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Executives

Dwight Grimestad – VP, IR

Pat Woertz – Chairman, CEO and President

Steve Mills – EVP and CFO

John Rice – EVP, Commercial and Production

Analysts

Robert Moskow – Credit Suisse Securities

John Roberts – Buckingham Research Group

Michael Picken – Cleveland Research Group

Christina Mcglone – Deutsche Bank

Ken Zaslow – BMO Capital Markets

David Driscoll – Citi Investment Research

Ian Horowitz – Soleil Securities Group

Chris Bledsoe – Barclays

Vincent Andrews – Morgan Stanley

Archer Daniels Midland Company (ADM) F3Q09 (Qtr End 03/31/09) Earnings Call Transcript May 5, 2009 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Archer Daniels Midland third quarter 2009 earnings conference call. My name is Owalia, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Dwight Grimestad, Vice President of Investor Relations. Please proceed sir.

Dwight Grimestad

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

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

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

Pat Woertz

Thank you, Dwight, and good morning everyone.

First I will begin with safety. During our third quarter, we reduced lost workday frequency by 8% and total recordables by 18% compared with fiscal 2008. We continue our program to implement values based safety at our facilities globally. And also next week, ADM holds our third Annual Global Safety Week during which we recommit ourselves to keeping safe ourselves and our colleagues.

Turning to our financial results, this morning we reported quarterly net earnings of $8 million or $0.01 per share, down 98% from the same period a year ago. Adjusted for specified items including two very significant unusual items, which we will discuss in a moment, our earnings were $225 million or $0.35 per share. Results were negatively impacted by two large charges related to equity investments. First, as we expected, we recorded a $132 million non-cash after-tax charge for our share of the currency derivative losses incurred by our Mexican affiliate Gruma. And then due to a restructuring of our Wilmar Holding Company, we had to record a $97 million deferred tax expense. And Steve will talk about each of these items in more detail in a moment.

Overall, operating results were generally weaker and all of our segments were down compared to last year's exceptionally strong third-quarter results. However, we do feel we performed relatively well given the global downturn, the tough economic conditions, weaker demand and reduced volatility. A few brief comments on the business this quarter. Oilseeds processing had slower North American demand, which benefited from export disruptions in Argentina and delivered strong growth European and South American results. Corn processing saw continued challenges in the ethanol industry as overcapacity, lower gasoline prices, and minimal incremental blending depressed ethanol margins. Higher sweetener earnings only partially offset the losses in bioproducts.

The agricultural services segment delivered its second-highest third-quarter results in face of significant contraction of market opportunities as the global crop supply increased and demand weakened. Going forward, we do see some promising signs in a few key markets. There have been draw downs in cold storage inventories of beef, pork and poultry, and we see steadying demand for gasoline, and of course we are monitoring H1N1 flu virus and related developments to understand any impact on our markets.

On the strategic front, this quarter we continue to execute our South American growth strategy as we acquired an oil bottling facility in Lima, Peru, converted a retired oil seed processing plant in (inaudible) Brazil to a fertilizer blending plant and expanded our elevator networks in Paraguay. We reported for the first full quarter our recently acquired rapeseed processing plant in Sraubing, Germany. The additional capacity helped us capture value in the face of reduced overall margins. Integration efforts continue at our Stratas packaged oil joint venture with Associated British Foods. We had our first production and deliveries of biowaste at USP glycerin at our new glycols plant here in Decatur. And we expect regulatory clearance for our acquisition of cocoa and chocolate producers, Schokinag, during the fourth quarter.

While these quarterly results were adversely impacted by the two significant unusual items, our underlying performance was solid in view of the global economic conditions and the associated challenges faced by our industry. Our financial condition is strong, and we remain focused on managing risks and costs as we execute our long-term strategy. Now I had the call over to Steve.

Steve Mills

Thank you Pat and good morning everyone.

Starting off on slide five, you will see our financial highlights for the quarter. Segment operating profit decreased $659 million or 72% this quarter and we will discuss the results on a segment by segment basis in a moment. I do want to mention however that included in the segment operating profit line is the 212 million Gruma currency derivative loss that we did discuss with you on last quarter's call. And this loss accounts for about a third of the overall decrease in segment operating profit.

Quarterly net earnings and earnings per share decreased as a result of the lower segment operating results and the tax items of approximately $97 million related to our Wilmar Holdings which caused our effective tax rate for the quarter to jump to 94%. As we look at our effective tax rate and exclude this unusual item, our tax rate for the quarter was about 31%, which is in line with last year's third quarter, and generally in line with our fiscal 2009 quarterly rate.

As to the unusual tax items during the quarter, the majority shareholders of one of the companies in which we hold a portion of our Wilmar investments initiated a process to modify the overall ownership structure of Wilmar. This process involved converting the underlying Wilmar investment from indirect to direct ownership. As a consequence, this conversion created a significant tax event for us here in the US, and we were required to record pieces of this tax expense in several different quarters. In this quarter, quarter three, we saw the first impact, which caused us to book tax expense of $97 million.

In the fourth quarter, we expect to see a further tax charge of approximately $60 million. And when the liquidation is complete, and we expect that to be 12 months to 18 months from now, assuming that the reorganization crosses all of the regulatory hurdles, we will see a final tax charge. This final tax charge will be based on the fair market value of Wilmar shares at that time. So it'll be difficult to estimate what that precise amount will be, but we base the calculation on yesterday's Wilmar stock price and exchange rate, and assuming the current US federal tax rate stays at 35%, and assuming regulatory clearance for this reorganization, the additional tax charge will be about $318 million. We didn't see much in the way of a LIFO charge this quarter, just a penny charge after tax, as commodity price levels were generally stable.

At the bottom of slide five, we have added a waterfall chart that shows the after-tax impact on our quarterly net earnings and earnings per share of the Gruma FX loss, the Wilmar tax item, as well as LIFO and other items. The appendix has a bit more detail on these items for the quarter as well as similar data for the nine months. Turning to slide six, slide six shows the summary of our operating profits by segment, detailing the changes in operating profit for the quarter and nine months.

Let's turn straight to slide seven to begin a review of each individual segment in more detail, starting with oilseeds processing. On a year-over-year basis, quarterly operating profit for the oilseeds processing segment fell $13 million and as you will see from the volume information in our appendix, our process volumes declined about 8%, principally in North America, as we adjusted our plant run rate in response to the slower demand. Crushing and origination results declined to $100 million for the quarter, due principally to weaker North American margins, as the slowing economy put pressure on crushing margins as product demand declined.

We did see some increased demand in South America and better crushing margins in Europe both in part due to opportunities arising from the disruptions in Argentina. North American soybean meal demand was down compared to last year as year-over-year animal numbers are lower. In South America results improved driven principally by increased grain merchandising volumes and margins, which overcame losses in fertilizers. Results in Europe were similar to last year supported by our ability to shift some production capacity among feed stocks to capture the best available margins.

