Archer-Daniels-Midland F2Q09 (Qtr End 12/31/08) Earnings Call Transcript

Feb. 3.09 | About: Archer Daniels (ADM)

Archer-Daniels-Midland Co. (NYSE:ADM)

F2Q09 (Qtr End 12/31/08) Earnings Call

February 03, 2009 09:00 AM ET

Executives

Dwight Grimestad - Vice President, Investor Relations

Patricia A. Woertz - Chairman, Chief Executive Officer, and President

Steven R. Mills - Executive Vice President and Chief Financial Officer

John D. Rice - Executive Vice President, Commercial and Production

Analysts

Terry Bivens - JP Morgan

Christine McCracken - Cleveland Research

Christina McGlone - Deutsche Bank

David Driscoll - Citi Investment Research

Kenneth Zaslow - BMO Capital Markets

Vincent Andrews - Morgan Stanley

Joe Gomez - Oppenheimer

Robert Moskow - Credit Suisse

Ian Horowitz - Soleil Securities

Christopher Bledsoe - Barclays Capital

Operator

Good day ladies and gentlemen and welcome to the Second Quarter Earnings Conference Call. My name is Antuan (ph) and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

I'd now like to turn the call over to Mr. Dwight Grimestad, Vice President, Investor Relations. Please proceed, sir.

Dwight Grimestad

Thank you Antuan. Good morning and welcome to ADM's second quarter earnings conference call. Before we begin, I would like to remind you that we're webcasting our presentation this morning on our new website, adm.com, which you can also reach by accessing admworld.com. The replay will also be available at that address.

For those following the presentation, please turn to slide two, the company's Safe Harbor statements, which says that some of our statements constitute forward-looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance, and financial results. The statements are based on many assumptions and factors, including availability and prices of raw materials, market conditions, operating efficiencies, access to capital, and actions of governments. Any changes in such assumptions or factors could produce different results. To the extent permitted under applicable law, the company assumes no obligations to update any forward-looking statements as a result of new information, or future events.

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

Patricia A. Woertz

Thank you, Dwight and good morning everyone. I will begin with safety first. During the second quarter we reduced lost workday frequency by 10% and total recordable incidents by 18% compared to our fiscal 2008. To continue our improvements, we're implementing a values-based safety program at our ADM facilities around the world.

Our financial results this morning; we reported quarterly net earnings of 585 million, up 24% from second quarter earnings of 473 million from a year ago, a great job by the ADM team for this fine results. Their insight into market dynamics, good risk management, good cost management all very good performance in particularly challenging markets. While our segment operating profit was down for the quarter, earnings per share increased to $0.91 per share after taking into account the impact of LIFO. Our Ag Services and Oilseeds Processing business continued to perform exceptionally well. We came into the quarter well positioned ahead of a weakening margins environment in these markets.

Our Corn Processing segment declined. We saw losses in our Ethanol business as we experienced declining market prices, declining demand, and we wrote down our Ethanol inventories. Now, the Ethanol business is still challenging, while we did foresee the over building of some supply a while ago, we did not foresee the depth of this current economic crisis or the decline in gasoline demand. Incremental blending which in the past above the mandate which had been increasing nicely has substantially stopped. We do have good reason to believe in the longer-term opportunities for Ethanol as we work our way through this over supply situation, and we'll talk more about on that on the call.

On the strategic front this quarter, integration efforts at are very important packaged oil joint venture with Associated British Foods, we announced that this last quarter, those integration efforts are going well. We recently announced the acquisition of the Schokinag Chocolate and Cocoa Powder business in Europe. And we've integrated our new Rapeseed Crush Plant in Southeast Germany into our European Oilseeds business. So that is complete.

Now like every company in the world today, we do see evidence of the impact and ramifications of this economic downturn and we are dealing with it. We've discussed this environment with you in the past couple of calls. We do see challenges ahead. We are confidently adjusting our business model, accordingly we are slowing production in markets where demand has slowed. And we are looking carefully at our cost structure and critically at the timing and staffing of our projects.

As a global producer of many basic and essential commodities I think ADM perhaps is better positioned than most to manage through economic downturn although, certainly we are not immune. Our balance sheet is very strong, we do remain focused on managing our operations, managing our risks, and executing our strategy.

So, I'll hand it over to Steve now and we'll come back in a moment for Q&A. Steve?

Steven R. Mills

Thanks, Pat and good morning everyone. If you have already reviewed the slides accompanying this call, you will have noticed that we have made some changes to the format and content of the side deck. We hope you find the changes helpful.

Starting off then at slide five, you will see our financial highlights for this quarter. Segment operating profit decreased $140 million or 15% this quarter as declines in bio products and in our other segments, more than offset the improved results of Oilseeds Processing and Ag Services. And I will go into more detail on the major segment operating profit changes in a few minutes when we cover slide 7 through 10.

Quarterly net earnings and earnings per share increased 24% and 25% respectively as our lower segment operating profit was more than offset by a credit from the change in our LIFO inventory reserves which continued to fall in line with lower commodity prices. On an after-tax basis LIFO changes favorably impacted earnings this quarter by $0.12 per share compared to a charge of $0.22 per share during last year's quarter. In the appendix to the slide deck you will find more details, historical information by quarter of the impact of LIFO on earnings and on our RONA measure.

Our effective tax rate for the quarter was 29.2% down from just under 31% last year, due principally to changes in the geographic mix of our pre-tax earnings. As we look at the full fiscal year... look forward to the full fiscal year, we expect our tax rate to remain in that 29% to 30% range. And for the trailing 12 months, our ROE stands at 18.7% and our LIFO-adjusted RONA payment at 13.5%.

Turning to slide 6; slide 6 shows the summary of our operating profit by segment and by sub-segment, detailing the changes in operating profit for both the quarter and six months. Let's turn straight to slide 7 to begin the review of each individual segment in more detail, starting with the Oilseeds Processing.

Oilseeds Processing had another very strong quarter. On a year-over-year basis, quarterly operating profit for this segment rose 46% to 319 million, up from 219 million in the year-ago quarter. Crushing and origination results improved $46 million to $187 million, and from a crushing perspective, coming into this quarter, we had a good bit of business booked forward with good margins and we executed this business during the quarter. As the quarter moved along, we did experience a decline in crushing margins as product demand slowed and farmers continued to be reluctant sellers. Origination results remained strong for the quarter overall, and our fertilizer results decreased due to both lower sales volumes and margins.

In our refining, packaging, biodiesel and other results, they improved globally, increasing 40 million to $86 million for the quarter, generally reflecting good refining margins in all geographic regions due in part to our diversification in both packaged oils as well as in bio diesel. Bio diesel results improved impart due to good demand on our Robinopolous Brazil facility. As you may recall this plant was still on startup mode during last year's second quarter. Additionally results for our second quarter of last year included asset abandonment charges of 15 million.

Oilseed results in Asia increased $14 million for the quarter due principally to improved earnings of our equity investee, Wilmar International, Ltd. And as a reminder, we do record results from this investment one quarter in arrears. So this quarter for us includes Wilmar's September quarterly results which showed better palm and soy bean merchandising and processing income.

