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Archer Daniels Midland Co. (NYSE:ADM)

Q1 2008 Earnings Call

November 6, 2007 9:00 am ET

Executives

Dwight Grimestad - VP of IR

Pat Woertz - Chairman and CEO

Doug Schmalz - CFO

John Rice - EVP of Commercial and Production

Analysts

Eric Katzman - Deutsche Bank

Robert Moskow - Credit Suisse

Vince Andrews - Morgan Stanley

Ken Zaslow - BMO Capital Markets

Ann Gurkin - Davenport

Diane Geissler - Merrill Lynch

Christine McCracken - ClevelandResearch

David Driscoll - Citi Investment Research

Ian Horowitz - Soleil Securities

Edgar Roesch - Banc of America

Pablo Zuanic - J.P. Morgan

John Roberts - Buckingham Research

John McMillin - FloridaAbbott

Operator

Good day, ladies and gentlemen, and welcome to the FirstQuarter 2008 Archer Daniels Midland Company Earnings Call. My name is Latashaand I will be your coordinator for today. At this time, all participants on alisten-only mode. We will be facilitating a question-and-answer session towardsthe end of this conference (Operator Instructions).

I would now like to turn the call over to Mr. DwightGrimestad, Vice President, Investor Relations. Please proceed.

Dwight Grimestad

Thank you, Latasha. Good morning and welcome to ADM's firstquarter earnings conference call. And before we begin, let me just acknowledgethat we've heard we've had a couple of problems downloading the slides from ourwebsite, so if you could please call us we'll be sure to get you a copy of theslides.

Let me remind you that we are webcasting our call and thatyou can access it at our website, which is admworld.com. The replay will alsobe available at that address.

Turning to slide 2, for those following the presentation, onslide 2 the company's Safe Harborstatement says that some of our comments constitute forward-looking statementsthat reflect management's current views and estimates of future economiccircumstances, industry conditions, company performance and financial results.

The statements are based on many assumptions and factors,including availability and prices of raw materials, market conditions,operating efficiencies, access to capital, and actions of governments. Anychanges in such assumptions or factors could produce significantly differentresults.

To the extent permitted under applicable law, the companyassumes no obligation to update any forward-looking statements as result of newinformation or future events. Slide 3 lists the matters we will discuss in ourconference call today.

And I will now turn it over to our Chairman and ChiefExecutive, Pat Woertz.

Pat Woertz

Thank you, Dwight, and good morning everyone. As is ourcustom at ADM I would like to start this morning with a safety moment. Laterthis week at our board of directors' meeting on Thursday we will discuss ADM'sperformance metrics for the quarter and several of those metrics do relate tosafety.

For the calendar year 2007, our lost workday rate hasimproved 26% for ADM colleagues and 13% for ADM colleague contractorsrespectively from the prior year. Of course safety isn't about numbers orrates; it is about people and those results do indicate that more people aregoing home safely every day than ever before. So thank you to everyone who'sfocusing on staying safe and driving towards zero injuries, zero incidents.

This morning we announced our earnings and, I'm pleased tosay that, the results this quarter set yet another milestone for us, a newrecord for first quarter earnings. Again, I think it shows the strength ofADM's diversified asset and product portfolio and certainly demonstrates thecapability of our organization.

A year ago our first quarter earnings were also a record atthat time and they reflected a steep growth in the ethanol market. Our recordearnings this first quarter reflect our strength in oilseeds processing, oursweeteners and starches, our global capabilities in grain merchandising andhandling, and in risk management.

We're seeing global demand for protein and oil, which isstrong. We're handling a large volume of North American crop, global commoditiesand freight markets are offering lots of opportunities, and we have completedmost of our sweetener price discussions for the year.

I would like to take a moment to update you on the strategicactions that we have taken since our last conference call. We have completedthe acquisition that we announced of the business operations of Fasco Millsthat increases our U.S.grain elevation footprint.

We have shared our views on second and third-generationbiofuels. Our Chief Technology Officer's spoken at analyst conference and thosecharts and slides are available for your viewing. We formed a very innovativealliance, I think, with ConocoPhillips to develop biocrude technology optionsfor the future.

We formed an industrial chemicals group and added to our technologyand research skill sets. We also realigned our organization and we streamlinedour reporting structure. So I'll turn it over now to Doug, who will take youthrough the quarter. John Rice, who, of course, is our EVP of Commercial andProduction since our realignment of the organization, Doug and I will be backwith you for Q&A after Doug takes you through the slides.

We've also taken a few steps this morning that I'll callyour attention to have, I hope, more disclosure and transparency in a couple ofour segment results and also our volume, so I hope you'll look for that today,as well. Doug, over to you.

Doug Schmalz

Thanks, Pat, and good morning everyone, and thanks for beingon the call this morning. As we have done in recent calls I will be usingslides today to review our financial performs, and as Dwight said, they can beaccessed via our website as usual.

In my remarks I will refer to the relevant slides as we gothrough those. If you go to slide 4, you'll see the summary of our quarter'sfinancial earnings highlights. As you can see, our net sales and otheroperating income increased 36% to $12.8 billion. About three-quarters of thatis reflective of commodity price increases and about one quarter of that is dueto volume increases.

One thing to notice there, as you well know, the absolutevalue of commodities does not really drive always down to our gross profitmargin, especially when you look at like our oilseeds business in our agservices sector where oilseeds is more on a crushed margin basis independent ofwhat the value of the beans are and ag services is a service businessthroughput type of business.

So as you can see, our gross profits increased 7% to $930million. If you exclude from that the inflationary impact of the LIFO adjustmentsthat we had this quarter, that increase is around 15% as we had a charge of $83million in this quarter and $17 million last year's quarter for LIFO charges.

That improvement really reflects, as Pat had mentioned, thestrengths in our oilseeds, sweetener, starches and agricultural servicesbusinesses, and also just a large North American crop, and the wheat shortagesaround the world and other imbalances around the globe really led us to havegood opportunities in our risk management results this last quarter.

Looking at selling, general and administrative expenses wereup 14% to $44 million, $354 million for the quarter. It's primarily driven byhigher employee-related costs, which includes $23 million of charges resultingfrom the recently announced corporate realignment initiative that we took thislast quarter and also effects of our foreign currency cost translations,particularly the Euro.

Our financing costs net declined to $25 million from $36million last year. That decline really reflects the cost savings that we'regetting because of our repurchase last year of $400 million of high coupon debtand replacing that with CP this quarter, and then also we issued our verylow-cost convertible debentures last year in the amount of $1.15 billion.

So the impact of that is that it's had a positive impact onour net financing costs. Our effective tax rates are 31.8% this year. That's up6% from last year's first quarter, but it's just up slightly from the 31.5%,which we had for our full fiscal year '07. That increase is primarily relatedto just shifts in our geographic mix of earnings.

With all that, our net earnings and earnings per shareincreased 9% and 11% respectively, representing a record company first quarterand as Pat said, a very solid start to our current fiscal year.

Moving on to slide 5, I'll reflect on certain items, whichimpacted our quarterly results, and as usual, the items on these slides arestated on an after-tax basis. The most significant items were the LIFO andbusiness realignment charges I referred to a moment ago.