Refining, packaging, biodiesel and other results increased $13 million for the quarter to $52 million, due principally to strong edible soy protein demand. Additionally, refining and packaging results are generally steady and the global biodiesel market acted in anticipation of a change in the duty structure in Europe, driving some short-term oversupply, which pressured both volumes and margins in Europe. This weakness in European biodiesel was largely offset by strength in South America as shipments in margin there rose to meet the growing Brazilian market as the biodiesel mandate there increases. Oilseeds results in Asia increased $53 million to $72 million for the quarter due primarily to improved earnings of our equity investments in Wilmar International Limited. We also recognized a gain in Asia for the quarter of $18 million related to the sale of an equity investment.

Looking at the crop update as we sit here today, last year's US soybean crop was about 2.96 billion bushels. As of April 9, the USDA projected a carryout at about 165 million bushels, and we're expecting crop updates next week. Current projections call for a smaller South American crop and the global soybean supply is projected to remain tight as reflected by the low stock to usage issue. In Brazil, soybean harvest is virtually complete and Argentina is about 75% done. US planting intention reports indicated that farmers expect to plant about 76 million acres of soybean, up slightly from last year. Current oilseeds market conditions show that global protein meal demand has slowed. Oil World reports for the crop year 2008-2009 that there'll be a global decline in protein meal consumption of about 1.2%. That is made up of a decline of 5% in the US, a 5% decline in the EU, 2.5% growth in Brazil, and an increase of 5% in China. And to put these projections in context, the crop year 2007-2008 protein meal demand grew at about 3.6% rate and the historical growth rate has been in the 4% to 5% rate.

Vegetable oil inventories are declining from very high levels which makes us cautiously optimistic on crushed margins going forward. At this point in time it is too early to tell the ultimate impact of H1N1 on pork demand.

Moving to corn processing on slide eight, corn processing operating profits fell $123 million to $49 million for the quarter as losses in bioproducts were only partially offset by improved results from sweeteners and starches, as we continued to work through higher net corn cost and we faced a very poor ethanol margin environment. As a reminder, our sweeteners and starches line includes the activities of corn sweeteners, syrups and starches, and the benefits from the transfer of starch at market price to the bioproducts group. Bioproducts results includes ethanol, both the ethanol we produce and merchandise, lysine, as well as other specialty food and feed ingredients, and it includes our new industrial chemicals business. Bioproducts also shares in its proportional share of the net corn costs incurred by the corn processing group including the related hedging results.

Sweeteners and starches operating profits increased over the prior year to $146 million p primarily due to higher average sweeteners selling prices, partially offset by decrease in sales volume and the higher net corn cost. This quarter bioproducts losses of $97 million resulted from lower selling prices for ethanol and lysine, versus the higher net corn loss. Looking at the crop update, last year's US corn crop of 12.1 billion bushels was the second largest crop on record, and the current estimated carryout of 1.7 billion bushels is considered to be ample. Corn exports from the US are projected to be 1.7 billion bushels for the crop year compared to 2.436 billion bushels last year.

US planting intentions report issued on March 31 indicated that farmers expect to plant 85 million acres of corn down slightly from the 86 million acres planted last year. Farmers are making good progress in planting corn in the western corn belt while wet weather has delayed planting in the eastern part of the corn belt. Assuming the anticipated corn acres are planted and that we have normal weather through the growing season, we should have an ample supply of corn to meet all needs, including the corn required to meet the higher renewable fuel standards.

The current market conditions show ethanol spot prices somewhere between $0.20 to $0.35 a gallon over unleaded gasoline and with the $0.45 per gallon tax credit, a blender currently has an incentive to buy additional gallons and we are seeing some discretionary blending above the levels required by the RFS. Ethanol margins remain weak, as there is excess capacity relative to RFS requirements, but if we look at today's corn prices and spot ethanol prices, ethanol margins are cash flow positive. We see lysine demand steady. Sweeteners volumes were down last quarter but we were in a seasonally slow period for soft drink demand. We will have a much better sense of end market demand in the next few months as we get into the warmer weather.

Let us now turn to slide nine and review the operating performance of our agricultural services segment. Ag services are $121 million for the quarter due principally to the decline in merchandising and handling results compared to an extremely strong $366 million that we reported in the prior year. Even though we were down, this was a strong third quarter, the second largest third quarter, second only to the last year's results. In prior quarters, we were able to leverage global crop disparity and also volatile commodity prices to capture excellent results. This quarter, reduced global demand and the increased crop supplies limited opportunities overall. US exports are still low compared to last year even though soybeans are up, but corn is down. Operating earnings from our barge and truck transportation operations increased $5 million for the quarter principally driven by reduced operating costs, specifically fuel costs in our barge operations. We are currently monitoring the progress of US planting, the eventual crop size in South America, and the trade activity in Argentina, all of which will have an impact on global crop supply and demand going forward.

Slide 10 is an operating profits analysis of our other segments. Our other segment reported an overall loss of $140 million this quarter, a decrease of $278 million from last year's third quarter. The other processing businesses had lower results due principally to the $212 million non-cash loss related to the currency derivative losses from Gruma. And we do record our shared of Gruma's results a quarter in arrears, so our March results Gruma's December 2008 quarter. And as an update to Gruma, in March, Gruma announced they had reached agreements to terminate the majority of their currency derivative positions and we're entering into financing negotiations with its counter parties and that represented about 87% of its total losses. Also last week, Gruma announced a $34 million net loss, that is using Mexican GAAP for their 2009 first quarter, our share of which we would record in our June quarter. Right now, it looks as though we will report something close to breakeven on a US GAAP basis.

In our wheat and cocoa processing operations, results remained largely unchanged in spite of some slowdown in cocoa demand that we saw in the quarter. Other financial was down for the quarter as we booked losses in our managed fund portfolio compared to gains last year as valuations of the underlying fund investments were negatively impacted by the global financial turmoil. Like Gruma, we do record our share of the managed fund activities a quarter in arrears. Our commodities future merchant operations was negatively impacted by the low short-term interest rate environment and by the absence this year of gains of security states that we saw last year. Current market conditions for wheat, we still see steady demand, and it appears we will have a good winter wheat crop here in North America, and we will be monitoring spring wheat planting. As I mentioned, demand has weakened in cocoa, and we have slowed our production to better balance our operating rates with market demand. Cocoa bean crop is similar in size to last year but with reduced demand it appears to be sufficient.

Turning to slide 11, slide 11 looks at the major components of our corporate lines. As I mentioned earlier, with the decrease in commodity price volatility, we had the smallest radiation in LIFO that we have seen in several quarters, a $5 million charge compared to the $64 million charge that we reported in last year's quarter. Corporate investment income and expense decreased $56 million primarily due to the increased interest expense relating to our additional long-term borrowings and to decreased interest income, both externally and intercompany, due principally due lower interest rates. The change in corporate costs and others was mainly driven by a swing in our minority interest eliminations, related to the results of non-wholly-owned consolidated assets.

