vs. $250,000,000 in profits year on year, and down to $135,000,000, is the number 1 reason for the decline, the mark-to-market losses or is that number 3, 4 or 5 on the list.

John Rice - EVP, Commercial and Production

It’s the number 1 reason is higher per cost of which this is a component thereof. We have some of this every quarter, we want to call it out because there is a little bigger impact and because as you pointed out the numbers have dropped quite significantly for the quarter processing division.

David Driscoll of Citi Investment Research

Ok. Just one more question Pat, just wanted to talk a little bit about mergers and acquisition opportunities right now. Certainly, we’ve just seen the Verison bankruptcy filing in the ethanol industry again, as you prepare remarks high what we see everwhere, ethanol margins are under substantial pressure, I continue to believe that the end long-term that you’ve given a fact that you had substantial capital spending going on within that business for the two plans under construction that you guys have definitively positive view on it, it makes sense to me that if you’d want to be an acquirer of the assets that are out there, there are commenting specifically on any particular company, would you be interested in taking advantage of distressed assets in corn-based ethanol in the United States, cause it’s different than your current strategy of having these mega plants that have much larger production of ethanol, in fact you have many other things that those sites co-generation etc…so the what I’m really trying to get is that, do you stick to the current strategy that you have, or does the stressed asset prices intrigue you enough so that you’d be interested in adding some assets at the right price?

Pat Woertz - Chairman and CEO

Let me first say that I don’t think that either, or; we do have our strong construction under way that is more than half-way completed are two expansion plans, our diesel plans have been complete, we’ve just talked about the one in Brazil. You speak about ethanol, and your question is mostly about ethanol in the US and I think we’re always actively engaged enough in the market, before we know plant locations, what would make sense, or of interest to us, to distressed assets are more interesting than those that are not distressed, and we’ll keep watching it, but I don’t think its either if you’ve phrased your question and either finish your work plans that are under construction, or distressed assets, that you have to look at it as one or at the other, I think we will consider everything.

David Driscoll of Citi Investment Research

I certainly do not mean to imply that you would perhaps not finish the plant. Of course I believe that you will finish those plants, the question is really whether or not you would want to add single individual 100,000,000 gallons-sized dry mill plants that don’t have the scale efficiencies the ADM is fairly famous for.

Pat Woertz - Chairman and CEO

We’re always looking at things and sometimes it’s whether they’re located relative to our system, and sometimes, smaller facilities, it has not been our expertise to think about adding small facilities. We’re actually building some small pilot plants for some of our advanced generation biofuels, sometimes you think of those types of things too, so we’ll continue to look at it.

David Driscoll of Citi Investment Research

How about just a general broad question, are you seeing a large kind of pipeline of potential is that something we should be thinking?

Steve Mills - EVP and CFO

The answer is, we are looking at being approached on a regular basis, and acquisitions are always in the mix of our growth strategy and I think it’s no secret at this point in the market cycle, there very well may be some good opportunities. So the answer is, I wouldn’t call it a pipeline, but we have areas of interest that fit into our pro strategy.

Pat Woertz - Chairman and CEO

I’ve also maybe mentioned it’s not like a pipeline, but it’s a funnel and this funnel is fuller than before, because people are coming to us and also there is distressed assets but they have to come through that narrow funnel portion to come out the other end and be something that would make sense for us and I think you kind of know our history, we’re patient we look for the right opportunities and I think we’ll still do that.

Steve Mills - EVP and CFO

I know the history well, which is a reason for the question, it seems like this is exactly the opportunity Adian has been looking for years. Thank you for all the answers.

Pat Woertz - Chairman and CEO

Thanks for your questions.

Operator

The next question comes from Todd Duvek of Bank of America, Security. Please proceed.

Todd Duvek of Bank of America

Yes, good morning, I appreciate you comments on the balance sheet on the credit rating, and obviously we’re on a very strong position currently, and I guess kind of follow on to David’s question with respect to acquisitions, can you just tie that in with your earlier comments of the credit rating and if there would be something that you could envision being so attractive that you would forego your credit rating to what it is today.

Steve Mills - EVP and CFO

Todd that’s a great question in that the typical answer around here at 8 am is, it depends. It depends because as we laid out we think clearly today that our credit rating and our access to commercial paper access is very important, but it’s just one piece of our business and one piece of our business model and could you picture an opportunity that might do just what you said, and the answer is yeah, you could. You would have to weigh out all the pluses and minuses of it, but I would expect to do all we can to keep our access to the credit rating in Tare 1 commercial paper access. Could you dream up the scenario that fit that, sure you could but we’ll see where that takes us.

Todd Duvek of Bank of America

I understand the difficult hypetheticals and thank you for your response.

Pat Woertz - Chairman and CEO

Thank you John. Thank you.

Operator

The next question comes from the line of Terry Bibbons with JP Morgan. Please proceed.

