Good morning, and welcome to the Archer Daniels Midland Second Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference call, Mr. Dwight Grimestad, Vice President, Investor Relations for Archer Daniels Midland Company. Mr. Dwight Grimestad, you may begin.

Thank you, Christie. Good morning, and welcome to ADM's Second Quarter Earnings Conference Call. Before we begin, I would like to remind you that we are webcasting this presentation on our website, adm.com. And the replay will also be available at that address. For those following the presentation, please turn to Slide 2, the company's Safe Harbor statement, which says that some of the comments constitute forward-looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results. Statements are based on many assumptions and factors, including availability and prices of raw materials, market conditions, operating efficiencies, access to capital and actions of government. Any changes in such assumptions or factors could produce significantly different results. To the extent permitted under applicable law, the company assumes no obligation to update any forward-looking statements as a result of new information or future events. Now please turn to Slide 3. On today's call, our Chairman and Chief Executive Officer, Pat Woertz, will provide an overview of the quarter. Our Senior Vice President and Chief Financial Officer, Ray Young, will review financial highlights and corporate results; and our Executive Vice President and Chief Operating Officer, Juan Luciano, will review our operations and outlook. Craig Huss, our Senior Vice President and Chief Risk Officer, will join Pat, Ray and Juan during the question-and-answer portion of the call. Now please turn to Slide 4, and I'll turn the call over to Pat.

Thank you, Dwight, and welcome, everyone, to our second quarter conference call. This morning, we reported second quarter net earnings of $80 million or $0.12 per share on a fully diluted basis. Our adjusted EPS was $0.51 and that would exclude LIFO and the impairment charges we took this quarter related to our Bioplastics business. Segment operating profit when excluding the impact of the impairment charges was $648 million. It was a tough quarter, particularly for comparisons. Last year's segment operating profit was a record. And this quarter, we took our asset impairment charges on PHA. And the operating environment was challenging. Ongoing weakness in global oilseeds margins, lower results in corn and poor international merchandising results hurt our second quarter profits. We remain optimistic about the long-term fundamentals of our business and the growing earnings power of our company. We continue to execute our plan to drive shareholder value. We are prioritizing capital projects, and we have adjusted our combined CapEx and M&A projections from $2 billion to $1.7 billion for this fiscal year. We are driving productivity. Our savings from these efforts should exceed $100 million when they are fully implemented. And we are returning capital to shareholders through dividend increases and share buybacks. This quarter, we returned over $300 million in capital to our shareholders. Now I'll turn the call over to Ray.

Thanks, Pat. Slide 5 provides some financial highlights for the quarter, which I'll run through briefly. As Pat noted, segment operating profit, excluding the PHA charge, was $648 million, down from the record quarterly $1.4 billion level a year ago. Quarterly net earnings, including the charges, were $80 million, down 89% from last year's second quarter. Looking at our effective income tax rate for the quarter, we recorded taxes at 31% to bring our 6-month rate to 30%. We continued to analyze our forecast geographic mix of earnings. But for the purposes of estimating our effective tax rate for the 2012 fiscal year, we still believe a 30% rate is a good number, inclusive of the impact of the PHA charge. Our earnings per share were $0.12 on a fully diluted basis compared to last year's $1.14. We recorded a LIFO charge of $59 million pretax or approximately $0.06 per share compared to a $0.25 charge in the same period last year. Adjusting for specified items, including LIFO and the PHA impairment charges, ADM earned $0.51 per share compared to last year's $1.20 per share. On Chart 19 in the appendix, you can see the reconciliation of reported earnings to adjusted earnings. We also had some significant negative mark-to-market timing effects in the Other segment, which impacted our overall results by $127 million pretax or about $0.13 per share. Our 4-quarter trailing return on invested capital of 6% including the impact of the charge was below our WACC by 30 basis points. If we excluded the impact of the charge, our 4-quarter trailing ROIC would be about 7%. Slide 6 provides an operating profit summary in the components of our corporate line. Juan will talk about the business segment results in his update. Let me touch on a few items…

