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Archer Daniels Midland Co. (ADM)

March 28, 2012 2:00 am ET

Executives

Juan R. Luciano - Chief Operating officer, Executive Vice President and Member of Risk Management Committee

Matthew J. Jansen - Senior Vice President and President of Oilseeds Business Unit

Greg Morris -

Valmor Schaffer - President of South America

Brent Arthur Fenton - Managing Director

Ray G. Young - Chief Financial Officer and Senior Vice President

Analysts

John E. Roberts - The Buckingham Research Group Incorporated

Unknown Analyst

David Driscoll - Citigroup Inc, Research Division

Juan R. Luciano

Good morning. I'm Juan Luciano, and I would like to thank you all for joining us in Hamburg. Pretty pleased to be here with you today to describe our Oilseeds business. We really have a great agenda we put together, a combination of presentations, some material that you see on the back and a plant tour. And I think this will provide you the opportunity today to take a deep dive into our Global Oilseeds business and, perhaps, more importantly, have the opportunity to interact with the wonderful management team that runs the business.

The way we're going to start is I would provide a brief introduction on ADM, cover some of the trends that we're facing in the agriculture industry and how we are positioned in our strategies to capitalize on those trends. After that, I will turn it over to Matt Jansen, the Global Oilseeds President; and he will be joined by Greg Morris, who will cover North America; Valmor Schaffer, who will cover Europe; our Host and President of Europe, Brent Fenton, who will cover Europe and sub-continent India. Then after that, we will have a

Q&A, where we will be joined by our CFO, Ray Young; our Chief Risk Officer, Craig Huss; our Corporate Strategy Vice President, Dwight Grimestad; and we have a new addition the team, and I would like to welcome Ruth Ann Wisener as the Vice President for Investor Relations. Welcome.

Today's discussion is obviously covered by our Safe Harbor statement, which you can read on the slide or on our website at adm.com. Those of you listening on the webcast who may not be that familiar with ADM, I would like to present some key facts about our business: our fiscal 2011 revenue was $81 billion; we operate more than 665 facilities, 400 origination and about 265 processing units; we serve customers in over 160 countries; and our market cap is slightly above $20 billion. On the right hand side, you can see the 3 key businesses that we have, Oilseeds Processing, Corn Processing and Ag Services and the respective percentage of profits from the $4 billion of OP the business generated in 2011.

Now let me show you how we are positioned in our company to capitalize on these global trends. While the world is experiencing volatility, there are some things that are very certain. When you look at the demographics and you realize the global population is growing by 0.5 billion people every decade and that we are probably witnessing the biggest change in standard of living that we have witnessed in many generations, and you have these people increasing the standard of living and, obviously, increasing their diet and consuming much more protein. Many of our large customers are advancing strategies to serve these growing needs, particularly in Asia. Our business, Oilseeds business, is aligned with those strategies.

In this favorable long-term environment, we are expanding our core models. This is our core model, our value chain. We buy crops from farmers

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on the left, move crops through our global transportation network and either sell them as crops or process them

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biofuels, industrial products.

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strong core model that's grown over the last century and continues to evolve.

Now let me show you how we're planning to continue to leverage this core model to capitalize on growing opportunities. I think some of you have seen this chart before, the top of it describes the regions where we're active, and the left side highlights the business activities. Orange boxes represent the strategic priorities. Places like South America, Eastern Europe and China that are growing and producing regions, we are focusing on growth. In other regions, we're optimizing our operations. In short, we're making sure that our growing global network feeds a glowing -- growing global population.

Maybe let me give you an example of one of them, in particular, the Wilmar partnership. You might recall that during our presentation at CAGNY in February, we announced that we had signed an MOU with Wilmar to partner in the areas of ocean freight, fertilizer and refined oils. We believe the partnership will leverage our strength in origination and distribution of fertilizers, save cost in fleet management and optimize our refining capacity in Europe.

We are pleased to let you know that our partnership in this area is progressing well. Earlier this month, we signed a definitive agreement to move forward in these ventures and, since then, both companies are preparing for the implementation process. We're excited about this venture and about our entire strategy of growth, faced with a growing, changing world.

Now Matt and his team will take you through our Oilseeds business in more detail, region-by-region. Matt?

Matthew J. Jansen

Great. Thank you, Juan, and welcome, everyone, to Hamburg. I'm very glad to share with you the Oilseeds division and our business overview. We're very near our oilseed crushing plant in Hamburg that we've passed last night. That's the largest of its kind in Europe. And I'm sure, this afternoon, as you get a chance to visit that plant, you'll gain a better appreciation for what we do there.

I'll begin this morning by giving a general overview of our global operations, and I'll talk briefly about what we do in China. And my objective is to share with you a footprint of our global assets. We'll talk a little bit about our recent earnings history, and I'll touch on some of the overarching trends that are shaping our industry across the globe. I'll introduce to you some of the specialty businesses that we have within our portfolio that are higher-margin product lines. And finally, I'll talk about our global strategy. And our global strategy is about extending -- or expanding our geographic footprint, it's growing our higher-margin business, and it's increasing our productivity and efficiencies through operational excellence.

So this map shows an overview of our global asset base, which is unparalleled in our industry, and we're very well positioned to meet market demand. And we have the capacity to process over 100,000 metric tons of oilseeds on a daily basis, and we are the top 3 in the global processors, with top positions in North America and in Europe.

Our business unit has over 130 processing facilities across the globe, many of which are crushing plants. About 1/2 of those are oilseed -- or oil refineries, packaging plants, biodiesel plants and higher-margin businesses, especially proteins, vitamin Es, lecithins and even sterols.

We participate in China largely through our participation in Wilmar, but we also do a lot of business in China selling to customers soybeans, rapeseeds and products. Bear in mind that in North America, we're primarily a processor, and many of our origination and export facilities are under the Ag Services division. While in Europe and in South America, much of our origination is within the Oilseeds division, together with the crushing plants and other processing plants.

Through this network, we can ship and source and process products virtually anywhere in the world. Taken as a whole, this integrated network, along with our insight and exceptional

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experience to manage the market dynamics, enables us to efficiently and cost-effectively connect growing supply and growing demand around the world.

Put you on OP just for a minute. You can see, roughly 2/3 of our OP comes from crushing and origination. About 1/4 comes from refining, packaging, biodiesel and other; and approximately 10% to 15% come through our relationship with Wilmar. Last year, OP exceeded $1.5 billion. That included a $71 million gain related to the acquisition of the remaining 50% of Golden Peanut. And after 6 months, this year, we're at $432 million. And as we discussed in our recent earnings calls, this year's slow down reflects margin challenges that are dragging the market down as a whole.

But we are confident that our efforts to grow our market presence and earnings power are positioning us to make the most of some of the undisputable trends that are shaping the global supply/demand base. And I'll talk a little bit more about those trends here in just a minute.

Risk management represents a critical aspect of our business, and it's one of ADM's core strengths. Beyond the basic supply and demand picture that influences our business and everyone else's, we have to account for variables such as macroeconomic conditions, FX and even speculative interest. These are all external factors that impact the price of commodities everyday, and we work hard to manage them effectively. But ADM benefits from having boots on the ground around the world; in-house experts who have first-hand, real time knowledge; everything from soybean yields in Mato Grosso, to feed-grain demand in pork and poultry customers in China, South America, North America and Europe. We know what growers are growing in South America, and we know what buyers are buying in all parts of the world. And we talk as a global team throughout the day, nearly everyday, to ensure alignment among our teams. This enables us to make timely, well-informed decisions and to capitalize on emerging opportunities.

Our belief is that having the right information is just part of the equation, how you interpret that information and what you do with it that makes the difference.

Some of the major factors working in ADM's favor are certain indisputable trends that are shaping the world around us. I'm talking, first and foremost, about the growth in population, which is expected to grow by 2 billion people between now and 2050. We see this as an opportunity, 2 billion people who will need more food and energy to live. Some of this growth will be in North America, which is projected to be in the low-single digits. South America is estimated to be 2x the rate as North America. Growth in Asia will be massive, an estimated 41%.

Increasingly affluent population is expected to rely heavily on agricultural production of North America, South America and Europe. This demographic inevitability gives us the confidence to continue pursuing our growth plans as we define them. A growing number of mouths to feed, along with rising incomes, particularly in China and Asia, is enabling millions of consumers to enjoy better diets.

You can see, in the past 2 decades, the world's population grew by 32%. We experienced a near doubling in demand for both oilseed meals and oils. Soybean meal demand has grown 161%. Oil consumption has grown by about the same percentage. Palm oil demand has increased more than threefold. Poultry consumption has increased 131%, and we've seen about a 60% jump in pork production. And we've got more people

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better and more food. This is another indisputable trend that supports ADM.

So now let's turn to the supply picture. Growth in North America production has been relatively modest in recent years. South America, on the other hand, is continuing to supply an increasing percentage of the world's soybean production. Production there has been growing at 5% compound annual rate, and we expect this trend will continue, making this the region's leading soybean producer. As you saw from the first map, and Valmor will discuss in a few minutes, ADM is particularly well positioned to capitalize on that fact.

Here's a summary of our regional look at ADM's market share. The size of the pie reflects the relative size of each region's crush market. The orange slices represent ADM's share, dark green slices represent other large players, and the light green slices correspond to smaller regional players. You can see that when it comes to soybean crush, some markets are far more consolidated than others, which illustrates why our growth strategy is different by region. North America, for instance, is more consolidated than either South America or Europe. South America is comparatively fragmented, which offers opportunity for further consolidation. And Europe is more like North America in terms of the mix of bag of industry players versus smaller operators. China is comprised of both larger and smaller operators. And as I mentioned a moment ago, it's a market where we participate largely through Wilmar, and growth in our Chinese oilseed business will continue to come primarily through Wilmar. However, we're also growing our export businesses to China.

Today, for instance, we supply Chinese customers with soybeans, canola, and oilseed products. We expect this trend to continue as well. Overall, the less fragmented a market is, the better the margin environment will be, especially when capacity utilization is in balance. Our geographic growth strategies are designed to capitalize on this dynamic.