Moving to slide 12, we will move away from the operating segment view to the financial statements format. Slide 12 reflects the statement of earnings highlights for the quarter nine months. Net sales and other operating income decreased 21% this quarter to $14.8 billion, as decreased average selling prices, due principally to the year-over-year moderation in underlying commodity costs and the impact of foreign exchange translations accounted for about 85% of the change in sales options. The gross profit decrease for the quarter principally reflects the decreased segment operating profits we just discussed. SG&A expenses decreased 8% quarter over quarter primarily due to lower personal related expenses and the impact of foreign currency translations. And our other expense net increased $127 million quarter over quarter. This change was due mainly to the swing from gains to losses in the equity earnings of affiliates, again primarily from the Gruma loss. And we had a charge in change minority interest eliminations.

Turning to slide 13, which has our selected balance sheet highlights, comparing items from our March 31 balance sheet to the June 30, 2008 year-end balance sheet. Similar to the fast two quarters, strong year-to-date earnings and the reduction in working capital requirements due to the drop in commodity prices have significantly impacted our balance sheet over the fiscal year. Operating working capital was down $4.3 billion, debt is down, we have no commercial paper outstanding, and our cash balances are up. Our net property, plant and equipment continues to rise, due principally to the spending on our major seven capital projects.

Turning to slide 14 and our cash flow statement, slide 14 lays out the significant items impacting our cash flows for the nine months and I'll touch quickly on a few of the larger items. As I mentioned in the balance sheet review, cash generated from operations before the impact of changes in working capital remained strong at nearly $2.4 billion. And the cash flow provided from the changes in working capital requirements reflects the lower inventory and receivables levels resulting from the significant decline in commodity prices since June 30. Our capital expenditures stand at just over $1.4 billion for the first nine months running now at the low-end of our fiscal year 2009 capital expenditures. In light of the current market conditions, we are watching our spending very carefully. And we paid down $2.9 billion of debt so far this year principally paying off our short-term commercial paper borrowings. Again, the key takeaways from slide 13 and 14 are that our balance sheet remains strong and that we have significant financial flexibility.

Slide 15 provides an update of our current financial performance using return on equity and return on net assets and that measure adjusted for LIFO and both of those metrics are presented on a rolling four quarter basis. Once again in line with the decline in commodity prices, our working capital asset base has declined. It does get moved a bit by the rolling four quarter affect and our fixed asset base is rising slightly in line with the expenditures on our major capital projects. RONA adjusted for LIFO, but I will note that we did not adjust for the Gruma and Wilmar items, now stands at 11.1% and ROE is at 14.9%, both solid numbers.

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

Pat Woertz

Thank you Steve. John and Steve and I are now available for questions. Operator, if you could please open the line?

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Robert Moskow with Credit Suisse Securities.

Robert Moskow – Credit Suisse Securities

Hi. I guess I will start with a Wilmar question. I didn't know that this was coming, so when did you guys get a sense that there was going to be this tax charge, does it have anything to do with new tax rules from I guess the current administration and I'll start with that question. Thanks.

Steve Mills

Okay – well, start, Pat.

Pat Woertz

I was just going to say it does not have to do with any new tax rules but I will let Steve walked through the timing and the relationship with the majority shareholders and the decisions made along the way.

Steve Mills

Thanks Pat. Well, this was mostly a first-quarter activity, so there wasn't a lot going on here. We have been spending a lot of time as you could imagine researching a variety of alternatives and to see if we are able to come up with a solution that was acceptable to the other shareholders. Third quarter – fiscal year first calendar quarter, sorry if I went wrong, is a recent item. But nothing as Pat mentioned doesn't have anything with the – with anything on the new rules and it was really an effort by the majority of the shareholders of the holding company structure to hold their interest directly instead of indirectly, and it also has the ancillary benefit of increasing the free float of Wilmar.

Robert Moskow – Credit Suisse Securities

Okay. And then I will ask a question about ethanol if I could. There was an article in the journal about it today, it is kind of difficult to interpret how the administration is moving forward on one hand, the EPA has been more strict on CO2 levels on the other hand, it looks like some more financing is going to go faster into biofuels producers hands and then the inclusion rate is going to go up. So can you give us a sense what's your interpretation of all these new information and how does it help or hurt your business?

Pat Woertz

Well, I'll start here and then somebody may want to jump in. Of course we're watching all of the discussions related to biofuels both corn based, advanced ethanol, advanced biofuels, and we feel quite positively that there is a recommitment of efforts associated with supporting biofuels in the market, both first-generation and second-generation. There's been further discussion about higher blend rates as you know, petition for 15%, even if that does not occur, up to 12%, would allow additional ethanol to flow to the market. I think we will watch the announcement today, I think it is a combination of ag, energy, and the EPA and it is on – strictly after our call here, so we will see the other announcement to come. I think there is some discussion as well on this concept of indirect land-use and the signs is rather unripe on the subject. It has to do with how land-use maybe even in other countries affect the biofuels produced here in the US. So I think more dialogue will occur on that subject. It is already occurred in California, there'll be more from the EPA and we're engaged in all of that. So I think it is positive in the overall affect that people are looking at and having the discussions about how to continue to support not only the renewable fuel standards that are in place but to ensure that they continue to grow.

Robert Moskow – Credit Suisse Securities

Okay. And then just lastly it is pretty clear and you have done a good job of signaling that the demand environment is getting tough, what is your outlook for the rest of the calendar year, I guess, on returns on capital? Is it possible to do your normal returns on capital in a weaker demand environment or is it just going to be a tougher than – this is going to be a tough year and then you need – maybe get back to normal in 2010 when presumably demand picks up?

Pat Woertz

I think you asked a couple of questions in there Rob. Let me see if I can pick it apart a little bit. I think we are cautiously optimistic going forward. I think the timing associated with think sort of flattening there, there is some good signs in certain markets, but we don't give guidance. So the idea of when the pickup takes a more advanced flow versus a flattening is a little bit of anyone's guess. I think the idea of returns which is a different question you asked does have to do with both the numerator and the denominator. We continue to complete our projects that are underway and most of those will be finished here within this calendar year and the earnings associated with those projects be they the cost efficiency ones like cogeneration on some that are further out as far as the earnings side of that goes, like our PHA and our second ethanol plant, we have slowed our progress on completing those projects. So they will come in a little bit later in the cycle.

John Rice

Rob, the only thing I would add is, we are not seeing any more plans being constructed. We are seeing plans still being idled or shut down and with the increase in the renewable fuels centered for next year, we do see the positive where the supply and demand balance may come more into line, maybe within the 1 billion to 1.5 billion oversupply coming into next year.

Robert Moskow – Credit Suisse Securities

Oversupply for next year?

John Rice

Yes.

Robert Moskow – Credit Suisse Securities

Despite the fact there is no new plants being built, John?

John Rice

Yes. We still have our plants. Right now we feel there is about 13 billion capacity, and then you have our plants will be coming on line which will increase a little bit more capacity in the market. Right now we have discretional blending going on which also increases the demand side of it.

Robert Moskow – Credit Suisse Securities

All right, okay. But you did use the term oversupply, so does that mean that the additional plant that you're building is going to add to the oversupply issue and then you have to hope that discretionary blending catches up?

John Rice

Well, our plant will add to the oversupply, but there are still more plants being shut down throughout the industry, the more inefficient ones.

Robert Moskow – Credit Suisse Securities

Okay. Well, I will stop there. Thank you.

John Rice

Thanks Rob.