Thanks, Ray. Good morning to everyone on the call. Beginning on Slide 9, I will take you through the highlights of each of our business segments, and then update you on our CapEx plan. I will conclude with our current assessment of market conditions and their implications for ADM. In Oilseeds Processing, our operating profit in the second quarter was $253 million, down $72 million from the same period last year. While margin conditions in our Oilseeds segment were generally weak, the diversity of our global Oilseeds business mitigated some of these pressures. Crushing and origination operating profit fell $61 million to $139 million. Continued weakness in global oilseeds crushing margins, particularly in Europe, reduced overall results. In response to this, we continue to take actions reducing crushing rates at European rapeseed-only plants and at European swing plants, moving some capacity from rapeseed to soybeans. Last year's second quarter reflected the $71 million pretax gain related to the acquisition of the controlling interest in Golden Peanut. In addition, last year's results included significant negative mark-to-market timing effect, which were not repeated this year. Refining, packaging, biodiesel and other generated a profit of $74 million for the quarter, which was essentially flat from last year. Oilseeds results in Asia for the quarter were in line with last year, principally reflecting ADM's share of the results from equity investee, Wilmar International Ltd. This quarter in Oilseeds, we continue to grow our international footprint. We completed the acquisition of Polish rapeseed crushing, refining, packaging and biodiesel business, Elstar Oils S.A. Our integration efforts are underway, and we're very satisfied with the assets and the team. We began a project to diversify and increased quality and efficiency at our Olomouc, Czech Republic sunflower seeds crushing and refining facility. And we announced plans to construct…

Thanks, Juan. And before we open the line and take your questions, let me just recap. Tough quarter, challenging environment, operating profits were down across the board, particularly against the record year comparison. The PHA impairment and the cocoa mark-to-market significantly impacted our results. We continue to take actions to drive our long-term performance. We remain focused on shareholder value. We increased the dividend in November. We continue to buy back shares. So with that, Craig will join Juan, Ray and me for the Q&A. And Christie, if you could open the lines for questions.

[Operator Instructions] Your first question comes from the line of Vincent Andrews of Morgan Stanley.

Let me just ask a couple of quick questions. Pat, on the last call, you made some comments about sort of what you thought the trajectory of ethanol was post the tax credit. And so we're a month after the tax credit and production hasn't given up at all, but margins are sort of bouncing around slightly above breakeven. And there was a comment, I believe, in the release about export weakness,, and exports were a big story in 2011. So could you just give us sort of a sense of where that market stands on the demand side and what your expectations are for exports this year?

Vincent, this is Juan. I will address the question. Remember, I told you in the last call that we were going to see a shrinking in the margins as we were going through all these changes. Obviously, exports were very good at the end of the quarter. And at this point in time, with those great margins that we have by Thanksgiving, I would say, we saw a lot of capacity coming into the market. Also, you understand that with these weather conditions, everybody can't produce at very, very high rates. So we have the industry producing at about, at the end of the year, at about 14.7% type of rate. And then we saw, after the end of the year -- normally, January is our low-mileage season for the U.S. with the winter, so we saw a decline in gasoline consumption. But we also saw the impact in exports of Brazilian reducing their mandate from 25% to 20%. So as we go into the year, we saw margins declined significantly in December although, as I told you -- I have anticipated that to you, we didn't see the magnitude and the speed at which it turned from Thanksgiving onwards. And so today, we have the situation in which probably some capacity had came out already in the last couple of weeks, so we may be producing at around 14.5%, 14.4% in the industry but we have a demand of about 12.2%. Even despite the 13.2% mandate, we have about 12.2% of current demand. And the exports are starting to pick up, but they are still reduced. And probably at this year, we are seeing something about 500 million gallons per year. That's our estimate at this point.

Okay. So just to be clear, you've got 12.2% of current demand, you mean for the full year of calendar...

These are current rates...

Current rates. Okay, fine.

Under the same, since driving mileage are low, that's kind of the demand.

Okay. I got you. That's your run rate now, will improve seasonally and then as exports come back and obviously we'll meet the mandate and so forth. Can I ask you, I read this morning that Russia is considering an export duty on grains. And if you put that in concert with what's happening with the South American crop, how would that change sort of the fundamentals in ag services potentially?

This is Craig. I read several releases this morning and basically, one minister says yes and one minister says no, and it comes down to politics. But we do see some seasonal issues, whether they be weather -- dry weather in Argentina or wet weather getting the harvest started in Brazil. We do have, obviously, some potential winter kill in the Soviet Union, Ukraine, all that Eastern Europe production. At this point, it's all conjecture, but they could bring opportunities to us as we go forward.

