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Bunge Limited (NYSE:BG)

Q4 2011 Earnings Call

February 9, 2012 10:00 a.m. ET

Executives

Alberto Weisser - Chairman and Chief Executive Officer

Drew Burke - Chief Financial Officer and Global Operational Excellence Officer

Mark Haden - Investor Relations

Analysts

Christina McGlone - Deutsche Bank

Robert Moskow - Credit Suisse

Diane Geissler - CLSA

David Driscoll - Citigroup

Lindsay Drucker Mann - Goldman Sachs

Christine McCracken - Cleveland Research

Vincent Andrews - Morgan Stanley

Kenneth Zaslow - BMO Capital Markets

Christine Healy - Scotia Capital

Ryan Oksenhendler - Bank of America Merrill Lynch

Operator

Welcome to the Q4 2011 Bunge Limited Earnings Conference Call. My name is Monica and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I would now turn the call over to Mark Haden. Mr. Haden, you may begin.

Mark Haden

Thank you, Monica, and thank you everyone for joining us this morning. Welcome to Bunge Limited Fourth Quarter 2011 Earnings Conference Call. Before we get started, I want to inform you that we have prepared a slide presentation to accompany our discussion. It can be found in the Investors section of our website, www.bunge.com, under Investor Relations. Reconciliations of non-GAAP measures disclosed verbally on this conference call to the most directly comparable GAAP financial measure are posted on our website in the Investors 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 are Alberto Weisser, Bunge's Chairman and Chief Executive Officer; and Drew Burke, Bunge's Chief Financial Officer. I'll now turn the call over to Alberto, and he'll begin with slide three.

Alberto Weisser

Good morning, everyone. In 2011 Bunge produced strong results in agribusiness, edible oils and milling with a record full year combined EBIT of over $1.1 billion. However, results in our sugar and bio-energy segment were negatively impacted by back to back years of poor weather in Brazil that materially reduced cane volumes and hence our results. In fertilizer we made progress transitioning our Brazilian business to a standalone blending distribution business, but volumes are still behind our targets.

We reorganized the team and structure of the business, improved risk management and filled gaps in our facility footprint. But we are still working on finding the right balance between volume growth and acceptable risk. We expect to get it right in 2012. Slide four, in 2011, we made important investments in new businesses and regions, and took steps to strengthen our core operations. These actions helped position us well for the future.

During the year we entered into joint ventures in palm in Indonesia, agribusiness in South Africa, corn wet milling in Argentina, oilseed processing in Paraguay, and open grain handling facilities in Mexico. Slide five, in our core business we announced the acquisition of food operations in India and Brazil, acquired margarine business in U.S., acquired a new port terminal in grain handling facility in Ukraine, acquired new grain handling facilities in U.S., and expanded sugarcane planting and cogeneration in Brazil.

Slide six, looking forward, we see some challenges but also see very positive signs for 2012, and expect to achieve good results. I feel very good about where we are at Bunge, we have the strongest balance sheet in decades, a superb team, strong network and strong market positions, and an ever growing geographic footprint. This gives me the confidence we will continue growing and performing well.

Now we will turn over the call to Drew who will discuss our fourth quarter financial results in 2012 outlook.

Drew Burke

Thank you, Alberto, and good morning. Let's turn to page seven in the earnings highlights. For the full year Bunge had diluted earnings per share excluding certain gains and charges of $5.80 versus $4.13 in the prior year. Our segment EBIT was $1,154 million versus $3,228 million in the prior year. The prior year included a gain of $2.4 billion on the sale of our fertilizer nutrient business. After adjusting for this year’s gain, our year-over-year EBIT demonstrated strong growth driven by our agribusiness and food and ingredient businesses.

Turning to the fourth quarter, total segment EBIT was $273 million versus $381 million in 2010. The fourth quarter 2010 performance was exceptional. It was driven by our grain merchandizing business which utilized its global network and origination capabilities to supply alternative sources of product necessitated by the drought in the Black Sea. Fourth quarter 2011 volumes of 39 million tons were significantly higher than the prior year and were driven by new investments coming online in our grains and oil seed businesses and higher merchandizing volumes in the Black Sea region.

Our agribusiness EBIT in the quarter was $203 million versus $377 million in the prior year. Decline was primarily due to the reduction in grain merchandizing profits. Oilseed processing results were better than the prior year as higher results in Asia, Europe and South America more than offset weaker results in the United States. Sugar and bio-energy results were a profit $3 million versus a loss of $56 million in the prior year. Our industrial business performed better than prior year on increased volumes and prices. While higher than 2010, milling volumes were negatively impacted by current and prior year weather problems.

Our 2011 planting program was completed in the quarter and should allow us to produce significantly higher volumes next year. Merchandizing results were slightly lower than 2010. Food and ingredients profits increased from $59 million in 2010 to $70 million in 2011. This increase was driven by our corn and rice milling businesses in North America. Edible oil results were in line with the prior year. Results in Europe improved considerably when compared to the second and third quarters of 2011 as both prices and volumes were higher.

Fertilizer had a loss of $3 million in the quarter, compared with a profit of $1 million in the prior year. Market conditions were more challenging in the quarter as margins contracted. Net income for the quarter is $254 million versus $301 million in the prior year. For the full year, net income was $942 million versus $2,354 million in the prior year. The prior year amount includes $1.9 billion related to the profit on the sale of the fertilizer nutrients business.