After tax, those two items negatively impacted the quarterlyresults by $65 million or $0.10 a share compared to last year's LIFO charge of$10 million or approximately $0.015 a share. The other items were securitygains and asset abandonment charges and in total were relatively similar tolast year's first quarter. A schedule to help you analyze those items bysegment for the quarter is in the appendix to the presentation.

Moving to page 6 or slide 6 gives us an update of ourperformance against targeted long-term performance objectives. As you know, wehave two performance objectives, which we report on a quarterly basis. Our RONAfor the rolling four quarters ended September 30, 2007, is 14.6%, exceeding ourtarget of 13%, even though our working capital has risen sharply andpre-productive capital spending has increased. We also have a cost objective ofless than $110 per metric ton processed. Our rolling four-quarter cost of$108.70 is below our objective, but our first quarter cost ends up being about$112.98, which is above our objective, and it's really due to the one-time $23million realignment charge that I discussed earlier and also from long-termincentive program costs, which are always skewed into our first quarter of eachyear.

In order to provide more meaningful information in ourfinancial presentations, as Pat mentioned we've included in the appendix tothis presentation a breakdown of the process quantities by commodity used tocalculate our cost per metric ton number.

We've also included in the calculation the quantity ofbarley processed by our malt division to align with the financial results ourwheat, cocoa and malt portion of our other segment.

The details of the calculations of these non-GAAP RONA andcost per metric ton performance metrics can be found in the appendix to thepresentation, including the by product or by commodity breakdowns for prioryears. We gave you the three years plus each quarter for 2007.

On slide 7 you will see a comparative summary of operatingprofit, which looks a little different this quarter. As part of our corporatereorganization, we have realigned certain operations in our segments to the waywe view the results of operations.

The changes made reflect reclassifications of operationssuch as protein specialties, natural health and nutrition, and animal feed,which were previously reported in our other segment.

These and other miscellaneous operations, which in any oneyear combined represented less than 3% of our total operating profit, have beenreclassified to the segments, which provide the feedstock from which they areproduced.

This then leaves cocoa, wheat, malt and financial servicesin the other segment. Our reclassified segment operating profits for the lastthree years are set forth in the appendix to the slide presentation as well asthe restated quarters of last year.

As you can note on the slide, our total operating profit forthe first quarter of fiscal '08 increased 23% to a record first quarter $797million, and on slides 8 to 12, I'll review with you the individual segmentscomparative earnings for this quarter.

On page 8 is an operating profit analysis of the OilseedsProcessing segment. Our oilseeds processing operating profit increased 23% to afirst quarter record $209 million from $170 million last year, due principallyto strong global protein and oil demand.

Crushing and origination increased $27 million, dueprincipally to better crush margins in North America and improved originationresults in South America, partially offset by lowerEuropean crush margins.

Our refining, packaging, biodiesel and other increased $13million, principally due to higher North American refining volumes and marginsand to better vitamin E results.

Asia results were comparable to lastyear. Our current market conditions for global oilseeds processing aregenerally positive. Increased global protein demand is supporting better globalcash crush margins.

Recent investments in several of our European plants let usreduce dependency on any one seed type. This allows us to enhance processingmargins by allowing production flexibility and opportunistically responding torapidly changing supply-and-demand factors.

Global demand for vegetable oil remains strong in spite ofthe high prices. As we approach the colder winter weather in Europe,we anticipate increase in seasonal demand for rapeseed oil for use in biodieselblends. We recently completed construction of our first biodiesel plant inRondonopolis, the largest in Brazil.And are very optimistic about the business there, ahead of the 2% biodieselblending mandate, which is due to come into force in January of 2008.

Slide 9, we'll move to is an operating profit analysis ofour Corn Processing segment. Our corn processing operating profit decreased 12%to $253 million from $289 million last year, due principally to the lowerethanol sales prices and volumes and higher net corn costs, which werepartially offset by favorable risk management results.

Sweetener and starches results improved $45 million due toadditional sales volumes and higher selling prices for all key products,partially offset by the higher net corn costs.

Bioproducts results declined $81 million, principally due tohigher net corn costs and lower ethanol sales volumes and prices. Last year'sbioproducts results, as you recall, reflect the positive impact on ethanolvolumes and prices of the phase out of MTBE.

As we look at current market conditions in the CornProcessing segment, we see the gross corn prices are well off their recenthighs and bioproduct values have improved as new markets outside the EU hadbeen found to absorb corn gluten feed. This leads us to expect positiveco-product value impacts on net corn costs in the fiscal 2008 quarters ahead.

USDA is projecting a $13.3 billion bushel crop, which wouldresult in a carryout of slightly less than 2 billion bushels and providesufficient corn quantities for 2008. Our 2008 sweetener and starch contractpricing negotiations are almost complete and we anticipate average sellingprices to increase slightly over 10% in 2008.

Also, we expect to see an increase in Mexicodemand for sweeteners in calendar year '08. As we expected our average sellingprices for ethanol declined during the first quarter of fiscal '08. Although weare seeing some improvement in pricing from the recent lows, we expect secondquarter ethanol pricing to also be down from first quarter levels.

The North American market for ethanol is growing and recentadditional demand from operators in Florida, Tennessee,North Carolina, South Carolinaand Georgia areencouraging. Finally, we are seeing higher selling prices for lysine due tohigher global feed grain prices.

Slide 10, is an operating profit analysis of ourAgricultural Services segment. Agricultural services operating profit doubledto $229 million from $115 million last year.

Our merchandising and handling results improved to $120million due to excellent grain origination and export market opportunities inboth commodity and freight markets, coupled with pronounced global grainimbalances caused by both supply and demand factors.

Our transportation results, consisting of barge and truckoperations, while still strong declined $6 million as barge loading activitywas slightly below last year's level due to timing. Towards the end of thisquarter, harvest activity had picked up significantly in the southern riverareas, but had not really hit full pace in the upper regions by quarter end.

Although southbound volumes remain good, we have seen somesoftening in northbound volumes. We continue to invest in grain handlingassets, improving grain receiving, cleaning, and drying capabilities inaddition to expanding temporary storage to handle the large North Americancrops.

We are handling record volumes today and are seeing goodelevation income. Higher and more volatile grain prices along with all-timehigh ocean freight rates continue to offer supply chain opportunities.

Slide 11 is an operating profit analysis of our otherprocessing segment. Other operating profit increased 43% to $106 million from$74 million last year, principally due to increased financial results. Ourwheat, cocoa and malt operations declined $5 million.

Wheat milling operating profit increased due principally toimproved North American milling margins partially offset by lower Europeanresults due to the increased wheat costs there.

We continue to expect challenges in processing this year'sweather-damaged wheat crop, which could create opportunities for ourstrategically placed mills and origination network.

Cocoa operating results declined as higher inventorycarrying costs, lower press margins, and weaker chocolate market conditions in North America depressed overall margins. Increased sales volumes ofcocoa butter and powder partially offset those margin declines.

Current market conditions should support a better marginoutlook going forward. Malt operating results improved as we continued to findways to integrate this business and to leverage our network around it.