Now the scenario for global rapeseed production is, almost literally, a world apart. Here, while the CAGR is running at about the same rate as global soybean production, build difference is where the growth is coming from. In this case, it's primarily Canada and EU. Not coincidentally, these regions are where our existing rapeseed crush plants are concentrated. We've been growing our origination and processing operations in Central Canada and in Eastern Europe, most recently through the expansion of our Lloydminster, Alberta complex, to which we're now adding a biodiesel plant; our acquisition of 3 grain elevators in Slovakia; as well as the most recently announced acquisition of Elstar Oils in Poland.

This map outlines our global rapeseed crush presence. Again, the orange slices represent ADM's market share, and the green slices represent the other large industry participants. You can see North America is once again fairly consolidated. Real opportunities for consolidation are in Europe, which should give you a sense of why we acquired the oilseeds business in Poland that we announced last November.

Elstar Oils was previously a traded -- a publicly traded company listed on the Warsaw Exchange. And after receiving all the necessary government approvals last year, we were able to finalize the acquisition, which gave us full control of a rapeseed crushing plant, refinery and fully automated biodiesel plant. These operations are now integrated into our global asset network, and Brent will tell you a little more about that here in just a few minutes.

I mentioned earlier, in addition to our crush business, our division is actively working to grow its higher-margin product portfolio. Today, we produce a wide range of specialty food ingredients and renewable industrial products from our basic oilseed building blocks. Some of those items are depicted on the slide here, and many samples on the table behind you represent some of the products that we're producing, including lecithin and even protein concentrates.

Although these businesses don't have much viability -- visibility, their earnings are meaningful not only in the percent, but also in their stability. So I want to take a little bit more time to talk about each of these businesses.

I know that most of you understand the basic idea of crushing. It's oilseeds in, and meal and oil out. But in reality, there's a whole lot more to our business. We process not only soybeans and rapeseed, but also sunflower, cottonseed, flax and peanuts. And we produce over 60 unique products. You see here, our liquid crude oil stream allows us to produce a variety of higher-margin products such as shortenings, margarines, vitamin E, sterols and biodiesel.

Similarly, on the meal protein side, we're able to refine or texturize the product to make a range of higher-value, higher-margin food grade ingredients with a broad range of food and industrial applications. This includes soy flour, concentrates, isolates, as well as textured vegetable proteins. As I mentioned earlier, you don't have a whole lot of visibility in these product lines, but they're meaningful under the context of our entire portfolio. It's a complex and integrated business model, and you'll hear more from Greg, Valmor and Brent of how these business models vary by regions.

No other industry player has a broader oil portfolio than ADM. Today, our total product portfolio encompasses much more than our soybean and canola value streams.

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we produce many of the world's most widely used vegetable oils, we have the opportunity to partner with our customers to create unique, customized solutions

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our food customers continue to look for ways to offer products that meet high consumer standards for taste, texture, better nutritional content. ADM are often the go-to player when it comes to proprietary formulations and innovative blends.

For example, our R&D department was able to develop a unique oil blend for leading global food companies. This blend helped our customer not only hit their nutritional target but also help the customer keep the same consistent quality in the end, and the product remained price-competitive. A takeaway here is that the breadth of our product offerings gives us the ability to optimize our value chain from our existing product portfolio.

As I mentioned at the outset, our overall growth strategy for Global Oilseeds involves expanding our geographic footprint, growing our higher-value businesses, operational excellence through a focus on productivity and efficiency. Broad global trends driving demand for our products, coupled with our well-located assets, strong risk management capabilities, diverse product portfolio, have helped shape our regional strategies.

Largely mature in North America, focused on getting greater value from our existing assets and on developing new sources of revenue, primarily through opportunistic acquisitions and by growing our higher-margin businesses. High-growth South America, working to expand our origination, transportation and processing capabilities, including our fertilizer and biodiesel capacities. We're counting this through select acquisitions, greenfields like the soybean plant in Paraguay that is now under construction and by increasing our existing plants' capacities.

Eastern Europe, which remains largely unconsolidated, we're focused on acquiring new capacity and increasing our existing capacities. While in Western Europe, we're working to find areas for opportunities -- opportunistic consolidation, strengthening our base business and optimizing our existing asset base.

Finally, in Asia, we're focused on increasing our capacity in India, both through acquisition, as well as upgrading our assets. And in China, we'll continue to expand our relationship with Wilmar through efforts such as the MOU that we recently signed that Juan mentioned, on ocean freight, tropical oils and fertilizer. But equally, we continue to expand supply to China with its raw materials, soybeans, canola seeds and products.

We believe

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various approaches leverage ADM's core strengths in each region and provide us with platforms for growth tailored to the most promising opportunities around the world. Now Greg Morris will give you a closer look at our North American business. And after that, Valmor will touch on South America, followed by Brent on Europe. Greg?

Greg Morris

Thanks, Matt. I'm glad to have this opportunity today to outline our North American businesses for you. Our operations in North America are highly complex and are well integrated. We're focused on driving higher margins through optimizing our crushing businesses and by expanding our specialty products businesses. So in the next few minutes, I want to give you an overview of the businesses that reside in the region. I'm going to talk about some of the fundamental drivers of our businesses, and I'm going to talk about our strategic objectives for each of the businesses. So let's start with a closer look at the various businesses that fall under the North American region.

ADM Oilseeds operates 67 production facilities in North America. Many of our facilities are integrated so we can take advantage of shared resources. The businesses fall into 2 main subsegments, first is crush and origination. This includes businesses like soybean crushing, canola, sunflower, cottonseed, flax and peanuts. The second group is our specialty products businesses. In this group, we take a product stream from the crushing business, further process it into a higher-value product. This group include businesses like refined oils, biodiesel, proteins, lecithin, cotton cellulose, natural health and nutrition. I'm going to cover each of these businesses in a little bit more detail, starting with some of the drivers that impact our crushing business.

As this chart illustrates, and as Matt mentioned, U.S. soybean production continues to increase, but at a rate that's slower than South America. U.S. production has grown at about 2% a year over time. With the exception of 2006, acreage has been relatively flat between 72 and 77 million acres. Yields have increased, though, about 1/2 a bushel in acre per year over the past 2 decades.

Demand patterns are shifting. Today, about 1/2 the soybean crop gets crushed, and about 1/2 the crop gets exported. Exports are taking a larger share of the U.S. soybean production. Chinese import demand for soybeans

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driving increase in exports.

So this is a dynamic environment. We're being plugged into a global business, and having that firsthand real time information that Matt spoke about is particularly important. ADM's Ag Services group is one of the largest exporters of soybeans from the U.S. Their insights and on-the-ground knowledge of these trade flows help us to form solid market opinions so we can better manage our risk positions.

Moving now to North American canola production. For the past decade, canola seed has been in great demand for both crush and exports. For the increasing Canadian canola acres

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yields, production has been able to keep up. Average growth rate in Canadian canola production is about 7%. Acres have increased, and we expect nearly 20 million acres to be seeded this year. Yields have also improved to the tune of about one bushel an acre over time.

You can also see the crushes doubled in the last 10 years. Canola seed is a higher oil-bearing seed, and so it's benefited from the recent oil-led markets. At the same time, canola seed exports have grown as well, led primarily by Chinese buying. A key takeaway here is that while canola demand is growing, Canadian farmers are answering the call by planning additional production.

Now while soybean demand is driven equally by crush and exports, soybean meal demand is driven primarily by domestic consumption. Domestic consumption is down 9% from the highs of 2006, due to an increase in production of alternative proteins, driven -- particularly distillers dried grains, or DDGs. DDGs are a co-product produced in the ethanol production process. Going forward, the USDA expects U.S. consumption of soybean meal to grow 1% to 2%. Overall demand does appear to be stabilizing, largely as a result of increased pork production, a more stable poultry market, but also due to growth in key export markets like Mexico where imports year-to-date are up 13% compared to last year. The impact that DDGs have had on our business is worth a closer look.

Soy bean meal demand is expected to get an additional boost from the slowdown in growth of DDG production. Today, production of distillers grains is outpacing soybean meal. Beef and dairy cattle get the most nutritional value out of distillers grains. But due to the abundant supply, all species of animals are being fed distillers grains in some capacity. However, with the slowdown in the growth rate of ethanol production and the corresponding slowdown in distillers grain production, the impact that DDGs have had in the past won't be the same going forward. An additional comment about DDGs, 10 years ago, we exported less than 1 million tons of distillers grains. Today, we'll export over 8 million tons. As we export more distillers grains, there is less pressure to feed more distillers grains in domestic feed rations. All of this will contribute to a more stable soybean meal market.

So another key driver of soybean meal demand is meat production. Per capita consumption of meat in the U.S. is down about 10% from 2006. But there continues to be a long-term shift away from beef and into more pork and poultry. This also will contribute to a more stable soybean meal market. Pork and poultry make up about 70% of the domestic soybean meal consumed.

Now as with soybean meal, the soybean oil market is driven mostly by domestic demand. But while soybean oil used in food applications have been declining, largely as a result of manufacturers' efforts to reduce trans fats, biodiesel use has grown to offset the drop off, thanks to the real fuel standard. Exports are also helping to mitigate the impact. But while they represent a small piece of the overall demand picture, U.S. has been and will continue to be a residual supplier of soybean oil to the world market. But taken together, the impact of biodiesel and exports gives us reason to be optimistic about soybean oil going forward.

Now some market share data. As you can see, the U.S. soybean crushing market is quite consolidated, with 65% to 75% of the market controlled by large global competitors. ADM operates 15 soybean crushing plants in North America. Trade flows are established and customers know how to use our products. The market is largely a mature industry. We're operating in an environment that does appear to be stabilizing. The industry has demonstrated its commitment to a more efficient operating environment with a better supply and demand balance. In the last 3.5 years, there's been 6 crush plants idled, 2 of which has been ours.

Canola, however, has experienced an expansion in capacity in the same time period. Today, 70% to 80% of North American crush capacity is controlled by multinational companies. ADM currently operates 3 canola crushing plants, but we have 3 additional plants that have the capacity to crush a variety of softseeds. The industry's crush capacity has more than doubled in the past 10 years as both global competitors and a few independent crushers have entered the space. The risk management portion of canola crushing is complex. We hedge our seed in Winnipeg in Canadian dollars, we hedge our products in Chicago in U.S. dollars. And again, this is a situation where, in a complex business, having access to a global network of firsthand information proves to be a distinct advantage as we manage our risk.