Turning to page eight and the balance sheet. Our financial condition continues to be very strong. Our balance sheet continues to strengthen and we have significant liquidity available. Our working capital usage has declined approximately $1.5 billion primarily due to lower inventories resulting from lower commodity prices and inventory levels. Our total debt has decreased $800 million to $4.1 billion. At year-end we had $3 billion of available and unused credit lines.

Turning to page nine in the cash flow statement. Cash provided by operations was $2.6 billion in 2011. Funds from operation was $1,373 million primarily consisting of net income of $942 million, plus depreciation, depletion amortization of $526 million. Changes in operating assets and liabilities provided $1, 241 million as a result of our lower working capital usage. Cash provided by operations was primarily used for capital expenditures of $1,125 million and debt reduction of $800 million.

Let’s turn to page ten in the outlook for 2012. We expect another good year in 2012 but we have some challenges. Agribusiness and food and ingredient should again be solid. Sugar should make a significant step forward as our planting program allows us to operate at a much higher level and begin to reach our earnings potential. Fertilizer remains on track and should show significant improvement as we move towards the year.

Turning to the chart, in agribusiness, our grain merchandising business should continue to grow as we expect strong plantings, large crops and increased global trade. Our new investments in export terminals in the Ukraine and Longview, Washington, will be fully on-stream and add to our volumes. Oil seed processing has a mixed outlook. In the near term, European rapeseed and U.S. soy crushing are facing challenges but they should see some improvement with the next harvest.

On the other hand, margin remains strong in Europe for sunseeds and Canadian canola processing margins are also performing well. South American margins should strengthen with the new crop. Asia demand remains strong but conditions continue to be volatile -- but margins continue to be volatile.

Turning to page 11. We expect to see improvement our sugar and bioenergy business. Our 2011 planting program should allow us to crush 17 to 19 million tons next year, versus 14 million tons this year. While that is still short of our capacity of 21 million tons, it represents a significant increase from this year and a business with a large fixed cost base. We expect demand for our products to remain robust in 2012, as a reminder the sugar business profitability is heavily weighted towards the second half of the year due to the crop cycle.

Food and ingredients should have another solid year in 2012, our growth rate will be enhanced by the results of our acquisition of the North American margarine business and our Brazilian tomato business in 2011. And the Indian edible oils acquisition we expect to close shortly. We expect our fertilizer business to make significant improvement in 2012 as the actions taken in 2011 take hold. We should continue to see reduced cost and we expect increased volumes as we move through the year. This business is also weighted towards the second half of the year, reflecting former buying patterns.

In conclusion, we look forward to 2012. While the macroeconomic situation is uncertain, there are reasons to expect a degree of resilience in our business due to the nature of our products. Our businesses are well positioned, our agribusiness and food and ingredients divisions have consistently performed well in a variety of market conditions, and we will have their growth accelerated by the new investments and acquisitions.

Sugar and bioenergy should have enough cane available to begin to show their earnings potential. While we expect a significantly better year in 2012, we will now reach our full potential in 2013 when we should have enough cane available to crush at full capacity. Fertilizers should hit our targets in 2012.

Thank you, and we are now ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Christina McGlone of Deutsche Bank. Please go ahead.

Christina McGlone - Deutsche Bank

Good morning. I guess first question is, Drew, when you were talking about the outlook and you said the U.S. and European rapeseed margin should get better with crops. I guess it will get better but they are still below normal, right. There’s still overcapacity there. And maybe, Alberto, if you could talk about crush margins just around the world and what we are looking at in terms of utilization.

Alberto Weisser

Why don’t I start with the crush margins and obviously they were under pressure in the U.S. in the fourth quarter. And much more recently, they have improved because of the reasons is that it’s clearer that the South American crop will not be as large as originally thought because of the drought. And that is shifting some business back to the U.S. And I think there has also been more rational behavior in the industry. Rapeseed, it’s too early to say, but in Europe as the crop -- we expect it to be better when the crop comes in, the harvest. And around the world, sunseeds crush margins are very good. In China they are volatile, but they are okay. In South America the margins are, at the moment, lower because it’s -- the harvest is starting soon. But it should improve.

So overall, I would say that the margins are slightly below a normal level. And they are weaker in U.S. but improving.

Christina McGlone - Deutsche Bank

Okay, that’s helpful. And then in terms of the South American crop coming in short both corn and soybeans, what does that mean for Bunge?

Alberto Weisser

It is -- you probably have seen today the USDA report, it’s the first estimate. It’s a little bit early because February is an important month. We only will know it by the end of February. But overall, I would say it does not, it has no negative impact. It might be slightly positive because it gives us ample supply in South America but it also gives us the opportunity to start earlier in the northern hemisphere. So the change, the drought, probably doesn’t affect prices but has a better dynamic in terms of margins.

Christina McGlone - Deutsche Bank

Okay. Great. Thank you. And then just last question. Drew, in terms of the pattern for 2012, so, seasonally fertilizer, sugar, second half weighted. In terms of agribusiness, how do we think about the weighting throughout the year there?