Financial results increased $37 million principally onimproved managed fund investment results.

Slide 12, is an analysis of our corporate costs, which morethan doubled to $150 million from last year's $72 million. Our investmentincome net increased by $23 million. The impact of LIFO inventory valuation wasto decrease results by $66 million as the current year's quarter included aLIFO charge of $83 million compared to a $17 million charge last year.

A $23 million charge was taken this quarter fororganizational realignment costs, and we estimate savings going forward fromthis realignment of approximately $22 million on an annual basis.

On slide 13 is a summary of financial condition as ofSeptember 30, 2007. As you look at those numbers, it's principally related toworking capital, which has continued to increase sharply and was up 29%, or$2.3 billion, from June 30, due to the increased inventory quantities andhigher commodity price levels.

These higher price levels have been, have also impacted ourreceivable values. These working capital increases and additional capitalspending have been funded by cash from operations of approximately $620 millionand an increase of $2 billion in short-term borrowings.

Moving to slide 14 is the summary our cash flow highlightsfor this quarter. As I previously mentioned, cash generated from operations wasprimarily used to finance significantly increased needs for working capital.

In addition, $2 billion of short-term debt was drawn downand $120 million of marketable securities were sold to supplement workingcapital needs to fund the $359 million of new property, plant and equipmentadditions and fund the $134 million of dividends and share repurchases duringthe quarter.

During the quarter we’ve acquired 1.9 million shares for $60million at an average cost of $32.65 per share. At this time, I'll turn it backto Pat and we'll be glad to take any of your questions.

Pat Woertz

Thank you, Doug. Operator, if you could open the line forquestions, John and Doug, I are here to respond.

Question-and-AnswerSession

Operator

(Operator Instructions) And your first question comes fromthe line of Eric Katzman with Deutsche Bank. Please proceed.

Eric Katzman -Deutsche Bank

Hi. Good morning, everybody.

Doug Schmalz

Good morning, Eric. How are you?

Eric Katzman -Deutsche Bank

I'm well, thank you. I guess my first question has to dowith the volume increase of 9% in the quarter. Since we really haven't had thatnumber before: can you kind of compare that to history? And are you seeing, Iguess, outsized growth globally? Are you taking share from smaller competitors?Can you just kind of frame that 9% number?

Doug Schmalz

I think a lot of that increase of the 9% comes through ourag services as we moved a lot of wheat this quarter. Oil sales in general wereup in volume, also, but a lot of it comes through the ag services sector, andreally that's dependent on what is availability around the large crops in the U.S.help that.

And so it's very difficult to compare that because it reallygets into the macro things of how large the crops are and so forth.

Eric Katzman -Deutsche Bank

Okay. All right. And then can you also, versus our model,the Ag service business was very, very strong, and, obviously with all of thevolatility out there:  had you theopportunity to exploit that?

Do you kind of see the same thing continuing? I mean: are wein a different level of volatility? I guess, sometimes, Pat, that word has beenused against you, but, maybe now, we can use it for you. How do you think aboutthat and then how should we think about ag services?

Pat Woertz

I appreciate your question, Eric. The time of the year whenwe're handling the crop, and particularly the North American crop, I thinkhaving volatility and then size of our business and scale, you'd argue that,that should work in our favor with respect to the ability to not only move thatcrop, have other origination opportunities.

Our global footprint allows more opportunities today thanever before, and the freight markets are allowing that. So I think our riskmanagement comes into play with not only volatility, but the large volume ofcrops we're dealing with.

Eric Katzman -Deutsche Bank

Okay, and then last question and I'll pass it on. I guessmaybe this is more for John. I was kind of a little bit surprised, I guess, interms of the corn processing division. It sounds like the price that you got ismaybe below what most people were expecting. Is that because you're maybeangling a little more there towards market share? And: is that also reflectedin volumes being down in the ethanol piece? I'll pass it on. Thanks.

John Rice

Well, the price increase, that also includes multiyearcontracts, which we also have increases on our sweetener and some starchcontracts. We're also seeing a little bit more volume going into Mexicocomparing this quarter to last year's quarter. We're seeing volumes there.

But as you're looking domestically, we don't really see muchgrowth in the sweeteners area right now. So I think the price increase, I wasvery happy with. When you start looking at it, we're also starting to getcloser to the sugar price in certain areas. That's something else we're alsocognizant of that going forward and corn's going to also play a big part inthis coming forward, head corn I should say.

Eric Katzman -Deutsche Bank

Then did you swing capacity to ethanol or from ethanol tosweeteners this quarter or are they just unrelated?

John Rice

It's unrelated this quarter. We have a lot of differentproducts. Lysine prices are getting a lot better so we're also looking at thelysine swing from ethanol to other products, but normally during the summer wealso see pretty, that's usually our best demand period for the sweetenerproducts.

Eric Katzman -Deutsche Bank

Okay. All right. Thank you.

Operator

And your next question comes from the line of Robert Moskowwith Credit Suisse. Please proceed.

Robert Moskow -Credit Suisse

Hi and thank you, and congratulations on a great quarter.Can I ask you about European biodiesel? The results there were also better thanwhat I had expected. I remember last quarter you seemed to be concerned about,that the tax regime in Germany andthen also about an influx of biodiesel exports from South America and NorthAmerica into Europe. Has anything changed there in thequarter, and should we expect better results this coming year?

John Rice

The biodiesel market in Europe it's still going to strugglea little bit just because we have new taxes coming on in 2008 in January and weare seeing a lot of imports from the United Statesand South America on the biodiesel and the vegetable oil going over to Europe.

I would not say that it's a terrible business but right nowwe are going to struggle a little bit more. But during the winter months, wealso feel like we're in a better position just because of our rapeseed crushand more of the biodiesel has to produced and made from rapeseed oil.

Pat Woertz

Robert, something I might add to your question there to keepin mind and that's that the biodiesel operations are really an integral part ofour oilseed complex with crushing, origination crushing, the production assetsand transportation, so it becomes again one stream that can and add value. Buteven as the business struggles, other streams, it kind of picks up some of thatintegration value.

Robert Moskow -Credit Suisse

Are you expecting another increase in biodiesel volume in Europe?And is that what can help your refining margins further in Europe?

John Rice

It can. The volume's really going to be coming as the priceof vegetable oil relates to the price of diesel fuel over there, so it's reallygoing to be dictated by the margin and what kind of margins we can get on thebiodiesel side as opposed to refining it and taking it to the food markets.

Robert Moskow -Credit Suisse

And then one follow-up, just on ocean freight, you said thatthe ocean freight prices are going your way this quarter. The inevitablequestion is going to be, let's say that we continue to have strong demand andvolatility like you say and I could see in an environment like that going onfor another year, but: are you locked in on your ocean freight costs? Are youmaking an unusual margin on ocean freight? And at what point do those costs goup for you and could that margin come down?

Doug Schmalz

Well, there are a lot of questions in there, but we havelong-term charters in a lot of our operations. We're always moving grain cropsaround the world. We're trading ocean freight on a daily basis along with on amonthly basis depending on where we see the sales coming and the opportunitiesand where we're going to originate crops from at any given time.