Operator

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

John Roberts – Buckingham Research Group

Good morning.

Pat Woertz

Good morning John.

John Roberts – Buckingham Research Group

The volumes decelerated down in the quarter in the processing segment particularly in the oilseeds side, are you entering the current quarter still decelerating down or have you at least seen stabilization at the end of the quarter?

John Rice

We are still running our operations globally at a slower place. We have not seen a pickup in demand even though in past comments we do see some more positive signs going forward. We have not increased our crushing rates just due to the uncertainty in Argentina gives us a little bit more optimism in European and South American crush margins and possibly into the United States also. So if anything maybe more of a bottoming. It doesn't feel like demand is shrinking anymore, we are not slowing our plants down anymore than they currently have been.

John Roberts – Buckingham Research Group

But if you're down 8% in oilseeds processing volume in the third quarter, are you currently running down more than 8% – the comps are still difficult as you go into this quarter as well, right?

John Rice

Well, the exact percentage, I do not know, but we haven't slowed our plans at all anymore.

John Roberts – Buckingham Research Group

And what is the size of the fertilizer exposure that you have in South America?

Steve Mills

It is – this is Steve. It is not a big number. We had about a $20 million loss in this past quarter and again we think those prices have bottomed out.

John Roberts – Buckingham Research Group

Thank you.

Pat Woertz

And that included the inventory write-down.

Steve Mills

That included the inventory write-downs.

John Roberts – Buckingham Research Group

Thank you.

Pat Woertz

Thank you John.

Operator

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

Michael Picken – Cleveland Research Group

Hi. This is Michael Picken calling in for Christine. How are you?

Pat Woertz

Hi, Mike.

Michael Picken – Cleveland Research Group

Hi. A couple of questions on your sweetener business. Just wanted to discuss kind of your outlook for what the soft drink demand is going to look like here this summer in the United States, if you have started to see a pickup in bottlers purchases more recently? And then secondly what your outlook is for Mexican exports, particularly there is some the uncertainty with what overall demand is going to look like with H1N1 but just your thoughts on Mexico sort of going forward?

John Rice

The sweetener demand during January and February is usually slow period but we have seen shipments start picking up a little bit. The summer is always the high volume period, so it is still too early to tell. But we are very cautiously optimistic b because we maybe believe the best way to say that demand does not seem to be as down as much as early indications. And with high sugar prices, sugar is up to $0.15 a pound now globally, so we are seeing more optimism and more shipments going into the Mexican market we feel during the rest of this calendar year.

Michael Picken – Cleveland Research Group

Okay great. And then if you could talk about sort of how you feel about the industry, whether you feel it is right sized in light of Cargill shutting down a plant and I guess the (inaudible) also shut down, a little bit of capacity for a few weeks here, have you guys been running full out and sort of what are your plans in that segment regarding your utilization rates?

John Rice

We have been running our compounds harder but it is not been due to the sweeteners. We have been running ethanol, lysine, and as Steve mentioned many of our other food and feed ingredients. But with the Cargill plant shutting down which represents maybe around 4% of the capacity, that should have a positive effect on the ethanol market – I'm sorry, on the sweetener market. But right now I think the supply and demand is fairly well-balanced. We are running our plants a little slower here nearby but the big key will be the ethanol demand and then also how we see the sweetener shipments and start shipments during the summer.

Michael Picken – Cleveland Research Group

Okay, great. And then last question one on the ethanol side, you know Valero announced that they are going to start to ramp up production on I guess three of the former (inaudible) plants with the fourth one coming in the next month. I mean I know we sort of already are at an over capacity, but do you think that the number of plants shutdowns by other people are going to offset the amount of capacity that is coming on before we start in our first plant over the near term?

John Rice

Yes. I do believe that with Valero starting those additional pounds, there will be additional capacity coming in to the market, so somewhere else into the supply and demand balance, we will have to have some other shutdowns or slowdowns I believe.

Pat Woertz

Michael, maybe another thing to keep in mind is underlying ethanol demand is also often just the basic gasoline demand, and gasoline demand is just entering what used to be referred to as the driving season and I guess it remains to be seen whether at least Americans in this country will be driving more this summer and therefore the pool itself will have higher demand and therefore maybe somewhat increase ethanol demand.

Michael Picken – Cleveland Research Group

Okay, thanks.

Operator

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

Christina Mcglone – Deutsche Bank

Thank you. I wanted to ask about biodiesel, it looks like, I'd guess in today's rules, we may see a deferral of the biodiesel carb out so that next year we will have kind of the 2009 and 2010 mandates being met. And I'm curious if that is largely expected or that will pressure biodiesel prices lower?

John Rice

In the US, we're going to have to wait until after the press announcement today, and that is the 30 days or 60 days comment period during that. So it is too early to tell exactly how biodiesel will play out in this.

Christina Mcglone – Deutsche Bank

Do you think John that people kind of – I have heard it before, so I'm wondering if people expect it, do you get that sense?

John Rice

I hate to speculate on an announcement that is going to come out in 30 minutes I guess.

Christina Mcglone – Deutsche Bank

Okay. And then just Pat you talked about this, but I wanted to understand more what this indirect land-use inclusion and greenhouse gas emission calculations actually means in the carb ruling and if EPA goes that way today, what does that mean for Midwestern ethanol? I mean is there a chance that you would then will not – the capacity go off-line and maybe not even be able to meet our RFS or in the grand scheme of things what does that actually mean?

Pat Woertz

Yes. It is an interesting question. First of all, maybe the California low carbon fuel standards which you refer to, the carb issue has sort of two items, the direct and indirect. On the direct, that is numerous pathways, none of which the plants in the – some of the plants in the Midwest such as ours with cogeneration isn't even part of the specific analysis or the grid. So what is important there is to know that we would have a chance as other plans would to have a specific analysis and we feel our plans have many more efficiencies than sort of the standard ones as part of the grid. So that is on the direct side.

On the indirect land use side, as I mentioned, both the environmentalists and scientists and I think even carbitol technologies that it is a science that is under new studies, so maybe it is not necessarily right for exact standards, but what they have included in the standard in California is an accelerated review of the science around indirect land-use. So it would mean how many mega joules for example would be applied to your plant that would be related to what type hypothetical under an assumption would mean, grasslands or other land would need to be taken out off – taken down from another part of the world. So there is work underway and there is dialogue with carb that will in dialogue that will come with EPA depending on what their rule making and decisions are related to the subject. So I think we are engaged with them, we are having good discussions and novel idea of what we are committed to doing our part in carbon capture and sequestration. It is not sort of something else we have willing and we believe that this will this whole idea of having low carbon fuels is a positive step, we just need to work on the signs to get there. So we are optimistic in the ability to work with them.

Christina Mcglone – Deutsche Bank

Okay. And sugar ethanol does really well in that pathway allocation, so does that put the import tariff at risk and or does that given your cash flow and your financial flexibility, does that make sugar acquisitions in Brazil even that much more interesting to you?