Drew Burke

Yeah, I think it’s going to be a little bit more second half weighted than we would normally expect. Mainly because the carry forward from the U.S. crop last year is not as strong as historically to profit opportunities in the first half of the year and we expect much more normal fourth quarter in our U.S. businesses. So I think you should look at agribusiness a little more second half oriented than usual.

Operator

Our next question comes from Robert Moskow of Credit Suisse. Please go ahead.

Robert Moskow - Credit Suisse

Hi, thank you. I didn’t hear any commentary about risk management in the quarter and I was just watching the behavior of one of your closest peers, Cargill. Seemed to have a very weak quarter and said that it had a lot to do with the trading environment working against them. Did you make an effort here to kind of take risk off the table and did that help your results, maybe versus some of your peers?

Alberto Weisser

You might remember in the earnings call of the third quarter is when we said we did take at that time already off and we continued to be very, very conservative through the whole fourth quarter. And so that is also because the market, the whole market, was much more difficult and all the players were more risk averse. So farmers slow in selling, customers slow in buying, so we were very, very cautious in the fourth quarter.

Robert Moskow - Credit Suisse

Okay. And as you look to 2012, and I know agribusiness is tough to forecast, I imagine that there is no change to that attitude towards risk. The way I would look at it is that means there is probably fewer opportunities for upside on the margins for agribusiness. Does that mean that we should be expecting kind of a tougher comparison year-over-year for agribusiness in general?

Alberto Weisser

It’s difficult to say. We obviously see the challenges with the global macroeconomic situation and everybody is more cautious in every sector. So originally we thought that agribusiness should, in 2012, should be higher than ‘11 because of all of the investments. So when we say we see the challenge, we are realistic, it could be at ’11, more or less.

Robert Moskow - Credit Suisse

Okay. I got you. And then lastly, just, I am trying to forecast edible oils and milling. It sounds like there were several acquisitions in edible oils, if I got that correct, because of tomatoes and margarine. Can you give me a sense of what that means to the volume in that segment of the business and is it material enough to really boost your forecast year-over-year in that segment?

Alberto Weisser

I don’t have the volumes here now. Do you have them, Drew?

Drew Burke

No, I don’t Rob. Let me come at it in a different way. I would think we had spent between $200 million and $300 million on those acquisitions in total. So if you start to think about it that way and what the return would be, you could get somewhat of an estimate where they will be. We will have the first two for the full year, and as I said in my comments, the third is expected to close shortly. We have already announced the Indian acquisition and should close it soon. So I’d rather give you kind of a hint in that direction versus trying to give you a volume projection.

Robert Moskow - Credit Suisse

Sure. And those are all in edible oils?

Drew Burke

Well, we believe right now they will all be reported in the edible oils segment.

Alberto Weisser

Yeah.

Operator

The next question comes from Diane Geissler of CLSA. Please go ahead.

Diane Geissler - CLSA

Good morning. So, Drew, I wanted to talk to you about this -- your comments on the sugar business. And you had said, I think that 2012 you still expected it to be below, kind of optimal rates because the crush would be below your capacity. Can you just -- given where ethanol prices have gone sugar, the cogen, what is your total expected profit on a metric ton basis when you get to full capacity? And then I guess as you think about 2012, I think you’ve done some replantings in 2011. How much benefit will that be kind of on the year-over-year profit change?

Drew Burke

Thank you for the questions. I think there were about eight questions. So I’m trying to sort through it here. We still feel very favorable for the outlook on the sugar business. I think before we said at pretty high rates of production we would be at $8 to $10 EBIT per ton. Certainly, we said this year it will be 17 million to 19 million and those rates of production are high enough to be there. Obviously, embedded in any number we give you like that is just not the volume we crush, but it also has to do with where pricing is in the markets at any one point in time.

So, there is a number of variables, but directionally we feel it’s still right for ‘12 and actually beyond. The projection is 17 million to 19 million tons is based on the plantings we’ve done. It is still too early to make a specific call on that crop. That will probably be some time in the April time period where we start to get a clear idea of the size of the crop. So, that will become the case. And the limitation on our ability to use our 21 million tons of capacity is the crop size. So that’s why we are below. It’s not commercial or operational reasons, it’s just how much crop we have available to crush. We have another significant planting program scheduled for 2012, and that should put us in a position to be able to crush at full capacity in 2013.

Diane Geissler - CLSA

Okay. So, if we take the midpoint of both of those ranges for this year, that suggests EBIT of 160 million. Is that what you have in your plan for 2012?

Alberto Weisser

We don’t give guidance.

Diane Geissler - CLSA

But you can even run at those very high EBIT levels --

Alberto Weisser

Yes, yes.

Diane Geissler - CLSA

Even if you’re not at the 21 million metric ton range. Even if you’re just in the 17 to 19 you could still see that level of profitability given the current pricing environment?

Alberto Weisser

Yes, we can.

Operator

Our next question comes from David Driscoll of Citi Investment Research. Please go ahead.

David Driscoll - Citigroup

Great. Thank you, good morning. I would like to just go back to agribusiness business for a minute. So first, Alberto, I believe what you said in response to one of the questions that you think more or less the entire agribusiness segment is roughly flat in terms of profitability year-over-year 2012 versus ‘11. Did I get that correct?