So, yes, ocean freight does have a huge importance in ourbusiness and we manage it on a daily basis and we're always looking at it.There has been, we always talk about volatility in our market, but in the oceanfreight, we've seen increased volatility in this last two quarters.

Robert Moskow -Credit Suisse

Okay. Well, congratulations again and thank you for theincreased disclosure as well. It's very helpful.

Pat Woertz

Thanks, Robert.

Operator

Your next question comes from the line of Vince Andrews withMorgan Stanley. Please proceed.

Vince Andrews - MorganStanley

Good morning, everyone.

Pat Woertz

Good morning, Vincent.

Vince Andrews -Morgan Stanley

I was just wondering: if you could touch on the kind ofevolution of the co-product situation in the EU? Recently, they approved the2006 biotech. And: just kind of give a little more detail on the other marketsthat you've opened up and how you see that playing out through the balance ofthe year?

John Rice

They have approved the 2006 crop, but so much of the harvestwas already in the system and the pipeline for 2007, so there was just a smallportion of corn gluten feed that could actually go into Europeduring that small window. Now, going forward, since we had that tough periodlast year we were able to develop a lot of new global markets for our corngluten feed. We're seeing more feeding in that also in the United States.

It's really working with a lot of our customers, too andthey'll buy corn and depending on what the corn gluten feed price is related tothe price of corn. We will buy and sell out of those positions and give themthe opportunity to buy other crops, so they may buy corn at one time.

As the corn gluten feed price goes down we may replace thatwith corn gluten feed and vice versa. So by us just having all kinds ofdifferent products so we can offer to our customers really gives us, I think, ahands of leading edge in the commodity markets around the world.

Vince Andrews -Morgan Stanley

Okay. And I was just incrementally hearing that the EU mighttry to expedite the approval of the 2007 biotech that are new products: is thatconsistent with what you might be hearing?

John Rice

I was so disappointed last year that I hate to get my hopesup this year on that, but, yes, we do hear the same thing that they are tryingto expedite it. So we will be able to ship corn gluten feed this year.

Also with the issues they had with their crops since thislast year because of drought, they may be more likely to expedite that.

Vince Andrews -Morgan Stanley

Sure. And then we've also all heard about Florida,Georgia, North Carolina and so forth addressing the fuel specsissues. Do you have any expectations for when those markets could open up froman ethanol perspective?

John Rice

I've been a little disappointed on the speed of that, but wehear Georgia'ssupposed to come up in the 1st of December. We are selling a little bit into Floridaas we speak. North Carolina,we're starting to see a little bit, also. So I think it's slowly cominginfrastructure has seemed to take a little longer than what I anticipated, butI do see here in the next quarter or next two quarters that the southeastshould really start blending a lot more. But infrastructure has been more of anissue than I would have thought, especially with the discount of RBOB that we'vebeen trading.

Vince Andrews -Morgan Stanley

Sure. And I guess one last question. There was no materialreversal of any sort of hedging loss in your quarter in the ag servicesbusiness. One of your competitors had a very large reversal. I just wanted tomake sure there was nothing similar that you want to tell us about?

Doug Schmalz

No, there was not, Vincent.

Vince Andrews -Morgan Stanley

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

Pat Woertz

Thanks, Vincent.

Operator

Your next question comes from the line of Ken Zaslow withBMO Capital Markets. Please proceed.

Ken Zaslow - BMOCapital Markets

Hello, good morning?

Pat Woertz

Hey, Ken, good morning.

Ken Zaslow - BMOCapital Markets

Just one quick question first. The high fructose corn syrupside, you said: favorable risk management. Is that: capitalizing on basis? Isthat how we should interpret that?

Doug Schmalz

It's capitalizing on global markets, on everything. It's notonly just basis, it can be flat price, it can be arbitrages between thedifferent core markets throughout world, the different ratios even between thebean and corn prices. So it's a little bit encompassing of everything.

Ken Zaslow - BMOCapital Markets

In a typical quarter, do you tend to buy more on the spotbasis and then be able to capitalize on the basis, or is it more done on afutures market?

Doug Schmalz

It varies by quarter, by year. There's really not a rule ofthumb, we have a very good group of merchandisers and traders out here and wehave very good communications; what we think the crop is, where we think demandis. So depending on our opinion on that, we'll tend to lean that direction.

Ken Zaslow - BMOCapital Markets

Are you guys building up inventories at all in ethanol?

Doug Schmalz

We are a little bit. Yes, because we anticipated thesoutheast to start blending a little quicker, but, yes, so we have built alittle bit. But when you really look at the whole industry, the industry's goneup, but really the days of supply has not. So, inventory's gone up but alsodemand's gone up.

Ken Zaslow - BMOCapital Markets

So the last time you built up inventory of any substance itwas either the California marketopening up or the MTBE ban, is that fair?

Pat Woertz

Yes, that's fair.

Ken Zaslow - BMOCapital Markets

So there is some anticipation by you that these markets willopen up? That's what I just want to make sure.

Pat Woertz

That's right.

Ken Zaslow - BMOCapital Markets

Would you think about buying ethanol assets rather than buildingand at what price? And how do you think about it, just because it seems like alot of these capacity buildups are slowing down a little bit and it seems likethere may be opportunity to come in and buy some assets a little bit cheaperthan maybe build it?

Pat Woertz

Yes, I'll take that one, Ken. We're actively engaged in thismarket all the time, and we know where every plant location is. We kind of havea sense of what locations might be interesting to us. But it would have to be areal value and scale and fit with our network, but it's not to say we aren'tlooking and aware.

Ken Zaslow - BMOCapital Markets

Great, I appreciate it.

Pat Woertz

Thanks, Ken.

Operator

Your next question comes from the line of Ann Gurkin with Davenport.Please proceed.

Ann Gurkin - Davenport

Good morning.

Pat Woertz

Good morning, Ann.

Ann Gurkin - Davenport

Just wanted to spend a little time on getting an update onyour work and, besides ethanol, other renewable fuels, switchgrass. Maybe areyou closer to doing something in sugar in South America,Can we just get an update there?

Pat Woertz

Sure. We've talked about diversifying our feedstocks whichwould include more palm, sugar, potential biomass to be run not only for firstbut sort of second-generation biofuels. Mike Pacheco, who is our new ChiefTechnology Officer, spent a little bit of time in about five slides or so,which you might want to look up on our website, but talked a little bit about.

So to speak, first of all our advantage in the dry mill ethanolworld, which, of course, we're completing two plants adjacent to our wet millsfacility. But then kind of spent time on the nearer term focused oncommercializing technology and again in a wide range; food, feed, industrialbioproducts and then biofuels. And when it comes to the biofuels piece, we kindof walked through the spectrum of not only technology conversion, but alsofeedstocks and also end products, and are attempting at this point and I wouldsay by February of next year, we will have a very limited list, or a veryhighly focus list, I should say, of the kind of opportunities for bothconversion feedstock and end products.

A good example is our ConocoPhillips project that weannounced, which is looking at biomass to biocrude, so this would be a type ofcrude oil that could be run in the traditional refineries yet made from biomassat very cost effective prices.