As we look at current market conditions last year's U.S. soy bean crop was about 2.96 billion bushels and the carryout is projected at about 225 million bushels. Most projections are calling for somewhat smaller South American crop, of course the ultimate size of this crop will depend on the weather. Although soy bean supplies are likely to remain somewhat tight, which would encourage additional acres to be planted in the U.S.

Global protein meal demand for calendar year 2009 is slowing. USDA projects that the growth in China will roughly offset declines in the rest of the world. 2008 protein meal demand grew at 3.6% rate and historical growth rate is 4% to 5%.

For the U.S. census numbers, U.S.'s crushing rates are trending down in response to the slowing protein meal demand and slowing export demands. As we look at the board crush margins reflected in the future's market today, they generally reflect the cash margin environment. Again for the census, vegetable oil inventories were flat.

In biodiesel, demand in Brazil was robust driven by the implementation of the B-3 mandate this past July and there is discussion of moving this mandate to B-4. And Germany has just moved its blending mandate to B-7.

Moving to Corn Processing on slide 8; operating results for Corn Processing fell to $29 million for the quarter as operating conditions, especially in the bio-products business were extremely difficult this quarter. We continued working our way through higher net corn costs. We were able to generally maintain profitability for sweeteners and starches, as higher average selling prices and improved results of our international joint ventures compensated for the higher net corn costs.

Ethanol margins collapsed during the quarter, as demand for transportation fuels dropped and gasoline prices declined. All the while net corn costs remained relatively high. Additionally, the excess ethanol industry production capacity and the resulting supply demand imbalance has kept a lid on selling prices. In addition, the falling ethanol market prices caused us to write-down the value of our ethanol inventory during the quarter.

Looking at current market conditions; last year's U.S. corn crop of 12.1 billion bushels was the second largest crop on record. The carry out of 1.79 billion bushels should be an ample supply level. Lower year-over-year levels of carbonated soft drink consumption have resulted in reduced corn sweetener volumes industry wide. We realized a mid-single digit weighted average price increase for sweeteners and starches during our contract negotiations for 2009 and we're optimistic that this increase will result in improved margins in 2009.

Currently, Ethanol's spot prices are $0.40 to $0.50 a gallon over unleaded gasoline. Although we are obviously experiencing challenges in the Ethanol business as the industry goes through its expansion on the way to supplying longer-term RFS requirements, we believe Ethanol is an attractive long-term market for ADM and a good long-term investment for our company.

Let's now turn to slide 9 and review the operating performance of our Agricultural Services segment. Operating earnings for this segment once again reached record levels rising to $462 million for the quarter, an increase of 147 million or 47% from the second quarter of fiscal 2008.

In merchandising and handling, we continue to benefit in the second quarter from our forward sales positions coming into the quarter and once again we are able to capture excellent results from opportunities arising from commodity price volatility. Our income from storage and drying also rose during the quarter as the large crops that were harvested and the relatively late harvest resulted in less field drying and required additional drying time at our elevators.

Transportation results increased $20 million for the quarter due to an increase in barge revenue due possibly to higher freight rates. Volumes were comparable and operating costs were relatively unchanged as fuel costs leveled out.

Looking at current market conditions, the soy bean harvest is starting in Brazil and we will see what opportunities arise from the uncertainties in the size of the South American crops. World wheat production reached a record 683 million metric tons last year, which enhanced the global supply of wheat stuffs. We see a good global supply of wheat.

It's really too early to comment on U.S. farmer planning intentions, but we are confident our network will provide us with good insights region-by-region as we move towards the planting season. We do not see the same levels -- at this point in time we do not see the levels of disparity in this location in the grain markets that we have experienced in previous quarters. U.S. exports are still low compared to last year, soy bean exports are up but corn is down.

Slide 10. Slide 10 has an operating profit analysis of our other segments which shows an overall decrease of $141 million from last year's second quarter. Our other processing business which by the way will include the results of our recent entry into sugarcane processing had decreased results due principally to the $40 million non-cash operating loss related to currency losses incurred by our equity investee, Gruma SA which we discussed with you on last quarter's call. Similar to our investment in Wilmar, we record our share of Gruma's result a quarter in arrears. So, our December results reflect Gruma's September quarter.

Wheat processing results increased as margin improved on broadly comparable sales and production volumes. Cocoa processing results also increased due principally to better processing margins. In other financial we recorded a loss this quarter due primarily to put loss provisions at the company's at our captive insurance unit. In addition our futures commission merchant operation had reduced interest income and marketable security gains, and we have recorded lower earnings from our management investments as these investments continue to wind down.

Our captive insurance operations which provides certain property, casualty, marine and other insurance coverages for ADM risk as well as for third parties recorded sizable loss provisions this quarter as a result of claims related to property damage. Principally loss is due to an explosion at our Destrehan export elevator facility in October. We also recorded losses in the captive for various ADM related business interruption claims including the spring 2008 floods.

Looking at current market conditions, in the wheat flour milling area we see steady demand and the large North American wheat crop has provided ample milling quality wheat for the industry. Demand has flattened out in cocoa and we are seeing customers back off a bit on their forward purchase cover from traditional levels. Cocoa bean crop is similar in size to last years and the final outcome of Gruma's foreign currency derivative positions remained uncertain. Based on Gruma's press releases a partial settlement has been reached with one of the counterparties and that some additional loan funding has been secured to help finance the losses. We further understand they are still in negotiations to close out the remaining part of their position and reach settlement terms with their counterparties.

Based on Gruma's public statement made back in October we are estimating that we will report further non-cash losses related to their foreign currency derivatives positions in our third quarter. Gruma has not yet released its December quarterly results. And as a note, our carrying value of our investment in Gruma as of December 2008 is approximately $250 million.

Turning to slide 11. Slide 11 looks at the major components of our corporate line, which reflects income of $11 million for the quarter compared to last year's quarter's net expense of 270 million. With the continuing decline in commodity market prices between October and December, our LIFO inventory reserves decreased a further $123 million this quarter. Last year's second quarter LIFO charge of 225 million reflected the impact of increasing commodity prices during that time period. As you can see on this slide this is a swing of nearly $315 million pre-tax between the comparable second quarters, which equates to a swing of approximately $0.34 per share on an after-tax basis.

Corporate investment income and expense decreased $70 million primarily due to an increase in interest expense related to our additional long-term borrowings. Decreased interest income both external and inter company due principally to lower interest rates and those items were partially offset by an increase in capitalized interest costs related to our large capital projects. Unallocated corporate costs and other were comparable quarter-over-quarter.

Slide 12, moving away now from the operating segment view to the financial statement format, slide 12 reflects the statement of earnings highlights for the quarter and six months. Overall net sales and other operating income were relatively unchanged this quarter. Higher average selling prices due principally to the year-over-year increase and underlying commodity costs were offset by decreased sales volumes and by the foreign exchange translation effects caused by the impact of the strengthening U.S. dollar. Thus profit increased $264 million or 28% this quarter to 1.2 billion due principally to the LIFO inventory reserve movement partially offset by the decreased segment operating profits that we just discussed.