Alberto Weisser

It’s obviously very early to say. We should, based on our investments, continue growing in ‘12 versus ‘11. But we are realistic that there might be -- continues to be some margin pressure. So we expect that perhaps to be more in line with ‘11.

David Driscoll - Citigroup

Okay. And so my kind of comments on there is, is that we’ve seen U.S. cash crushing margins pickup. And it looks like kind of the oligopoly structure in the United States is working, I think reasonably favorably relative to the overcapacity that’s there, that we see in capacity utilization rates. So, I just want to kind of maybe push a little bit on this one and just say, why wouldn’t you think that in aggregate, profitability in agribusiness wouldn’t be directionally better? Because it is clear that you do have stronger volumes that will come through. You mentioned the grain merchandising capacity increases, with cash crush margin increases in the United States and a good South American margin environment. I guess, I’m not pulling it all together in terms of why you wouldn’t be a little bit more confident that you would see directional improvement in profits within the business segment?

Alberto Weisser

Look, Dave, it could very well be. But obviously, we are seeing the end of the northern hemisphere crop and the margins are under pressure in North America. So that is exactly what we see now and we saw it in the fourth quarter, so we have to deal with that. That’s the current challenge. But we see there is -- the picture is constructive, is positive. The demand is there. USDA estimated the soybean meal demand 4%, soybean oil in general 4%. The crop in South America is good and the way it is structured it will also help the northern hemisphere. So the picture is constructive but it is very early in the year. And you are right, at the moment the margins have improved in the last couple of weeks. You see it on the CBOT Board Crush. But it’s early. We have to be realistic. There are challenges. And the global macroeconomic pictures with the sovereign debt, so we have to be careful.

David Driscoll - Citigroup

That sovereign debt point is one I want to pick up the threat on. In the last quarter you of course talked about kind of a risk off because of the difficulties from the perturbations in the sovereign debt market which then crept into your markets, in the agricultural markets. If we presume that those types of disturbances don’t happen or happen to a much lesser extent in 2012, isn’t that also just a fundamental positive for Agribusiness?

Alberto Weisser

Yes, it is. It is. And we should see much more normal pattern of buying and selling of farmers and customers and that should normalize. I think you are right.

David Driscoll - Citigroup

Okay. Two more questions for me and I will pass it along. I wanted to do a big picture question. You talk a lot about return on invested capital. Obviously, the company is not returning adequate returns versus it’s expected return on invested capital -- sorry, versus it’s expected weighted average cost of capital. What I want to get a sense from you guys is, when you think about getting back to -- and I put these numbers, I put normalized numbers between $8 and $9 a share -- when you think about that kind of an area, what kind of timeframe, given the growth inherent to these markets, would you put at directionally to get back to some kind of appropriate returns? Is it a two-year timeframe, a five-year timeframe? I think people really need to hear some commentary regarding this. Because the very significant increases in total invested capital over the last five years have gone largely unnoticed when you look at earnings per share. So there is a lot of folks out there, Alberto, who just don’t understand this and what the leverage of this company is. It’s a long question but perhaps you could provide some thoughts?

Alberto Weisser

No, I understand. And it’s relatively easy to answer, because it is very much related to sugar, bioenergy, and fertilizer. When you look at the investments we have done in sugar & bioenergy, which is around $2.5 billion, and the returns are not there yet. But we know exactly why they are not there and we believe they will be there, as we ramp up the sugarcane production. So if we do the 17 million to 19 million tons of sugarcane processing, the $8 to $10 per ton in EBIT, we are closer. So we probably should be at cost of capital in the sugar & bioenergy business as we mentioned in the past in year ‘14, ’15. And we probably should be, this year or next year, in fertilizer. Hopefully, in this year we should be. Agribusiness, food and ingredients and fertilizer would be above cost of capital and we’re just ramping up sugar & bioenergy.

We have to remember that when you build a new business Greenfields, brownfields at the moment we have the highest amount of investments. So, the denominator is at the highest value, highest amount and the numerator is also affected because depreciation is the highest. As these businesses season more we will get -- very soon it will be very close to cost of capital. That is always the problem when you build new businesses. But we see it very clearly. We believe in it, the returns, all the time. We analyze it exactly as we expect it, perhaps long-term even better. Because when we got into this business we didn’t think about cogeneration which is an additional interesting income stream.

So, we’re very confident that we’ll get there. We’re a little bit unlucky in sugar & bioenergy that we had this major problem in 2010 of drought and fires and affected the cane field. But we had heavy investment in planting in 2010, another heavy one in 2011. We exceeded our plans and with all the plantings we have in plan for 2012, we should be there in 2013.

David Driscoll - Citigroup

So, if I bring it altogether then, it sounds like the agribusiness segment is, in 2012, it’s flat, perhaps directionally higher pursuant to the factors we just discussed. Sugar and fertilizer clearly improving and food and ingredients has just been a nice solid business, continues to be so. So then net-net, you guys (hinted) flat out sales in the press release, but net-net, earnings are up in 2012 over 2011, no ambiguity on that. Would you agree?

Alberto Weisser

I like your analysis, Dave.

David Driscoll - Citigroup

I like it too.

Operator

The next question comes from Lindsay Drucker Mann of Goldman Sachs. Please go ahead.

