Bunge Q1 2009 Earnings Call Transcript

Apr.23.09 | About: Bunge Limited (BG)

Bunge Ltd. (NYSE:BG)

Q1 2009 Earnings Call

April 23, 2009 10:00 AM ET

Executives

Mark Haden - Investor Relations

Alberto Weisser - Chief Executive Officer and Chairman

Jacqualyn A. Fouse - Chief Financial Officer

Analysts

Christopher Bledsoe - Barclays Capital

Christine Mccracken - Cleveland Research

Kenneth Zaslow - BMO Capital Markets

David Driscoll - Citi Investment Research

Vincent Andrews - Morgan Stanley

Robert Moskow - Credit Suisse

Christina Mcglone - Deutsche Bank

Operator

Good day everyone and welcome to today's Bunge Limited First Quarter 2009 Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Mark Haden. Please go ahead.

Mark Haden

Thank you Beth and thank you everyone for joining us this morning. Welcome to Bunge Limited first quarter 2009 earnings conference call.

Before we get started, I wanted to inform those of you who may not have seen it in the press release this morning that we have prepared a slide presentation to accompany our discussion of the first quarter results. It can be found in the Investor Information section of our website, www.bunge.com, under Investor Presentation.

Reconciliations of non-GAAP measures disclosed orally on this conference call to the most directly comparable GAAP financial measure are posted on our website in the Investor Information section.

I'd like to direct you to slide two and remind you that today's presentation includes forward-looking statements that reflect Bunge's current views with respect to future events, financial performance, and industry conditions. These forward-looking statements are subject to various risks and uncertainties.

Bunge has provided additional information in its reports on file with the SEC concerning factors that could cause actual results to differ materially from those contained in this presentation, and encourages you to review these factors.

Participating on the call this morning to discuss our first quarter results are Alberto Weisser, Bunge's Chairman and CEO; and Jackie Fouse, Bunge's Chief Financial Officer.

And now, I will turn the call over to Alberto.

Alberto Weisser

Good morning everyone. The start to 2009 was more challenging than expected. Bunge's first quarter results reflect this. Retail fertilizer margins in Brazil suffered from aggressive price reductions by competitors, which drove sales prices below international levels. Many local retailers have been facing liquidity issues due to tighter credit.

Additionally, global demand for soybean meal was soft. Despite this difficult start, our confidence in the recovery in all our markets and a solid performance in the second half of the year remained strong.

We are working through our higher cost fertilizer inventory and the supply of fertilizer products in the Brazilian retail channel has been reduced by approximately 30%, since the end of 2008 and is approaching historical seasonal levels. Both of these facts should improve margins as the year progresses.

Higher commodity prices resulting from tighter global oilseed stocks are supporting farm economics, and should help stimulate sales of fertilizer products in the second half of the year when South America enters its major planting season.

Since mid-January, the USDA has reduced its estimates for global soybean production by nearly 15 million metric tons, mainly due to the weather related production issues in South America.

Global soybean meal consumption in the first quarter fell by roughly 6% compared to the same period in 2008. While this figure represents a relative improvement over the 9.5% year-over-year reduction in the fourth quarter of 2008, consumption was slightly lower than expected.

We are however seeing signs of stabilization in the poultry and pork industries and we estimate soybean meal demand for the calendar year to be up about 1% versus 2008.

Fears of lower demand for our core products have historically been short lived and the products and services that we and our industry provide are necessary in all types of economical climates.

Looking ahead, the world will need good harvest in North America in 2009 and South America in 2010 to alleviate tight agriculture commodity stocks and meet recovering demand. We believe Bunge is well positioned to benefit from these opportunities. I will now turn the call over Jackie who will discuss our quarterly results.

Jacqualyn A. Fouse

Good morning everyone. Thank you for being on the call this morning. Starting with the highlights from the Bunge Limited income statement and the segment results. Agribusiness volumes benefited from growth in our sugar business and the addition of our two new plants in Russia and the Ukraine.

This volume growth pushed the total Bunge Limited volume evolution into positive territory. Agribusiness EBIT was positively impacted by solid profits from our growing businesses around the world which posted results higher than last year, but these were more than offset by a loss for the quarter in oilseed processing as margins for soybeans were negatively affected by weak global demand and substitution by other products.

Fertilizer volumes for the quarter were sharply down versus an outstanding quarter last year in 2008. The quarter's fertilizer EBIT was significantly negatively impacted by our high cost inventories as well as the effect of heavy discounting of local process by retailers in Brazil.

These losses include a write down in inventory as of March 31st of $64 million and that write down is the result of using the same accounting methodology that we have consistently applied historically and was driven by the fact that local selling process in Brazil diverged from international prosperity during the quarter and as of the end of the quarter, fell below our cost.