So, that's an example of something where we actually havethat one up and running. There's a couple of other collaborative researcheswe've announced, one with the Colorado Consortium, one with Purdue University,etcetera. So, a lot going on, but more clarification and I would sayfine-tuning of that by early next year.

Ann Gurkin - Davenport

Great. Thank you.

Pat Woertz

Thank you.

Operator

And your next question comes from the line of Diane Geisslerwith Merrill Lynch. Please proceed.

Diane Geissler -Merrill Lynch

Good morning.

John Rice

Good morning, Diane.

Pat Woertz

Good morning, Diane.

Diane Geissler -Merrill Lynch

Congratulations.

John Rice

Thank you.

Diane Geissler -Merrill Lynch

Just getting back to the outperformance in ag services thisquarter, seems like there are a variety of things going on, but the two mostimportant are just the ultimate size of the crop this year versus last year,and then the dislocations globally and your ability to capture margin there.

In this quarter can you quantify or is it like two-thirds,one-third the outperformance. I'm just trying to get a feeling for what's thesustainability? Obviously the first piece is probably more sustainable, justhaving larger crops in the U.S.from here on in and your ability to capture value there. If could you give usjust a little bit more clarity or commentary around what really drove that andone versus the other?

John Rice

Well, I don't have any data to really be able to quantify itlike that. But what's really led to it this quarter was we had back-to-backdroughts in Australia and in Eastern Europe. We also had a problem with the wheat crop, so that reallycreated some opportunities to move different feedstocks, different grains todifferent parts of the world. We have a huge corn crop here in the United States. People were looking at instead offeeding some feed wheat, feeding some corn or corn gluten feed products. So itreally just set up well with our whole structure and our merchandisingcapabilities around the globe to be able to service our customers all differentparts of grain.

So, I guess in my mind, without really going back, I'd havea hard time quantifying exactly how much this quarter is opposed to any otherquarter, but large crops also plays a big part in it and in the second quarteror third quarter we'll have the South America crop coming online.

Pat Woertz

Diane, I might add to that as I have learned -- been astudent of this business, we've been building for these kinds of crop years forten years. Again elevation assets towards transportation etcetera and so, whenyou have great price movements and great crop movements and great crop volumes,I don't think there is a system that can handle it better than ours.

So I know your question's more about sustainability and howmuch going forward and if you could quantify the unusual items here, but youmight argue that every quarter's going to have some unusual items, be itweather, be it volatility, and so maybe that's just a little bit of add-on toit.

Diane Geissler -Merrill Lynch

Okay, well I appreciate that. It's just kind of you look atthe number, and I don't think you've ever done more than $120 million or $130million in operating profit in any quarter going back the quarters that you'vegiven us on this segment reporting, so then you look at the $229 million andit's a big number. So I just want to get a little bit better feeling for what anormal quarter would be but obviously there is never a normal quarter.

Pat Woertz

You bet.

Diane Geissler -Merrill Lynch

Okay. Well, that's really was my main question. Thank youvery much.

Pat Woertz

Thanks, Diane.

John Rice

Thanks

Operator

Your next question comes from the line of ChristineMcCracken with Cleveland Research. Please proceed.

Christine McCracken -Cleveland Research

Good morning.

Pat Woertz

Hey, Christine?

John Rice

Hi.

Christine McCracken -Cleveland Research

First, just a point of clarification. You mentioned that youhad a little late by excluding and that it might help you in the next quarter.Can you give us any more color around the percentage maybe of volumes that youexpect to shift or any color that you could help, that might clarify thesituation?

John Rice

It's very minor. It was just really the timing of the cropfor our southbound. There is some concern around the industry. We are seeingless steel imports, less cement imports coming into the United States.

So, there is a little bit of an effect on the northboundbusiness, but the southbound business with our large corn crop and soybeanstock that we still have and crop coming on, export markets still should bevery good and we anticipate very good southbound movement, and as morefertilizer keeps coming into the United States for the corn crops that shouldalso help some of the northbound.

Christine McCracken -Cleveland Research

All right, doesn't sound like a big deal then? Just lookingat ethanol, you obviously gave us some color on what we view as more of anormalized ethanol market today. Can you tell us now with the situation whereit is, if you look at your plant expansion in the same way or can you give usan update on the timing of when those volume increases could come?

John Rice

Well, I believe that right now it's going to be more of aconsumption driven market than supply. I think depending on how all the plantscome online and the timing of them, they could actually come on quicker thansome of the markets.

So I think, from a timing perspective here over the nextyear, for everybody else I don't know exactly but we do hear of some plantsbeing delayed, some construction being delayed, some people actually havingpermits and not finishing. So you may see not as many plants come online.

Our plants, since they're so integrated with our other cornplants, we're keeping construction going and we feel we have a low costprojects being built there that will make us very competitive over the longrun. So those plants are still online.

Schedule wise they may fall back a month or two, but wethought we'd update that probably in the third quarter, once we get through thewinter months and see how the steel shipments and everything else comes. Butright now, we're still looking ahead and planning to build our ethanol plantsbecause we long-term see the growth in the market.

Christine McCracken -Cleveland Research

Okay, and just in terms of -- you look at these markets. Whyis it that these vendors aren't adding or making the structural adjustments touse the ethanol faster? It seems like the economics would warrant that at thispoint. Do you have any view on that or is it just that they need to make somechanges and are dragging their feet a bit?

Pat Woertz

Well, you know Christine, I think John said that we'redisappointed that it hasn't come a little faster, in particularly in thesouthwest where I think there's good intent there, but the actions aroundgetting that infrastructure in place has been slower than we thought.

Certainly with the lower prices, there's lots of economicincentive to blend as much as possible, but obviously, if you don't have theinfrastructure to blend it, that's hard to do. It may be a good point to makewhy we, along with others, believe that this energy bill that is beingdiscussed, we've formed some interest with environmental groups, with certainlyif you call it second generation as well as first generation ethanol.

There's not a good ethanol and bad ethanol. We'll never getto some of these second and third generation opportunities if we abandon ourcorn ethanol base. So we think it's important to have a renewable bill standardthat help support a smooth transition, kind of getting back to your point abouthow infrastructure gets done. And sometimes with the smooth transition that anRFS standard allows year-by-year, that infrastructure can happen again on asmooth basis rather than quickly overnight to say replace MTBE, which was thediscussion a year ago.

Christine McCracken -Cleveland Research

Do you get the sense that there's been any shift inpolitical support for the renewable fuels industry or do you still sense thatit's coming, but that it's taking a little longer than you expected?

Pat Woertz

We sense still a strong amount of support and bipartisansupport for ethanol. There is some discussion about other parts of an energybill that's perhaps are more controversial or difficult, so maybe the part thatcould get passed more appropriately we will get bogged down with other items,but we still sense a good amount of support and I guess I'd give it that 60%chance which we have talked about before. We're working again with a broadrange of stakeholder to help advance that bill.

Christine McCracken -Cleveland Research

Great. I'll leave it there. Just to echo, I reallyappreciate all the increased detail. And my might ultimately understand yourbusiness some day.

Pat Woertz

That's good, Christine.