Lindsay Drucker Mann - Goldman Sachs

Thanks. Good morning, everyone. Could you talk a little bit about the volumes in agribusiness in the quarter, they were larger than what we were expecting. Just wanted some clarification on why you had such strong volumes?

Drew Burke

Sure. I think it came from several places. First, we’ve made significant investment in the U.S. grains business. Both in terms of interior grain handling facilities and in terms of the port on the West Coast. While the port has not started shipping, which it will do shortly, we have been originating volumes for that program. So we had the origination volumes in the new businesses, we had the volumes moving out to the port. So we had good growth in volumes in North America. We also have a much bigger crop in the Black Sea, so we have origination opportunities there. And we’ve brought our new oilseed crushing capacity during the year. So it was kind of all three of those things coming into the fourth quarter and producing the type of strong volume growth you’ve seen.

Lindsay Drucker Mann - Goldman Sachs

Is that something we should -- until the next slug of investments come online, is that a good run rate to use in terms of volumes for the business going forward?

Drew Burke

We always hesitate to give run rates because it’s heavily dependent on crop sizes and other factors, other than our underlying business. But one thing I would say is, in the current year we don’t have the (NYSE:PNW) export volumes and they will fully come in next year -- in ’12, they will fully come in. And that will add -- it’s about 8 million tons total and we’re 50% owner, so we get benefit of about 4 million tons there. And the Nikolayev port also did not operate with us for the full year and further, so we’d get another million tons there. And a number of the other facilities I mentioned only came on later in the year. So there is still some inherent growth out of those investments. I don’t think you could assume it will be flat until you hear other investments announced. You’re going to get the full year impact of many of these things coming on. But again, just to caution, that other things affect our volumes other than our capacity.

Alberto Weisser

But also, we continue believing that we will be growing at 5% to 7% on volume on average.

Lindsay Drucker Mann - Goldman Sachs

Would 2012 be a larger volume year given some of your investments, than your average?

Drew Burke

We believe so.

Lindsay Drucker Mann - Goldman Sachs

Okay. Great. Then I just wanted to clarify on the sugar business. You talked about this $8 to $10 a ton profit number. What would you think that profit number could be when you are fully loaded with cogen and all the other investments that you intend to put in place layered on?

Alberto Weisser

Well, it has to be both because just think about the -- we have to cover our returns. So if you have invested $2.5 billion and we will do some, as we are doing at the moment, expanding. We are doing expansion in planting but also in cogeneration. So there will be some more operational assets and they will have to return, at the end it will have to be 2 percentage points above cost of capital, so more or less about 10. So it gives you an idea where the EBIT per ton will be.

The traditional number of $10 per ton cane is an older number from 5, 10 years ago, which was at the time when sugar was also priced at $0.10 per pound. With the environment we have today and the sugar has to be priced at $0.20 per pound for the Brazilian farmers to expand. So the number should be above 10. We will see how it evolves with cogeneration, with ethanol, with sugar. We don’t want to exactly say yet what our expectation is, but it will be above these numbers.

Lindsay Drucker Mann - Goldman Sachs

Okay. And then lastly, if you could just shed some light on what you are seeing in the U.S. biodiesel market, now that we have gone through the credit expiration?

Drew Burke

I think in the biodiesel market, there is a downturn in the first part of the year as people ramped up production in the last part of the year to take advantage of their credit. So we see a short-term shift down. But longer term, the mandates are in place and we think it will come back to normal volumes and follow the mandates.

Lindsay Drucker Mann - Goldman Sachs

So are you essentially seeing people cashing in on the (RINS) that they accumulated in prior -- specifically last year? And ultimately the expectation is that you will cash in on those and then in 2013 will be back to RFS levels?

Drew Burke

Yes, we think you are going to move back to the mandate levels as everything clears for the system.

Operator

Our next question comes from Christine McCracken of Cleveland Research.

Christine McCracken - Cleveland Research

Good morning. Alberto, I think you said that it’s a little too early to tell how large next year sugar crop might be. But you have put in, replanted a lot of cane, your competitors, I think are doing the same. Wouldn’t you expect to see a pretty sizeable improvement just on productivity gains alone for next year?

Alberto Weisser

When you talk about us, yes, we have exceeded even our targets. And now the whole industry has not invested as much. So not every player in the industry has invested as much as we have even on a relative term. So it is -- there will be an increase in yield and productivity, but it is not going to be all what is necessary to cover all the demand that is out there.

Christine McCracken - Cleveland Research

All right. The drought that was seen here for a few years now, how much of a hangover impact then are you expecting on next year? Is cane still, maybe the overall cane crop? And is it fair to say that the sugar that you’ve replanted maybe more drought resistant and therefore perform better even if there were ongoing issues for next year?

Alberto Weisser

I would say that we are always going to have some weather issues and that’s why the target is to have a little bit more than what we really need. And we have seen -- many of you have mentioned that some competitors who have performed better exactly because of that. They have a little bit excess capacity, and that is also our target. So we always have to consider that there will be some weather issues. What was different was 2010, where it was so drastic, so tough that there were even the fires. So that one affected everybody in a stronger way. So, what we expect is that in 2013 we will be in a position where even if there are weather issues, we should be able to be producing close or at capacity.

Christine McCracken - Cleveland Research

All right. And then just one last question. Can you remind us how much of your cane you actually produced yourself and how much is coming from third parties?