Selling, general, and administrative expenses varied by less than $1 million quarter-to-quarter as lower personnel related expenses and the impact of foreign currency translation on non-U.S. dollar denominated costs were offset by increased provisions for doubtful accounts. Other income and expense net had a swing of about $125 million quarter-over-quarter. And this line item is made up by external interest expense and investment income, gains and loses on marketable securities, earnings of our equity investees, and minority interest expense.

Our interest expense net investment income increased due to the additional long-term expense and the reduced short-term income, equity earnings from affiliates was $31 million lower primarily related due to the Gruma loss, minority interest was $12 million higher and wheat and grains from sales and marketable securities fell by 13 million.

Turning to slide 13, we selected some balance sheet items to highlight comparing our December 31 balance sheet with our June 30 year-end balance sheet. As shown here, our strong earnings for the first half of fiscal year and our reduced working capital requirements due to the drop in commodity prices have significantly impacted our balance sheet over the past six months. Operating working capital is down. Debt is down as you can see we have no commercial paper outstanding and our cash balances are out. Our net PP&E continues to rise due principally due to spending on our major seven capital projects.

And now turning to our cash flow statement on slide 14. On slide 14 we've laid out the significant items impacting our cash flows for the six months and I will just touch quickly on a few of the larger items. As I just mentioned from the balance sheet highlights, cash generated from operations before the impact of changes on working capital was up nearly 50% to slightly more than $2 billion due principally to our record six month earnings. In addition, we generated another $3.8 billion of cash flow from changes in working capital requirements for the quarter primarily due to reduced inventory and receivable levels resulting from the significant decline in commodity prices.

Our capital expenditures have been just over $1 billion for the first six months and just over $2.6 billion of debt, principally short-term commercial paper borrowing has been paid down so far this year. The key takeaways from slide 13 and 14 is that our balance sheet is getting stronger and that we continue to increase our financial flexibility. And we put a chart together on slide 15 that further illustrates our financial conditions.

On slide 15, the blue bars depict our liquidity over the past 30 months in the terms of cash, short-term marketable securities, and available commercial paper capacity. You can see from the chart that we have come through the recent volatility in the commodities market with substantial liquidity and that our long-term debt-to-equity levels have returned to a much more comfortable 28%. We are well positioned to cope with market conditions as well as being well positioned for market opportunities both large and small, that may present themselves in today's challenging economic climate.

Slide 16. Slide 16 provides an update of our current financial performance using return on equity and RONA return on net assets adjusted to LIFO. Both metrics are presented here on a rolling full quarter basis. And as you would expect with the decline in commodity prices our working capital asset base is declining, its moved here a bit by the rolling four quarters effect and our fixed asset base is rising in line with the expenditures on our major capital projects. RONA adjusted for LIFO now stands at 13.5% and ROE is at 18.7%, both solid numbers in the lights of the volatile market conditions we have seen and the significant amount of pre-productive capital that is currently on our balance sheet.

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

Patricia A. Woertz

Thank you, Steve. Operator, if you would please open the call for questions. John Rice, Steve Mills, and myself are here to respond.

Question-and-Answer Session

Operator: (Operator Instructions). And your first question comes from the line of Terry Bivens with JP Morgan. Please proceed with your question.

Terry Bivens - JP Morgan

Good morning everyone.

Patricia Woertz

Good morning Terry.

Terry Bivens - JP Morgan

I have two things this morning. Just in terms of the LIFO charge, a bit bigger than we were looking for. Can you break that down, was it more the composition of the inventories or the level of the inventories?

Steven Mills

Well Terry this calculation and this decline was principally priced. We don't adjust the volumes on a quarter-to-quarter basis for this calculation based on how the rules dictate how we do LIFO. So this is strictly a price decline in our LIFO based inventories?

Terry Bivens - JP Morgan

Okay. Then just in terms of cash on the balance sheet. Obviously there is quite a bit here. How would you characterize that Steve, is that more a measure of just prudence here or there has always been the question obviously as to why more -- there isn't more aggressive share repurchase and I know you guys are always on the look out for acquisitions. If you kind of give us your view on the need and the likelihood that the cash levels will stay where they are now?

Steven Mills

That's a good question Terry and the conservative folks here indicator like to have a little cash on the balance sheet to start with. We know we have a business that does have volatility from time-to-time. From the share repurchase perspective we've commented several times that the rating agencies have, in our discussions with the rating agencies, they have agreed for us to be able to be able to maintain our rating work at that and that share buybacks are going to be put on the shelf for the time being until we have a little more certainty over the future of commodity prices. So we've got cash on the balance sheet as you know most of that's build up here just recently and we've got it therefore whatever uses we needed it for.

Terry Bivens - JP Morgan

Okay. Very good, I'll pass it along. Thank you.

Patricia Woertz

Thanks, Terry.

Operator

Your next question comes from the line Christine McCracken with Cleveland Research. Please proceed with your question.

Christine McCracken - Cleveland Research

Good morning.

Steven Mills

Good morning, Christine.

Christine McCracken - Cleveland Research

Just on the Ethanol industry, obviously things are a little tough there. I'm wondering if you are continuing on your plan relative to new capacity and if you could just comment on the write-downs in your Ethanol business?

John Rice

Our current plants are, yes, we are on pace to finish our ethanol plants. We still feel they are very well integrated with our wet-mill plants and will give us competitive advantage. Long-term we're still very positive to this industry, we saw there was going to be an overbuilding when everybody built up to about 15 billion gallons when their mandate was closer to 10. So, it has come to us as a surprise, but like in Steve's comments the slowdown in gasoline demand took us a little bit by surprise. For the long-term we still feel very positive about the industry.

Patricia Woertz

One thing I'll add, Christine, and then may be I'll ask Steve to comment on the Ethanol write downs. We are looking at all our projects. I think it's prudent to do so whether they're Ethanol or any of the other ones under construction to see anyway we can continue to optimize cost as they are built out. So that's something we'll update you on our capital projects at the next call particularly after the winter and also after all of our optimizing cost reduce. Steve on Ethanol inventories?

Steven Mills

Yeah on the inventories, Christine, of course we had falling market prices during the quarter and we took some write downs on the inventory we carried into the quarter as well as on some of the Ethanol we produced during the quarter which as prices went down and that over the quarter period, we estimate that at about 60 million for the pretax for the quarter.

Christine McCracken - Cleveland Research

Okay, and just in terms of the number of companies that are struggling here. Do you anticipate some rationalization of capacity, is that how you see currently the industry developing here and would you consider given some of these values of these companies getting involved where you might have some hole in your network?

John Rice

Well we feel the capacity right now is right around 12.9 billion, we have 2.7 billion shutdown in the industry. The industry is running right about at 10.2. The mandate this year is 10.5 and it will be 12 billion next year. Yes, we're always looking at opportunities, which plants make the most sense for us, which is a good location. Other plants we just don't think they fit into our long term strategy or make financial sense for us to invest in. So we're just going to stay away from those, but yes, we always are looking at different opportunities out there.

Christine McCracken - Cleveland Research

That's helpful. Thank you.