Christine McCracken -Cleveland Research

Thanks.

Operator

Your next question comes from the line of David Driscollwith Citi Investment Research. Please proceed.

David Driscoll - CitiInvestment Research

Okay, thank you. Good morning, everyone.

Pat Woertz

Good morning, David.

David Driscoll - CitiInvestment Research

Pat, I definitely want to say thanks for the increaseddisclosure. I really do appreciate it. It's a good amount of information andwe'll look forward to spending some time looking at it. A couple of quickquestions.

Some of these pieces have been asked, but I just want to goback over things. The 10% price increase, that does appear to be a little bitless than what we hear in terms of the industry talks. It would be, John, isthe reason for this is that this is the nature of the multi-year contracts andthe effect of the blended increase would be not just on the ones you sign todaybut on the overall business that you have i.e., more than half of the businessis under multi-year contracts. Is that the way to look at the 10%?

John Rice

That's one way to look at it. All our multi-year contractsdo have increases, and depending on the year and when it actually comes, it canhave a different increase that can play into that. Also in some markets whereour fructose price is -- and you start getting into the West Coast market orsomething starts bumping up into sugar prices, too.

We came out with a 15% to 17% list price increase, and themarket is still very tight in capacity. We have Mexicocoming on next year, so I would, I'm not disappointed at all with a 10% priceincrease and we've had back-to-back years of very good price increases. So Ilook at 10% as a very good price increase for this year, looking at what'shappening around the world in the markets.

David Driscoll - CitiInvestment Research

On Mexico itself,can you guys share with us your estimate for what you think the overallpotential for fructose demand at Mexicois industry wide? You don't have to say your particular number; I'm justcurious where you see fructose demand going to from where it was in 2007?

Pat Woertz

David, we anticipate the total Mexican sweetener market togrow from about 400,000 metric tons in 2007, which I think is the rate thatit's at about now to about 750,000 metric tons.

What part of that is the soft drink market, I think, is whatabout a million metric tons, John, and …

John Rice

Yes.

Pat Woertz

And that is about 50%, I guess, sugar and sweetener there.So I think it's quite a positive message and positive story there and we'll seehow this all unfolds.

David Driscoll - CitiInvestment Research

Given that you guys…

John Rice

That open market down there with the sugar prices and thecrop in Mexico,I think there's some opportunity to ship a little more fructose’s next year.We're seeing a lot of interest and people are starting to talk contracts fornext year.

David Driscoll - CitiInvestment Research

That brings up the question on excess capacity. You guys runyour front end grind at 100%. You do need to switch, as I understand it you'regoing to have to switch from one product line over to fructose.

Can you just give us a sense on what level of excesscapacity that you have? Is it the ability to shift 20% of the grind? Is thatpercentage is too high? I'm again trying to get a ballpark here.

John Rice

Well, that's the number we've been throwing out lately, butas we keep increasing drying a little bit, just because of the efficienciesthat number keeps getting a little bit smaller.

But during the winter months, we ship less fructosedomestically and we'll be able to just take some of that fructose and ship itdown into Mexicoand probably produce less ethanol during that time period.

David Driscoll - CitiInvestment Research

Understood. Pat, on the ethanol side and John, you guys gavesome nice color on some of the markets. John, in some of your prepared commentsyou said that EU markets are opening a bit slower because of infrastructureissues.

How do the fuel specification issues impact? Or: how havethey impacted the ability of those markets to open? I want to really understandhere: the differential between the specification issues and the infrastructureissues? As you guys see it.

Pat Woertz

I'll start that one and this may be a question, David, todig into and give you a little more color offline because it really depends onthe state specs and the movement between states.

It's a factor, but certainly infrastructure is a much biggerissue. You've got to have the ability to take the volumes and to move thevolumes, before you can have the flexibility to kind of make sure you'remeeting specs by state.

So infrastructures are bigger issue, but as far as fieldspecs by pad or by state, we can talk about that and maybe have a little moredetail around that. I'd consider it minimal, though, as per your thinking.

David Driscoll - CitiInvestment Research

Okay. Final question I had for you guys was: can you justgive me a little color on what you see happening in South America,particularly on the soy crop? I.E., what's your outlook?

John Rice

The crop is about 5% to 10% behind last year's pace rightnow and it's just been a little bit dry. We're seeing very good rains down in Brazilright now, so we feel the planting should get caught up.

The crop may be a little bit later this year than what wesee in normal years. We're hearing anywhere from 0% to 7% increase in acreage,but I think really time will tell as depending on how the weather goes.

With these prices now with the strong Real is having a pricereaction or I should say the farmers are having reaction to how much additionalland they want to expand down there right now.

David Driscoll - CitiInvestment Research

You're seeing the negative reaction because of the Real waspartially offset by I would trust by the higher prices for soy?

John Rice

Correct.

David Driscoll - CitiInvestment Research

Great. Thank you for all the answers. Take care.

Pat Woertz

Thanks, David.

Operator

Your next question comes from the line of Ian Horowitz withSoleil Securities. Please proceed.

Ian Horowitz - SoleilSecurities

Hi, Good morning, everyone.

John Rice

Good morning.

Pat Woertz

Hi, Ian.

Ian Horowitz - SoleilSecurities

Excellent quarter. Just a couple of quick questions: shouldthe Velva plant add to your tonnage for this coming quarter? And if so: can yougive us an indication of what that would be?

John Rice

Yes, the Velva plant is up and running biodiesel. We'reshipping just because the holiday markets are working right now; a lot of thatproduction is actually going over to the European market.

I can't remember off the top of my head the size of thatplant. It'll have a small effect, but in the grand scheme of things it's just atotal.

Ian Horowitz - SoleilSecurities

75 million?

Pat Woertz

75, I think.

John Rice

Thanks.

Ian Horowitz - SoleilSecurities

So…

John Rice

It just plays into our whole network on...

Ian Horowitz - SoleilSecurities

Great, but that's backed on to a crush facility?

Pat Woertz

You're breaking up there, Ian. Can you say that one, saythat one more time?

Ian Horowitz - SoleilSecurities

Yes, that biodiesel plant is backed on to a crush facility,so that shouldn't change overall tonnage, correct?

John Rice

No, it's just exactly, just where the oil ends up going.

Ian Horowitz - SoleilSecurities

Okay. Second thing, I've heard from, we've heard from anumber of different ethanol producers about their, we've seen a massive drifttowards bought contracts. Can you just comment on where you're seeing thingsbetween spot and forward contracts or gasoline plus contracts?

And the follow-up question to that is are you seeing muchdemand for anything beyond the first calendar quarter of '08 in terms of beingable to write out the supply contract?

John Rice

Market still is very spot. When the ethanol prices got downto $1.50 a gallon, we were so much cheaper than imports coming to the CDI inthe United States.You started to see more interest, especially with the differential between theRBOB and ethanol

A lot of people had interest in buying out forward. Now alot of people were not able to do that and then ethanol prices have come up alittle bit. I'd probably say as markets develop you're starting to see a littlebit more people looking to buy a quarter, maybe two quarters out, but we'restill not back to anywhere close to people wanting to buy a year unless theycan really buy it real very cheap.