Terry Bivens - JP Morgan

Hi, good morning Chase and English here standing in for Terry Bivens. A couple of quick questions. I’m intrigued by your fertilizer volume gains in a quarter given volume weakness reported by other suppliers in South America, is it fair to assume that your capture share games and your sales are credited by AG commodities supply commitments?

Steve Mills - EVP and CFO

We’re a relatively a small fertilizer player, I’m not sure who you are comparing us to, but relatively small. We had a good quarter and it’s part of our origination process and origination network as far as how we try to utilize those sales, John, you want to continue?

John Rice - EVP, Commercial and Production

And this is comparing year over year and you know, every year we keep drawing a little bit more of our business down there worth financing of plumbers with fertilizers so since last year, we’ve had a lot higher fertilizer prices, so that was part of the increase in the profitability.

Terry Bivens - JP Morgan

So it’s a little preliminary to assume that you’ll likely capture, buy and share gains to South American commodities on harvest?

John Rice - EVP, Commercial and Production

Correct.

Terry Bivens - JP Morgan

One question on ethanol, US ethanol prices appeared to have decoupled from gasoline recently. We’ve had some reports suggest that this may be the result of ethanol pricing evolution to a cost plus model. Two other questions related to this, one, do you think that decoupling is the sustainable and is the pricing model in fact evolving?

John Rice - EVP, Commercial and Production

Long term, I feel that once over capacity, there’s no longer a large factor in this market, we will start selling ethanol vs. whether it’s replacing un-leaded gasoline, that’s how we sell all our products.

Whether it's protein or whether it’s corn sweetener. So, eventually, we’ll get to that point, right now it’s more on the cost/plus as you said, just because of the over capacity in the industry and people love to buy corn today and sell their ethanol today and lock in a little bit of the cash flow march. So, I don’t know if we are out of that time period yet, but newer capacity leaves I feel going forward that ethanol will be priced vs. unleaded gasoline which is what it replaces. Very good, thanks, I’ll pass it on.

Terry Bivens - JP Morgan

Jason, I got you here, I just wanted to call out that we did put in the appendix for Terry’s request.

Terry Bivens - JP Morgan

I saw that there, thank you much.

John Rice - EVP, Commercial and Production

To add to all others on the call, the fact with our historical process volumes drawings in the chart, just wanted to make sure you saw that and that everyone else that might utilize that information has seen it too.

Terry Bivens - JP Morgan

Very helpful and much appreciated.

Pat Woertz - Chairman and CEO

Thank you.

Operator

Our next question comes from the line of Chris Bussel of Barclays. Please proceed.

Chris Bussel - Barclays

Good morning. Just a question, it seems to me that the market right now is kind of grappling with getting a feel for ADM ongoing earnings and it seems that maybe the markets’ implying an expectation that is more cyclical, more as when I listen to you speak I get the sense that there’s more structural change that you believe is not really kind of being accounted for in current valuation. They provided what based out was kind of a normal type of base for their earnings, I was wondering if you’d be able to do the same or kind of directionally. It seems like the market is implying a reversal to kind of the 2004-2005 earnings levels, it seems a little bit severe, but I wanted to get your perspective on kind of a normalized earning space?

Pat Woertz - Chairman and CEO

Well Chris, I’ll start and maybe Steve, as he had talked about some of the metrics we have work underway going for it might help to add to this, I’m frustrated by our evaluation, like every shareholder, I don’t think it reflects the long term fundamental strength for this company and its ongoing ability to continue to add value and that doesn’t mean that I’m helping answer your question about what a normalized quarter or a year might be because it’s not appropriate for us to provide guidance or even quote “normal” because we see ourselves at different levels and different in different years and your analysis and others’ may say that we’re at somewhat higher plateau levels relative to the past 30 years, we’ve had our highs and lows and whether that’s a sustained higher level or one that has more longevity in it, in its peak then we’ve seen the fall where it remains to be seen, but I think it’s the fundamental underline capacity of the global networks, the globality of our business and our network of assets, which we have continued to add to the base, one of the most important things about our businesses, we continue to add to the base, and how these kinds of returns that are well-above our cost of capital over a period of time, those are the things that we hope will ultimately will be reflected in our evaluation.

Steve

Chris just to add another comment, as we look at the business here, we set long term strategies, we set short term strategies and then we deal with the market conditions that we’re handed in a particular period of time and that’s what makes applying that term “normal” very challenging. We have a history, which right now is all you can rely, has proven that our models have been successful at returning shareholder value and that we continue to build on that model, build on that system, it’s something that your basic question about what’s normal or what’s average, where’s the range, is something we ask ourselves from time to time, but each given period as you can appreciate, especially in these last 6-9 months to a year, can be very unpredictable and very volatile and we’ve shown that we’ve navigated our way through that to bigger and better places on a regular basis.