Pat Woertz

Well, keep in mind much of this would be further down the line than immediately. So in California, it might mean 2011 or 2013 before arguably due to your assumptions there that Brazilian ethanol would find its way to California because it would be the one that would have the lowest carbon footprint so to speak. So I think, in general, to your point, we believe sugar investments in Brazil is good foreign ADM because it will have global opportunities as well as local domestic opportunities. So, Brazilian ethanol can continues to be of interest to us. Our sugar investments that we have underway there now are proceeding, and we continue to be interested at the right prices et cetera for any growth.

John Rice

Yes. The only thing I would add is our plans should be operational at around September or October this year.

Christina Mcglone – Deutsche Bank

Okay. And then just last question John, can you explain why you said Argentina's crop reduction is helping crush margins in South America, but – and you said maybe the US, why would help the US?

John Rice

it would be –I said proper reduction, but anyways, the if Argentina does have a smaller crop, they will have less to crush down there, which would allow us to be able to crash more than pickup some of the export market into the Latin American countries and also into the European market. Just less competition.

Christina Mcglone – Deutsche Bank

but why isn't it going to help the US crush margins, because crush margins have gone up sequentially in the US?

John Rice

Yes. I'm sorry, it will help the US.

Christina Mcglone – Deutsche Bank

Oh, it will. Okay. All right thank you.

Pat Woertz

Thank you Chris.

Operator

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

Ken Zaslow – BMO Capital Markets

Hi, good morning everyone.

Pat Woertz

Good morning Ken.

Ken Zaslow – BMO Capital Markets

What did you say was utilization rates in high fructose corn syrup?

John Rice

I don't think we did.

Ken Zaslow – BMO Capital Markets

What is it then?

John Rice

We don't necessarily look at it as a utilization rate and high fructose corn syrup. We look at utilization in our whole corn operations with all our different crops.

Ken Zaslow – BMO Capital Markets

Okay. What is that utilization rate?

John Rice

As you can tell from the Beverage Digest and other things, demand is lower in the soft drink market, but this is going to be the summer period where we feel that demand could pickup and then also what we are seeing in Mexico just because of the high price of sugar.

Ken Zaslow – BMO Capital Markets

Okay. So – I'm assuming utilization rates are lower than last year, but is it exceedingly lower? I mean can you give us some parameters. And then I guess what I'm trying to figure out is also what does it look like for 2010, how do you see it playing out?

John Rice

Demand is not as bad as what the perception is. I think people have been throwing out numbers somewhere around 3% to 4% reduction. But that is early in the year and it is really going to be more how the summer season goes along with the exports to Mexico.

Ken Zaslow – BMO Capital Markets

Okay. How are the exports to Mexico going?

John Rice

We are starting to pick them up. We're starting to see more interest down there just because we have $0.15 sugar.

Ken Zaslow – BMO Capital Markets

Even with the H1N1 virus?

John Rice

It is still too early to tell exactly how that will all play out.

Ken Zaslow – BMO Capital Markets

Okay. So let me understand it, so the demand (inaudible) but you're not sure if it is going to get better but we don't know about H1N1, is that kind of what you're saying?

John Rice

Exactly.

Ken Zaslow – BMO Capital Markets

Okay, that is clear.

John Rice

(inaudible) fulfillment in the future, and how the summer looks, and how the H1N1 plays out.

Ken Zaslow – BMO Capital Markets

Okay. You know going to H1N1 for a second, how do you care if – or to what extent or how do you see the switching if there were switching between chickens and hogs and hogs and chickens, how does that change soybean meal demand and do you care one bit?

John Rice

Well, we care just because we don't want to see the demand of any of the products go down. But it is still too early to tell how this will play out. If people have spine out in their whatever they call them, yards of fields or whatever, they have not been reducing their stocks in the United States. So right now we have not seen any drop down in demand, and it is going to all depend on what happens here probably in the next 2 to 3 months and what happens at the grocery store level.

Ken Zaslow – BMO Capital Markets

Let me rephrase the question. If the overall protein demand does not change and they are switching from hogs to chicken, and how does that affect you guys? Are you net neutral, do you care about protein, do you care about the switch, what is the rule of the thumb, how do you think about that, assuming that protein demand does not change? A consumer will change from hog or pork to chicken or pork to beef, how do you kind of see that shifting around, and how does that affect soybean meal demand?

John Rice

Well, we work with all our customers. We have all the different proteins, so in the case of if soybean protein demand is lower and rapeseed meal is better, we can switch our operations and produce more rapeseed. So we're always working with the customer, what makes the best ingredients for them to be able to feed their animals. So it is really more of a total animal number as opposed to I would say poultry or hogs because lysine can be used in certain animals and how cattle comes into play. Aquaculture, there's all kinds of animals and fish we're feeding around the world.

Steve Mills

This is Steve. I think the other kind of complicating factor in the formula that each of those animals converts proteins at different rates. So you would have to go through those hypotheticals, but there is no question that pork uses more protein in its diet than chickens to but it is just I think it is just all speculation as how it will all work out. But the good part for ADM is that we do supply all the ingredients and all the products, so we have to see how it plays out.

Ken Zaslow – BMO Capital Markets

But on the – I am not even asking what you think about how it plays out, I am saying if pork demand goes down by 5% and chicken demand goes up by 5%, do you care? I am just trying – I am not asking about your forecast for the H1N1 impact, I am trying to figuring out what the sensitivity that what you guys think about if things happen and you kind of gave two different answers depending on who answered. It sounds like it doesn't matter, but it does matter.

Steve Mills

I think that at this time usually say it depends around here. It does matter to the extent that we do – are concerned about our customers and it will influence which products go to which place.

Pat Woertz

But it depends where the demand is down as well, so it depends a little bit on geography. So I think we're looking at each other saying it probably depends Ken but maybe we are a little more neutral than we are biased towards one animal or another.

Ken Zaslow – BMO Capital Markets

I would have thought you would have said neutral, that why I was just – all right, that is it, that is all I have.

Pat Woertz

Okay, Ken.

Operator

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

David Driscoll – Citi Investment Research

Thank you very much. Good morning everyone.

Pat Woertz

Good morning David.

David Driscoll – Citi Investment Research

In the ag services business, John, can you make a couple of comments here about kind of the last couple of years I think what we have seen is just tremendous tightness and dislocations in the agricultural markets, and in the absence of that factor, much more so than the changing volumes that has affected profitability within agricultural services and to a lesser extent oilseeds, generally would you agree with that? And then secondly, following on that point, do you see a return to very tight conditions anytime soon?

John Rice

Well, volumes do come into play. What we did have the previous year was good volumes plus a dislocation. Volumes always help in the ag service areas, the larger the crops, the better the demand. It just fits our model very good. Now going forward, we're coming into our growing season here. So on a daily basis, it is too much rain, not enough rain, or we going to plant corn, not enough corn, so it is always a constantly moving target and what the other areas of the world and how their markets are doing, or how their weather is doing also.

David Driscoll – Citi Investment Research

I suppose what I am looking at is you know the year ago if you look at slide nine on the ag services operating profits, $250 million reduction in merchandising and handling is not a blip, it is not just a small thing. There was something special that happened in those years ago period and other periods, and it is always a question of you know almost did you catch lightning in a jar back then and is that the principal factors that are – we need a repeat of those type of factors in order to see those results again, number one? And is there any evidence that we have the potential to see that in the near term going forward?