Drew Burke

It is, I think at the moment 60% is, we produce, and 40% is from third parties.

Operator

Our next question comes from Vincent Andrews of Morgan Stanley. Please go ahead.

Vincent Andrews - Morgan Stanley

Thanks very much. Just a couple of questions. Maybe, Drew, on the tax rate, it came in, I think, below what you had sort of been talking about for the third quarter and then your guidance for next year, it’s kind of been lower as well. So, my guess is, is just to shift in geographically where you think you’re going to make your money. But could you give us a sense of what that shift is and what’s causing it and where the surprise is coming from?

Drew Burke

Thank you for the question, Vincent. I think you summarized it pretty well. In the current year, the drop in the tax rate towards the end is because our pre-tax income was lower in certain of the higher tax jurisdictions than we had expected. In our capital structuring, we said we improved about a year or two ago is providing a little bit better results than we expected. So that is why you see the drop this year and the drop and what we are seeing next year. We think that, that program is going to work out a little bit better. The increase from this year to next year is really driven by the improvement we expect to see in our sugar, in our fertilizer business as Brazil is a pretty high tax rate jurisdiction for us.

Vincent Andrews - Morgan Stanley

Okay. And can I ask you, on the comments you made in fertilizer was that the conditions are going to be challenging, I guess, to start things off or let’s say that’s what in the press release. And my guess would be that’s a function of some of the price movement at the end of the fourth quarter. So it’s less that you need to take an inventory write-down and more adjustments. So you are going to have to move some higher cost inventory through the system. Is that the right way to think about it?

Drew Burke

For the first quarter of next year that is -- for ‘12, sorry for confusion on the year. But for the first quarter of ‘12, that is correct. We are talking about pressure on margins in the first part of the year or maybe not even to have first half of the year, maybe first quarter. But not to the level where we expect to see any write-downs in 2012.

Vincent Andrews - Morgan Stanley

Okay. And when you guys first started getting big in the sugar business, I kind of remember there being a conversation around ultimately changing the mix of owned plantation versus third party purchasing. And then of course the last couple of years, from a shared crop perspective have been unique to say the least. So was that still -- can you remind us of what your thought process is and what you want your mix of owned versus third party to be?

Alberto Weisser

Our target is to get to 70:30, and we probably should be able to reach it in 2012.

Vincent Andrews - Morgan Stanley

Okay. And then my last question is just on -- it goes back to the sort of commentary around your return profile, which I agree is very important. And my question is, you sold the wholesale fertilizer business several years ago and you got a, I can’t remember the exact amount of proceeds. But if memory serves me correct, you have not completely reinvested those proceeds into new assets. If I recall, some of those proceeds went into working capital during a period of rising commodity prices. So first, is that recollection correct? And second, do you envision being able to take some of that working capital and reinvest it into harder assets? Because part of my sense is that your return profile is not only hindered by the sugar not performing the way that it’s capable of, but also because you have a little bit of a return drag from the higher working capital?

Alberto Weisser

I would perhaps characterize it a little bit different. We mentioned that we had now the strongest balance sheet that we have had in decades. So you could see, we could leverage up and have a higher return. But, this is not that easy because we have very clear rules about hurdle rates and what kind of returns we want to achieve. And we have not been able to do perhaps one or the other acquisition that we wanted because of price expectations or it didn’t meet our hurdle rate. So we don’t mind to be in this moment to be well capitalized in a very difficult environment.

So we could take advantage of opportunities that might arise. But I will say, your recollection is correct, that we used some of the money to invest in working capital. But as you saw, as commodity price come down, the money is coming back. So, we are capitalized. We think we will be able, with our capital structure, to reach our target of being 2 percentage points above cost of capital, not this year but perhaps next year or ‘14. But it also allows us the flexibility to take advantage of opportunities that might occur.

Operator

Our next question comes from Ken Zaslow of BMO Capital Markets.

Kenneth Zaslow - BMO Capital Markets

Hey, good morning, everyone. Just a couple of questions. One is, can you talk about the change in the South American crop and how that’s going to affect your agribusiness?

Alberto Weisser

The drought that is occurring in the southern part of South America is going to reduce the crop expectation. You might have seen the first estimate from USDA this morning. And it will not have a negative impact. It’s either neutral or positive for us, because the crop will be big enough that we have enough products to process and to merchandise. At the same time, it is not too big that it doesn’t affect the U.S. crop. So, you might remember that last year we had a tail of the southern hemisphere that affected somewhat the northern hemisphere. So, this should have a slightly positive impact on the U.S. or the northern hemisphere, impact on profitability on margins for the processors and merchandisers.

Kenneth Zaslow - BMO Capital Markets

Okay. And then secondly, in terms of the sugar business, when you guys are doing your volume expectations, I guess over the course of the last, a little bit, you guys keep on ratcheting it down. What is the risk that it gets ratcheted down again? I mean, how confident are you in your forecast going forward?

Alberto Weisser

Look, I think, obviously, we are learning and we are getting more used to estimating these crops and that’s why we have this wide range of 17 to 19, our target is 19, but it might be 17. So, what has been really unique was the problem in 2010. You might remember that the whole industry, including the federation or the association, UNICA estimated the crop for the Center South of Brazil of 560 million tons and it ended up coming in at 492. So, I think everybody underestimated how dramatic the impact of the drought and the fires were in 2010, because it was not only an absolute acreage that was reduced but it had also an impact on the yield of existing fields.