Chris Bussel - Barclays

I understand, it seems to me that we’ve had a kind of a series of “exceptional” quarters in it the market seems a little fanatic here and I can understand why because it’s up to gage what is kind of the underlying value of that ongoing range stream.

Pat Woertz - Chairman and CEO

Yeah, we hear you. To put value of that underlined earnings and cash range stream and I thought Steve’s point these was long term/short term and then current conditions provide.

Chris Bussel - Barclays

Understood, I guess another way to look at it, when I’m attempting to gauge it here from the outside, if I look at the volumes that you’ve provided, in the slides, it looks like we’re about levels 10% higher since 2003, but if I think about where your earnings are at, probably more than four-fold 2003 earnings levels, so it seems there a big gap between the volumes that you’re processing and then the earnings that you’re deriving from those volumes, and there’s probably a lot at play there, but I’m wondering if you can give me a sense of how much of that, how much utilization levels have improved since 2003, at capacity utilization levels, and if it’s your sense that how much of the incremental $2.00 versus 2003 in earnings that that has contributed?

Pat Woertz - Chairman and CEO

Well there’s a couple of things, those are processed volumes, Chris, as you know, and they don’t include the other types of base assets we’ve added to the business, the egg services asset, the infrastructure, transportation assets, storage assets, intellectual assets, which I’d probably put on the top of the list, that continue to get better, and as you add to that base, it’s that base that grows as well for the additional earnings potential, not only the processed volume base.

Steve Mills - EVP and CFO

Chris, looking back, back then you had a lot more excess capacity in the market and what we’ve seen is increased demand in soy protein, and other proteins around the world, and we’ve also seen more global demand for bio-fuel, so maybe to capacity I don’t have it off the top of my head. Back then was 80 to 85%, now the industry is running closer to 90 to 95%, and that has a lot to do with the returns over time, and we keep seeing the demand going forward we keep adding to our asset base. We keep increasing because we keep seeing those trends going forward. So going back to 2003 I think just gets a little tough to relate just to the pure volume, you have to look at the utilization rate of the industry at that time.

Chris Bussel - Barclays

Just a couple of quick other ones, on global trade, on the protein side, it sounds like we’ve heard some concerns about key trade routes, whether to Eastern Europe or Russia experiencing some credit related disruption. I was wondering if you’re seeing the same thing in terms of grain commodities and oil seed commodities.

Steve Mills - EVP and CFO

I’m sorry, what type of disruption?

Chris Bussel - Barclays

Credit related disruptions, willingness to accept certain lines of credit extended by foreign buyers.

Steve Mills - EVP and CFO

We’re very diligent on our credit lines, most of the grain business is done on an LC business, so we have not seen any real disruptions in that market as of yet.

Chris Bussel - Barclays

Okay great, and the last question is, the election today, any big kind of difference for you in terms of whether we see kind of this super majority in congress on the Democrat side? I think you’ve been pretty clear about where the Obama camp and McCain camp has come out on things, but more from the congressional perspective and super majority versus not, any thoughts there?

Pat Woertz - Chairman and CEO

Yes Chris, we need to be, and are prepared for any administration as well as any set of congressional representatives by just being clear about what our issues are, what’s helpful to have a strong economy, particularly strong rural economy, some of the issues related to our plants, our production, so it’s not of our interest to nail down whether it’s a super majority or it’s something less, we are prepared to work with staff and representatives, as there will be a transition here, obviously in the turnover to make sure out positions are clear.

Chris Bussel - Barclays

Thank you for taking my questions.

Pat Woertz - Chairman and CEO

Thanks Chris.

Operator

Your next call comes from the line of Vincent E. Andrews of Morgan Stanley, please proceed.

Vincent Andrews – Morgan Stanley

Good morning everyone, just a couple of quick ones. First, could you just remind us, I think foreign exchange has been a headwind for you guys over the last year or so, particularly in your European operations from an SG&A perspective, can you help us understand how within that, and outside of that how the weaker dollar might benefit or not benefit you?

Steve Mills - EVP and CFO

Well Vincent, it’s a real mixed bag because from an absolute financial statement perspective the weaker dollar has inflated our balance sheet line items for example SG&A and other. You get into the more economic side of things and what does a weaker dollar or stronger do to your business. We do have a few businesses that are Euro based, cocoa business has a little more global flavor to it, not quite as heavily dollar dominated as the Euro, or as cocoa. It will influence the financial statements, and I really wouldn’t call it a head-wind per say because there are some benefits, it’s just really hard to quantify because oftentimes our commodities are needed no matter where the exchange rates are. John, do you want to add onto that?

John Rice

I can add, and when it comes to SG&A costs, how we look at them is if you are in Europe we look at not increasing the Euro based nomination versus the dollar, so every part of the world is different on how they look at the SG&A costs, but it’ really in the local currency, what they look at it, make sure they’re not increasing over X%.