Pat Woertz

One thing David, let me add here. You used the lightning term. Lightning shaped a little bit like a volatility charts and volatility was kind of at its peak in those periods that you refer to. And I interrupted John, you were going to add...

John Rice

And every day we come in and look at different opportunities we see globally, taking it all the way from the farm to the end consumer. We have freight, we're handling through our elevators. And last year we also had another factor was that we had it so concentrated part in the United States and also helped the elevation of our operations, that the whole world had come to United States to source a lot of their grains.

David Driscoll – Citi Investment Research

So, in the absence of that condition going forward, would generally be a negative factor? Agree?

John Rice

I wouldn't say that as we keep expanding, as Pat said in her notes, so we expanded operations in Paraguay. We are looking at more operations in Europe, so we keep expanding more globally, keeps giving us other opportunities.

Steve Mills

I think and I will just add to that David, the way we look at it around here, you never know what the new factors are going to be tomorrow, the next day. So today you might say you don't see some of those same signs but that is why John and the team and the rest of us come in here everyday to see what is going to happen.

David Driscoll – Citi Investment Research

Certainly, makes it easy to forecast from our perspective.

Steve Mills

We understand that.

David Driscoll – Citi Investment Research

Pat, can I just ask you one more question on this California deal, the low carbon fuel standard. The one point that I just want to explore a little further is my read on this passage of this new standard. The implementation I believe is set for 2011 and so when you said that this was off a little ways, yes, it is 2011, but it feels to me like with John's comment, which I agree with, overcapacity in 2010 combined with an outlook that potentially there is a major problem for corn-based ethanol in the California market, something like – what was that, 1.5 billion gallon market for the US, this is – I was amazed at what the California folks did and it seemed extremely negative regarding corn-based ethanol and what the outlook would be in 2010, 2011, you pick your year, and it just feels horrible. So kind of temper my negativity on this, if you believe so, and please tell me why because I just can't believe what California did right here?

Pat Woertz

Well, there is a couple of questions in there, so let me pick it apart, David. When I was responding to a question earlier about Brazil ethanol, that is sort of where I brought the 2013. There is a step up in the California plans between 2011 and then 2013 where it would be more likely in 2013 to that specific question that Brazilian ethanol would meet more of the California low carbon fuel standard than other ethanols produced in the US, other than may be the advanced ones produced in California out of different bio feed stocks that are not food related. So that was the comment on 2013. Well, I won't say that I can that this isn't a concern of ours or a discussion that is ongoing with carb or that we didn't have good dialogue with them going into it. I think the key issues are the ones I referred to about the indirect land-use signs, that review needing to take place and to have good signs contributing to it, and I believe that is what will continue to happen. And secondly that California understands the market implications of some of the standard so that you don't have maybe the unintended consequences of no ethanol in the US, very little ethanol in the US could enter the California market, and California gasoline is already sort of the highest priced in the country. It would even get to a greater extent if you had to fill its needs with imported ethanol for example. So I think there is more work to be done to have the dialogue with California and so that is where my optimism comes from is we are in that dialogue but you're right. It kind of has taken a very rapid path to support its low carbon fuel standard efforts and biofuels produced in California, that is kind of the direction that it was headed.

David Driscoll – Citi Investment Research

On balance, if this thing goes through as is, this looks like a disaster for ethanol and/or if your efforts prove fruitful and if you can get back to where we were, it is simply back to status quo and then we just look at the oversupply of ethanol in 2010 relative to the mandate, would you agree with that frame up?

Pat Woertz

Well I think that is a general frame up, yes, maybe I wouldn't use the word disaster because I think there is always the idea of how you have these discussions and I have more optimism that we will be positive in our discussions. But you are correct that under a certain scenario, American ethanol will not find its way to California and imported ethanol in fact would replace it in the years sort of post-2013.

David Driscoll – Citi Investment Research

Thank you very much.

Pat Woertz

Thanks David.

Operator

Your next question comes from the line of Ian Horowitz with Soleil Securities Group.

Ian Horowitz – Soleil Securities Group

Hi, good morning everyone.

Pat Woertz

Hi, Ian.

Ian Horowitz – Soleil Securities Group

Steve, can you just go over one more time, I missed it, you went over current conditions for meal demand globally down 1.2%. Can you just go over, you did a US, EU, Brazil and China, can you go over those numbers one more time?

Steve Mills

Sure, Ian. No problem. The US was down 5%, the EU looked for a decline of 5%, China was going to have an increase of 5% and Brazilian growth was projected at 2.5% . Now that is all based on crop year 2008-2009 which will take us fall to fall.

Ian Horowitz – Soleil Securities Group

Okay, great. And can you remind me again what the fiscal projections are for CapEx for the year?

Pat Woertz

Ian, if you're talking about CapEx for 2009 fiscal year, we had said between 2 billion and 2.5 billion, and we will find ourselves on the low end of that, in fact maybe just bouncing up against or slightly under 2 billion.

Ian Horowitz – Soleil Securities Group

Okay. And should we expect a project update kind of find out on the next quarter's call? I mean I thought we would be getting something…

Pat Woertz

Yes. We had said we would only update it if there where changes to it, any approved changes in both spending and/or completion, and there have not been. So you can refer to the last one. So if in fact there are any for the next quarter, we will certainly include that. Steve?

Steve Mills

Ian, I think we will also update you when – because we are in the stages where some of these plants are coming online. As Pat mentioned earlier, we have got the glycol plant, the first step to make USP glycerin took place and we should be seeing some of that literally every quarter here over the next up something happening on each of these projects. So we will keep you updated and again as Pat mentioned if we have got anything that takes us off schedule, off our schedule either at or back, we will let you know.

Ian Horowitz – Soleil Securities Group

Okay, great. And with the new information that we have out, anyone care to take a stab on RIN availability for calendar 2009?

John Rice

Well, the RINs are – there's two different RINs out there trading right now, 2008 and 2009, because you can carry it over into the following year. So 2008 is at a discount. 2009, due to if there is an increased blending, we have more, we have higher renewable fuel standard, so people will probably come into the year with more RINs available for 2010 until all the rules are set. So there is I guess I don't know exactly what the number is right now but it is a constantly moving target, and people are cognizant of those also, but the economics right now are to blend ethanol.

Ian Horowitz – Soleil Securities Group

John, do you think there's a chance that as we get into calendar 2010 virtually and not literally, but virtually there are RINs available out of the 2009 vintage?

John Rice

I wouldn't think so because I would think people would just want to carry some of those over just due to the flexibility of being able to use them.

Ian Horowitz – Soleil Securities Group

Okay. And then last question, kind off David's and Christina's question on the carb standard. First of all, I think the oil mills, the Midwestern oil mills definitely got diverse scores out of the group, out of the different pathways, specially from a direct, not even an indirect score, how does that impact your business? And second part of that, can you envision a scenario where we're going to have two different multi tiered ethanol pricing kind of carb compliance, non-carb compliance, if the 11 northeastern states do decide to kind of piggyback on California's rulings, we could see a significant amount of the fuel conception market being under this low carbon fuel center compliance and only a small, a much smaller percentage available for kind of non-carb compliance fuel, do you see that there is going to be kind of a dual float?