The picture for cottonseed crushing is quite different. 100 years ago, there were nearly 900 crushing plants in the U.S. 15 years ago, there was 29. Today, there's just 12. This industry is a classic example of capacity consolidation as we move from several small inefficient facilities to a few larger, more integrated facilities. ADM has a large portion of the North American cottonseed crushing market share. We're the only global company in the U.S. that crushes cottonseed. We operate 4 cottonseed crush plants, primarily in the South.

Cottonseed's a by-product of the cotton ginning industry. About 1/2 the whole cottonseed is fed to dairy cows, and about 1/2 is crushed. More feed alternatives are finding their way into dairy rations, the dairyman is feeding less whole cottonseed today than he has in the past. This change in feeding along with the consolidation in the crushing industry has made for a better supply and demand balance for raw materials, and it's allowed to run -- it's allowed us to run our plants at rates that make this a good business. And while I didn't mention flax, sunflowers and peanuts, ADM has similar large market shares in those businesses as well.

Earlier, Matt introduced you to this flowchart and mentioned some of the higher-valued products we produce. I want to give you some additional insight into those businesses that reside under the North American umbrella yet are marketed globally. Lecithin, sterols and vitamin E are derived from production streams created in the oil refining process. These products have functional and nutritional benefits and are used in a wide range of food, feed and industrial applications. Biodiesel shortenings and margarines are all familiar products that use refined oils as a feedstock.

In addition, ADM produces the most comprehensive portfolio of soy proteins in the industry. A distinct competitive advantage that we have in this business is the facility indicator. It's a highly integrated facility where we produce all of our protein products for food use. Having all these products under one roof gives us a unique opportunity to create custom protein blends to better serve our customers. We also produce cellulose from the linters that we collect in the cottonseed crushing process. We process this material into a variety of pulp products that are used in a number of food and industrial applications. So as you can see, our portfolio of products is both broader and deeper than the traditional commodity meals and oils. Now that's an overview of our North American crushing and specialty products businesses. Let's take a look at how those components link to our strategic objectives for the region.

Matt provided a high-level overview of our oilseed strategy for North America. I'd like to give you a little bit closer look. In our crushing businesses, our strategy is aimed at optimizing the front end and the back end of the value chain. We're looking at infrastructure improvements that can enhance logistical capabilities and storage capacities. We're working to improve operating efficiencies to improve yields, to reduce energy use, to reduce cost and by further integrating some of our North American facilities. We're improving our distribution channel by reducing freight cost and gaining better access to export markets. And we're leveraging our overall network to better serve our customers, to capitalize on our assets and insights, to take advantage of our economies of scale and to better manage our risk. We're also looking closely at our asset base to identify consolidation opportunities.

In specialty products, we're focused on projects that will allow us to grow this segment as a whole, developing new higher-value projects -- products such as CLARISOY, the world's first transparent soy protein. We're working on new oil blends and protein blends to better serve our customers' functional needs. We're exploring new applications for existing products.

Customer collaboration is a core component of our open innovation model to leverage our commercial applications and operations expertise, to innovate products and process improvements while overcoming challenges to improve the bottom line for both ADM and our customers. Finally, we are seeking opportunities to expand our North American model and take advantage of existing core businesses globally. While we consider the North American business a largely mature business, there's still plenty of opportunities for us to expand our margins. We're working hard to capitalize on some -- on a lot of these opportunities.

I'd like to hand it over to Valmor to give you some insights into our South American business.

Valmor Schaffer

Thanks to everyone for the opportunity to be here today and show you this quick snapshot of our operations in South America. ADM South America grew from a Brazilian crush operation into a regional oilseed and grains player. We have a diversified asset base and geography. The company has a fully integrated basis model, focused on our crush activities, on increasing capacity, high margins and added-value business.

Let's review the main drivers of our business in South America. ADM South America has a well-diversified business model with strategically located assets. Our solid origination footprint in key growing areas is the basis of our integrated value chain, allowing us to generate margins from the farm to the export berth, ready for shipment to the destination markets. Our current business is more than just a crush operation. We have a strong agricultural service component. Origination and farmer pre-finance, integrated logistic and storage and, on the top of that, we have our processing and biodiesel operations and export terminals.

Furthermore, compared to North America and Europe, South America market is far less consolidated and, as such, offers exciting and promising growth opportunities. Let's explore what the drivers are of this integrated

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South America business is a key part of our global oilseed footprint. As Matt mentioned, from a farm in Mato Grosso to the food industry in Europe or to the processors in China. South America attends global needs, and ADM's integrated value chain allows for an efficient and unparalleled trade flow to key consumption areas. Markets like Europe, North Africa, Asia and other countries in Central and North America.

Let's check out the South America crushing presence in the region. This slide shows you a high-level overview of the crushing footprint in the region. As ADM, we operate the following plants in Brazil, Bolivia and, as for the next crop, 2013, Paraguay as well. We have 7 soybean crushing plants, 1 sunflower seed crushing plant, 5 refineries and 5 packaging plants and 2 biodiesel plants.

ADM already has a solid and diversified crushing asset base in the region. Looking at the charts and the distribution between regional and global competitors, it is obvious and interesting that the market still offers plenty of consolidation opportunities. Currently, we do not have a crushing asset in Argentina. It is, though, in our radar screen, just a matter of finding the right entry opportunity.

Let's check the South America soybean production and market conditions. As you can see in this chart, South America production has increased substantially, more than 60% in the past 10 years, driven by a strong increase in planted area. Brazil is currently the second largest producer of soybeans in the world. And Argentina, the third. Paraguay, the sixth.

More important, farmer economics continue very, very positive. The future prospects: further acreage increase to land conversion from pastures into agricultural land. This unique opportunity will allow for a substantial growth in production. Key, however, will be additional investments in infrastructure and logistics to handle these large crops.

South America is a leading world soybean exporter. ADM has a strong participation in that market, and we are looking to increase our exports even further. Soybean production and ADM exports grew too, confirmed by the upward trend of our market share. ADM is the largest grain and oilseeds exporter in Argentina. In Brazil and Paraguay, we are one of the top 3 oilseeds and grains exporters. South America is the major agricultural commodity exporter, and ADM plays its part.

What are some of the main drivers of our

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in this chart, growing internal soybean meal demand driven by booming meat industry. Brazil has converted into a world leader in meat production. Its market share of world exports is becoming increasingly larger. In the last decade, the country market share has changed from 4% to 22%, confirming this trend. Rising incomes, particularly in developing countries, and changes in the eating habits are leading the increasing world meat consumption, boosting the exports. The conversion from soybean meal into animal protein is competitive in the country, and we expect growth in demand to continue.

What about the oil markets and its dynamics? The food sector and exports traditionally were the main demand drivers. We have seen a shift though. The biodiesel mandate was implemented in 2005. Biodiesel consumption continue to show strong growth and provides a new outlet for soybean oil and other.

ADM is converting a crush stream of crude oil to higher added value products. Meanwhile, consumption increases as well, supported in the regions' positive economic momentum. ADM's biodiesel plant in Rondonopolis, the northern state of Mato Grosso with a daily production capacity of nearly 1,200 metric tons, is the single largest plant in Brazil. In July, we will complete the construction of our second biodiesel plant in Joaçaba, in the state of Santa Catalina, south the country. That will have a daily production capacity of approximately 500 metric tons.

This brings us directly to our next slide, expansion projects and investments. South America is dynamic and growing, and ADM is participating. Construction of our biodiesel plant in Joaçaba will be finalized in July, as I said, expanding our market share in the Brazilian biodiesel market.

We continue to invest in storage and logistics. Our Paraguayan barges investments are a clear example of that. These barges ship fertilizers upstream for our blending unit, and the same barges brings oilseeds downstream exports, similar logistic flow at ADM. Our Paraguay crush facility, barges in the country and currently one of the ADM's major investments will come online in time for the Paraguayan 2013 harvest.

In this picture, actually a great example of how our integrated South America model works. Ship the fertilizer raw material, our ADM barges, upstream to our blending plant, which you see on the left-hand side. The blend-in puts and truck the products to the farmers in the interior. We pre-finance these farmers, and we originate their soybean, which are trucked back to our crushing plant. Oil are loaded on the barges and shipped downstream for exports. This is a really efficient and integrated value chain. [indiscernible] investments in the region, spending our value chain and tying in the South American farmer with the world markets. That's what we do.

So let me show you how the fertilizer is an important part of the South America business model. Fertilizer distribution is one of our pillars in the South America value chain. ADM's market share in the South America fertilizer market has grown in the past years. We are focused on growing the business. Fertilizer is one of the great tools ADM has to build and strengthen the partnership with the farmers as customers and as producers. This is clearly an area where we fully leverage our logistics origination assets and know-how, a partnership with the South American farmer, financing the crop with inputs to offtaking the grain and oilseeds to be processed for export.

Our current footprint consists of spending and distribution in Brazil, Paraguay and Chile, marketing and sales in Peru, Ecuador, Colombia, Uruguay and Bolivia. And sourcing globally together with

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Now I would like to share with you how that integrated value chain drives our margins. Here we have a summarized overview of our value chain from farm to processing plants and added value, or directly to exports and destination markets. What sets our operations in South America apart is clearly the fertilizer operation and integrated logistics. It's important to understand that we need to be in and are efficient in every step [indiscernible].

Where is our growth going to come from? South America will play a leading role

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increase in global demand for agricultural products, food, feed and fuel. ADM will capture part of this increased volumes by expanding our origination, transportation and processing capacities. Additionally, we'll keep growing our higher-margin business too. Here, example, is the new biodiesel plant. ADM has a solid track record since its entry 15 years ago in South America. However, we are convinced of the region's growth potential, and ADM is in an excellent position to take advantage

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after this South America snapshot

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Brent Arthur Fenton

Thank you, Valmor, and good morning, everyone.