Pat Woertz

Ian, maybe another little bit of color around that. As welook to the future, we're working with various testing programs. The Departmentof Energy Argonne lab is doing some testing on e12 and e15 and even sometesting up to e20.

If you think about volumes of ethanol being able to beabsorbed into the system at a greater pace with the current infrastructurewhile e85, for example, gets its legs and some traction, I think e12 and e15can help fill some of that gap, when and if that testing is completed.

Ian Horowitz - SoleilSecurities

Okay. Great! And your recent announcement on the industrialchemical business: does this affect your relationship with Metabolix at all? Or:how will you look to Metabolix in this new relationship?

John Rice

It doesn't affect our relationship at all. We brought in anindividual that understands the applications and how a lot of these green chemicalscan fit in the market and that's really what we're looking at.

With Mike Pacheco's leadership, we're looking at a lot ofdifferent chemicals we can produce from many of our feedstock’s and we reallyneeded to get somebody in here to be able to help us with the applications inthe market side of it, and what makes sense, especially on a scaling up.

Pat Woertz

And maybe again a little more on that, Ian. Metabolix hassome of their own announcements out there, but we’ve recently visited theirmarketing site and their customer pipeline is really growing each quarter.

I think there's about 80 different products, there arepotential product applications that now we're working on, so I think theapplications will be ready as that plant comes on stream December '08.

Ian Horowitz - SoleilSecurities

And: will Mike be responsible for that relationship goingforward or?

John Rice

No, actually, that report's up to me, but like a lot of ourbusinesses, we have to coordinate production with research and commercials. Wehave to work very closely together.

Ian Horowitz - SoleilSecurities

Okay, one last question and then I'll get back in the queue.You mentioned and a number of your competitors mentioned HSCS pricing comingvery close to the sugar price.

Do you have any sense on where we could start seeing demanddestruction on HSCS with regards to the price or can we really assume that HSCShas the ability to get to parity or near parity with sugar and still be able tobe absorbed into the market?

John Rice

The rough rule of thumb, this hasn't been an issue for quitesometime. The rough rule of the thumb is we always feel that a 10% discount tosugar, we will not lose any market share at all. People like to handle the highfructose; they already have the systems in place.

So just watch in the world sugar markets are also going tohave an impact on it.

Ian Horowitz - SoleilSecurities

Okay, great! Thanks again for the disclosure, and I'll getback in queue.

Pat Woertz

Great, thanks Ian.

Operator

And your next question comes from the line of Edgar Roeschwith Banc of America. Please proceed.

Edgar Roesch - Bancof America

Hi, good morning.

Pat Woertz

Hi, Ed, how are you?

Edgar Roesch - Bancof America

Pretty good. Congratulations! Most of my questions have beenanswered, so just want to take one more pass at the drivers in ag services, andyou'd mentioned some global grain dislocations that created some opportunities?

But I was also wondering if just in the U.S. do the largecrop rotations and shifting acreage that is more prevalent today with thevolatility in the prices, does that create more opportunities in some of theselocal markets that might have been settled down into routines as where farmersare only tweaking a percentage or 5% or so, a year in terms of their allocationof the crops and now their doing much more drastic shifts? Thanks.

John Rice

Guess that gives us more opportunities just when peopleswitch from corn to beans and the same amount of acres you're getting threetimes the volume, so that helps with all our logistics, our transportation. Italso just gives us more volume.

When people start planting different crops around the areasin normal places that they normally don't grow it, they need to be able toshift wheat maybe to an export market, which really helps our transportation.

It'll also play into our milling. We've got to take thebetter quality wheat and take it to different mills to be able to process itfor our flour customers. So, I know I'm dancing around this answer, but, yes,all these type of fluctuations in the market definitely play into ourinfrastructure.

Edgar Roesch - Bancof America

And just to add to that, John, if you're spreading out therate of harvest as well, does that also play a part? If the harvest takeslonger or year-over-year, you're at different points in your cycle?

John Rice

Yes it does, but it can vary from year-to-year. If the yearlikes this, where we had very dry in the east the harvest came off veryquickly. And then the harvest was slower in the west. They ended up movinggrain from east to west a little bit more than normal.

So, each year, it's kind of a tough question to answer,because each year we'll see a little bit difference that we can play in thelogistics game and how where we want to ship crops from one area to the otherarea.

Edgar Roesch - Bancof America

Okay, and could I just ask one last one and then I'll let itpass it on. This was clearly an opportunity this past quarter and I'mwondering, you mentioned going down into South America as the next step and theharvest there later in the fiscal year. So, I'm just wondering: are thoseopportunities likely to be greater in North America thanSouth America?

John Rice

Well, for the next quarter, I think, we still are in theprocess of harvesting our crop…

Edgar Roesch - Bancof America

Sure.

John Rice

We still (inaudible) all in the field. So, in the SouthAmerica crop, right now the exports are less out of there and mostly exports;wheat, corn and soybeans are going to come out of the United States in the next quarter.

Edgar Roesch - Bancof America

Okay, thank you.

Operator

Your next question comes from the line of Pablo Zuanic withJ.P. Morgan. Please proceed.

Pablo Zuanic - J.P.Morgan

Good morning, everyone.

Pat Woertz

Good morning.

Pablo Zuanic - J.P.Morgan

Just a couple of questions. I want to follow-up on theagricultural services point: can't you just give us the dollar revenue for theagricultural services? How much was that have been -- how much was volume andprice if you can give that number? I know it's on the 10-Q, but it would helpif you give it now?

Doug Schmalz

Well, we'll have the dollar values of the revenues in our10-Q, which will be filed by the end of this week. I don't have that righthere, but we did. We had the volume increases that we talked about a lot ofthat came through our ag services group, as we moved commodities around theglobe.

Pablo Zuanic - J.P.Morgan

All right. Now as a rule of thumb, and maybe this is toosimplistic, but when I think of agricultural services in a high-pricedinflation environment food grain, does that normally translate into also higherpercentage operating margins for that division or not necessarily?

Doug Schmalz

I think, as I mentioned earlier, if you look at the twobusinesses of ours, if you take the oilseeds sector and you take the agservices sector, the margins that are made on, for example, on an oilseedswhether it's an $8 bean or a $5 bean, you might have a little more opportunityto make a little more off of an $8 than a $5, but the crush margins on thosereally don't change much. They can be the same for either. Then if you look atthe ag services that is a trading margin that you make off of that and whether,once again, you may make a little bit more margin off of it about than youwould if it was a $10 bean versus a $5, but the impact to gross margin is justnot relative directly to the sales price.

If you look at our actual dollar values this year of agservices, it looks like we'll be about $5.5 billion of sales in this quartercompared to about $4 billion last year, so up about $1.6 billion.

Pablo Zuanic - J.P.Morgan

Thank you. And just on the crushing side, when I think ofthe outlook for North American crushing margins, I see that soybean pricescontinue to go up and that's going to be a source of pressure. On the soybeanmeal side that I'm aware of, production of life still is not necessarilygrowing much, so I don't see it as a big driver of demand.

And on the soybean oil side, the biodiesel industry, atleast in the U.S.hasn't taken off. So, why should I assume that crushing margins in North America are going to get better? They may actually come down.