The results also include approximately 150 million of FX recovery, so they are net of that. And that is out of the balance of about $250 million that we carried over from 2008.

Food products volumes grew due to our milling business. EBIT was positive well below the first quarter of 2008 due to lower margins caused by higher cost crude oil inventory and competitive pressures and the weak demand environment. The magnitude of the fertilizer losses pushed the total Bunge Limited result to a net loss.

With respect to the balance sheet, our balance sheet and financial position remained very healthy. Operating working capital as of the balance sheet date did not change appreciably versus year-end 2008. Though inventories and receivables both came down, this was offset by lower payables in the fertilizer business as we stopped importing into Brazil.

Our continued focus on working capital efficiency led to a further reduction in our cash cycle days and gross debt levels remained close to those at the end of the year 2008.

The negative cash flow from operations for the quarter was caused by the net loss and by a modest increase in working capital usage, driven by the change in fertilizer payable and in total was in line with the cash usage of the first quarter of 2008. Furthermore, we continue to prudently manage our capital expenditures.

We maintained our solid liquidity position with over $3 billion of committed availability as of March 31, 2009, and we expect to sustain our position of this order of magnitude throughout the year.

During the quarter, we took the opportunity of testing the commercial paper market for receptivity to Bunge Paper and found that we were able to reactivate this funding source at relatively attractive rates.

Turning to the outlook for the full year, the first quarter of this year turned out to be more challenging than we had anticipated and we do not expect to be able to make up for the losses incurred in Q1, despite the fact that we are confident in the solid second half of the year. Therefore, reflecting this expectation, we are lowering our full year guidance to $4.90 to $5.40 per share.

We continue to see farm economics as well supported and believe this should encourage fertilizer purchases.

We also think that soybean meal demand should improve throughout the year.

At the same time, the challenges we saw late last year and during the first quarter of this year persist with respect to the macro-environment for credit and the uncertain global economy and we as well are still working through high cost inventories in, both fertilizer and to a lesser extent in edible oil.

With that, we'll open the call up for Q&A. Thank you.

Question-and-Answer Session

Operator

Thank you. And the question-and-answer session will be conducted electronically. (Operator Instructions). And we'll take our first question from Chris Bledsoe with Barclays.

Christopher Bledsoe - Barclays Capital

Good morning.

Alberto Weisser

Good morning, Chris.

Christopher Bledsoe - Barclays Capital

Just a question on, I guess, I had always thought of your food products division as sort of a natural hedge within the business. So that in a inflationary environment, the lag effect might cause a profit squeeze in that division and then in a deflationary environment vice versa.

But in -- I guess it looks like one of the biggest shortfalls versus my estimates within that division actually, and it appears that that's a function of holding higher cost inventory and then I guess I am just wondering why choose to give away that natural hedge and essentially hold greater inventory levels in that business?

Alberto Weisser

The level of inventory has been the same. We carry a very little inventory in this area.

The two main reasons for the variance, the negative variance was first of all, we had a very good first quarter last year. But secondly, there was a lot of pressure in two regions in the world, Eastern Europe, and also in Brazil by competitors selling on the market.

So they sold at the prices at the level that was much, much lower than they should have. So there's a competition going on in Brazil between two large players meat players that got into the margarine and some partially in the edible oil business, and as also in Russia, we have seen some competition of some of the competitors going against our new efficient plant.

So it's a mixture of last year higher margins, this year competitive environment, but the inventory situation is probably a minor issue here.

Christopher Bledsoe - Barclays Capital

Got it, okay. And when you talk about kind of looking into the back half and seeing a recovery, partly on stabilization and chicken and pork, what exactly are you talking about stabilizing in chicken and pork. Is that their profitability stabilizing or is that off their production levels stabilizing? In all of the forward-looking indicators that I see and that's more, much more U.S. centric still point to contraction well into the back half of 2009?

Alberto Weisser

When we talk about the environment in the livestock industry, first of all, we want to make sure that our main customers are profitable and what we see is that in the poultry industry, in the poultry sector, the margins have been improving recently. Probably as not sufficient yet long term, but short term, it has been improving, that is on the one side.

We see that on the hawk side, the margins are still not very attractive, but at least they are all going up or stable, number one. Number two is that the supply picture is also more imbalanced with the demand. So there is not a pressure of having to reduce further the supply.

Now, that is for us very important that the environment is stable. And when we say that we expect the soybean meal demand to be up 1%, obviously this is not extremely high especially when you think about the second, the last quarter of 2008, the soybean meal demand was down 9.5%.