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in the next 15 minutes or so, giving you an overview of our European oilseeds business, as well as our Indian oilseeds business. Through the process, what I want to illustrate to you is we've got a strong business model and a strong product portfolio throughout the regions.

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how our business, how we connected up locally, as well as globally into the ADM network and point out some of the similarities and the differences between Europe and the other regions that we've just reviewed. In the end, I want to leave you with the fact that we've got a strong integrated platform positioned for growth throughout the region.

I'd like to start off by, first of all, taking a look at the trade flows.

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Europe is a large consumptive market and is a growing importer of oilseeds and oilseed products, due to the fact that it's a net deficit in proteins and oils.

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Our European oilseed business comprises soybean crushing, rapeseed crushing and sun seed crushing, as well as refining of these products. This includes also tropical oils refining, which are imported from Southeast Asia, as well as further downstream value-added products such as specialty processing, specialty fats and oils, packaging and bottling.

Matt mentioned earlier in the global overview, assets in Europe are supplied from raw materials sourced locally, as well as globally.

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soybeans from South America, the U.S. Gulf, as well as from the Canadian Great Lakes

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also take canola from areas like Australia, as well as Canada and the Black Sea. Sun seed and sun oil, we move from the Black Sea into Europe, as well as we -- taken into India for importation.

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South America into Europe

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and also export it into Middle East, North Africa and other places.

Palm oil, out of Southeast Asia and bring into our factories, like you've seen yesterday, at the Hamburg. Soybean oil is exported back out of Europe into areas like North and South Africa, as well as other destinations.

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Our global assets really benefit from the trade flows of the region at the way we're set up. And in the end, just the -- the fact is that it's a -- to leave you with this key fact that it's a large consumptive market, we've got the assets in place and the ability to lever that market going forward. Now I'd like to take a look at our asset footprint to kind of illustrate to you a little bit more how we can capitalize on this.

Oilseeds footprint in Europe reaches west from the U.K. and spreads across northern Europe, moving eastward into Poland, Czech Republic, Ukraine and Russia. We operate in 8 countries, crushing plants, 10 refineries, 3 specialty oils and fats plants, 4 biodiesel plants, 4 packaging plants and 8 elevators that we own, as well as many that we lease; significant and leading positions in most of our markets; and we have a highly integrated business model. We have flexible capacity so we can switch based upon profit margin potential, as well as customer demand. And, for instance, just an example of that, is our Europoort plant, we can switch between rapeseed and soybean capacity when market dictates, and we could do the same in our Spyck, Germany plant. For instance, we can switch between rapeseed and sun seed crushing.

The industry on soybean crushing is highly consolidated as you can see by the chart. A mature market consolidated, and about 80% of the capacity is in the hands of global players like us. Rapeseed crushing, while highly consolidated also, has about 50% of the capacity in the hands of global players. Sun seed crushing is more of a fragmented marketplace, with about 35% of that capacity in what I would call global player's positions. And the balance is in small fragmented companies, as well as some strong regional players.

We distribute a lot of our oils through partnerships like, for instance, we have a partnership with Princess Foods in the U.K. and Poland. It's called Edible Oils Limited. And through that partnership, we use their branding expertise to market both branded and private-label oils throughout the region, and we supply the manufacturing base to support that. We've also got an origination network, as I mentioned, and we're continually expanding that. We recently just purchased an operation in Slovakia. So we're adding 3 grain elevators to our network which supports our crush. That network is extensive, and we're trying to build on that because as we increase crush capacities, we see opportunities to supply our network further.

And we also source directly from farms, as well as from trade sources, and this gives us a lot of insight on the ground as to know what's going on with the farmer and with the crops. Additionally, as we mentioned earlier, we've started to round out some of our processing capacity by acquiring assets like the Elstar operations in Poland, which we're currently integrating into our ADM network in Europe. The long and short of it is we have tentacles in the field, we've got people on the ground, we have strong central management control in Rolle, Switzerland, where everything is managed from. This allows us to drive standardization and synergies across the region.

I'd like to review some of the key strengths we have in logistics and show how you that works. Having access to deepwater ports is key to our strategy. [indiscernible] waterway transportation in the inland coast is also key. We're able to take in primary ports that feed our operations in Hamburg and Europoort so we can take in Panamax-sized vessels which unload very efficiently and allow us to do global arbitrage amongst the continents. Arbitrage, which can be both on price, which is influenced by freight rates, as well as quality of the products that you want. [indiscernible] are operated around the region, which we move into our plants like Purfleet and Erith in the U.K., as well as we use barges to facilitate logistics in our mines and Straubing plants in Germany. All of this gives us a competitive freight structure.

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well-positioned, and we have an efficient network that creates opportunities for the company.

Now I'd like to take a look at crop production, as well as some key consumption trends in the region to give you some insight into the dynamics of the business.

This slide is a chart of rapeseed production and, as you can see, it's been growing at a significant pace over the past many years. In fact, production has doubled in the last decade. So crush -- the capacity has actually outgrown the rapeseed production, causing Europe to be about a 3 million metric ton net importer of rapeseed, increasing demand for imports. ADM is a large player in that arbitrage and that import activity. And this -- as I mentioned earlier, this comes from areas like Australia, the Black Sea, as well as Canada.

Showing in Europe, we also see dramatic ability to increase yields. And just a "for instance" of that, if you look at Eastern Europe, the yields there are approximately 1.5 metric tons per hectare. Whereas in Western Europe, they're about 4 metric tons per hectare. So we're also excited about those opportunities for the company.

Some of the challenges the business faces is due to the rapid increase in production, which is driven obviously by demand, primarily for biofuels. The crush capacity has increased pretty rapidly over the years as I mentioned. So we see that as a challenge for the business, but we also see that as an opportunity to consolidate where possible. And we're doing that. Again, as you look at the business model, it's highly integrated, and it gives us a competitive advantage going forward. And we'll look for all these opportunities to drive consolidation.

We see a pretty completely different story on soybeans. Virtually 100% of the soybeans that we process in Europe are imported and, of course, ADM is a major player in that arbitrage. The industry is highly consolidated as I mentioned, and crush volumes are actually in decline. There's 2 primary reasons for this decline in crush. The fact is that we have significant competitive soybean meal imports coming out of South America, which impacts the profit margin. So you can bring soybean meal and, at certain times, that's cheaper than processing here. As well as in addition to that, strong growth in biofuels demand, it causes a switch from low oil-bearing seeds like soybean processing into high oil-bearing seeds like rapeseed. So capacity shift, and it's more of an oil demand-driven market than a protein demand-driven market. These things have played out in the industry, and we've adapted to it. Again, the integrated assets that I've pointed out earlier in deepwater ports linked to a global network give us the competitive advantage.

Now let's take a little bit of a link -- how our network links up to the consumption in the region. In contrast to Valmor's outlook on meat production that he showed earlier for South America, Europe is a relatively stable market. The bulk of the population is quite affluent, and demand is very stable. It's a mature market. It has low growth rates, but the population and GDP supports a very stable base for protein offtake. And that's whether it's processed in Europe or whether it's imported.

You'll recall I spoke of a shift from soy crush to softseeds crush, and now I'll illustrate how that demand picture looks on the oil side of the equation. The fast-growing oil demand creates an opportunity for ADM. Food demand is generally flat as depicted by the flat line at the bottom of the chart, while oil demand into biodiesel is exploding. It's gone from 0 to 12 million metric tons in the last decade, and the biofuels demand is further driven by mandates going forward. In fact, by the year 2020, we expect to have well over 20 million metric tons of biodiesel demand in Europe. Still, this again is an industry that overheated and has overcapacity. So the industry as a whole runs somewhere around 40% to 60% of capacity, depending on the seasonality. Our integrated assets in our ADM network run at much higher rates. In addition to this, there's a renewable energy directive which requires all feedstocks to satisfy sustainability requirements. And due to ADM's ability to globally source and have our networking capabilities in our supply chain, we're able to supply these sustainable feedstocks. Once again, integrated assets and a global network gives us an advantage.

Now I'd like to move to our Indian oil business and give a brief overview of how that looks. So the Indian business is a dynamic and growing and important market with tremendous long-term potential. One example of this is that in India, they consume about 14 or 15 kilograms of oil per year per capita, whereas you and I are eating probably about 45 kilos per year in the Western world.

We're present in the country with 5 assets. These are integrated crushing, refining, bottling and packaging units. We crush soybeans and sunseeds, as well as we process palm oil and distribute.

The demand in India is driven by several overwhelming trends. First of all, the demand in the population base. You've got 1.2 billion people in the country buying at 7% to 9% a year, and you've got a middle-income class that's growing from maybe, say, 9% to 11% of the population today, which is expected to probably go up to almost 40% to 45% by 2020. So if you add that up, that's about 600 million people in the middle class by 2020.

The acquisitions in the country, which we're currently integrating and trying to optimize, as well as looking for further growth opportunities in the region. And it's...

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By both domestic as well as imported oils, as I mentioned. That is where our efforts are focused in both of these areas.

We also see large opportunities for India to increase its yields per hectare. We see vast differentials between areas where there -- where they have good agronomic practices and where they don't. And their potential is large. And this is a fragmented per industry. The challenge is that it has a lack of distribution, a lack of infrastructure. But also, a big opportunity for us is there's a lack of food processing in the country, and we see that as a significant opportunity for a company like ADM.

To illustrate my point about oil demand, I'll show this on the next chart where you can see the oil consumption in India and how that looks. As you can see by the chart, demand has almost tripled in the last 2 decades. And if you look at the last 5 years, the trend has accelerated and at a pretty high rate of speed. Imports today supply a little bit more than 50% of the demand. And as I mentioned earlier, we participate in the trade flow and distribution for both imports as well as domestic processing within the country.

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this country in getting the infrastructure right. Food processing is also critical to our strategy, the increase in food processing, I should say.

Now I'd like to review our product portfolio and show you a little bit about our strengths and opportunities in those areas, as well as point out some of the differences between here and the other regions. The main differentiation of our European portfolio is the diversity of its oils. We process coconut oil, palm kernel oil, shea, shea olein, shea stirring, small amounts of walnut. We bottle and package olive oil, as well as we do high oleic sun oils, high oleic rape oils. And in India, it's mustard oil. We're able to supply these oils with the appropriate sustainability certifications, which is key to our success, and we see opportunities to build out further our value-add or higher-margin business with things like enzymatic interesterification, bottling and packing as well as a specialty fats and oils.