But the reason we are more and more confident is that the average, on average you’ll keep these sugarcanes growing for five years and we are replenishing them. So we had now two major replantings and expansions ‘10, ‘11, and we’ll have another one in ‘12. So, obviously, we’ll replant it to an amount that will be more than we need so that we have enough reserve for these weather events. So I think we are becoming more and more confident. And so far the weather, it’s obviously very early, so far the weather has been benign for sugarcane plantations.

Kenneth Zaslow - BMO Capital Markets

And what about also on the sugar margin side. I mean, again, kind of saying this as (inaudible), but you actually have not gotten that margin that you have expected. And in forecasting it, to what extent is it like a theoretical exercise versus the confirmation that you’re going to be able to get that 8 to 10? I mean, again, what is your level of confidence? It just seems like a very abstract number and why not make it 7 to 9, why not make it 9 to 11, or how did you come up with that number? It seems more abstract than you found it in numbers, I guess?

Drew Burke

No, Kenneth, it is grounded in numbers in which we’ve modeled the business using several different scenarios. But that margin is also, it is a dynamic margin where prices matter, volumes matter, etcetera. So you have a number of factors going through there and it may seem to you a wide range, but that’s the range we’re comfortable looking at. The other thing I would point out is, sugar is a heavy fixed cost business. So within a certain range those type of numbers hold up, you start getting below that range. You’ve got a pretty big incremental profit moving for the last ton and it can move quickly.

So one reason that why our projections have not held to that is, when we’re producing down to 14 million tons with 21 million tons of capacity, that’s an awful lot of fixed cost absorbed. If you are up at 17 million to 19 million, it’s a much different level of fixed cost absorption that’s having an impact. So that’s why we’ve always said, be careful using that range getting out of reasonable production levels, because it will move quickly. It also moved quickly to the upside, by the way, if you get above the totals we are looking at. But if you get below it, it moves quickly also.

Kenneth Zaslow - BMO Capital Markets

And what type of returns do you expect to have on the CapEx part that you actually laid out in the presentation?

Alberto Weisser

We have our traditional hurdle rate which is above, significantly above cost of capital. 25% of our CapEx doesn’t bring any returns because its maintenance, sometimes it’s regulatory issues. And obviously you have to remember also it’s not immediate because it takes sometimes three years until all these numbers to completely in. And we feel good at the moment because many of the projects over the last couple of years are now coming up. It’s the plants in Asia, it’s the ports, some of the sugar expansions. So we are now starting to see some of the benefits of the investments over the last three years. But overall you should expect something only after three years after we have invested it. That’s why sometimes we prefer acquisitions because they are immediate. But CapEx takes a little bit longer.

Kenneth Zaslow - BMO Capital Markets

And my last question is, there is a lot going on in Canada, in terms of the Canadian Wheat Board going away. Is there a plan of action for you to take advantage of that? Is it an internal or is it an external opportunity? How do you think about that?

Alberto Weisser

I think we look at every option. You should remember that we are present in Canada. We have large terminal in Eastern Canada, six or seven silos. We have already a silo in Western Canada. We are one of the largest, if not the largest, originator of canola seeds. So we have a significant presence there, 800 employees. So to expand this into doing more of grains is not a big issue. And we have shown in the past that we can do this. We went from nothing into Eastern Europe and have done it relatively well. So at the same time, we will take, as always, a cautious approach. We will go step by step.

Kenneth Zaslow - BMO Capital Markets

So do you think will be able to capture some of the wheat? I mean is there, I think it won’t quantify, but I didn’t realize that you captured the wheat -- accessing the wheat and then being able to move it around. I didn’t realize that. Is that going to be a sizeable benefit or is that something that....?

Alberto Weisser

It’s not something for ‘12 -- it will not move the needle. But I think you will see us involved in that.

Operator

Our next question comes from Christine Healy of Scotiabank. Please go ahead.

Christine Healy - Scotia Capital

Hi, thanks. First question just on oilseed processing. You talked about how there has been some rationalization in the U.S. soybean industry. Could you talk about just how well Bungee has done in this regard and if there is any further plans over the next few months?

Alberto Weisser

We feel very good about what we have done. When you look at the last six years, we have rationalized our plans. We in fact have reduced our capacity by nearly 1.5 million tons over the last five, six years. And we have done what we need to do. And the plants are efficient, are the right place, are the right size. We have shutdown plants, in total four plants. So we are done. We feel we have done what we need to do.

Christine Healy - Scotia Capital

Okay. And then on the agribusiness segment, your increase in volumes was in part due to the Black Sea volumes, your new port there. So how concerned are you by this year’s crop situation in Ukraine and what impact you think this will have on Bunge?

Alberto Weisser

It is very early to say, but it should be okay, Russia and Ukraine. There are some doubts like always about whether -- is there going to be a winter kill or not, it was a little bit dry in Ukraine during planting season. But there might be, it’s early to say, but there might be some reduction, but at the same time the Russian crop is supposed to be very large. It is early. We’re not yet concerned.