So on a year-over-year basis versus 2007, it is probably lower. So we are not assuming a drastic improvement in the environment of the livestock sector. Now what is more important for us; one, obviously one very important is that the industry is operating at least at the level where they are earning money and operating decently, but what is very important for us is also the crush margin structure, and that has improved. Reacting to the lower demand picture, we also have a lower supply.

The South American supply has been reduced by the difficult weather situation by something like 15 million tons, that's the USDA statistics. We are starting to see that it's probably even less than that.

The more recent indication show the Argentina's shortfall in the soybean production is even less and that has made that the crush margin expanded and they are attractive and they are normal. So that was necessary for our industry having a smaller demand, but the crush margins are fine.

Christopher Bledsoe - Barclays Capital

Why would crush margins expand if the input is raw soybean? Why would crush margins expand if the available supply of soybean is contracting?

Alberto Weisser

You have less production from Argentina. There is the pipeline in the livestock sector is very small. So the meat industry is needing all the soybean meal. So we have a nice premium from the demand on the soybean meal is a mixture of less production, crush production from Argentina because of less soybeans plus the livestock industry working hand-to-mouth. So, it came, not from the oil side the increase in crush margin, it came from the meal, soybean meal side.

Christopher Bledsoe - Barclays Capital

Okay. I'm going to -- I appreciate it. I'm just going to jump back in the queue.

Alberto Weisser

Okay.

Operator

And we'll take you next question from Christine Mccracken with Cleveland Research.

Christine Mccracken - Cleveland Research

Good morning.

Alberto Weisser

Good morning, Christine.

Christine Mccracken - Cleveland Research

Relative to that shortfall in the crop in Argentina, we've seen a fairly hefty pick up in buying activities from China. I think you mentioned it in the release. Can you talk about what might be behind China's extraordinary, I guess, interest in soybean inventories right now and, if you expect that to continue?

Alberto Weisser

We really don't know this, Christine. But I think everybody is seeing that we're going to have very, very tight stocks at the end of the southern hemisphere harvest. So by September 1st, we probably are going to have the tightest stocks in five years. So it's probably much more precautious measure by the government to make sure they have enough supply.

Christine Mccracken - Cleveland Research

And I guess that sets out for a fairly good incentive for farmers in South America, particularly with the economics relatively good now. Can you talk about the credit situation and where that stands today in terms of the banks willingness to lend and if you've changed your position relative to lending the farmers down there?

Alberto Weisser

Yeah. You're right. That is the tight stocks and are the main drivers why the commodity prices are so high. And if soybean prices need to be higher, normally corn prices follow, because otherwise the U.S. farmers will stop planting too much soybeans. So that is one of the reasons we see these high price and there is a risk that they even might go higher. So that is very positive for the South American farmers, for the North American farmer also. And, therefore, we see strong indications of demand for the fertilizer products.

Now credit, I think we will see the same situation we saw last year, which is the agro business sector. We -- the food processors, the crop input sellers are all going to be very careful with credit like we were last year. We are not changing significantly our policy this year and what -- who has jumped in to help on the funding is banks and government. But also with now two years in a row where the farmers have made good money, they are much more capitalized. So we see very strong indications, very strong demand indications from the farmers. We don't expect to have to give significant amount of credits.

Christine Mccracken - Cleveland Research

All right. Just one last question. It looks like the ending numbers are putting a recent pick up, I guess, in fertilizer production. Can you talk about whether you're ramping up production at your mines and if you so expect to expand phosphor demand?

Alberto Weisser

Yes, this is the time of the year where we have to start producing the raw materials. The issue we had in the first quarter was much more with the imported materials, so the retail part of the business, the commercial aspect, the retailing. Now this is -- all the mines have to produce significant amounts for the production that will be needed for the second half of the year.

This is becoming a normal year, not like the last two years where 30, 35% of the demand is in the first half and 65, 70% in the second half. And just to keep the same amount of volume, the fertilizer volume that we had last year, we need all this production. And this is also because of the tight credit situation. Not every blender, not every retailer is being able to import materials. So, there is going to be a strong demand for the domestic production.

Christine Mccracken - Cleveland Research

Okay. I'll leave it there. Thanks.

Operator

And Ken Zaslow with BMO Capital Markets. Please go ahead.

Kenneth Zaslow - BMO Capital Markets

Hey, good morning everyone.

Alberto Weisser

Good morning, Ken.

Kenneth Zaslow - BMO Capital Markets

Just let me know if you can't hear the question. So if I look at the back half of the last three quarters, it's going to be your single best year ever in the last three quarters, how is that possible? Can you help us bridge that? It doesn't make any sense?

Alberto Weisser

We feel that Ken, we have mentioned it in the past that we have to look at it always on a yearly basis. And so when you look at the whole year, obviously we will not be able to make up, as Jackie said the first quarter. But when look at agro business and food and you look at our whole year estimate that is something that should be possible. Obviously, the demand is not as strong as we wanted, but we expect the margins to be there.