Operator

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

Christina McGlone - Deutsche Bank

Good morning.

Patricia Woertz

Good morning.

Steven Mills

Hi Christina.

Christina McGlone - Deutsche Bank

My question has to deal with the liquidity that you highlighted Steve. I'm curious, I mean in my opinion you're probably the best positioned company in my universe to go through this global slow down and I can see you picking up a lot of distressed assets similar to that Rapeseed facility in Germany and I'm just curious where is your focus in terms of investment, where should we look for you to deploy capital?

Steven Mills

Well that's a great question and we appreciate the comment Christina. We believe we're well positioned as well of course as a global company. We're looking in all corners of the world, in all areas of the business. These as we all know are unprecedented times. So I hate to limit our scope anywhere either by geography or by line of business. I think our eyes are wide open right now.

Christina McGlone - Deutsche Bank

So, there is no point of focus like logistics or geography or increasing your product line if there is no specific point of focus?

Steven Mills

I don't think so, Christina because we know the value chain is there, so we've got opportunities all along the value chains. We're especially interested in opportunities that help leverage that chain even more than we do today, whether that's beyond the origination, transportation, processing new products. So, I think it's safe to say that we're not limiting ourselves here.

Christina McGlone - Deutsche Bank

Okay. And then are we still looking at 2 to 2.5 billion on CapEx for this fiscal year?

Steven Mills

Well, that's the pace we're on now and I think that's -- we'll probably still fit into that.

Christina McGlone - Deutsche Bank

And do you think in fiscal '10 since it is kind of right around the corner, will we see a step down or is that a continued level?

Steven Mills

I think we will be off of this 2 to 2.5 and the past comments a minute ago in this time of challenge, we're challenging ourselves from a cost and efficiency perspective to see what we can do to optimize our cost structure at our existing -- on our existing projects. But I don't think there is any question at this point in time we see that number falling off.

Christina McGlone - Deutsche Bank

Okay.

Steven Mills

But, we're not through with our look forward process for 2010.

Christina McGlone - Deutsche Bank

Okay.

Patricia Woertz

And if I may add to that, there is deflation in the markets out there and to the extent there are some parts in their equipments, field, labor even that we have not locked in there is a chance to again optimize those costs on these projects and we are challenging, and John made several visits even recently this past week in defining and identifying further cost optimization while still being able to complete these projects.

Christina McGlone - Deutsche Bank

Okay. And John, you talked about being slightly short of the mandate this year, will it just be satisfied by wins and ethanol coming in through the Caribbean or is there any risk to modification of RFS this year?

John Rice

I don't think there is any risk to this modification of the RFS. They all have to do with what our Bob and the plant markets are versus the ethanol market any given time. If the other day the unleaded gas spikes up $0.15 a gallon, people may start blending more ethanol. So, it's kind of a moving target, but I think right now using the 10, 5 blend is a pretty good number.

Christina McGlone - Deutsche Bank

And do you know how many wins exist?

John Rice

I do, but not off the top of my head.

Christina McGlone - Deutsche Bank

Okay. I'll follow-up, I'll find. Just last question, Steve it sounded like, when you were talking about Ag Services and oilseeds, you had gone into the quarter with certain positions and now they seem to have rolled off, so should we be looking at a significant sequential decline in both of those businesses, from here?

Steven Mills

I'll let you draw the conclusions from my comments.

Christina McGlone - Deutsche Bank

Okay. Thank you.

Patricia Woertz

Thanks Christina.

Operator

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

David Driscoll - Citi Investment Research

Thank you. Good morning everyone.

Steven Mills

Good morning David.

John Rice

Hi David.

David Driscoll - Citi Investment Research

John, I would like to pick up where Christina left off there on the comments that you all made in the prepared script about Ag Services and Oilseeds. This is a vital point, because the question that I think probably most of us are getting all the time is the sustainability and profitability starting number one in Ag Services and then secondly in Oilseeds, as it has pertained to, maybe, similar trends from Ag services. So the question here is, is it accurate that in your comments what you guys have said is that and again this kind of follows out of my questions from the last conference calls, you saw really exceptional conditions in the market place prior to the U.S. soy bean harvest. That led to a wonderful opportunity for ADM which you capitalized on and we've seen now two quarters in a row a fairly spectacular profitability within Ag Services and in Oilseed Processing. But again, if we hear you are right what you're saying is that is kind of coming to its end and you said I think and this is what I'm really hoping you'll clear up here is that as the quarter progressed new business that's being booked is being booked at much lower margins? John can you give us some understanding as to what this market looks like?

John Rice

Yes, the first thing I want to say is everyday we come into this office and we always look at new opportunities. What is out there? What opportunities can ADM take advantage of today? So to say what's going to happen forward is always a little tough. But when you look at the facts and that's what you're asking about, we're seeing lower meat demand, poultry numbers are down, layer numbers are down. We're not seeing the corn exports out of the United States. We saw a rain in Argentina overnight so their crops start going to get a little better, (inaudible) to get a little a little bit more rain. So I mean you always have dynamics that are always changing at any given day and any given week. We're always looking at those. But when you look at the numbers and that's where I think you asked me about last time was demand is down, we're seeing a slowing in the economy, people are not eating out as much. So, yes, we would think that over the time that margins and we've slowed down our crushing operations. Margins have deteriorated from last year.

David Driscoll - Citi Investment Research

Okay. When I cut the numbers at different direction and I look at just the processing operations, this quarter seems to have shown when take oil seeds, the corn processing, cocoa, and wheat, put it all together and just look at the run rate, you know, for all of '08 Pat, you guys regenerated about 65% of your profitability from the processing ops and I've always thought that that was the elements that were, the kind of the good elements because we would have some confidence that they have an ongoing sustainability, that number has dropped to less than half the profitability for the current quarter, so it feel like its just confirming a number of these statements, would you guys agree with that?

Steven Mills

We're.

Patricia Woertz

No, you go first.

Steven Mills

It's always a little tough because we always look at everything to our total value chain. We're really sole integrator, we break our businesses down, but we work together so closely in all our businesses globally, so at times where somebody may end-up buying soy beans in the Ag Services area that can easily transfer over to the Oilseed area. So that's a little tough to just break it and try to slice it that fine, in my opinion.

Patricia Woertz

I think your comment now David is fair that processing in general as we said is down. So you'd argue that any part of the value chain that is down while you hope and see opportunities where other parts can pickup, there are the facts that processing in down, yeah.

David Driscoll - Citi Investment Research

Okay. Just one final question and I'll pass it along. We've seen a rather spectacular decline in shipping freight rates, can you comment on what type of impact that has on Archer Daniels?

John Rice

It hasn't had a real large impact on ADM here lately. We've -- its really had more of an impact on cheaper products to our customers or some freights gone from lets just say $100,000 down to 5 to $75,00 a day. I mean it does impact us on dispatch to and to merge, but to say that it really impacts us in any particular time, currently its not. But we are looking at longer term targets also right now.

David Driscoll - Citi Investment Research

John.

John Rice

At rate so it could help us.