Vincent Andrews – Morgan Stanley

Okay, and then one other one, it would just be, and this was touched on a little bit earlier, have you changed the amount or level of credits that you’re extending to farmers in South America in the past six weeks?

Steve Mills - EVP and CFO

No we have not.

Vincent Andrews – Morgan Stanley

No you have not, so you’re operating business as usual down there.

Steve Mills - EVP and CFO

Correct.

Vincent Andrews – Morgan Stanley

Then lastly, I think Steve mentioned in his prepared remarks that the dynamics of the up and all price relative to the wholesale gas prices has now inverted relative to where it’s been for about a year now, and you mentioned that that might have some delay in terms of incremental new ethanol market expansion, and I presume yours is speaking strictly about incremental discretionary blending as opposed to existing discretionary blending. Can you discuss the dynamics at which you think that new market expansion might be delayed, is there a key price level of key gap between ethanol and [ph – arbob 02:06] which you think we need to be either in front of or behind in order to continue to encourage infrastructure addition?

Steve Mills - EVP and CFO

You always have to compare the cash markets, unleaded markets are what the ethanol market is, and depending on the part of the United States ethanol is worth about $0.20 to $0.30 over unleaded gasoline. The blender gets a $0.50 credit for blending, so it’s still below unleaded gasoline when you subtract that $0.50 away, so the rule of thumb usually is until we get up to that $0.50 over unleaded gasoline we will keep seeing the discretionary blending, so under that scenario we would still have another $0.20 to go.

Vincent Andrews – Morgan Stanley

Sure, but there was a comment made that you’ll still see it, but the pace of expansion might be slow, so is it fair to assume that as we get closer to being a parody including the $0.50 tax credit you’d expect the pace of expansion to slow?

Steve Mills - EVP and CFO

Sure, just because when everyone was making an extra dollar a gallon when it was so cheap, everybody was trying to get their infrastructure in very quickly. Now, with gasoline demand down, people are going to be slowing their blending capabilities and expansions also.

Vincent Andrews – Morgan Stanley

Okay, I’ll leave it there. Thanks so much.

Pat Woertz - Chairman and CEO

Thanks Vincent.

Operator

Your next question comes from the line of John Roberts of Buckingham Research, please proceed.

John Roberts – Buckingham Research

Good morning. You don’t have any of your projects going on beyond the first quarter of next year, do you have an estimate at this point how much capital spending is going to drop after the first quarter next year?

Pat Woertz - Chairman and CEO

John, maybe you want to look at the appendix, let’s just pull the slide up,

John Roberts – Buckingham Research

We’re in fiscal ’09.

Steve Mills - EVP and CFO

Right, and these major projects go off into the early parts of ’10, and the answer is that we don’t have an estimate yet for what ’10 looks like.

John Roberts – Buckingham Research

Unless you start some major new projects very soon it’s unavoidable there will be a big drop.

Steve Mills - EVP and CFO

There will be a drop based on where we stand today, and of course when you get into the first quarter of calendar ’10, which is the third quarter of our fiscal year, so our fiscal ’10, I’m sorry, I’m getting my dates wrong, you’re all the way into fiscal ’11.

John Roberts – Buckingham Research

Okay.

Steve Mills - EVP and CFO

The bottom line is you’re right, John, that right now based on significant capital construction, those numbers would start to fall off significantly.

John Roberts – Buckingham Research

Because of the lead time that you’d have in any new projects you announce.

Steve Mills - EVP and CFO

As we talked earlier on the call, there’s always the opportunity for acquisitions and or different kinds of projects where…

Pat Woertz - Chairman and CEO

Or incremental growth, which is a much shorter timeline project for certain plants.

John Roberts – Buckingham Research

The Grupo Cabrera announcement, which sounded very similar to at least the rumors that we had back in July, does that preclude activity with other ethanol producers, or sugarcane processors in Brazil?

Pat Woertz

It does not.

John Roberts – Buckingham Research

So you don’t have any restrictions put on your in terms of other activities you might pursue in Brazil.

Steve Mills - EVP and CFO

Only the ones we’ve put on ourselves.

John Roberts – Buckingham Research

Okay, thank you.

Pat Woertz - Chairman and CEO

Thank you John.

Operator

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

Robert Moskow – Credit Suisse

I had a question about the net asset base, is the math that I’m doing correct here, that it’s about $19 billion?

Steve Mills - EVP and CFO

I think that’s the average, I think that’s right Rob.

Robert Moskow – Credit Suisse

Well, Steve, if you did 13% on that, wouldn’t that get you like $3.80 of earnings per share?

Steve Mills - EVP and CFO

Yes, that’s the arithmetic.

Robert Moskow – Credit Suisse

Okay, well the market’s not giving you credit for it, but maybe they should. That’s my only point, thank you.