Now on fertilizer, at soybean prices of $10, in excess of $10, the farmers are very profitable. Let me tell you the breakeven in the farthest part of Brazil, we're talking about Brazil here. And the method we will also breakeven is something like 790. So they are very healthy. They will find the money to buy the products. We should not mix -- the problem we have in the first half, in the first quarter and in the last quarter of last year is really these high cost inventory that we bought in the first half of last year that now are not completely, but mostly, sold.

So the new harvest should be normal, a very good harvest, and very good production and the farmers are in very good shape. And the government is ramping up with the credit lines and we are comfortable that this should be a good second half in fertilizer and in oilseeds and in also in food products.

Kenneth Zaslow - BMO Capital Markets

How much of the loss this quarter was because of the high cost of inventory and what would that be for the remainder of the year?

Alberto Weisser

The losses in the quarter, mostly of it is high inventory cost.

Jacqualyn Fouse

That's correct Ken. And I think if you look at the split of the profit between the first quarter and second nine months, I mean, we originally believe that it will heavily weighted to the second half of the year. We continue to see that and even more so I would say and if you back into the implied numbers for the second nine months, you'll see that we did lower the net income estimates for those in the range of probably something between 80 and a $100 million versus our original expectations for the nine month. The biggest issue here has been that high cost inventory in getting it worked through with of it coming in the first quarter.

Kenneth Zaslow - BMO Capital Markets

I guess what you said, does it sound like do you think that the farmer is going expand acreage next year?

Alberto Weisser

Well, we are not expecting that. But because we are not planning for that. So, everybody is being very careful. But the used, it was not expanded last year and you remember that fertilizer demand was down 9%. So, they did not use enough fertilizer. And that is why some of the yield was low as well. So, weather capitalization they have in all the two years in a row was good margins. We have very, very strong indications that they will use probably the same amount of fertilizer that we sold last year at least.

Now we have to remember that the tight stocks worldwide indicate that we are going -- there is very, very significant risk that we will see in higher soybean prices between now and the end of September. It's the lowest level in five years. So it is -- everybody is seeing it. The farmers are seeing it. They are lining themselves up to buy the fertilizer.

Kenneth Zaslow - BMO Capital Markets

Okay, and then my next question is, will you be profitable this quarter?

Alberto Weisser

You know how difficult it is for us to plan quarter, as we look at it on a yearly basis. But I would dare to say, might be in trouble with Jackie, but we should be slightly profitable.

Jacqualyn Fouse

The biggest trouble Ken is going to be the local fertilizer price, so.

Kenneth Zaslow - BMO Capital Markets

Okay and then the last question, what's the historical relationship between soybean prices and soy crush margins. How does that usually work?

Alberto Weisser

There is not too much relationship there. They are -- when you look at, there is not a very good correlation between margins and soybean prices.

Kenneth Zaslow - BMO Capital Markets

So are you would actually make margins in a higher soybean environment? Or you don't care if the price of soybeans is high?

Alberto Weisser

It is not automatic. It's not automatic. But when soybean prices are high, there is a tendency; there is enough money for the farmers. So there is a little bit of an expansion in the margins. When soy prices are lower, normally we make it up to more volume.

Kenneth Zaslow - BMO Capital Markets

Alright.

Alberto Weisser

So margins tend to be a little bit higher in high soybean price environment.

Kenneth Zaslow - BMO Capital Markets

Great, I appreciate it. Thank you.

Operator

Now we'll take our next question from David Driscoll with Citi Investment Research.

David Driscoll - Citi Investment Research

Hey, thanks a lot. Good morning everyone.

Alberto Weisser

Good morning, Dave.

David Driscoll - Citi Investment Research

Alberto, with the soy meal demand, as you mentioned in your prepared script, down 6%, I think I am a little confused on some of your comments here regarding the 1% full year number because that mathematically then has to work out to be a fairly sizable pick up in terms of growth in the future quarters. If we and right now everything that I am seeing would say that second quarter would also be down quite significantly similar to the first quarter. That puts a much larger onus on Q3 and Q4 to see soy meal demand actually reach 1%.

What's your confidence in this number? It feels optimistic to me, but you are the expert. What's, what am I missing here? Why should I be more confident in this growth?

Alberto Weisser

I would use the best way always to do it, the way we also do it is let's use the USDA figures. The USDA figures show that on a per harvest year-to-year basis. So, October '08 to September '09, soybean meal demand will be down 2.5%. So, but the last quarter of this year doesn't need to increase significantly vis-à-vis the fourth quarter of '08 because the fourth quarter of '08 was down 9.5. That is why, I mentioned on an earlier comment 1% up doesn't mean a lot. So, because probably vis-à-vis '07, it's less, but we are now working off a lower environment.