David Driscoll - Citi Investment Research

If I just translate, just I want to tie off one risk that I get asked about a lot. It's not like people should think that ADM was substantially long freight and that upon a decline in these marketplaces, that that's a significant negative to you, you're saying that you can mitigate those types of issues and that you're not, it's not a big negative to ADM, is that a fair characterization?

John Rice

I am sorry, David.

Steven Mills

I'll jump in there a little bit, David. But freight is a component that's -- we have to deal with freight everyday and some people could see it as another commodity. We have to manage that. But we again, just like all of our other businesses I think we have extremely good risk management around that. We're -- so there is always some exposure, but I think we're comfortable with how we have managed the risk through on this freight.

Patricia Woertz

I might also comment, David that as fright rates were extremely high, we took a lot of that management risk from our customers and did a lot more shipping to destinations. So we kind of have understand the business and I think we are in a good position to manage that cost and that commodity at a good time.

David Driscoll - Citi Investment Research

So it doesn't sound like a big concern. Okay. Thank you very much for all the answers.

Patricia Woertz

Thank you, David.

John Rice

Thank you.

Operator

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

Kenneth Zaslow - BMO Capital Markets

Good morning, everyone.

Patricia Woertz

Hi, Ken.

Steven Mills

Hi, Ken.

Kenneth Zaslow - BMO Capital Markets

I know you don't manage your call or anything to the stock price or anything is that, and I find that extremely respectable. What I'm trying to figure out is how to give you credit for the Ag Services business. And what I'm trying to get at is over the last six quarter, the Ag Services business has generated an average profitability of say $320 million give or take a couple of million dollars. Can you just talk to what has actually changed in this business if I go back five years ago, four years ago, we are not even close to that number. Is there something that you've done, is there something that's changed, or is it just that the market condition has just created opportunities, is there hiring, is there risk management, what has changed?

Patricia Woertz

Well, let me start and then I'll let our guys boast a little bit about their own capabilities. I think we've been building on our capabilities in Ag Services both the human capability as well as physical assets, which you know included in this area are storage, transportation, drawing facilities, port facility. We have built that out to be able to deal with markets and market conditions and market disruptions, that are the kinds of opportunities you described in these many several quarters where we have had extraordinary earnings. In addition because of the credit issues in the market I think our strong credit ratings are strong, if you will balance sheet in customer relations, origination relations have been an advantage to us both on the cost and the access to working capital required to continue our merchandising and crop origination in a way that some people don't have access to this liquidity that we have. So, I think it's a clear longer term strength, but I think it's a strength that has shown out and worn out in this time of volatility.

Kenneth Zaslow - BMO Capital Markets

So have you hired more people and adjust the infrastructure? Is there some sort of quantification of something that you can help us -- and again I'm trying to be on your side on this, I just can't, market is not going to give you credit for something we can't forecast in anyway. I am just trying to figure out if there is some sort of a change over the last two years besides the market conditions?

Patricia Woertz

Well, let me -- let John and Steve comment too.

Steven Mills

We've had -- Ken as you know; we've had very good --

John Rice

Or something good, its very high volatility here in the last couple of years in these markets and with just different areas of the world not having crops and our ability to be able to move crops from one area to the other area and our communication. We have a very good staff of people working around the globe, working together, coordinating to make sure everything works together, and our group has just done an excellent job here in the last two to three years. I just have to give them a lot of accolades for all of that.

Kenneth Zaslow - BMO Capital Markets

Alright.

Patricia Woertz

You asked about additional people. I think we have had additional if you want to call it training as well as experience in these very difficult markets and I'll give John credit for it and the team for all that they've done to work through and actually even work through mistakes as well as work through successes to really develop a higher capability. I think we do have a higher capability than we had say five years ago?

Kenneth Zaslow - BMO Capital Markets

Okay. In terms of the volumes and this may not be a huge point, but Oilseed Processing was down about 5%. When we think about crushing going forward we only think about utilization rates, something that's often forgotten. I see the spreads and you guys see the spreads, but utilization rates, does this imply that there is a slowing of your utilization rates, is there something to that we should be little bit more cautious on, is that an issue that we should think about?

Steven Mills

Well Ken, the answer to that question is yes. The deals on utilization rates for both the industry and ourselves are slowing. And it's simple because demand is slowing down. And where we stay at -- kind of everyone is slowing.

Kenneth Zaslow - BMO Capital Markets

So how does the industry manage to do that. Will you be -- will the industry be reducing capacity? Will you be turning off different facilities or you will only work certain days a week. How does that play out over the next -- again I see the processing companies obviously cutting productions. So I'm assuming or do you swap it around the country, the world. How does it play out?

John Rice

That depends. We will look at our operations what makes the more sense cost effectiveness. Whether we run as planned at 10/4, whether we just run it slow, whether we take more through our maintenance now as opposed during the summer time, and what we think about the long-term demand. So we'll mange each plant differently region-by-region, South America has been running slow just because we're just starting harvest now and now they're starting to pick up their crush rate. Europe we've had to run a little harder just because we've had bio diesel demand over there, bio diesel sales on the books. In United States, we've had slower protein and oil demand. So we had to run our plan slower. So it's something we have managed on a weekly basis. We're always constantly looking at it. The world is on a hand-to-mouth basis buying wise right now. People come in today for put them all to ship. So, that will add a little bit more volatility also in the market going forward and how you manage and run our operations.

Kenneth Zaslow - BMO Capital Markets

So, you don't want to give us any specifics?

John Rice

Balance changes if I -- we're not running all our plants in a 10/4, we're not running them all slow. Some plants have better operations, so we may run one plant a little harder and some plants maybe located right in the middle of the poultry region and doesn't see the meal demand, so he may not run us hard.

Kenneth Zaslow - BMO Capital Markets

I appreciate it. Thank you.

Patricia Woertz

Yeah. One thing to add to that Ken as you get off the call. More than 200 plants around the world, there is the opportunity to do this differently, depending on the regional expectations and the regional demand in the area.

Operator

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

Vincent Andrews - Morgan Stanley

Thank you. Good morning, everybody.

Patricia Woertz

Hi, Vince.

Vincent Andrews - Morgan Stanley

I got a couple of quick ones and then I might try my hand at the Ag Services issue. And the first is, has anything changed either from your perspective in terms of farmer credit availability in South America or the industry's perspective? Are you lending more now than you were maybe last quarter or the quarter before?

Steven Mills

I will start with that and if anyone wants to join me here. But we've historically been a lender to the South American farmer either cash or inputs and that the amounts of that have increased year-over-year since we've been in the business. So we continue to participate there as well as I believe some of the others in the industry but it is somewhat depended on their own individual resources, and one of the big factors is the banking system in Brazil and its availability of cash for the farmers. But from our particular situation, we continue to lend and we have continued to increase that lending year-over-year.

Vincent Andrews - Morgan Stanley

But given that you say that your fertilizer volume in Brazil being down is it reasonable to assume that that's a function of your lending being down as well?

Steven Mills

No, I don't think that's fair. I mean our -- the pre what we call pre-financing which again is partially inputs and partially cash, is they are really to help us secure the crop in the long-term. So, it's not necessary a specific issue to fertilizer, that is one component. But our overall pre-financing has continued to go up.