Pat Woertz

No. I think that is part of the risk and the discussion going on is does carb really want to have that, does the markets really want that? I think markets in general have wanted to go to more common fuel standards, not create yet another for blending component that is even dissimilar. But obviously if you enact legislation that creates a second tier or a different type of tier of ethanol, that is one of the possible outcomes.

John Rice

My personal opinion is I can obviously be wrong is, part of the program for the renewable fuel standard was to have a source of fuel grown domestically. And by putting these different carbs in, we're just replacing part of where our energy supply comes from, whether you would bring it from the Middle East or of whether you bring it from Brazil. So the main reason we did part of this was for energy security. I think in the long run, it makes more sense to make sure that there is a good domestic corn or cellulosic ethanol production.

Ian Horowitz – Soleil Securities Group

I mean there is one element or one angle you can take on this is to argue the policy but another angle to take would be to actually try to comply and I mean the ethanol industry in general, not necessarily ADM specifically. Can you see the situation where Midwestern produces try to do as much as they can to their plants, to their actual facilities to improve their scores? I mean if you look at the pathways, simply turning off your driers, from what I remember, it is about 10 points in score improvement. Is there anything that—do you see that happening, and is there anything that ADM can do to improve the scores on wet mills as well?

Pat Woertz

Maybe I will start and John wants to add to this. I think absolutely and your hitting the point of some of the objective of the legislation is to have lower carbon emissions from any production. And if you can compare production, of course running driers for DDGs is one of the energy intensive activities. So some plants in the Midwest will comply to different extents than others, it is the same uncertain the calculation of that intensity, that carbon intensity at the moment, and that is why a lot of caveats in some of these comments. Plants will qualify under different criterion. We believe very confidently that ADM's efficient plants will have positive calculations, but we have work to do to get that accomplished.

Ian Horowitz – Soleil Securities Group

And any idea whether you're new two projects will kind of lay out the score? They are co-located, so they should – I would assume they have better scores than gas fired standalone gas driers, correct?

Pat Woertz

Well, there is efficiencies to new plants, but it has to do with how you get your cogeneration, what your feed stocks are, what the composition of the percentage of different feed stocks that you can run, whether it is biomass or coal, et cetera. So there is calculations to do, and again we are not part of the grid, so we have to do the individual accelerated review which is how carb defined it.

Ian Horowitz – Soleil Securities Group

Okay, great. Thank you.

Pat Woertz

Thank you Ian.

Operator

Your next question comes from the line of Chris Bledsoe with Barclays.

Chris Bledsoe – Barclays

Good morning.

Pat Woertz

Hi, Chris.

Chris Bledsoe – Barclays

Just a point of clarification, the ethanol oversupply reference, was that for calendar for 2010 or fiscal 2010? I'm just wondering if by the end of calendar 2010, if we should expect kind of a tightening up of supply?

John Rice

Balanced, 2010.

Pat Woertz

You are tightening.

Chris Bledsoe – Barclays

And fair to expect some tightening, you said?

John Rice

Yes.

Chris Bledsoe – Barclays

Okay. And it seems – to me it seems that just kind of looking at ADM today, you're much more procyclical company that you had been maybe five years or ten years ago, pre-ethanol. And so if I just wanted to kind of grossly oversimplify the positive inflection, kind of the driver of the positive inflection for ADM as a whole, would the key be the comment that you made about steadying gasoline demand and kind of watching kind of the global recovery take place here and the timing of that, and the demand it drives for gasoline? Or is that too much sophistication?

Pat Woertz

Let me see if I understand your question. Chris, I think you're talking about cyclicality as it relates to the ethanol business or that piece of our corn processing that relates to ethanol, is that correct?

Chris Bledsoe – Barclays

Well, for the company as a whole, really just kind of looking at how ethanol demand has driven other operations within the company, including like ag services and the pull through that it has created in ag services, and so just really for the company as a whole?

John Rice

I wouldn't say the ethanol component had an effect on the ag services side of our business, or two different parts of the business. But the overall economy will have a great demand hold for our whole system. So as the economy gets better, people start eating more, people start driving more, we will start seeing more overall demand. So that is really the underlying positive outlook I guess.

Chris Bledsoe – Barclays

I guess I just recall a few years ago when the discussion was how big a player ADM is going to be and why is ADM going to be in the ethanol business and remember at the time the discussion was focused on the kind of pull that it creates in the entire system for biomass and for ADM's assets and the utilization rate of assets, whether it is be merchandising and transportation assets or processing assets. Which is why I asked, and I realize ethanol is kind of a different business line than your other units, but the demand for ethanol being driven by the demand for gasoline creates this kind of pull through, and I thought that was the reason you were in ethanol in the first place?

Steve Mills

I'll take a stab at part of this, Chris, and let the others join in. But as we look at our from a strategic perspective, volume and scope is what drives us. We have to expand that volume and scope. What biofuels has done with being an additional demand pull and adding to the general scope, it's been a good thing for ADM in many ways. It has helped leverage part of our business, different businesses. And as John pointed out, the kind of the underlying macro economic factor that we continue to follow is just a general trend to get demand back up in all of these places. So it is not wrong what you said because the buzz of ethanol and biofuels has been an important customers of our product which is helped volume and scope. I think Pat, would you like to…

Pat Woertz

Yes, I would support what Steve said and I guess it does link on Chris to your theory. If you think about the longer term, the world is going to need more food to feed a growing population that is continuing to eat better. The world is going to need more energy from alternative sources, lots of different sources to feed that population, but the slowdown in this global economy has caused the blip in that trend line that you would argue was that trend, are we no longer on that trend line, or is it one of the slowing impacts? And I would say it is one of the slowing or you used the term cycle, one of the slowing effects, but I think the world based on demographics, et cetera, will get back on the trend line of greater demand longer term.

Chris Bledsoe – Barclays

Okay. And then if I am just looking across at some of your peers, or at least one of your peers, it seems to me that there is an anticipation for a pretty positive back half to calendar 2009, not just stabilization either, a pull on recovery. And I would love to ask you if that is premature, but I know you're not going to give me guidance. So maybe I would just ask if you are concerned instead, if you are concerned that their views being rather optimistic about the back half, if their views will lead to irrational production decisions and prevent a better balance between supply and demand for some of your key businesses?

Steve Mills

I think as we have mentioned during the call today that we look for those signs of recovery and that we're cautiously optimistic. I don't think that – I think we are almost going to have to leave it at that because no one really knows. I think your question about whether there'll be some unusual behavior in the marketplace because of that, I can't speak for the competitors, but you would think that we're all going to react to similar signs and the demand is out there. So we will have to see.

Chris Bledsoe – Barclays

Okay. And I guess I'll just – I'm wondering if there are decisions that are made today based on an outlook three or six months from now, if there are decisions made today that you know by competitors rather than industry that are irreversible and that could – that require more of a runway to reverse and therefore could put us in a situation where we don't see a V shaped recovery, instead we see something more like an L shaped recovery or stabilization, if those decisions being made today on the ground expectations of a V-shaped recovery put the industry in a potentially worse off situation, or if it is just a flip, a switch you can just flip off in the industry to slow production in response to slowing demand, or demand not materializing as robust as you might have expected or competitors may have expected?