So, we are not saying that we are see very, very strong demand. We're seeing a sluggish demand, but at least it is not going further down. So, that is what we are saying, stabilization of the environment, which I think is positive.

Jacqualyn Fouse

And based on where we're coming from, improvement throughout the course of the year, on weak comps from last year as Alberto said.

David Driscoll - Citi Investment Research

Right, understood. Of course, again mathematically that has to be true otherwise there's no way to get to one. The follow-up I would have for you, Alberto, is November '09 new crop bean prices have not moved very much. Your comment seem in direct contrast to this. Why do you think that new crop bean prices have not rallied?

Alberto Weisser

No, because I think the concern is that we -- it's more about the old crop situation that people are worried, because we will end, once you have the new crop, it's a new environment. That's the beauty of our business; everything resets itself. And what people are worried about is the old crop. And, but even with the normal -- that's right. We just mentioned in the prepared remarks, we need now a good harvest in the northern hemisphere and another one in the southern hemisphere in '10. So that we get back to normal inventories, because the land's available we needed both, for soybeans and for corn. And there is additional demand for corn because of the ethanol and we need the additional demand for soybeans because of the tight stocks.

David Driscoll - Citi Investment Research

So you think that with the planning intentions report from the USDA on bean acreage, you think that's enough and that there is not necessarily the need to see new crop bean prices actually rally?

Alberto Weisser

That we don't know, Dave. But it is -- we're seeing even a poor crop in Argentina then the last year USDA report has said. And it's not only Bunge, I think the whole industry is seeing that. So the drought was probably more severe than we all expected. It was not only on acreage, but also on yield.

David Driscoll - Citi Investment Research

One final question. Jackie, can you give us the indication as to what's happened to MAP prices, at the retail level in Brazil. You made comments here that this has moved. So moving back on the January call you were optimistic on this. And now today you're telling us that there was intense price competition. Can you give us some numbers so that I can understand it? How did it start in January? How it ended in March? And what's the feeling or what's the actual experience right now at the retail level on phosphate prices.

Jacqualyn Fouse

Well, as we started the quarter, what we saw is that local prices basically maintained their parity with international prices. There is always some degree of discount to a list retail price that is based on some kind of historical average, though it can be anywhere from maybe 10 to 25% or something. But that's normal. But the parity relationship was maintained. And then as we moved through the quarter, we started to see that breakdown as some of the smaller retailers needed cash and then started. Everybody tried to hold the line and then started to discount more heavily, because they needed the cash. So, that took place over the course of the quarter. And as regard towards the end of the quarter, we were seeing discounts substantially higher than they typically would be.

David Driscoll - Citi Investment Research

We're citing 10%, 20%, what's the number?

Alberto Weisser

It's very difficult to see it, because these prices are -- they are very different in the northern part of the Brazil and the southern part of the Brazil, in the interior. So it's very difficult to pin in down exactly. But it was significantly discounting.

David Driscoll - Citi Investment Research

How much risk do you have on potash? We haven't seen those prices really crack. There is the chance that they do. If they do, does that put your earnings at risk in the back half?

Alberto Weisser

There is always a risk with price, like we have with margins, with everything. So, but I believe that even in North America, the farmers have delayed significantly the timing in terms of when to buy, when you just -- when you see the crops that we need worldwide. The demand should be back and should be strong for fertilizer. So if there's not enough production, we should see a convergence of prices.

Also I'd like to always remember that we need to see phosphate prices getting closer to 450 to $500 per ton, because that's the kind of prices that are needed for our Greenfield plant to be profitable. So if the prices stay too low for too long, you will not see additional production and then you will see further spikes in the future.

David Driscoll - Citi Investment Research

Thanks for all the comments. Certainly, I understand the difficulties. Thank you.

Alberto Weisser

Thank you, Dave.

Operator

And Vincent Andrews with Morgan Stanley. Please go ahead.

Vincent Andrews - Morgan Stanley

Thank you. I guess a few things. One is just I wanted to understand. Let's just start with the oilseed processing. Jackie, did you say you lost money in oilseeds processing in the quarter?

Jacqualyn Fouse

Yes.

Vincent Andrews - Morgan Stanley

But that, I guess where I'm confused isn't that a spread business?

Jacqualyn Fouse

Well, and you also have mark-to-market. It gets better at the end of every accounting period that if crush margins have improved in the future. Well that number can be negative and we can recover some of that later, but.