Vincent Andrews - Morgan Stanley

Okay. And then on Ethanol, I couldn't tell from your comments but the issues that affected you in this quarter as you just reported, it sounds like some of them are going to linger into the next quarter. But can you give us a sense about whether you will be profitable in Ethanol and bio products in the coming quarter?

Patricia Woertz

It is all tough and its hard to say maybe I will start at some, it's a little hard to say what probably will. It really depends on how gasoline demand goes. Whether there is continued incremental blending rate, a little bit of an increase in incremental blending. It depends where the balance of the supply-demand comes out. If there is even lower ethanol demand, as a result of just slower gasoline demand that will affect us. When you think about when the balance of production and the new RFS requirements come into play, that should be early 2010.

Vincent Andrews - Morgan Stanley

Okay.

John Rice

We see more plants shutting down. It seems like every week, but everybody is still currently -- its seems like if they buy corn today, they turn around, they want to sell their ethanol today and they put in there as long as they make a little bit of cash flow. So margins are very difficult in this environment right now.

Steven Mills

And I guess I'll just add from the inventory write downs that we took during the quarter. If you make the assumption that prices don't go down further, we should not see the impact of write downs, because that's my definition, so again we'll have to see where it goes.

Vincent Andrews - Morgan Stanley

What if the prices go up, what you -- is there inventory that you would have to write up?

Steven Mills

We wouldn't write it write it up, but it would be sold at a margin.

Vincent Andrews - Morgan Stanley

And were any of those write downs related to third party. In the last quarter you talked about benefiting from some third party ethanol margin that you started to do and you didn't mention that this quarter. So I just wanted to tie those two things together?

Steven Mills

No. Most of the sale of third party is for the most part back-to-back.

John Rice

I mean its not a big component of our inventories.

Vincent Andrews - Morgan Stanley

Okay and then my understanding is that there is about 1.5 million win credits out, a billion win credits out there and in current economics, lot of people are speculating that those will all get used, which would, John you said that there is 10:2 of capacity still in play right now, it makes it sound like there a lot -- if all those win credits are going to get used, that 10:2 number is going to come down. Do you feel like given your cost position, your balance sheet through a liability distribution systems that from a volume perspective your contribution to that reduction in sales volumes would come pro rata with your market share or that you given probably being a better supplier, or a more reliable supplier given those attributes that you probably would not given up volume. Does that make sense?

John Rice

Yes, currently I do not see us giving up any volume. We feel we have a cost advantage in the market. We also have a distribution advantage in the market. We are trading gallons with other people, which helps supplements the market also, but at this time we feel under the current marketing conditions we would not be slowing down our operations.

Vincent Andrews - Morgan Stanley

Okay and now I'll take a crack at Ag Services and my way of looking at it is going to be as Ken noted five out of the last six quarters, you have had just kind of outsized results, and you kind of gotten up to a mid-single digit operating margin which is not outrageous by any stretch of the imagination. I mean, why shouldn't that margin be sustainable on a go forward basis, why shouldn't you just be able to charge more for your services?

John Rice

As long as the volumes are there in any particular market, you are exactly right. If volume gets to be as like in United States this year where we do not have the export volumes coming out you tend to have a little bit more excess capacity down at New Orleans. Now the Hurricane took out one of our facilities so that did tighten capacity back up a little bit. One thing about Ag Services, we have to remember its all the way from buying from the farm, taking it through our elevator, taking it through our transportation for the nana barges, trading wheat in Europe, trading wheat in Ukraine, buying it out of Australia, I mean it's our great big world out there and there is a lot of different factors in this that all add up just with our volumes.

Vincent Andrews - Morgan Stanley

Yeah. I'm just surprised that you guys aren't a little more bullish given it appears the crop in South America is going to be a little more difficult -- it's going to be difficult and probably smaller which seems like we present...

Steven Mills

You know with the rains last night, all the sudden we are feeling better about the Argentine crop and the Brazilian crop.

Vincent Andrews - Morgan Stanley

Okay.

Steven Mills

So its always a moving target. Now the exports long about April move out of the United States and soy beans and start coming out of South America. So that can affect our North American Ag Service and we'll start exporting those soy beans out of either Argentina or Brazil.

Vincent Andrews - Morgan Stanley

I was just thinking given your size I think you are the best.

Patricia Woertz

One thing Vincent, maybe a good way to think about it is you can plan a little bit and you can hear our comments about what we think some of the opportunities will be. But we manage this in real time. This is a big real time business and we'll just have to see where the weather and the opportunities are.

Vincent Andrews - Morgan Stanley

Okay. Thank you very much for all that and I will pass along.

Patricia Woertz

Thank you.

Operator

Your next question comes from the line of Joe Gomez with Oppenheimer. Please proceed with your question.

Joe Gomez - Oppenheimer

Good morning.

Steven Mills

Good morning, Joe.

Joe Gomez - Oppenheimer

I was wondering if you might be able to provide a little more color, a little detail about the increase in the provision for doubtful accounts. I know back in December you didn't seem to be too worried on that and the counterparty risk. I was just wondering if you could provide some more color there?

Steven Mills

Well, we always worry, that's my nature, that's my job here is to worry about these kinds of things. And as we've said several times today we're a big company but lots of risks. We don't think we have anything significant but there isn't any question that it's a tougher world out there economically for all of our counterparties. And so as we always do, we're very prudent in our approach, we were careful, we've had a touching word here that we have not historically had significant problems, we don't anticipate them. But as we go through these kinds of times, we do set -- we set up provisions and its not a material amount but in that call Joe we were just describing SG&A which hadn't moved much on a quarter-over-quarter basis, to extent that we haven't had reduced personnel related expenses which is a good thing. The offset to that, the majority of that item came out of provision but it's not a significant number.

Joe Gomez - Oppenheimer

Okay. And I was wondering if you might be able to talk a little bit, may be provide some additional detail on the acquisitions of the German chocolate manufacturing, the kind of what size the acquired business is?

John Rice

So the chocolate -- it's in the Industrial Chocolate Business in Mannheim Germany. It also -- we are looking at that operation and how does it fit in, maybe we'll able to consolidate some of our other operations to make the whole European chocolate manufacturing more efficient. So, it's just really is our long term strategy to get more into the industrial chocolate was really the main reason behind that acquisition.

Steven Mills

Yes and I will just chime in here, it's a good fit both from what it does and where it does. Of course it's still subject to clearance by the relevant anti-trust authorities in Europe, so, the closing on the deal will be timed on that. But we're excited about this opportunity again. We think it's a great fit.

Joe Gomez - Oppenheimer

Okay. Thanks.

Steven Mills

You're welcome.

Patricia Woertz

Thank you, Joe.

Operator

Your next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.

Robert Moskow - Credit Suisse

Hi.

John Rice

Hey, Rob.

Steven Mills

Hey, Rob.

Robert Moskow - Credit Suisse

Hi, how are you doing? On the RONA target for 13%, can you give us a little more color on what your targets might be per division, was it -- on the Ag Services side, do you have a RONA target for those assets, is it lower than the rest of the portfolio?