Operator

Your next question comes from the line of Ken Zaslow of BMO Capital, please proceed.

Kenneth Zaslow – BMO Capital Markets

Good morning everyone, one general question. Talking about the normalized earnings and all that, but essentially, it sounds like looking back in history the only way you should use that is if you decide to divest all the capital that you spent over capacity comes in line, and the world completely changes back to ’03 levels, is that, that’s kind of my thinking. You can’t really use history to look at your core earnings given your asset base, given that the world is changing. Is that fair? Is that what you’re trying to say?

Pat Woertz - Chairman and CEO

I’m not sure.

Steve Mills - EVP and CFO

I think the answer is yes, Pat do you want to start?

Pat Woertz - Chairman and CEO

Say what you said again, Ken, though, first.

Kenneth Zaslow – BMO Capital Markets

It seems like a lot of people are trying to look back at ’03. ’02. ’01, going back, but your capital basis changed dramatically.

Pat Woertz - Chairman and CEO

It has.

Kenneth Zaslow – BMO Capital Markets

The world has changed, biodiesel, going back five years ago, that wasn’t really part of the equation. Is history actually a good measure of what is going to happen in the future?

Pat Woertz - Chairman and CEO

Let me start on that, and I think maybe we’re having some build. I think you’re right, looking backwards gives you some information, but its’ not a perfect predictor of the future, nor would any set of history be a perfect projector of the future. I think understanding, though, the conditions that were in place during either the peaks or the valleys and what happened during those, whether it’s overbuilding, whether sustained area, you know we had a very conservative time where we didn’t spend any cash and we needed to get through some fine expenditures. There is some difference in the troughs and the peaks during those times, and we certainly do have a different asset base and different world demand in consumption than we had during the past, and that’s why I think Steve, in some of his work on the appropriate metrix, and the appropriate looks for our asset base going forward has that in mind.

Kenneth Zaslow – BMO Capital Markets

When you do add the asset base, you do expect to earn return above or in line with your RNOA, is that fair?

Pat Woertz - Chairman and CEO

That’s fair.

Kenneth Zaslow – BMO Capital Markets

Then, just going to the actual specific of the quarter, when will lower corn prices actually hit your income statement? Obviously they’ve come down, does it take two quarters, does it take a quarter, when will we start seeing, again, absent your head, whatever’s going on there because I know you don’t want to tell us which is fine, but what about the direction of corn going lower, when does that actually hit your income statement?

Steve Mills - EVP and CFO

Lower corn prices are always more beneficial to our corn processing, it’ll be a little bit, a lot can be on the timing, versus when the sale was made. An example I like to use is, let’s just say that we sold sorbitol at $0.25 for February, so if we go buy the corn back in October, or in September, the mark to market losses, we still have our sale of $0.25 sorbitol. But, with corn values coming down, that will not be, we already have our margin locked in, but we’ll actually prefer that margin going forward, we’ll just have a wider margin just by bringing it to a market value.

Now all of our hedges don’t work that way, it’s just some of them, when they come in this hedge ineffectiveness. So it’s not one quarter, it can also go from quarter to quarter and how it comes in due, the PNL.

Kenneth Zaslow – BMO Capital Markets

Maybe I’ll ask the question in a different way.

John Rice - EVP, Commercial and Production:

Let me jump in. We’re not going to tell you what our position is, and you know that, but we’ve historically said, we’re not out over a year, we’ve always said that, and we’re generally hedged, but it’s not always hedged. We sometimes do some anticipatory buying, so this is going to come in, we will see some drops during this fiscal year, and as we might have said earlier it takes some time to get through the system here.

Kenneth Zaslow – BMO Capital Markets

So you would be a quarter or two out. It’s this fiscal year which is in the next three quarters but maybe not next quarter, so it’s between one and three quarters, is that fair?

Steve Mills - EVP and CFO

I would say if you go between one and three quarters we should see some impact of the lower corn costs/

Kenneth Zaslow – BMO Capital Markets

In terms of the ethanol balance, how do you see this playing out? As you said, there were a couple of facilities that are either going bankrupt or that some are actually closing down, yet the markets aren’t opening up as fast, maybe as you thing. By what period of time do you think we’re going to be in a balance between demand and supply that the margins will be restored?

John Rice - EVP, Commercial and Production:

I guess, to put an exact timing on it, I feel that over the next two years, probably, just with the drop in demand of unleaded gas also has a new play into this, where we were projecting maybe one to two increase in demand of unleaded gas. So with demand coming down and plants coming on its kind of skewed a little bit, but I still believe probably sometime over the next two years we should come into our supply and demand balance, because nobody is building new plants now.

Kenneth Zaslow – BMO Capital Markets

Then my last question is, in the crush margin outlook, I know you gave it for the US. How does that differ from the US and how does the outlook look for Europe between rapeseed and sunflower and soybean?