Alberto Weisser

But, Vincent the situation was that we had a dramatic reduction in demand. And so we had substitutions. So there was not enough demand for soybean meals. So the crush margins were low. So when you look at it between the end of '09 -- '08 and beginning of '09, the crush margins were low. They recuperated at the end of the quarters and they are fine. You can see it on the boat (ph) crush, but it was basically a situation of margins.

Jacqualyn Fouse

Yeah, I think we even spoke about it maybe in February, where we saw the U.S. margins sort of bottom in November, December. They got quite low.

Alberto Weisser

Plus the farmers were very, very slow in selling. So they capitalized. So you had a reluctant farmer selling and slow demand that really reduced the margins like we haven't seen in a while.

Vincent Andrews - Morgan Stanley

I guess I just -- is this the first time you've lost money in this way or has this happened before in the past?

Alberto Weisser

It was a small amount. So, we have seen that before. Normally, this evens out during the year. You have moments in the quarter where you have these kinds of situations. But having a 9.5% drop in soybean meal demand and then a 6.5, that we haven't seen in many, many years.

Vincent Andrews - Morgan Stanley

But the issue is really for me -- from a utilization perspective?

Alberto Weisser

Yes.

Vincent Andrews - Morgan Stanley

It wasn't an issue (ph) have you owned soybeans at price X and crush went to well below X?

Alberto Weisser

No. It's a slower demand and also the reluctant farmer selling. So we had to pay a heftier price for the farmers to get the beans and so there was a squeeze on the margins.

Vincent Andrews - Morgan Stanley

Okay. Then in terms of fertilizer, I guess, like everybody else, I'm trying to think about how your second half of the year is going to get you to the guidance as you put there and you -- I'm just confused because you lost on your fertilizer, but you got a foreign exchange reversal in the quarter of about a hundred and something million dollars and you have a little bit of that left. How --

Alberto Weisser

Let me. I know it's frustrating. It's also frustrating for us, because we have to separate the excess inventory that we have carried over from last year. There is not a lot of freedom what we can do with the provisioning and the write down.

So the rules are very, very clear. So there's only so much we could have done in December and so only, it's very clear what we can do and what we cannot do. So we have to follow the rules.

But when you think about these losses that we have in the first half, wheat is much more related to the retail buying and selling of imported products that we brought last year and we were unable to sell it all last year. Remember that during the year we have been saying that fertilizer demand in the country would up 5%, 6%, but the industry was talking about 10. It ended up being 9% down. So this is something like 4 million tons of additional imported materials that were not sold and that were bought at higher prices, plus obviously some input raw materials like sulfur and others.

So this, as it was not sold by the end of the year, it had to be sold in the beginning of this year. So this is not completely flushed out, but it is -- most of it is nearly -- a level that is nearly seasonal.

So this you have to mentally think of it as cleaning up of the dramatic changes last year. So when we look at this year. When you look at the business of this year, it is a very -- it's a pretty environment, high commodity prices, sugar is good, soybean's prices are good, corn prices are fine. So the main products from the -- are in good shape. The farmers are more capitalized. There is money from the government. There is more money from the banks. So, the outlook for the planting season in the second half, remember one-third first half, two-third second half is positive.

They are very -- I see very, very little risk for reduction in prices in soybeans. Five year, the lowest ending stock in five years, is -- it's quite amazing.

Vincent Andrews - Morgan Stanley

Okay. I guess that gets me to the point I'm struggling with is that you're basically raising your expectations for the back half -- for the 2Q through 4Q relative to what you said in January, but there's --

Alberto Weisser

No, Vincent it's the same. When you really look at it, our expectation is a little more or less the same. We are a little bit more confident now. We are not raising our expectations. So the only thing is we are a little bit more confident now.

Jacqualyn Fouse

Vincent, I think if you -- back into the numbers and we can walk you through that offline and you calculate what the implied net income is for the last nine months of the year, what you'll see is we have lowered that a little bit, but not a lot. It's basically taking the hits from the first quarter flowing it through. And then about $80 to $100 million reduction in the expectation for the other nine months, which is pretty close to being in line with where we thought before, but with a higher degree of confidence associated with delivering that.

Vincent Andrews - Morgan Stanley

Okay. We'll have to go through that with Mark offline and maybe the last question I have. The fertilizer issue was across all three nutrients. Is that correct?

Alberto Weisser

Less on potash.

Vincent Andrews - Morgan Stanley

Less on potash.

Alberto Weisser

Yes.

Vincent Andrews - Morgan Stanley

And Alberto what's your view or Jackie what's your view of the $750 a ton potash price that seems to be the new spot price in Brazil? Is that -- you think that's sustainable?

Alberto Weisser

I have no view there. Jackie?

Jacqualyn Fouse

I don't think I would dare to.

Vincent Andrews - Morgan Stanley

Okay. I'll pass it along. Thank you very much.