Steven Mills

No, we don't have those targets by segment. We -- as we look at our business, as one line of business one value chain, so we don't go and do that.

Robert Moskow - Credit Suisse

Okay. But aren't margins at least typically higher in certain elements of your business, can you give us any kind of sense of how to think about the disparities of how those businesses work or you don't look at it that way?

Steven Mills

No, I think there is several ways to look at it. As we evaluate each of the business, there is always a different mix of assets we've got, for example, Ag Services carries a lot more working capital, processing divisions by definition have more fixed assets, but we look at -- as we look at projects here and returns, we are looking at every project one at a time, look at it as a standalone, we look at it how it leverages the rest of the business. So, we test, we clearly test every decision to see how it fits into the whole.

Patricia Woertz

If you look at IRR, pay back, as well as RONA for any particular set of projects and as Steve said, it really depends on how it fits.

Robert Moskow - Credit Suisse

Okay. And just one quick follow up, on corn you actually sound a little more optimistic than I thought on the profitability outlook for corn syrup. Are you saying that the higher selling prices plus maybe some by-product credits are helping you there? I thought that the by-product values were very, very weak in corn and that would actually hurt profitability going forward. Are you seeing something different?

John Rice

By-products credits are less but also corn's down from a time. We are seeing lower oil prices, lower DDGs and meal prices. But I don't think its anything out of the ordinary. I guess what I am more concerned about maybe this year is just the volumes. We are seeing lower volumes in starches, we're seeing lower volumes in soft drinks. So maybe the operations may have to run a little less which could raise our operating cost, so that would be a little bit of a concern, I guess on our side.

Robert Moskow - Credit Suisse

If corn continues to track down from here, John, do you think that would be a benefit to your margins going forward?

John Rice

We always like to say that cheaper corn is benefit for our margins.

Robert Moskow - Credit Suisse

Okay, thank you.

Operator: Your next question comes from the line of Ian Horowitz of Soleil Securities. Please proceed with your question.

Ian Horowitz - Soleil Securities

Good morning everyone.

Patricia Woertz

Hi, Ian.

Ian Horowitz - Soleil Securities

I assume that the lack of update on the capital projects means that kind of everything is still kind of going on track and on course?

Patricia Woertz

I would say the lack of update is more -- it's the middle of the winter here. So one question is we always try to update once we get to the spring. Secondly, as I mentioned we're kind of reviewing all relative to optimizing costs. We think we can find some optimization here in some of this deflation area time. We will update you on the next call as far as anything we learn with that review.

Ian Horowitz - Soleil Securities

Steve, in the past you guys have offered up cost per metric ton produced, are you guys not going to be delivering that segment anymore?

Steven Mills

I don't think that we're going to do that. We put it out there. There is no question, cost is a important to us, but that particular metric just didn't seem on a consolidated combined basis that when we look at cost it's more from an internal perspective. That number just didn't seem to be working on the outside, which we have and just as an addition we have established a cost team in the organization that is poring through every cost, everywhere looking for best practices, prices that we can optimize. So it's always been a focus of ADM in my long career here, and I think it will always continue to be. But we just thought that the metric itself just wasn't -- didn't turnout to be as useful as we thought it would.

Patricia Woertz

And each organization has cost metrics that are really valuable to them, but one across the entire organization per metric ton we thought was a short at it. I'm not sure how useful it really was. So we continue to look for one that works for all of ADM, but frankly what really works is the ones with the individual plant, the organization than the individual business segments.

John Rice

So we thought just even currencies played so much would affect the cost per metric ton. The metric itself exactly like Pat said just doesn't seem to work out like we anticipated.

Ian Horowitz - Soleil Securities

Okay, understood. Steve, in this upcoming, actually in the second calendar quarter, will we see the reduction in debt on your balance sheet due to the, because of the Telles JV?

Steven Mills

I guess I didn't follow that completely. I'm sorry.

Ian Horowitz - Soleil Securities

When the Metabolix JV comes on line, which I think is in the calendar second quarter of '09, will we see a debt that you're carrying on your balance sheet move into the Telles JV or would have no effect on your balance sheet?

Steven Mills

It will have really no impact on the balance sheet. The way the JV works, we're pretty much the funding mechanism for this, so we don't see much change when that comes on.

Ian Horowitz - Soleil Securities

Those costs associated don't then move into some sort of off balance sheet Telles financial statement?

Steven Mills

No, we had essence ADM is a creditor to the joint venture. And I mean eventually the joint venture will be a standalone company and once it gets rolling etcetera but it won't have any material change to our balance sheet.

Ian Horowitz - Soleil Securities

Okay.

Steven Mills

When we see our future.

Ian Horowitz - Soleil Securities

Okay. And then question for John. We see something 2 plus billion shut in of capacity right now in the Ethanol business. I am just wondering what your opinion is on how this will kind of roll-out, I would assume that some of this capacity just never becomes or has a difficult time kind of surviving through this environment. But do you see that there is some portion of this capacity rolling back online possibly in different ownership structures as demand kind of rose?

John Rice

Actually the possibility is for all that. We've been through this in lot of our industries over the history of the company. For everybody, the exuberance of this industry, everybody just comes out and builds the plant without the financial backing and knowing that things are going to turn around and turn negative for a little bit of the while. We when -- as Steve said we came in with our eyes wide open, and we felt like we're going have a downturn in this industry for a short period of time. Somebody's plants I don't feel yes, we will start backup others probably will start backup with new ownership. A lot of it has to do with the cost structure, how well they can manage their corn position and get the ethanol to the different markets around the United States, do they have the infrastructure to be able to handle that, and do they have the wherewithal to be able to handle the byproduct credits. It's not just what the byproduct credit is in their local market but what's the whole world situation. So that's where we are at that gives us I think our distinct advantage in this whole market.

Ian Horowitz - Soleil Securities

Yeah and I kind of agree and so when I look at the difficulties that may present themselves for the remainder of this calendar year in Ethanol and how that the mandate will be serviced in 2009. When you agree that in 2010 we are kind of -- we are going to be a much more physical market and those kind of left with large position of the capacity we will be able to take advantage of potentially a much better environment where this won't be as much of a credit driven market as it will be truly inclined with the physical mandate?

John Rice

Yes, the numbers right now would indicate that, that near the end of 2009, early 2010 that the market should come back into more balanced supply and demand.

Ian Horowitz - Soleil Securities

Okay.

John Rice

And the rents (ph) won't be carried over either.

Ian Horowitz - Soleil Securities

Alright. So 2010 I mean the way it is structured right now will have zero excess rents, correct?

John Rice

I don't know if zero is the right number. But potentially yes.

Ian Horowitz - Soleil Securities

I don't know if zero right answer but something significantly less than we have now.

John Rice

Correct.

Ian Horowitz - Soleil Securities

And then the last question, I will get back in queue. Can you give us some indication of enforcement of this RFS, what we are hearing is that kind of everything has been shelved for the time being with the new administration about how to on all different kinds of the policies. And I'm not quite sure with the timing of an enforcement program and how or why blenders are -- you've been concerned about RFS right now when there is no economic incentive to blend ethanol and there is no enforcement of the mandate?