Steve Mills - EVP and CFO

We’re seeing very good demand in rapeseed in the protein meals over there, and also biodiesel, not with prices coming down a little bit, but we’ve also seen rapeseed prices come down. In the winter months they tend to use more rapeseed oil and biodiesel in Europe and less palm and soy because of coal flow issues. South America margins have come down a little but just because of the tightness of the crop. We’re getting ready for a new crop, so when that harvest comes we should see margins come back a little bit. Still, overall with the global economy going down, it will have somewhat of an effect.

Kenneth Zaslow – BMO Capital Markets

Great, I appreciate it.

Pat Woertz - Chairman and CEO

Thanks Ken.

Operator

Your next question comes from the line of Christina McGlone of Deutsche Bank, please proceed.

Christina McGlone – Deutsche Bank

Thank you for taking my question, and congratulations on a great quarter.

Pat Woertz - Chairman and CEO

Thank you Christina.

Christina McGlone – Deutsche Bank

I just wanted to understand ag services better because I know you, we had a situation were we didn’t have a lot of crops in the US, we had a lot of crops outside the US, yet your footprint is kind of geared for the opposite scenario, but you still did phenomenally well. I want to understand better how that happened.

John Rice - EVP, Commercial and Production:

We have a lot of assets in the US, but we also have a lot of assets outside the US. We just tend to have more on the grain side in the United States. When the wheat supply ships from North American supply, whether it’s coming from Europe, Eastern Europe, we’re still partaking in those markets, so it was just our ability to see where the new supply was going to come from.

Christina McGlone – Deutsche Bank

John, is that supply shift to Australia, can you still benefit there, or is that a different scenario?

John Rice - EVP, Commercial and Production:

We originate wheat out of Australia.

Christina McGlone – Deutsche Bank

When you talked about freight management, do you trade freight? What does that mean, freight management?

John Rice - EVP, Commercial and Production:

We have freight positions because we’re moving products all around the world at different times, whether it’s soybeans, whether its protein, whether it’s oil. So at times we may have freight booked out forward and at other times we may make a sale and book freight on a later date.

Christina McGlone – Deutsche Bank

Okay got it, and then just a last question quickly, it sounded like you talked about soybean oil supplies not being burdensome, and I wanted to get a better idea of what’s going on in biodiesel, because we have the new mandate coming in the first time we have the carve out, but it seems like we’re not going to be able to export as much to Europe

And I’m curious, what’s the net effect of that? Is it an increase in demand for soybean oil in the US or is it kind of status quo?

John Rice - EVP, Commercial and Production:

Well, with the mandate we should be able to see an increase in demand in the United States, but that will be a concern if that oil cannot go to Europe. That is correct. But a lot of the Argentine oil was actually going over to Europe and coming into the United States, so I think maybe that should help the US bio diesel industry a little bit.

Christina McGlone - Deutsche Bank:

Because Germany just implemented a rule where they’re not using soy? Is hat correct?

John Rice - EVP, Commercial and Production:

I know they’re talking about it. I don’t know if it’s actually taken effect yet. I don’t know if it actually has.

Pat Woertz - Chairman and CEO:

Germany seems to be talking about some sustainability requirements for the bio diesel which might include a limit on what amount of soy goes in.

Christina McGlone - Deutsche Bank:

OK, and sorry, last one. Next year we go to $.45 on the tax incentives in ethanol? Is that right?

John Rice - EVP, Commercial and Production:

I think that’s right.

Christina McGlone - Deutsche Bank:

OK, thank you.

Pat Woertz – Chairman and CEO:

Thank you, Christina.

Operator

And your next question come from the line of Ian Horowitz of Soleil Securities. Please proceed.

Ian Horowitz - Soleil Securities:

Hi, good morning, everyone.

All:

Hi Ian.

Ian Horowitz - Soleil Securities:

Just a little bit off Christina’s question: that $.45 credit, there’s a volume threshold that you have to exceed, correct? That the industry has to exceed to get to that lower credit rating? Or is that effective Jan. 1?

John Rice - EVP, Commercial and Production:

No, that’s just a blender’s credit. If we’re talking the same thing. It’s a blender’s credit.

Ian Horowitz - Soleil Securities:

Right, but I thought that lower credit got triggered on a total industry capacity level as well.

John Rice - EVP, Commercial and Production:

No.

Ian Horowitz - Soleil Securities:

I think in the prepared remarks Steve talked a little bit about the wheat substituting for the soybean meal demand to the livestock market. Do you guys see this as a more longer lasting situation, or is it a snap back reaction from the better harvests we’re seeing, or predicting to see, out of the Ukraine and Australia?