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

I wanted to talk a little bit more about Agricultural Services. So you made in your prepared comments the statement that the $150 million was within the historic range. So are you -- what were you trying to get at right with that statement? Were you trying to say that this result is kind of not a bad result? Or are you trying to say that this is just an explanatory factor in terms of the year-on-year delta? I wasn't sure what the conclusion, what the takeaway was supposed to be from that.

Well, I think -- this is Pat, David. I think the idea of a range that we've tried to clarify is a somewhat average range of the past of $150 million to $200 million. And even with poor international merchandising results, which we did comment on, and slower exports out of the U.S. that we were within the range. So I guess you can take that, if you had more average of both of those, you'd be higher in the range.

And then expanding on the poor international results, can you talk about why they were poor? Is this a veiled reference to kind of the European problems and how they crept into grain markets? Or is this something fundamentally specific to ADM? And then furthermore on that question, does it have a bearing on the March quarter and the rest of calendar '12?

This is Craig. I guess I'd say our job is to manage market volatility around our assets, and we have a very structured process for doing so. We analyzed the variables going out there and decide the risk-reward relationship in positions. And our risk positions have been somewhat lower, but it's been a difficult situation. And it's lower this year, but that's not a change in our thought process, much more just a -- we haven't seen the opportunities that we've seen in the past.

Okay. So, Craig, you're not trying to say that this had -- one of your competitors flat-out said that the European debt problems affected the grain markets and led to their business having lower origination results. I'm trying to get a sense if you agree with that statement. And then critically, what I really want to know here is what your thoughts are going forward, if this continues to negatively affect your ability to profit within ag services?

We've not changed our process at all. I would say that carrying inventories and things like that had been a little difficult this year just because of the risk reward on them. And that's basically why we've just seen less opportunity.

Okay. Final question for me is on Oilseeds. We've seen a pickup in spot cash crushing margins in the United States. In fact, it's been fairly material on a year-over-year basis. Juan, in your comments, you made a statement that, of course, things are still weak. But I'm very curious about, number one, the spot U.S. margin impact on your business in the December quarter. And then what do you take away from the improvement in those margins on a go-forward basis? It looks material, but I'd like you to tell us if that's the fact or if it's really not as good as it otherwise appears on the spot crush.

Yes, David. In Q2 for us, we saw a sequential improvement versus Q1. So what we said before that we've seen, with the harvest, the situation improved a little bit. So in the U.S., margins have come up a little bit but from low levels. As we go forward, we see Europe continued concerns, especially on the rape side because of the tight supply there. The U.S., it will depend a lot what happened with South America, obviously. If you remember, a couple of years ago when South America had a bad crop, we didn't have a problem with the extra demand that the U.S. get and to have full capacity utilization of all this capacity. Now we are wrestling with capacity utilization. But it is that, is that South America becomes very competitive. So that's why I would say at this point in time, it's very much a weather market. So last week was very dry and 40 degrees in Argentina. And people start to worry, and sometimes we get a little bit of a meal export market going. And then it's raining today, it rained yesterday in Argentina, so the market's come back a little bit in soy. So it's a weather market for this quarter. But I would say despite the improvement, we still see relatively softness in the margin, in overall in Oilseeds.

Do you expect your Brazilian crushing margin business to be better than what your comments were for Europe rapeseed?

Yes. We see South America kind of in between.

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

Just a couple questions. How much oilseed capacity are you guys taking out?

We took -- when you say taking out, Ken, if you mean permanently shut down, we shut down one that we announced last quarter. At this point in time, we're just slowing it down and we are running probably in the range of 80%, 75% depending on the oilseed. What I think I told this quarter is that, as we seen, I gave a little bit more detail of what we're doing in Europe. And we're seeing a little bit more -- we're seeing a little bit of a decline in demand in biodiesel in Germany because of -- German GDP probably has been affected by all these things. And also the winter was a little bit milder than expected, so heating oil demand is not that huge. So we shifted a little bit more to soy crush when we had that flexibility and we slowed down a little bit rape in Europe. So that's -- but that's something that we normally do, but I just wanted to give you more color.

Okay. So it's not incremented. It's the one facility in the U.S., that's really what changed.

Yes. We didn't shut down anything else.

Okay. And then when you reduced the CapEx and acquisition capital by 15%, is it sort of expected lower cash flow, less opportunities? Or just -- why would it be there was a change in that? Like what was the reason for the change?