Product development. We work on solutions for low saturated fat solutions as well as cocoa butter equivalents, which complements our cocoa business. Our ability to formulate and blend oils to match certain applications for our customers is another key to success.

In India, we could very easily expand our portfolio, and we look for opportunities to move into cottonseed processing as well as peanut processing to add to our portfolio. Again, the portfolio was strong, and we see room to improve it and strengthen it further.

Now I'd like to summarize the region and the strategy. As I mentioned earlier, Western Europe primarily is -- I view it as a mature, consolidated business for the most part. There's opportunities. We seek opportunities to consolidate further as well as to optimize. An example of that is the recent activity that we've -- that Juan mentioned earlier with Wilmar. We see opportunities to improve our refining operations there. Additionally, we look for downstream opportunities and try to increase the flexibility of our assets so we can move our profit margins between different crops as we process.

Productivity by further standardizing and -- our operations and reducing costs. In Eastern Europe, it's a bit of a different story. The strategy in that region is really to acquire existing capacity that work, drive the costs out of the operation and run these operations, further expand where it makes sense. This will increase our competitiveness on cost as well as quality.

Again, as I mentioned, it's a fragmented market, and the consolidation has to be the play there. So it's an acquired domestic processing. We're going to expand our import opportunities, strengthen our distribution network or further value-added opportunities. Quality supplier like ADM is well sought after in this market. And operational excellence is definitely something that market needs. ADM is well positioned today, and we're committed to growing our business and developing a leadership presence and position. So I hope this gives you a good feel for our European oilseeds business as well as our Indian business and our global. Excited about the opportunities ahead of us. Now I'd like to turn it back over to Matt.

Matthew J. Jansen

Well, I hope that through our discussion this morning, you now have a better insight into our assets and our footprint and how we are positioned to meet the growing demand around the world. Importantly, Brent and Greg and Valmor touched on our strategies and how they are tailor made by region and how they tie into our overall global oilseeds strategy. I hope you have a true appreciation for our management team and the skills and the experience that each of these bring to our team. And I hope it shines through that our experienced team is really focused on shareholder value. We're going to take a 10-minute break. It's 9:15 right now, so we'll be back in -- at 9:25 for Q&A. And we look forward to continue the discussion.

[Break]

Question-and-Answer Session

Juan R. Luciano

Okay, we can start with the Q&A. There's only one rule to the Q&A. Since this is a webcast, please wait until you get the microphone from Dida [ph] to ask a question. And we have 2 teams, the team that present to the left and the usual faces on our Q&A to the right. So go ahead, John.

John E. Roberts - The Buckingham Research Group Incorporated

John Roberts, Buckingham Research. I don't think I saw what revenues are in Europe or -- and the revenues, oilseeds, in Europe. Or -- and kind of size things for us on a revenue basis?

Juan R. Luciano

Brent?

Brent Arthur Fenton

Yes, our revenues amongst the groups, we don't break them out by region. We don't report it that way.

Ray G. Young

Revenues for oilseeds is about -- it was last year, about $30 billion as a total. And that's -- there's a pretty even split among the 3, North America and South America and Europe, in general. But like Brent said, we don't break them out. But the total number is about -- was right around $30 billion last year.

Unknown Analyst

I have a question for Brent. When you talk about kind of the global business, the on-the-ground knowledge for ADM, I'm just curious. And I know -- I guess 1.5 years ago when Russia implemented the export ban, ADM seemed like they didn't adjust to that situation very well. And I kind of want to know what happened. And then why -- what's changed in the network that, that won't -- that you'll be more on top of things in the future?

Brent Arthur Fenton

Well, I think the -- I mean, as far as what happened 1.5 years ago, I guess I'll -- what I'll comment on is what we could do today. So our organization is structured such that we've got -- with people on the ground feeding that information into our centrally managed business units, that allows us pretty much real-time information across the globe. So we're constantly communicating amongst the continents between our office in Europe, for example, and so Paul in South America as well as in North America and Decatur. And that network and knowledge base creates a pretty much instant on-time information throughout regions. Now that's not to say that sometimes you don't miss something by a little bit, but, certainly, the objective is not to.

Unknown Analyst

Is it better than it was 1.5 years ago [indiscernible]? Is it -- has that changed? I mean, are there -- I'm just trying to see like maybe is there more communication? Is it the fact that you're getting this asset base in Slovakia and Poland? Is that helping you?

Brent Arthur Fenton

I think everywhere that we grow, we access more information and we have more people on the ground. Therefore, it's a matter of accumulating that and communicating amongst the regions. So I would say yes, it gets better. It's also get more complex and more complicated, but generally it's better.

Juan R. Luciano

But I think just also, I would like Greg to add some comments to that because I think he was in that time, too.

Greg Morris

Also a big part of that area. And when you say we didn't react, I would say that really what happened, there was a big dryness, and there are positions that are taken every day. In reacting to a position, I don't think it was necessarily communications issues is what I would say. But we do work. And as we consolidate and as they take a presence, as we've got bigger in Romania, as we get bigger in the Ukraine, we are certainly better at decision making and you're much better picking up those decisions of the dryness and going forward. But I don't think there was a failure in that case. It was just a -- It was a -- it didn't work the way -- we had dramatic changes in weather and we had positions on that we had to correct.

Matthew J. Jansen

I would just complement that with one last comment, is that as I talked about that risk management slide that we had, one of the things that we had to deal with, obviously, is government intervention. And that's, in fact, what happened in that particular case. And we acted or reacted to that at that time, but that's one of the realities, especially as we grow globally, that we are going to continue to be faced with.

Unknown Analyst

About 2 years ago, you communicated a target, a long-term growth target of, I think, 5% to 7%. You didn't talk about that today. Does that still stand even with, I guess, the slowdown in meal demand we have seen over the last 2 years? And how much of that is driven by acquisitions?

Matthew J. Jansen

Well, we didn't talk about that, you're right, but we still have growth plans in our soybean crushing. But as we've seen this last year, there has been a slowdown in demand, and our results have reflected that. But we still do have growth aspirations in that regard. We're going to achieve that through running what we have better. We're going to acquisitions. Like the Polish acquisition of Elstar Oils will play a part in that. We've got the crush plant in Paraguay that's under construction. That will be online in time for the 2013 harvest. So it's a combination of running, optimizing the assets that we have, buying, as well as the building to help us get there.

Unknown Analyst

Can you just comment a little bit on the North American crush situation? And I think you mentioned 6 plants have been shut recently. I don't know if you can give some color on what percentage of capacity actually came out and kind of where we are on the road to rationalizing more or how much needs to be done?

Greg Morris

Yes. So there's 2 stories with regard to soybean crushing in the U.S., and I talked a little bit about the supply side and those 6 plants. You can't neglect or overlook the fact that there has been some de-bottlenecking done in that same time period. I think the net reduction in capacity has been about 3% if you look at the added capacity and then the idle plants. The other side of the equation is the demand side that I touched on as well with the potential for an improving domestic consumption. If you think about the crop problems in South America and what that could potentially mean for U.S. export program on meals, I think it's a combination of a supply story and the demand story starting to come back.

Unknown Analyst

Okay. Juan, you actually said that the higher-margin products were I think you said "meaningful". So I guess what I'm trying to figure out is what does meaningful actually mean in terms of percentage of your portfolio? What is the margin differential between the higher-margin products and the base products? And then where do you expect the higher-margin products to be in 2 to 3 years?

Juan R. Luciano

Matt, do want to take that?

Matthew J. Jansen

I'll take a stab at it. First of all, in our crushing and refining, we have the soybean and rapeseed crush, but we also have the cottonseed and the peanut crush and flax and linseed. Those businesses, as Greg pointed out, are -- we -- ADM has a larger participation in those businesses. Those are, in general, a comparatively higher-margin business than what we see in soy or rape. And so -- and that is embedded also in our -- if you remember the pie chart, the 66% that is in crushing and origination and roughly about 25% of our earnings is in the refined package and biodiesel. In both of those pieces of pie, we have some of the higher-margin businesses. So we have the crushing side, say, for example in the origination and crushed pie and for cottonseed, for example. But then, in the refining, packaging biodiesel and other, we have other value -- higher-value products. So roughly -- we don't have an outright breakdown that we provide in terms of what the higher-margin businesses are, but they are an integral part of our total picture.

Unknown Analyst

If the U.S. crush margin is roughly historically $0.60, these products would generate what cents above that?

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[indiscernible] no competitive information that you're leaking out. Just kind of on a base case, what would you say would be the margin structure?

Greg Morris

Well, it's an interesting question, but it's not necessarily the way that we look at our businesses today. As I mentioned, a lot of these specialty products use either an oil product or a meal product from the crushing business as a feedstock. So there's a transfer price at -- and market values, and we look at those businesses more as a standalone as opposed to allocating back to the initial bushel that's crushed. So our soybean crushing businesses are certainly a building block in the overall portfolio of businesses that we run. You can't have one without the other. But we don't necessarily allocate back all the profits and look at it on a per-bushel basis.

Unknown Analyst

I have 2 questions for Valmor. One in terms of Paraguay, this year, I think initially, estimates came out for 8.5 million metric tons of soybean production, and now we're looking at maybe 4.5. So when the plant's up and running, and then I think that Dreyfus, AGP and Bunge are putting a facility in, and are -- is there going to be a problem with the supply of beans in terms of availability of crush? And then can import some somewhere else if you get stuck? Or do you just run that plant late that particular year? How does that work?

Valmor Schaffer

Well, our crushing plant is estimated to be ready for the first tests in September. And I think that the Bunge's, Dreyfus and AGP [ph] plant will be ready just at the end of the next year. So for us, of course, with this reduced crop, we're going to be facing some shortage at the end of this year. But our plant, since the beginning, we were considering that starting in September testing, back and forth, it will be ready for working in -- at full steam in December. And we are very close with the new crop and we still have some beans to be resolved for that crush.