Operator

And Robert Moskow with Credit Suisse. Please go ahead.

Robert Moskow - Credit Suisse

Hi, thanks.

Alberto Weisser

Hi, Rob.

Robert Moskow - Credit Suisse

I guess what I'm trying to reconcile also is that you are, like Ken said, you're forecasting the next three quarters as really being a better performance for your business than it has been last year, than it was last year, than it was the year before and you think that the a table is set for better performance.

But it's very unclear to me whether you're saying that its demand driven. When I go through the comments it seems more like its supply driven this time around. You're basing it on because bean prices, supplies are low, maybe the fertilizer inventories are starting to work through.

But I'm not really getting the sense that there's any kind of tipping point here on demand, maybe you could just try to take one more shot at it to give some confidence that demand is not just stabilizing here but also has a -- sort of rebound. (ph)

Alberto Weisser

No. In the agribusiness, the last year was obviously was a very good year and we believe that '09 will be more in line with '07, below '08 but in line with '07.

So this is the way we normally do it. It's above cost of capital type of earnings. And the reason we are confident is that the way the market is structured is that it is fine in a sense that we are not going to -- we don't believe that we are going to see further deterioration in demand; that we will see a stabilization and which we are seeing already now; that we are seeing a better environment for the poultry industry which are profitable, and we believe that we should see improvement in the hawk industry.

So these are our biggest driver for all demand. And we have seen that vegetable oil has grown 3% in this quarter. Obviously soybean oil was a little bit lower. And overall, we have seen also recuperation of the margin. So, it's nothing -- it is not too much to be expected from the demand increase, but much more from a stabilization of the margins.

Plus, always when we have situations like where we have a dislocation in the market, where we have a smaller crop from Argentina, this improves the profitability in other parts of the world. And it has a positive effect in U.S., has a positive effect in Brazil, and that's the beauty of having this global network.

So even if you are a little bit lower in one part of the world, you, more or less, can compensate it with the other parts of the world. So we are comfortable that with a stable, not increasing demand but with normal margins, we will be able to perform well, not as good as '08 but in line as '07.

And in food demand, in the food side and food and ingredients, I think we have now some of the problems we had in the past with the volatility of the prices and the issues in Eastern Europe, I think, we have them behind us; we should see a positive performance on food products.

And on fertilizer, at the moment it's all about the issue that we do need the additional soybeans and corn. It's cynical. The world needs it. The inventories are so low and the proof is despite this economical crisis, soybean prices are above $10 and corn are above or close to $4.

So the market, the world needs these crops and so that means the farmers will have to plant it in the northern hemisphere and in the southern hemisphere. So that is why we are confident, we are very confident that even in an environment where perhaps the demand will be the same as last year, the margins will be good.

Robert Moskow - Credit Suisse

And then a follow-up there. You did mention the word substitution in the feeding of animals, I suppose, with soybean meal being phased out, I suppose, per week. What if that substitution effect continues? Would that hurt your demand outlook? And why wouldn't it continue? If they're substituting now, why wouldn't they just continue?

Alberto Weisser

No, it happened already. So, it happened, so, that's it. So, we are at a level. In Europe, it was a situation that we had two years in a row, very poor wheat crops. So, that is why you might remember that the second half of '07 was very, very powerful in terms of margins, because of that dislocation. And the first half of '08 also benefited from that. But this now adjusted itself. So, these substitutional type of feeds, wheat in Europe and DDGs in the U.S., it's in. So it's in the numbers. But that is why when you see the soybean meal being up 1%, it considers that we don't expect that they will be, that soybean meal will substitute these type of alternative inputs.

Robert Moskow - Credit Suisse

And where are you getting your quarterly estimates for soybean oil demand up 3%, soybean meal demand down 6%, where do you come with those?

Alberto Weisser

Wops, I probably gave you some internal -- our internal estimate. So it's probably not public. I am in trouble here, so.

Robert Moskow - Credit Suisse

Well. Thank you, anyway.

Alberto Weisser

Thank you.

Operator

And we'll take our next question from Christina Mcglone with Deutsche Bank.

Christina Mcglone - Deutsche Bank

Good morning.

Alberto Weisser

Good morning, Christine.

Christina Mcglone - Deutsche Bank

Alberto, I guess I know you talked a lot about fertilizer, but I wanted to just understand more specifically, when do you expect to be finished working through your high cost fertilizer inventory? And I think that you have sulfur contracts coming in now at lower prices. So are we seeing a lower average cost of fertilizers. Should we see that as we progress through the year as these sulfur contracts come in?