John Rice - EVP, Commercial and Production:

It’s just an evolution, I guess that’s the best way to call it. You know, from one year to the next on whatever crop. Last year we saw great corn demand and soybean demand because we had huge wheat crops. Now we got good wheat crops started. It depends on what everybody grows. But long term I don’t think everybody – you know, if wheat prices come down enough people will quit planting wheat, and plant soybeans instead. So I don’t think it’s really more of a long term, I think it’s just an evolution from year to year, and how the feeding companies look at what they want to put in their formulas.

Ian Horowitz - Soleil Securities:

Right, so when we talk about a meal growth of 2% to 3% you don’t see that as a sustained 2% to 3% growth rate.

John Rice - EVP, Commercial and Production:

No, we still believe that over long term we’ll be able to get 4% to 5%.

Ian Horowitz - Soleil Securities:

And now, when we were up in Cedar Rapids, there was discussion on credit concerns for customers, counter-parties, specifically in the protein segment. Have you seen any alleviation of those concerns recently or are there still difficulties in dealing with the counter-parties from a credit standpoint?

Steve Mills - EVP and CFO:

I think we – this is Steve – I would say we are still in the midst of credit concerns. As John mentioned earlier we’re very diligent about how we handle our credit counter-parties. But there’s no question that there are some – unfortunately – some of our customers are having some challenges here. So they’re still out there. And we, as I mentioned, we did add a bit to our provision for bad debt reserves in consideration of that.

Ian Horowitz - Soleil Securities:

And is there an update on the – I’m going to mispronounce this – but Dustrahan, Louisiana explosion?

John Rice - EVP, Commercial and Production:

Yes, it will probably be two to three months before we are back operational at Dustrahan, but we had an elevator at St. Elmo’s, Louisiana, that was not operational. And here in the last week we got it operational, and as a matter of fact we’re loading a ship today down there, so we don’t think it will have any effect on us. It really is more of a logistics – it hurts our logistics a little bit – but I think within three months we’ll be back operating at Dustrahan.

Ian Horowitz - Soleil Securities:

You have an expected cost for repairs yet?

John Rice - EVP, Commercial and Production:

No, still working on that.

Ian Horowitz - Soleil Securities:

One last quick question: with this announcement that Brazil sugar ethanol JV. Is the Brazil into the US open at this point? Or currently are we still kind of under water on that trade?

John Rice - EVP, Commercial and Production:

Brazilian ethanol does still not work in the United States. I think that there’s about a $.07 difference on ethanol B to ethyll B basis and by the time your take freight it will not work.

Pat Woertz - Chairman and CEO:

Ian, it is also, as you’ll see in our announcement, these two plants which is the Brazilian investment, will be producing ethanol for Brazilian consumption. That is very strong in the areas where these plants will be.

Ian Horowitz - Soleil Securities:

Excellent. Thanks a lot, guys.

Operator

Again, ladies and gentlemen, if you wish to ask a question, please dial star followed by one on your touchtone telephone. And your next question comes from the line of Mike Lupikin of Cleveland Research. Please proceed.

Mike Lupikin – Cleveland Research:

Good morning, I’m calling on behalf of Christine McCracken. Just wanted to touch base following up on this Brazil question and just see: do you think there’s a chance the US government may lower the tariff over the next couple of years? And if so, what would that mean for domestic producers?

Pat Woertz - Chairman and CEO:

Well, at some point maybe the tariff will be lowered, you know our investment in Brazil continues to reinforce that we feel that we that bio fuels has a place in the agricultural portfolio in different regions of the world. So, whether it’s Brazil, or Japan in looking at different sources for ethanol both from the US as well as from Brazil. So whether the tariff exists or not our longer term strategy is to provide products where the markets demand it.

Mike Lupikin – Cleveland Research:

OK. And just thinking globally, after you guys produced a really strong year and we had a good US harvest, and maybe some of the other areas, particularly the Australian wheat crop and Europe had a disappointing crop, and then this year it looks like globally things look better particularly with a larger wheat harvest. As we think about sort of your overall business, what is sort of the best environment for you? Is it to have large crops everywhere? Or is it better to have sort of dislocation? How should we think about that?

John Rice - EVP, Commercial and Production:

We like to see very large crops and good demand, globally. For both food and fuel. And industrial.

Pat Woertz - Chairman and CEO:

When you think about the long term, that’s good for the world, that’s good for us.

Mike Lupikin – Cleveland Research:

So there’s no particular benefit. Because particularly with ag services I thought a lot of the benefit last year was due to the fact that we had sort of a dislocation with short crops in some areas.

Pat Woertz - Chairman and CEO:

Well while you may hope for crops – abundant crops – everywhere in the world and hope for continued demand, we always find that that’s not the case sometimes by region. So you’ll find different weather conditions, different planting conditions, and so forth, so an abundance of crops is continually good for us.

John Rice - EVP, Commercial and Production:

And I think when we have situations like when we did last year, we’ll look at those opportunities and potentially capitalize on those, but if you really step back and ask from a long term perspective, the abundance and demand is where we want it. But that’s not to say we can’t make money in other environments.