Unknown Analyst

And then the other question is, can you talk about the health of the poultry and hog sector in Brazil. Now that you've had corn prices spike, are they -- are their economics deteriorating? And is that a threat to soybean meal demand in Brazil?

Valmor Schaffer

Well, the meat industry is very -- is still competitive in Brazil despite the higher prices in corn. The higher price in corn is not something just restricted to Brazil. So -- and we keep -- can keep competitiveness worldwide. We were -- especially in the states like Mato Grosso, Goias and Santa Catarina. So we estimate that the growth in meal production will continue, that the country is well prepared for that. I think that we have technology, we have relatively low-cost inputs. And so my -- I'm really bullish for that meal production for -- especially for Brazil within the next...

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David Driscoll - Citigroup Inc, Research Division

Driscoll From Citi. I don't know who want to take -- who wants to take this question, but the Wilmar position, obviously you have a 16% stake here, so you cannot fully integrate this. So there's 2 questions. The first one is, what are the limitations on ADM to increase its stake in Wilmar? Is there anything that would impede you to do this? And then maybe you could answer why we haven't actually ever seen that if there is no impediment. The second related question would be in this memorandum of understanding that you have signed, is the way to think about this is that because you could not fully integrate those operations into ADM, there was an opportunity out there on the cost side that was never arbitraged, and this memorandum seeks to do that by taking those various pieces where if it was fully integrated into ADM, you would see significant cost advantage?

Juan R. Luciano

Thank you, David. I will take it. Maybe I'll let -- you might want to comment if you want to. I can't comment regarding the past. I don't think there is a limitation for us to go over 16% in Wilmar. We continue to look for opportunities to do more with Wilmar, and there are several avenues we're taking of how to do more with Wilmar. The thing that we wanted to take first were those opportunities where we had operating profit available for both companies without creating a lot of the structure, without doing things that required too much in terms of regulatory approval or due diligence or whatever. So the teams are getting to work together much better. And we sat together and we identify where were the low-hanging fruits, if you will, in our relationship that we can profit from without, again, too many lawyers who are creating too much of an infrastructure. So we've put together this MOU for 3, if you will, strategic alliances. We don't even need to create a JV for some of these things. So those things are being implemented and, as I said, the MOU. And then we have signed the definitive agreements and we're going to implement that. And the team has a longer list of things that we will not pursue that maybe take a little bit more complexity. In parallel to that, obviously there are layers of that. There is a more strategic layer in which we're analyzing what to do with that on a long-term basis in order to continue to increase that's complementary to -- between the 2 companies.

Unknown Analyst

Can you give us any sense of what the size of the dollar opportunity and cost reduction is through this memorandum?

Juan R. Luciano

Yes. And there is a progression of as we get more comfortable, we'll throw more things into that. But I will say you should estimate in the range of maybe $30 million to $40 million per year initially. And especially the ocean freight and all that or even fertilizer where it grows, it can become larger. But I think initially, I think as we are bringing like 2 vessels per side, so that's kind of about the size that we're looking at.

Unknown Analyst

And that number is a cost reduction and it's not a revenue figure? So some kind of enhanced revenue -- it's a cost reduction?

Juan R. Luciano

Yes, it's an operating profit contribution, if you will.

Unknown Analyst

First, if you were to go around the horn regionally, put the same crushing plant in the U.S., Brazil, Europe, what's the difference in cost of production outside of the efficiency of that particular plant? Where are the low to kind of high-cost regions?

Juan R. Luciano

I guess I'll start with that and then we can add more color from the particular regions if you...

[Audio Gap]

Generally speaking, let's say, the production plants, the cost -- production plants in each region, there is really not a whole lot of difference in actually cost to crush soybeans. You have some movements, let's say, that might be in dollar terms that the -- impacted by FX. But I would say in general, South America is inherently a lower-cost market. Europe, on the other hand, is maybe somewhat higher. But in terms of the differences, they're not really material among the 3 different regions and in terms of the cost to transpose into beans into meal and oil. There's not a material difference among the geographies.

Unknown Analyst

Okay. And so the new capacity that you're building, what's the cost per ton for a greenfield crushing plant?

Juan R. Luciano

I'm not sure if we announced what the -- Greg, do you remember if we announced what -- the cost for the size of the investment in Paraguay? Internally, I don't think we've talked about that.

Greg Morris

No.

Unknown Analyst

Okay. And then as I think about South America, if your margin structure is lower than, say, in the U.S. than South America for crushing and the invested capital obligation is higher because you're prefinancing farmers, as your emphasis in your growth shift down south, is that a return-dilutive proposition for you guys?

Ray G. Young

In fact, accretive, we do have a -- I mean, we are paid for that operation. There's margin in our prefinance operations. And Valmor can talk a little bit about that, but it's a -- we prefinance with a -- in a barter-type situation with fertilizer, with other inputs, and not -- with some, let's say, cash. But it's not a -- but it's not all cash. But at the end of the day, there's margin in every one of those inputs that we're prefinancing with.

[Audio Gap]

Valmor Schaffer

Finance. The because portion of our prefinance is given in inputs, in fertilizers and agrochemicals and seeds. So we have a margin in those operations. And the small amount we give in cash is basically for the labor and diesel the farmers need, and we charge interest rate over that. So prefinance is a business for us.

Unknown Analyst

[Indiscernible] from Stevens [ph]. I was hoping you could share with us your process of how you decide whether to build, buy and what the parameters are in each country in terms of acquisition. Is there some sort of target multiple that you look at when you're acquiring a facility?

Ray G. Young

Juan, you want me to -- I can start off with that and then maybe we can talk about the different regions. But as Valmor and Brent and Greg discussed, we have different growth strategies tailor-made for each region. And some of those incorporate building, others incorporate acquiring. When we can acquire and consolidate, that's the preferred route. And so without -- we prefer to expand our footprint without growing in capacity. That's the ideal. That's not always available. For example, what we're doing in Paraguay. By at the time -- if you remember back almost a year ago, we acquired a crushing plant in the U.S., in the southwest part of Missouri. That's more of an opportunistic type of acquisition, that we stepped in. That plant was almost new, but the owners didn't really have the capital to run the plant. We stepped in. We've invested in this plant, and now it -- have made it -- we've made it more efficient. It's -- there's a biodiesel plant attached to it that we have in joint venture. And so it's a combination of all of these. But I would say that in every type of acquisition or construction, that we're going to have an inherent return that's going to meet our hurdle rates and that we do in a review process across the company. And we have, in general, a minimum required for a hurdle rate and that there may be different geographic variances in that. But regardless, we're going to meet the hurdle rate or we simply just won't do it.

Unknown Analyst

Is there a target [indiscernible]?

Ray G. Young

I would say from my -- we look at it more on an ROIC from -- and not necessarily a target multiple. Oilseeds, for example, has in the last 3 years averaged 10% to 12% range on ROIC. And so to give you an idea of what we're -- what we've been able to deliver.

Unknown Analyst

I had just 2 question. I was wondering if you could maybe make a comment on DDGs, the situation in China. I mean, I know there's been a spat recently but is product moving there now or...

Greg Morris

A couple of weeks ago or within the last month, I'll say, there was some significant tonnage of distillers' grains that was traded to China. Our expectation and, I think, the market's read on that is that the trade dispute will be settled in the near future.

Unknown Analyst

And then just I was wondering if you could help me think about long-term meal demand. Obviously, I see the Brazilian share of protein exports rising, but is it not the case that much of that is based on like grazing land, which doesn't use meal? Is it that incremental production uses soybean meal and there's no grazing land left? Or how should I think about that?

Valmor Schaffer

Well, Brazil has a -- we have a great or, I mean, large increase in the feedlots, which is something new there. So they are using more protein to feed the cattle as we are losing land for the agricultural side. So -- and this is -- in my personal opinion, this is a trend that will be -- last for some time.

Unknown Analyst

[Indiscernible]?

Valmor Schaffer

Well, I don't have that breakdown, but it's substantial, still substantial in the past years in small feedlots. So the uptrend is really big.

[Audio Gap]

Ray G. Young

Is that cattle really don't eat a lot of soybean meal in the ration. That's mostly a poultry and hog ration that -- where soybean meal is used. And so the past year in the grazing is more of a cattle.

[Audio Gap]

Unknown Analyst

[indiscernible] soy protein with unique characteristics. For example, it's transparent. And I was wondering, what are your plans with this product? What potential do you see? Are you talking about market size or market penetration? And what could that mean for ADM? Because I think a lot of food and beverage producers are very interested in that.

Greg Morris

Yes, so we've been talking to a lot of our customers for the past year about this new product. We've seen great interest in it. The types of applications that we're targeting would be low-pH beverage drinks. So think about juices, think about sports beverage drinks. Whey proteins today find their way into those applications, so those could be a potential replacement. One additional benefit of this technology and of this product is that you don't have the beanie taste. And so there's really potentially, even outside of low-pH beverage applications, in -- more food and nutrition applications as well. Our production facility that we've been constructing for the last 12 months or so, it's recently come online. And so we move into let's call it the advanced stages of commercializing this product. So we're working hand-in-hand with a number of our customers, our research team, their research teams, trying to identify real opportunities so that we can springboard into expansions within this product too.

Unknown Analyst

What percent of the oilseeds revenues is non-processing revenue or merchandising activities? Because outside of North America, the merchandising activities included oilseeds rather than the merchandising segment.

Brent Arthur Fenton

The -- first, the risk management and the merchandising are an integral part of our operations. We typically enhance our margins with the -- with our trading deck that's embedded within our business. But in terms of carving that out and discussing that on a separate line, we don't do that.

Unknown Analyst

Could you give us a rough breakdown of soy versus non-soy? Or if you want to soy, canola, rapeseed together, put all these other things in there that's there, what -- can you give us a breakdown by crop?

Brent Arthur Fenton

Our merchandising are incorporated in whether it's the soys, the -- or rapeseed or the oils and meals associated with that. But in terms of -- I think a -- one way to look at it would be from a kind of a relative soy percentage crush versus rapeseed. And so we're bigger in the soy crush than -- on a global basis than we are, let's say, in rapeseed. But we have it in both aspects.