Jacqualyn Fouse

Christine, just with respect to sulfur, I mean we start to see some benefit from the new sulfur purchases in April, but we still got high cost inventory to work through. So over the course of the year the average sulfur cost is going to come down. But it will take some time for it to come down appreciably. And it should be down rather nicely in approaching spot prices, spot prices down at the end of the third quarter, something like that. So sulfur, the trend will be down, but it's going to take a little bit time based on the averaging for these new purchases to come in and the old inventory to be worked down and for that to come down.

Christina Mcglone - Deutsche Bank

And so for all of your fertilizer portfolio, do you think you will be at market prices by the end of third quarter when we're really in the heat of the fertilizer buying season?

Alberto Weisser

Yes. When you mean spot prices, yes. Most of it is already out by now, but sulfur is probably one of the one that will take a little bit longer, but also it's very difficult to say exactly when you might have some other stuff. But I would say most of it is out already now, and sulfur is the last one remaining until the second and third quarter.

Christina Mcglone - Deutsche Bank

Okay. And then Alberto, you talk about or the USDA, I guess this week talked about Brazilian corn and cotton goods being shifted to beans, and if intensely doesn't change. So you get the same application that you got last year. Would you expect fertilizer volumes to be up this year like phosphate oriented fertilizer volumes in Brazil?

Alberto Weisser

We have shown in the last two years we are -- although we try to be very careful, even though being careful, we get in trouble. So with higher inventory, you remember how careful we went into the season last year, but we still got into the trouble. So we are going to be very, very careful. There is -- I think there are probably more chances for an upside on demand for soybeans in Brazil, because of the very, very tight stocks. But it's early. The farmers normally start buying in June, because they start planting in September. So we still have some time to go. But early indications are very, very strong that we will have a very good planting season for soybeans. That is positive for Bunge, because most of our products we sell them SSP, which is phosphate products.

Christina Mcglone - Deutsche Bank

Okay. And then just last question on the crush margin side, you can see U.S. crush margins coming up sequentially since March with Argentina's presence diminished in the global market. My question is, will you be able to earn those margins; will you be able to have enough beans in the U.S. to actually process since supplies are low?

Alberto Weisser

Yes, because we had similar situation and perhaps not as tight as this year, but you remember that U.S. is still the second largest exporter of soybeans. What you would see is then starting U.S. to reduce their exports of soybeans so that there are enough beans for the domestic market. That is normally the way it works. And you would start seeing more beans coming from other parts for the export market. But for the domestic market, we believe, there will be enough beans for the livestock industry.

Christina Mcglone - Deutsche Bank

Okay. Thank you.

Alberto Weisser

And if worse comes to worse, you still can import meal from Brazil. So there should be meal from Brazil. So I don't think there is a worry for the livestock industry in the U.S.

Christina Mcglone - Deutsche Bank

Okay. Thank you.

Alberto Weisser

Welcome.

Operator

And we'll take a follow up question from Ken Zaslow with BMO Capital Markets.

Kenneth Zaslow - BMO Capital Markets

Hey, good morning again. Sorry, to prolong this call. But I guess what I am trying to figure out is, on the oilseeds side, do you expect a rebound in the merchandizing side or the crush margin side? And I guess that's my first part.

Alberto Weisser

It's more on the crush margin side.

Kenneth Zaslow - BMO Capital Markets

And then if I look at it regionally, U.S., Argentina, Europe, Brazil, how do you see that playing out? Where do you see the greatest recovery and where do you see more miles recovery? Can you give us some magnitude, because it's still scratching my head here?

Alberto Weisser

We feel that U.S. will be a normal type of environment; Brazil, a little bit better than normal and we should see Europe a normal type of environment; and Argentina, obviously, less because of less supply.

Kenneth Zaslow - BMO Capital Markets

So a normal environment plus a little recovery merchandising gets you to your back half numbers.

Alberto Weisser

Yes. Well, we look at it on a yearly basis.

Kenneth Zaslow - BMO Capital Markets

All right, I am good with that. And then the other question is, how much foreign currency benefit do you have baked into your SG&A for the fertilizer side? I'm assuming there has got to be some thing in there to get to these numbers again. Is that fair also?

Alberto Weisser

Not this year, not too much this year because remember we had some hedges for the year, both for Alimentos the food business and for the fertilizer. But some of them are now getting off. So, Jackie?

Jacqualyn Fouse

There'll be a little bit, but that's not going to be a material number.

Alberto Weisser

That benefit should be more for next year.

Jacqualyn Fouse

Yeah.

Kenneth Zaslow - BMO Capital Markets

Okay, thank you very much.

Alberto Weisser

Thank you.

Operator

And that does conclude our question and answer session for today. Mr. Haden, I'll turn it back over to you.

Mark Haden

Great. Thank you and thank you everyone for tuning in with us this morning.

Operator

And that does conclude our conference for today. Thank you for your participation.

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