Mike Lupikin – Cleveland Research:

Fair enough. I’ll leave it there.

Pat Woertz - Chairman and CEO:

Thanks, Michael.

Operator

And your next question comes from the line of David Driscoll of Citi Investment Research. Please proceed.

David Driscoll - Citi Investment Research:

Thanks for taking the follow up. When I look at the oil seed processing business, $500 million plus of profit generation in the quarter – I mean this is half, almost half, of the 2008 profit for that whole division. And then when you go back in other years you just don’t see – this quarter was an unbelievable quarter in oil seed processing. I’m curious, John, if you’re the right one to answer this question, or maybe Steve, but when we think about the risk profile I’ve always viewed ADM in a way where you guys are excellent risk managers and that always meant to me that you never really risked your firm. I mean, some of these ethanol companies, they’ve literally blown themselves up because they took a speculative position on the corn market, and it didn’t work. ADM never seems to have done that, but conversely we don’t seem to see fantastic highs and profitability if you ever get these things right. Now in oil seed processing today we’re seeing one of those results that is kind of out of the realm of anything we’ve seen in the past. Is the level of risk that was taken in that business, in the quarter, substantially above historical levels of risk? And if not, can you explain a little but as so how this type of number gets generated?

John Rice - EVP, Commercial and Production:

We have not changed our risk profile at all. We still have limits that we watch in all our positions, and also look at this as a total company-wide position, so we won’t have all positions running one way, unless we feel very strong about that. So I think when it comes to the oil seeds there are a lot of factors that came in, that we mentioned earlier. We saw very good bio diesel margins in South America. We saw an opportunity to open some bio diesel margin in Europe. By having our beans purchased right with a tight carry-out came into place. I think you know a lot of it was all the stars got aligned at the same time, but we did not increase our risk profile during that time period.

Pat Woertz - Chairman and CEO:

Let me add to that. Your question, David, that obviously there are times when our notional risk, which would be the price of commodities or the cost of commodities, being from a high to a low over, say, period of time – 12 months. Time is what we take through in our processing. That can change by a particular time frame. But the way we look after risk, and the way we look after the system, as John has said, has not changed. In fact, if anything, it’s continued to get better and more flat communication in these volatile times. I think it needs to be. So I think we’ve become stronger in that sense.

David Driscoll - Citi Investment Research:

Steve, can you just confirm for me that ex the lifo charge the corporate tax rate was 26%, or thereabouts, I think I got, like, 26.1%. But below your full year guidance – and I believe you said on the call 30% is the new expected fully rate and that’s down about a half point from prior guidance?

Steve Mills - EVP and CFO:

Yeah, we think we’ll be at about 30 – I don’t have my calculator here – but I think you got to be close on the other. Because when you do look at the lifo as the kind of fully loaded US tax rate credit. I think that’s right, but I do think we see 30 as the ongoing rate as I mentioned earlier, as we look at the benefits that we’ve put into place in Europe and in other places just to try to gain efficiency and improve our tax structure.

David Driscoll - Citi Investment Research:

In the underlying reason why the tax rate would be above the 26% I’m getting is just simply over the course of time a different mix of geographies and you net out at 30%? Is that right?

Steve Mills - EVP and CFO:

Absolutely.

David Driscoll - Citi Investment Research:

Final question: John, what’s your thought process right now with the credit issues and so forth in Brazil in terms of Brazilian bean acreage? Do you expect total bean acreage in Brazil to be up? And if so, zero, 2%, 5%? Any context you can give around this I think is helpful.

John Rice - EVP, Commercial and Production:

I think it’s still early. I mean, I think we got right at 30% of the crop harvested right now. The weather conditions are very good – Planted, I’m sorry – got to plant it before you harvest it.

David Driscoll - Citi Investment Research:

I was going to say, something very different is happening down there than what I’m used to!

John Rice - EVP, Commercial and Production:

It’s still too early to tell exactly how we’ll come out. But right now we’re saying it will be somewhat unchanged.

David Driscoll - Citi Investment Research:

Unchanged. OK. Thank you so much for all the answers.

All:

Thanks, David.

Moderator:

You have no further questions at this time. At this time I’d like to turn the presentation over to Ms. Woertz for closing remarks.

Pat Woertz - Chairman and CEO:

Thank you all for your questions and your interest. While we’ve had a terrific quarter we’re certainly not complacent nor are we immune from any economic pressures. We love our space, we like our assets, our network, and we remain confident in our strategy to continue to deliver value. Thanks for your interest. You might see the upcoming events are both the dates for our second quarter call as well as the Tagni conference date. Thank you, bye now.

Operator

Thank you for your participation on today’s conference. This concludes the presentation. You may now disconnect. Good day.

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