Unknown Analyst

[Indiscernible] Can you break that down by some kind of cross breakdown?

Brent Arthur Fenton

I wouldn't even make up a number on that. I don't have that number available, and I would hate to make up a number on that.

Unknown Analyst

We're...

[Audio Gap]

Through the quarter, and I just wanted to see if there's any kind of update. You've seen soybean crush margins get a bit better in the U.S., but farmers are really holding on to their grain, their corn. And then, at the same time, ethanol is probably a bit worse than most of us expected. So I don't know if you can give an update on how things are going and maybe how things look up until the harvest.

Brent Arthur Fenton

[Audio Gap]

We do see some sequential improvement.

[Audio Gap]

Okay, that when -- if you take a look at the corn segment, we're probably thinking that for this quarter, again a lot of it is going to be dependent also on the March 31 crop report. But as we kind of see the corn segment unfolding, I mean, directionally, I wouldn't be surprised if our corn segment profitability for the quarter will be approximately -- roughly 1/2 the level that we saw in the second quarter just due to the fact that the ethanol margins have been...

[Audio Gap]

Services, I don't see anything unusual occurring in the ag services segment. I mean, we've always talked about this historical range of $150 million to $200 million per quarter. I don't see anything unusual which would suggest that we won't be in that range in the third quarter. Other segment, remember in the last quarter, in the second quarter, we had a large mark-to-market adjustment in cocoa of about $127 million. I don't see any negative -- big negative mark-to-market adjustments there that we saw in the last quarter. So -- I mean, so in general, I mean, I think that it's playing out very similar to what we thought at the end of the second quarter when we had our earnings call, I think the only...

[Audio Gap]

Juan R. Luciano

Going forward, we'd probably see maybe a little bit of a reversal, as I said, into the next quarter where we'll see maybe ag services coming down a little bit given the situation, and corn...

[Audio Gap]

Juan R. Luciano

But we saw that the big price was going to drive exports much faster than it actually did. I think putting together these export programs take a lot of time. And sometimes, politics gets in the way, too, which is not as faster as the market. But we think that at this point in time, if Brazil touches a little bit their gasoline prices, ethanol will then seep into the equation.

[Audio Gap]

At -- and...

[Audio Gap]

Add more mileage because of December season...

[Audio Gap]

Unknown Analyst

Guys, I just wanted an outlook on the rape de-crop because in Europe because you're hearing some of the freezing has damaged the crop. I know last year it was depressed because of the supply. So is that a risk again this year? And then is it just a matter of the supply of rape? Or it sounds like there's overcapacity in the country. So that's another -- or in the region. That's another issue as well?

Brent Arthur Fenton

As far as the rapeseed crop goes, I think Oil World's last number is something like about a 19.5 million-ton crop is what they're looking for. Maybe, this year looks to me like -- across Europe, it doesn't look like we maybe have as large of regional dislocations as we maybe had in the last year.

Now...

[Audio Gap]

As far as crushing capacity in the industry, I mean, as I mentioned, there is an overcapacity as we've overbuilt versus the production of rapeseed. But that also is satisfied by imports. And as margin structure gets to be problematic, I think you'll see quite a bit of that capacity start to get reduced or rationalized.

Unknown Analyst

Greg, can you discuss the ramifications of a 94, maybe 95 million-acre U.S. corn planting this year? So that would be record acreage. I'm curious to hear what are the -- how do the dominoes fall. And Matt, I don't know if you want to chime in on the implications of the oilseed side as well, but I think the 2 of you can probably divide this up nicely.

Greg Morris

Well, you start out and we've talked about -- we started talking about 93, and we went to 94. And then, we had this warm weather and it got to 95. And my goodness, 2 weeks ago, it was 96. And at that point, they started...

[Audio Gap]

Goodness, we're talking about a decrease in Argentina and South America. We got the crop report coming, and you've seen this reversed. Now our people are buying beans because they realize we don't have enough...

[Audio Gap]

I mean, when you grow corn, you're take it away with something, you're starting to take away bean acres. So we've seen the correction in the last couple of weeks of trying to bring some bean acreage back. I think while we know for a fact that the farmer is going to get in early if possible and the weather is warmer now -- in fact, we planted some corn in Central Illinois, which is -- I can't remember that happening in the past. And if it doesn't frost, that gives them a leg up. I'm not sure if that gives them a yield advantage. But it gives -- it at least spreads out the risk. But I think overall, we're going to continue the uncertainty into Friday, and we'll start over and we'll have that uncertainty until we get crops up. But we know we needed 14 billion-plus corn crop. And the farmer...

[Audio Gap]

Ice and...

[Audio Gap]

And make more money than he can with beans. We've seen a correction, as you always get, and that's going back. And I think that correction is just directly to once we...

[Audio Gap]

Off, a little bit off, and as they finish up in Brazil and Argentina, we'll get more of that. But I think that's the big thing. We want more corn acres, but we've had this new advent of, "Hey, we don't have as big a crop in South America as we thought." So those are trading against each other as we even up for the report.

Unknown Analyst

Guys, given the shape of the futures market and the price reductions in the future, well, certainly, this sounds positive for ADM's storage. But I'm just curious on your thought process on how strong is a record corn planting? I mean, it seems like it should stress the systems in North America greatly, which I would assume is positive ADM...

[Audio Gap]

These words, not me, and really discuss kind of what's the margin, how do we think about the margin opportunity that ADM could be faced with come harvest.

Greg Morris

Well, a couple things on that. If you plant the corn crop early...

[Audio Gap]

Or...

[Audio Gap]

Up carryout issues. I mean, that's -- and that's...

[Audio Gap]

[Indiscernible] in good weather, that's true. But I'm not going to speculate on that other than reasonable assumption. If you are in the processing business and your raw materials are cheaper...

[Audio Gap]

Ray G. Young

I'll say it's something we -- we do need to encourage more acres planting right now

just to make sure that we've -- that there is adequate supplies for next year. But I guess the way we can -- even with the "94-plus" on the corn, I think there's going to be adequate supply of soybeans around the world. And keep in mind that as Valmor touched on...

[Audio Gap]

And so the soybean supply will get reset again every 6 months, more or less.

[Audio Gap]

Part of the value of our network is understanding those flows and understanding those volumes and where they are and where they aren't and the timing of those. And so as Greg said, I think that we're trying to buy more acres right now with today's current prices in soybeans in the U.S. versus corn, and we'll wait and see what the report says on Friday.

Unknown Analyst

Gents, you talked about the return on capital in the oilseeds business has been 10%, 12% over the last 2 years, I guess. Can you go around the horn in your divisions and just talk about what the returns profile are?

[Audio Gap]

Juan R. Luciano

Vary. I think that oilseeds has been the most stable for the last 3 years. As Matt indicated, 10% to 12% range. When you take a look at the other divisions, there's a wider range. And you can look at the operating profit performance of those divisions as well and you can get a pretty good sense in terms of how wide the ranges would be in terms of return on capital. I have to say that as you know, we've talked about our total returns have been, last fiscal year, averaging about 9%. And so I have to say that all of the divisions have been contributing towards achieving this target here. You have to remember, we also have a corporate sector, right, which is basically a cost sector, which drags down the overall returns as well. So you will have to think that all the other divisions would be above our corporate average, and then we have a corporate sector, which brings down the average in order to get it to a 9% level that we had in the last fiscal year.

Unknown Analyst

I had a few questions. So first, clearly consolidating is a big driver in your oilseed business. Why not work the consolidating angle more in the ethanol piece of your business? It sounds like you guys are happy to kind of let some of these less efficient producers die out over time. Why not be more aggressive in consolidating that industry?

Juan R. Luciano

We look at...

[Audio Gap]

Some of those opportunities are either too expensive or not plants that actually had some long-term viability, so it was going to have to buy them expensive and shut them down. And to be honest, that they were not of a size that will tip the balance of the market. So we didn't feel there was a good return to do that. So we continued to do so. We've been very careful in building our own plants to be winners long term from a location perspective in terms of acquiring grain but also having the infrastructure around in the sides to be cost competitive. So we're very pleased with that. And we will do so to the extent that we can move the market and improve the industry structure. We will not do so to the extent that we will dilute our competitive position by adding bad assets. So that is part of the strategy, just we need to get the right candidates. And I haven't seen them yet.

Unknown Analyst

So prices -- it's just been...

[Audio Gap]

Margins coming under pressure, some more opportunities will shake out?

Juan R. Luciano

Yes, I think that you'll see that we have a strong balance sheet and we would like to...

[Audio Gap]

Unknown Analyst

And just lastly, in light of how strong the returns have been in the wet milling piece of your corn business, why not prosecute more growth opportunities there?

Juan R. Luciano

Yes, we are. And I think that, well, we like of -- that part of the -- this -- it has higher barriers to entry, if you will. There is more technology. When Matt was talking about or he was answering your question or somebody else's question about build versus buy, sometimes there are technologies in which you want to buy because the technology is less differentiated. So it doesn't make a big difference. There are technologies like in wet milling where we have a lot of proprietary technology that is a differentiator. So there, we would like to build more. So we're looking at a couple of projects in that area.

Unknown Analyst

On Slide 46 on Page 23, this is Val's chart, Our Integration Drives Profit Globally, you've got corn listed there. So I just wanted to confirm. Corn origination out of Latin America is reported in the oilseeds segment?

Valmor Schaffer

That's correct.

Juan R. Luciano

Correct. Yes. What you will describe as our ag services business in the U.S., in South America it's reported under oilseeds.

Unknown Analyst

Juan, as a follow-up to Lindsay's question, when you talk about Corn Processing, wet mill projects you're looking at, if I look at your matrix, that would not be in the United States, right? It looks like South America and China? Or some in the U.S. as well?

Juan R. Luciano

No, I will say -- excuse me. I will say in the U.S., we felt that we have a put a lot of the money into the corn business over the last 5 or 6 years, and we want to see those projects return the money before we put more money into that. So we want to keep the business focused on returning the money on that and improving the operation. There is still -- there are still many, many opportunities for us to de-bottleneck those assets, keep [ph] the de-bottlenecks, and improvement of capacity without having to invest in a new plant in the U.S.