Christine Healy - Scotia Capital

Okay. And just one last question, just on the sugar segment. Just curious, should we expect even more earnings to be weighted to the second half this year than a normal year? I’ve seen some reports that harvest could be delayed by a month or two. Is that your view?

Drew Burke

I don’t know if it’s so much more than a normal year. They are always pretty strongly weighted to the second half. So, maybe a little bit more, but not a lot. And we have not made all the final decisions of when our plants are going to start up. We’ll do that as the crop develops and as we plan out our capacity for the year, because you want to maximize the yield. So if people have the opportunity to delay, they are actually going to take it because they will get better yields. But it depends on how much volume you need to process over the full year, when your startup date is.

Operator

Our next question comes from Ryan Oksenhendler of BoA Merrill Lynch.

Ryan Oksenhendler - Bank of America Merrill Lynch

Good morning. Can you talk about sugar, what happened in the quarter? Because I thought, Drew, you talked about last quarter on the conference call that this quarter should be solidly profitable, and you had a $29 million unrealized loss last quarter that should have reversed, or at least some of it this quarter? So I think, I was just a little disappointed in the results in the quarter. Can you just talk about what happened there?

Drew Burke

One, I think it was a significant increase from the prior year. Our plants ran better and we had gotten a small increase in volume in quite a bit. I would say that we did sell less than we projected in the quarter and are carrying a decent amount of inventories over the 2012. So that had some impact. And again, it was just the crop size and the lacking of the volumes in the fourth quarter.

Alberto Weisser

If I would summarize in one line. The volume came in lower than we expected. And as Drew was saying before, because of the high amount of fixed cost, it has a significant impact.

Ryan Oksenhendler - Bank of America Merrill Lynch

Okay. And then just to follow-up on some of Ken’s questions in terms of forecasting. How many hectares do you guys source from, totally?

Alberto Weisser

In 2012, 70% should be our own, what we are directly responsible for the planting, and 30% the third party. I think the total amount is around 230,000 hectares.

Ryan Oksenhendler - Bank of America Merrill Lynch

Because I just wanted to get some insight. So I think 25,000 of that will be -- so you replanted 50,000 and 25,000 was incremental, is that correct?

Alberto Weisser

We, in fact, we exceeded our target. We planted much more than that. And what you should think about it is that on average every year, you have to replant 16% of your cane fields. And the ones you own your own or you directly are responsible for the planting. So everything above that is for expansion.

Ryan Oksenhendler - Bank of America Merrill Lynch

Okay. Because I’m just trying to get a sense of forecasting it for next year. If you had around 200,000 hectares this year and you milled about 14 million metric tons, it would have been about 70 tons per acre or hectare. Which was about in line with the industry and I’m just trying to get a sense if I’m thinking about next year, you’ve got, I don’t know, you are expecting…?

Alberto Weisser

No, you are on the right direction. The only thing is they are much complicated because the first year plantings, the yield is closer to 100 tons per hectare and the fields that are in the fifth year are much, much lower. So we still have some older fields out there. And some of the planting we use for seedlings for next year. So what we do is we maximize the amount long-term. We might sacrifice perhaps, when we see 17 to 19 that implies already that we might use more cane that we planted to use seedlings so that we reach, in ’13 we reach the capacity that we need.

So it’s a little bit -- there are many things. Is yield -- how poor was the crop of the third and fourth and fifth year sugarcane, how much you use for seedlings, how much is replanting? But that is why we give you the indication that we think planting was better than we thought, but we are keeping our estimate for 17 million to 19 million tons of sugarcane production that we will process.

Ryan Oksenhendler - Bank of America Merrill Lynch

Okay. I just wanted to see if you guys were expecting the cane that you didn’t replant -- don’t know what the yields on that would be versus this year because last year was impacted by weather, but this year the crop’s a year older, even if you assume a normal weather pattern?

Alberto Weisser

Yeah. The yield should be up because we took advantage of the ones that were problematic. We just replanted them. So, we are being very aggressive. It’s all about maximizing yields and getting to full capacity. So, we are not being cheap here. We are looking at it very, very economically. So, where we don’t have the yields we are replanting.

Ryan Oksenhendler - Bank of America Merrill Lynch

Okay. And how many hectares do you plan to replant in 2012?

Alberto Weisser

It’s more or less the same. We planted around 62,000 last year, so it’s probably more or less the same.

Ryan Oksenhendler - Bank of America Merrill Lynch

Okay. And then just the third party cane that you source from, do you know how many hectares of that were replanted this past year?

Alberto Weisser

That I don’t know. I don’t know we....

Drew Burke

If I managed to hear your question, Ryan, the 50,000 or so for Bunge are third party planted. We planted about 13 of that.

Ryan Oksenhendler - Bank of America Merrill Lynch

So that’s included in the 50,000?

Drew Burke

No, that’s included in the 63,000, Alberto referred to.

Ryan Oksenhendler - Bank of America Merrill Lynch

Okay. So, that includes third-party cane. Got it. Okay so, that was just Bunge.

Drew Burke

50 Bunge, 13 third party.

Ryan Oksenhendler - Bank of America Merrill Lynch

Got it. Okay. Thank you, guys.

Operator

We have no further questions in queue. I will now turn the call back over to Mark Haden for any closing remarks.

Mark Haden

I want to thank you again for joining the call. We’ll talk to you soon.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.

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