Patricia Woertz

Well, two things and one is, I think the current administration as they look towards their whole set of priorities when you look at the energy piece, there is support to continue not only the RFS but continued support for bio fuels in general first and second generation and implementation or enforcement there of. So, that's -- as a general statement, that's not a lot of specifics. And your other part of the question was just related to what incentive, I mean blenders need to meet mandated requirements and then it is an economic incentive above that to blend greater balance.

Ian Horowitz - Soleil Securities

Why do they need to meet mandated requirements now when there is no enforcement of -- there is no real penalties for missing blend levels?

Patricia Woertz

No, they're complying with the rules and we're seeing that in the market, we're seeing compliance.

Ian Horowitz - Soleil Securities

Okay, thanks. I'll get back in the queue.

Patricia Woertz

Okay. Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Chris Bledsoe with Barclays. Please proceed with your question.

Christopher Bledsoe - Barclays Capital

Good morning.

Patricia Woertz

Hi Chris.

Christopher Bledsoe - Barclays Capital

You had mentioned just a couple of months back, I think it was in Cedar Rapids about doing more work on replacement costs. I was just wondering if you had -- where you are on that analysis, if there are any interesting findings on it, and probably most importantly whether your share price currently implies discount to the implied enterprise value?

Steven Mills

Frankly, we haven't spent a lot of time on it Chris. And along with the priorities, it just hasn't risen high enough to do it. So it's a fair question and we'll put it in the queue, but it's just not at the top of the list right now.

Christopher Bledsoe - Barclays Capital

Okay. Also it sounds to me just from listening to your prepared remarks, there was sort of an element of maybe managing expectations, a bit about the outlook and I can certainly understand, where that would be coming from with the magnitude of the macro headwinds that are sort of out there. But in recent quarters, you've put up some outsized gains, and it seems to me that has really been driven in those small part by the organizations intellectual capital, so risk management and proprietary activities. Are you basically now saying I guess that the and I don't want to put words in your mouth, but I'm just trying to understand if you're now saying that the organization, just from kind of intellectual capitals perspective maybe didn't enter pay views of the magnitude or the duration of some of the macro headwinds in this current downturn and that therefore we shouldn't expect these outsized gains in coming quarters?

Patricia Woertz

Well Chris, first of all, we're not trying to manage expectations. We're trying to share with you everything we can relative to our knowledge about the markets that are relevant to our analysis both looking back and then sharing current market conditions. So, we know a lot about markets, but markets change and the investment in the intellectual capital we'll say that we can capture those market changes as they occurred taking advantage of our network and understanding where products are needed, but you can't forecast something that don't you know the extent of the change. So yes, that intellectual capital is there to do and absolutely optimize and I think excel at that risk management, at that use of the network but markets change.

Christopher Bledsoe - Barclays Capital

Okay. So I certainly understand. And it's not so much a change even that I am sort of asking about rather than sort of... I mean it was more kind of extraordinary event in prior quarters, a thing that you were able to sort of take advantage of in some of those simply not repeating themselves necessarily or from intellectual capital perspective not necessarily being able to repeat those types of gains but I certainly understand what you're saying, it really just depends on the opportunities as they present themselves and that's not necessarily something that you can forecast.

Patricia Woertz

Yes, you said that quite well. And I am not saying we can't repeat it, so I am just saying we don't know markets change.

Christopher Bledsoe - Barclays Capital

Okay, I understand. And then if I sort of contrast that to some of your peers who looking at calendar 2009 and I think anticipating a back half recovery and may be that's not so much comment about just kind of intellectual capital and the ability to get themselves on the right side of the trade as much as it is just the broader macro environment expecting a back half recovery. Is that based on what you are seeing in your major end market and a sort of a level of duress that you understand some of these end markets to be in right now. Is that even a reasonable expectation for a kind of back half recovery, setting aside what it may mean or may not mean for ADM results, just from a more macro perspective?

Patricia Woertz

Well, who knows in some cases we -- I often ask when I am with different colleagues whether it is ADM or (inaudible). Where we in the second or third inning of this game or are we are in the ninth inning of this game and the answer is everything in between including whatever particular market you are involved with, if you are involved in electronics business, you have a different view than if you are involved in Ag, you have a different view if you are involved in Europe or Asia than you might in the U.S.

So I think it really depends, certainly we can't speak for our competitors, but I think that the basics message about ADM strength is that if it's a lengthier recovery or even a sooner recovery, we're extremely well positioned to and with the strong balance sheet to be able to work through this all if even if its short or lengthier and hopefully even increase our shareholder value with the opportunities presented.

Christopher Bledsoe - Barclays Capital

Okay. And then my last question would just be, in looking at Ethanol profitability relative to Sweetener profitability, this seems to be at least in the recent memory the biggest, kind of disconnect with HFCS type of returns and sweetener type of returns right now are pretty healthy for '09 but with Ethanol obviously very depressed.

So I think you used to get the question, are you concerned about capacity swinging into sweetener, so I guess I'm curious still on that front but also even beyond just swinging of capacity, are there ethanol producers that are in enough duress right now where they maybe looking kind of just salvage value of their asset and what percent of the assets, of the equipment going into in Ethanol facility, what percentage of that equipment can actually be applied to sweetener end market?

John Rice

To take a dry mill and make a sweetener product, very little of it, it will just be the elevator. It would be about the only portion of it. I don't see any of these Ethanol plants that takes a lot more capital to get into dextrose sweeteners. Lot of these other products that I don't see any of these plants doing that. All the contracting is done before 2009. I did mention where we -- there seems to be less volume in starches and sweeteners, so people may be running their plants a little less. We are -- that's why we are constantly looking at new produces we can make from corn such as PHA. We have Propylene Ethylene Glycol plant coming on, Lysac, it's a superabsorbent.

So we are always constantly looking at other products we can make from corn to help expand our corn and try and give us more flexibilities just for cases like this. Some of those will come on maybe this year and other's down the path, but that's what we are constantly looking at, for any type of environment because we are always lined up -- try the long term to increase our corn so when the demand's down it does effect our profitability and operating cost.

Christopher Bledsoe - Barclays Capital

I think its the other day that a competitor of your had commented on your Ethanol plant that they have got coming online and the flexibility to swing capacity but its still your view that that's essentially as zero sum if you are some game, I do understand the swinging of capacity?

John Rice

Any swinging of wet mill or dry mill capacity?

Christopher Bledsoe - Barclays Capital

Dry mill capacity?

John Rice

I think it's zero sum game.

Christopher Bledsoe - Barclays Capital

Yes, okay. Alright, well thank you.

John Rice

Thanks Chris.

Operator: There are no further questions at this time. I would now like to turn the call back over to Pat Woertz.

Patricia Woertz

Very good, thank you everyone for your questions and our comments today. We look forward to seeing many of you at Tangney which of course will be later this month. We've that noted in the last slide there, as far as our Tangney date and the next state of our next call. Thank you, bye-bye.

Operator: Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect. Good day.

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