John Rice

Long-term we still feel very positive about our business. We are increasing our oilseed plants that we have mentioned before. We are running them show currently but we believe things will get better in the long term which will make those assets pay. Short term, we're running our business on a day-to-day, looking at the opportunities that we see, that we may – that can give us signs of what we feel are long-term opportunities and short-term opportunities we see.

Chris Bledsoe – Barclays

Okay, I will leave it at that.

Pat Woertz

I will just maybe add to that, Chris. You're starting to sound like you are asking questions, will there be huge new greenfield projects to be built in this time because people feel optimistic. We are not seeing signs of that. I think we are able in our business we can speak for ourselves to slow production to meet demand but invest for the longer term in areas that make sense for us longer term. So we feel good about the long-term and again cautiously optimistic here as we proceed through the rest of this fiscal year.

Chris Bledsoe – Barclays

Got it, okay. Thank you.

Pat Woertz

Thank you, Chris.

Operator

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

Vincent Andrews – Morgan Stanley

Hi. I just wanted to get an update on South America, particularly the way the farmer environment looks like coming out of the smaller fall crop and the drought environment, the credit environment, how does the soybean crop look, so John if you have kind of any overall thoughts, it would be great?

John Rice

With the higher soybean prices and cheaper real, it looks very positive currently for the Brazilian farmers. Now the Argentine farmer has different issues, so I guess that's the best way to answer that question.

Vincent Andrews – Morgan Stanley

But what about from a credit extension perspective, have your policies changed at all over the last quarter?

John Rice

No, they have not.

Vincent Andrews – Morgan Stanley

You're extending the same amount of credit today as you were three, six months, nine months ago?

John Rice

Yes.

Vincent Andrews – Morgan Stanley

Okay. Thank you. I think we all want to get on the biofuels call.

Pat Woertz

Okay. Thanks Vincent.

Operator

(Operator instructions). Your next question is a follow-up question from the line of John Roberts with Buckingham Research Group.

John Roberts – Buckingham Research Group

Thank you. You said the ultimate tax on Wilmar is going to depend on the stock price of Wilmar. So you have somewhat of a natural hedge there I guess. If the stock moves up, actually if the stock moves up, you get the benefit of having higher values, but you are paying more tax. Do you think you will hedge out or lock in some certainty on what the tax will be by hedging the Wilmar stock?

Steve Mills

I think that is still a lot of uncertainty there and we have got more than one variable, it is more than just another Wilmar stock price. It is also US tax policy which is in flux. We have got exchange rates. And it is a little – the other piece of that is that the way we report our earnings here on US GAAP is that we are going to our percentage of their underlying earnings. It doesn't necessarily reflect what is going on with the stock price. So you're right, we could take some steps there, but we are going to continue to monitor it and we're also looking for ways to help mitigate this tax if possible. So lots going on here.

John Roberts – Buckingham Research Group

Thank you.

Pat Woertz

Thanks, John.

Operator

Your next question is a follow-up question from the line of Ken Zaslow with BMO Capital Markets.

Ken Zaslow – BMO Capital Markets

Hi, guys.

Pat Woertz

Hi.

Ken Zaslow – BMO Capital Markets

With all the disasters talk of ethanol, I consider you guys pretty smart, what build the facilities?

Pat Woertz

What we thought – your question is why continue to finish the ones we have started?

Ken Zaslow – BMO Capital Markets

Yes. You're making it out to be like as a gloom and doom scenario and maybe it is, but if you believe that, why continue building your facilities, I must be missing something?

Pat Woertz

I hope you didn't hear doom and gloom. I think what you did here is some concern and discussion about what California has done recently but that we are engaged and the industry is engaged and we think we have very efficient facilities, including those that are under construction that would meet low carbon fuel standard intensity requirement. So I hope you didn't hear gloom and doom, you probably heard some responses to folks that painted a downside picture that has some percentage of being possible.

Ken Zaslow – BMO Capital Markets

Because you did say ethanol margins are positive?

Steve Mills

It is cash flow positive.

Ken Zaslow – BMO Capital Markets

Okay. And then my understanding is you're saying there is still oversupply next year, but would you expect it to be positive margins or negative margins?

John Rice

With a billion gallons, maybe 1.5 billion gallons of order capacity, that I feel is getting us very close to balance supply and demand. You're going to always have a period of time where some plants are not going to be operating, out of locations, downtime, so we have got a billion gallons right now and the discretionary blending, I think we're getting closer to supply and demand balance.

Steve Mills

And our plants are going to, we feel are going to be some of the most cost effective, if not the cost-effective in the industry which should help them. And I think to your beginning question, one of our facilities is nearing completion, and we have taken steps on the other one to be prudent as we stand out to try to be as cost-effective as possible.

Ken Zaslow – BMO Capital Markets

Great, I appreciate it.

Pat Woertz

Okay. Thanks Ken.

Operator

Your next question is a follow up question from the line of Robert Moskow with Credit Suisse Securities.

Pat Woertz

Rob?

Robert Moskow – Credit Suisse Securities

Can you hear me? I'm sorry – sorry to prolong, but you still have losses in your financial segment, are we going to lapse those at any time soon or see some kind of improvement anytime soon?

Steve Mills

It is hard to tell, Rob, but we certainly hope so. The hit this past quarter was principally from the managed funds which to the extent their underlying investments declined in the October to December quarter would have been expected just because of the general market turn down. So we're hopefully going to get those rebounded. I think as we mentioned before those are on a total bases are down under hundred million and winding down. So it seems like over the last few quarters there's been a variety of things, we have had managed funds. We have had the ag national insurance when we had a loss, so it has been a mixture of things, but we certainly want to get it back on the positive track.

Robert Moskow – Credit Suisse Securities

Okay. Thank you very much.

Steve Mills

You're welcome.

Operator

Your final question is a follow-up question from the line of Christina Mcglone with Deutsche Bank.

Christina Mcglone – Deutsche Bank

Thank you. Steve, just a point of clarification, the Gruma losses are non-cash, but the Wilmar tax issues items are cash?

Steve Mills

They will be – yes, that is correct. They will be cash during the calendar year, it is not just we are going to write a check at one time, but it will be cash in the relatively short term. But you are absolutely right, the Gruma is non-cash.

Christina Mcglone – Deutsche Bank

Okay, thank you.

Steve Mills

You're welcome.

Operator

ladies and gentlemen, this concludes the question-and-answer session. I would now like to turn the call over to Pat Woertz for closing remarks.

Pat Woertz

Thank you everyone. I won't delay anymore. We appreciate your questions. As you see, the upcoming events we have several investor conferences and we look forward to talking with you at our next call in August. Bye now.

Operator

Thank you for your participation in today's conference. This concludes your presentation and you may now disconnect. Have a great day.

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Source: Archer Daniels Midland Company F3Q09 (Qtr End 03/31/09) Earnings Call Transcript
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