Unknown Analyst

And then, Greg, did I hear you right? It sounds like the rationalization process in North American oilseeds is maybe -- or do you feel like that's stalling now? Because you're talking about stabilization in meat -- the meat sector and then less competition from DDGs. At least, that's kind of flattening out as well. Or do you think that the industry has more to go? Because it might just be this temporary demand that we're seeing because of a shift from South America, and then once they start crushing or next year the crop comes in, and you're in the same situation.

Greg Morris

Yes, so I think what's happened over the last, let's say, 6 years or so is that as more alternative proteins have found their way into livestock rations, the livestock feeder in the U.S. has become more conscious of the nutritional value and the value of switching between different ingredients. And so I think there's -- I certainly think that there are still some inefficient facilities out there. I still think they're going to be challenged going forward. We've spent a lot of time and effort over the last several years adding infrastructure, as I mentioned, to low-unit [ph] trains, for example, to better access customers and export markets. The integrated facilities have a natural advantage when you think about shared resources, so they're always going to have a leg up. So I guess the answer to your question is, I think the stand-alone facilities in the U.S. are going to continue to run up against challenges whether it's in the next 6 months or in the next 6 years, to be determined. But I think that certainly, the integrated facilities that have spent the time and effort to have refineries, biodiesel plants or have some logistical advantage are going to continue to be in a better position. We have a couple of stand-alone facilities. But when you think about integrated could be on the front end or it could be on the back end. For example, if you have a small crush plant that's in a good origination territory, that can operate as a country elevator essentially and also process beans, I'd say that's some form of integration. That's different than having a small crush plant sitting next to a large, well-integrated crush plant in a well-developed territory with sizable grain elevators that are accessing export markets. So it's a little bit more complicated than just identifying stand-alone facilities, and I guess taking into consideration the trade territories they operate in, and you have to take into consideration the destination markets that they -- that they're tributary to.

Unknown Analyst

Going back to the long-term outlook for meal demand, I appreciate you talking about the impact that DDGs have had. But can you talk a little bit about the relationship between wheat and corn prices and how that's impacted an increasing wheat feed use and how that will impact the meal demand going forward?

Greg Morris

Certainly, there's more wheat being fed, and that has an impact on soybean meal. We look at soybean meal in a relationship to corn. To a large degree, corn is a proxy for DDG pricing, and what you've seen is that even though soybean meal prices have gone up, it's still cheap on a relative basis over the long term compared to corn. And I go back to my comment about the livestock feeder in the U.S. has become very sophisticated in the last decade, and knowing the value of the alternatives has made a very complicated business for him and for us to better understand what our customers alternatives are so that we can price ourselves accordingly. But certainly, DDGs, wheat feeding, canola meal, I mean, it's all going to play a part in the future demand for proteins.

Unknown Analyst

And just longer term on. . .

Greg Morris

Let me follow up on the wheat feeding. It's very regional. It's a very regional issue in the States. In the Southeast, there's a lot of feeding because there's soft wheat and soft wheat has priced itself under corn a good part of the year. And if you go down into Texas and Oklahoma, because freight rates have expanded so much, you see some feeding in those areas. So I would say it's very regionalized, segmented. But I would say that you will see wheat fed in Oklahoma and Texas. You'll definitely see fed in the southeastern part of the U.S. because it's cheaper than corn. I mean, it's that simple. But as a rule, hard wheat is enough over corn that you're not going to significantly take away from the hard wheat crop. And we see that on a normal year, but you'll see it again this year and you've seen a significant amount of soft wheat fed this year.

Unknown Analyst

And longer-term thinking about your market structure in oilseeds. It seems that oil demand is growing faster than meal demand over the longer term. So I guess in 2 parts. I guess how that impacts your margins over the longer term. Is it going to be lower than historic levels? And then just secondly, when I look at your margin structure between oilseeds and ag services, it looks like when I think about the North America business, the ag services business, the margins are much lower. And as you grow bigger in South America and Europe, it sounds like it's bigger on maybe the merchandising and the ag services side the business. Will that impact your margins longer term as well going forward?

Brent Arthur Fenton

So I would say I think the first part of your question was about oil demand outpacing the oil -- the growth in proteins. So typically, what that would do for our business is the impact would probably overall be positive and more so for high oil-bearing seeds like a rapeseed or a sun seed crushing operation versus a soybean operation. That would be the -- probably the most obvious impact. Now in addition to that, then, of course, that produces more mid-proteins, meals, et cetera, and less soybean meal, for example. But for the longer term, I mean, I think the oil demand, certainly, is a growth story for the company. And you're right, it is growing at a fast pace in certain regions, driven primarily by biofuels for the most part. So I think our assets are positioned perfectly to...

[Audio Gap]

Unknown Analyst

Is sort of the global supplies of soybeans enough that you should feel comfortable with the -- it's inadequate supply? So the -- as this --

at what levels would you not believe that's the case? Like what would we have to be worried about? Like what would the crops have to be for you to not have the utilization rates that you feel comfortable with would be my first question?

Matthew J. Jansen

What I meant by that is there in terms of by looking at the carryout situation in the U.S. and where that might be. And so if you get down to, let's say, roughly sub-100 million bushels on a carry in-carry out basis, then you're out of beans technically. And so that's kind of the number to watch. But it's really a -- there's lots of moving parts in there involved in that. Obviously, exports are one in terms of soybean exports. And so -- but generally, the gauge is the carry in-carry out number that -- and we consider 100 million bushels is out of beans.

Unknown Analyst

Are you less or more optimistic about the outlook for oilseeds relative to, say, 3 or 4 months ago? Which regions are you most optimistic about and which ones are you more now concerned about? Can you just talk about that?

Matthew J. Jansen

I would say, through our comments of earlier this morning, we are generally optimistic about the oilseed side. The U.S. has got a, at least in my view, and Greg touched on that, an optimistic outlook. South America this year is challenged on the reduction in the production down there. But I would say I'm most optimistic about North America.

[Audio Gap]

Greg Morris

In fact, where we were a number of months ago, we were anticipating a big South American crop and an early South American crop, and we didn't get either one of those. There's tickle [ph issues down there, it's allowed us to extend our export meal programs longer than what we had initially thought. That's helped. But I think that the real thing that helps me become optimistic about the future is when you look at board crush margins today and you look at where they are for new crop. $0.55 today, $0.75 for new crops. Something's happening out there. Either people are getting optimistic about the kind of the South American crop year where maybe we pick up some additional exports and maybe optimistic about biodiesel. I mean, there's optimism in the market, and it's reflected in board crushing.

[Audio Gap]

Brent Arthur Fenton

South America, as you have that kind of a dislocation, that tends to actually be margin positive for your European business going forward. Now we go through this normal kind of a cyclical or seasonal period through this summer, but I would say I'm relatively optimistic about soybean processing margins forward.

Juan R. Luciano

There's probably time for 2 more questions before we have to leave for the plant.

[Audio Gap]

Unknown Analyst

Whom are considered a regional competitor or global competitor when you did the Asian market share?

Matthew J. Jansen

I think they're about 13% in their capacity in China. 13% or 15%, I think, is [indiscernible].

Unknown Analyst

In Europe, do you see any effect of the European economic situation or the euro exchange rates? I guess the presumption is no, it hasn't come up, but I just thought I'd check since we're here.

Brent Arthur Fenton

I would say not really. I mean, we see the same effect that everybody sees every day in the news, I think, the general malaise about the economy. But generally, from a demand offtake or these kind of things, major impacts to our business, I would say not.

Ray G. Young

And Joe [ph], maybe just add on that a little bit. I mean, we've been watching the European situation very carefully. I mean, our footprint is predominately a Northern European footprint in terms of our production as well as our customer base versus the Southern European footprint. So when we take a look at our, for example, our receivables exposure profile, we're not that exposed that much towards the Southern European countries. And frankly, we've been also managing our exposures very, very carefully, our counterparty party risk with respect to European banks as well. So all in all, I think the team has actually managed through the European turmoil...

[Audio Gap]

A close eye on it as well going forward. But I think that in fact, our footprint is actually a better footprint for us in terms of managing risk, and then we've been carefully looking at counterparty exposure. So I think we've managed through the turmoil well recently.

Juan R. Luciano

Last question. Yes.

Unknown Analyst

And I appreciate it. Maybe you got to come back here on this -- on the comments you made on the quarter just to make sure that I understood actually some of the pieces. So you said on Corn Processing, the entire division that profits in the third quarter would be something like 1/2 of the profits that we saw in the second quarter. Is that correct? Is that what you said?

Ray G. Young

Yes, directionally. I mean, again, I'm taking out the PHA charge in the second quarter, but directionally. Again, things can change in the last day of the quarter when the crop report shows up. And then that could have an impact on our positions. But on -- so directionally, just based upon how ethanol margins have moved in this third quarter, I think directionally, I wouldn't be surprised, based on what I see right now, that the corn segment operating profit could be directionally half the level that we saw in the second quarter.

Unknown Analyst

Okay. So then, you mentioned that ag services was normal. I think you used the word normal.

Ray G. Young

Well I said it's consistent with the historical range of 150 to 200. I don't see anything which would suggest that we'd be out of that range.

Unknown Analyst

Okay. So then, wrapping it up then, so we've got a fairly significant negative on a sequential basis within corn. I'll call it normal profitability within ag services. And then the final piece is better-than-expected crushing margins. But I -- but it doesn't sound like that positive on crushing would offset perhaps the negative revision on corn processing. Do I have the magnitude of these numbers roughly correct?

Ray G. Young

No, we're going to see sequential improvement. We're going to see a sequential improvement oilseeds versus first and second quarter. Again, the magnitude, I'm not going to comment on the magnitude. I think a lot of it is also going to depend on what's going to happen in a month. But just in -- with the margin improvements that we've seen on board margins, we are seeing a sequential improvement.

Juan R. Luciano

Well, thank you very much. That concludes our Q&A and our webcast. And I hope you found these useful to understand how we all see the business a little bit better. And we thank you very much for your interest in ADM. Thank you very much.

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