John Rice

We're seeing meal demand up about 6% and oil demand up about8% and we're also seeing a lot of growth in the Latin American countries, sowe're starting to see more exports. As the South American crop gets less andless right now, we will be able to export more, we feel, into the Asiain terms of soybean oil, but we're seeing very good protein demand around theworld and oil demand right now.

Pat Woertz

And Pablo, those were global demand numbers.

John Rice

Yes, exactly.

Pat Woertz

But again very strong.

Pablo Zuanic - J.P.Morgan

Alright, and just to follow up, maybe this is more out inleft field, but some day Castro may die, Cuba may become a U.S. partner and theU.S. may want import sugar from Cuba. If that happens, and I know it's way outthere, but if that were to happen that could be very detrimental to the HSCSindustry, right? I guess it's on no one's radar screen, but--

Pat Woertz

Well, actually all markets are on our radar screen, and Ithink this company has had the look of that potential occurring for many years,so I think we kind a look at its return, I don't know if you have anything toadd to that, but--

John Rice

No. It's just another market opportunity and what happensthere I guess we I haven't really looked at that yet.

Pablo Zuanic - J.P.Morgan

Okay, and just a last one, industrial fuel specs in thesoutheast, southwest: how much of a fuel spec issue is a weather-related issue?I mean: it sounds like in some states it's just a matter of signature I meanthe congress in those states agreeing and just changing the specs, but I'm wonderingbecause of heat in the summer or because of weather issues maybe those specsare there for a reason?

Pat Woertz

Well, sure, there's always RVP issues for summertime fueland that's there for the warmer weather reasons. We've kind of thought about morefundable standardization with respect to fuel specs, and I think the morestandardization we could get across the country, somewhat the easier it wouldbe to allow for infrastructure to move. But I don't think weather's a showstopper, or those parts of the spec are a showstopper.

Pablo Zuanic - J.P.Morgan

Okay. One last one if I may Pat. In terms of biodiesel,obviously you’re in Europe new plant in the U.S.,and now the largest plant in Brazil,just help us think through in terms of what's the outlook in those threeregions? In terms like you're a lot more bullish on Brazilif so, is that true and why?

Pat Woertz

I think your question related to biodiesel and that's--

Pablo Zuanic - J.P.Morgan

Biodiesel, that's right. I am sorry.

Pat Woertz

It's in Rondonopolis and we think the demand there inlandright around the plant, so to speak, will be strong. That'll be a good marketfor us. U.S.will grow more slowly on the biodiesel side. I'm not sure if I heard, did Ihear your question correctly?

Pablo Zuanic - J.P.Morgan

Well, yes, I'm just trying to understand. It sounds likedifferent research I look at from either industry experts outside the USDA andother consultants that we talk to, they make it sound like in the long-term,the country with the best potential for biodiesel is Braziland I just wanted to get your take on that part?

John Rice

They have a 2% mandate coming up in January. A lot of it'sgoing to have to do with government policies, import, export tariffs. Brazilhad a very good record of looking at renewable fuels. We can just see whatthey've done in the figures, so, I would guess, I wouldn't be surprisedlong-term if they keep trying to push the biodiesel mandate higher.

Pablo Zuanic - J.P.Morgan

All right, thanks.

Operator

Your next question comes from the line of Robert Moskow withCredit Suisse. Please proceed.

Robert Moskow -Credit Suisse

Just a quick follow up. You have your industrial chemicalsgroup that you're forming and then you also have one your top people, BillCamp, developing an Asian strategy, and yet you have relationships with Wilmarin the Far East and then Metabolix in industrialchemicals. Do your partners there consider your efforts to be competitionagainst them and how do you view these efforts?

John Rice

In terms of Metabolix, no. We've had a lot of discussionswith Metabolix about what products we're looking at getting into. They'rereally more looking at the PHA right now. I know they're also looking at someother industrial chemicals, but ours are really going to be based on thefeedstock’s we already make.

Robert Moskow -Credit Suisse

And what about Asia?

John Rice

In Asia, we've had a few discussionswith them right now but we're still on the ground floor of really developingour industrial chemical platform. Right now, we have the propylene, ethanol,glycol plant. It's really the first plant that we're going to be bringingonline and it's still kind of a research and development area in what we canproduce. Can we be very cost competitive and what the applications are? We'restill in the early stages of that, I guess.

Robert Moskow -Credit Suisse

Correctly, are you saying that the Asian efforts are relatedto industrial chemicals, or you're still trying to figure out a strategy for Asiathat potentially could go beyond your relationship with Wilmar?

Pat Woertz

Well, that the latter is the case. I think maybe we wereconfusing your two questions there, Rob, sorry. But in Asia our strategy isvery linked to Wilmar because of our investment in the largest agriculturalcompany in Asia. But, more holistically, we're lookingat the broadest of strategies in Asia and that's thebasis of our work right now that you refer to Bill taking on.

Robert Moskow -Credit Suisse

Okay, thank you.

Operator

(Operator Instructions)

Pat Woertz

Okay, operator, do we have no more questions?

Operator

I have one that has just queued up. And your next questioncomes from the line of John Roberts with Buckingham Research. Please proceed.

John Roberts - BuckinghamResearch

Good morning.

Pat Woertz

Good morning, John.

John Roberts -Buckingham Research

In your last quarter you actually warned us that thisquarter would have a lot of opportunistic activity. I was wondering if you feltas good right now about the potential for opportunistic activity in theDecember quarter as you felt back in the summer about the September quarter?

Pat Woertz

That's I think we feel really strongly about ourorganization, about the markets that we're participating in, and I think I hopewe've been open with you today related to where we're seeing strong demand,where we're seeing markets a little weaker, and I think we're quite positivefor the long term. So I appreciate your question, John. I think we're in a goodplace.

John Roberts -Buckingham Research

Thank you.

Pat Woertz

Thank you.

Operator

And your next question comes from the line of John McMillinwith Florida Abbott. Please proceed.

Pat Woertz

Well hello, John.

John McMillin - Florida Abbott

My first question is: “a bisider”. Doug, I heard you say thebenefits of lower biproducts would be more going forward. Did I hear thatcorrectly?  That we obviously know cornoil is up and biproducts are up, but: did some of your prepared remarks saythat that benefit is more going forward than it was in the past quarter?

Doug Schmalz

I think what we said was for 2000 we were talking aboutethanol is reduced the ethanol pricing down next quarter but we also said wesee some improvements in bioproduct values, which should help us on our corncosts going forward, yes.

John McMillin - Florida Abbott

More than in the past quarter?

Pat Woertz

In this current quarter, yes.

John McMillin - Florida Abbott

Okay. Thank you.

Pat Woertz

Thanks, John.

Operator

I show no further questions in the queue. I would now liketo turn the call over for closing remarks.

Pat Woertz

Okay, well thanks very much, everyone, for your interest andI will see you next quarter.

Operator

This concludes the presentation and you may all nowdisconnect. Good day.

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Source: Archer Daniels Midland F1Q08 (Qtr End 9/30/07) Earnings Call Transcript

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