Yes, I wouldn't describe it as a change. It was the continued working on our process of capital allocation that we started 6 months ago maybe. So when we started, we have like, we wanted to see the full pie chart of opportunities, the full pipeline in front of us. We saw $3.3 billion. We said okay on that. We think that $2 billion will be something reasonable. Then as we start working and increasing our hurdles and going through our prioritization, into giving priorities to outside U.S. and giving priority to Oilseed and ag services. So as we put those filters, we started to become more, a little bit tighter into that. And that's why at this point, the update is we are about $1.7 billion into that.

Okay. How much capital are you spending on the agribusiness? And could you just kind of say how much have you spent over the last 12 months? A ballpark would be very helpful, just kind of -- because I know you're spending more on logistics. I'm just trying to figure out how much of that $2 billion -- the $1.7 billion is now on the agribusiness? How much has it been over the last year or so? Just some sort of estimate would be very helpful.

Yes, Ken. I mean, I think we've indicated -- it's Ray here, that we're targeting about 70% of our growth investments in the agri -- the ag services sector, as well as the Oilseed segment. I mean, a lot of that is targeted outside of the United States as well. I don't think we want to go beyond that, because I think how we want to think about cap allocation is what are the segments we're focused on growth, and what are the segments that we're focused on optimizing. And we're going down that path right now.

Okay. And my last question is, the ethanol exports for this year, I think at one point, you guys thought it was going to be closer to 750 million. Now I think you guys are now saying 500 million. What was the change?

Yes, I think the 500 million is net from the imports that Brazil will bring into the U.S. So probably the gross number is probably 750 million to 800 million as we said before, Ken.

Okay. So there's no change to that?

No. Not in our view at this point. Too early although.

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

I guess first question, Pat, with respect to the PHA write-down, it was an investment that was made in the pretty recent history. And I'm just curious, what changed that caused you to walk away and to write it down?

Well, I guess we -- as you probably know, we started an exploratory arrangement with our partner there back in 2004, and further made an alliance and investment just early 2006. But it's truly a change. In the last review of our project that looked at the economical equation -- it's kind of a calendar year budget cycle. And as the budget was brought to us with cash spending and what the outlook was and revised several times, it still could not be in the economic projections that we felt made sense to us. So we evaluated what to do and clearly, it's something where we decided to take the write-down and do the -- look at -- it's a noncash, of course, write-down. Then we'll look at those assets, as Juan has mentioned in his remarks, to see if there are other options for use of them in Clinton.

Okay. I mean, I guess just going forward, when you talk about the CapEx plans, I guess now the question would surface, is there a chance that some of these new projects would have these risks as well? Because there wasn't that much time that passed since you decided to do it, to writing it down. I mean, is there a different process in terms of evaluating the projects?

Christina, this is Juan. I will say that the only difference with the process is that it adds a little bit of a -- more to the hurdle rate when we go into things that we are less familiar with, like in this case. So it's difficult to compare the other projects in the pipeline where we're focusing on the things that are core to us and the businesses that we have, obviously, gross momentum in -- growth momentum in. So I think that the issue in PHA is a difficulty of us going with something that is new in the world, in a market that is completely new to us. So I don't think that you should extrapolate those difficulties into our current CapEx. Also, the current CapEx adjusted also reflect the fact that we will not have to spend extra CapEx into PHA that we had in the plan to.

Okay. That's helpful. And then, Ray, for cocoa, it's the most frustrating segment to model. So we have $100 million of mark-to-market losses that eventually will reverse, but we have no idea on the timing. And then are there more losses that could happen? Or now we're kind of in a steady-state where the gains should start rolling in? How do we think about this?

Well, first of all, I think we're sympathetic with you in terms of the volatility of the mark-to-market in the cocoa segment. Christina, a lot of it's going to be a function of how cocoa bean prices move. Part of the reason why we saw the large negative mark-to-market adjustment is the fact that cocoa bean prices fell over 20% in the quarter, which is a dramatic move in a short period of time. So when Juan talks about the fact that we've built up about $100 million of cumulative losses on our balance sheet, we know that eventually, that will unwind. So as we sell down the beans or as prices move up, a lot of that should unwind. We're just hesitant to provide any indication in terms of the exact timing because frankly, it is difficult to estimate. And secondly, there's a lot of other factors that drive how the unwind will occur. So we just want to alert you that there is about a cumulative of $100 million of losses built up. It will eventually unwind. We're very -- we, ourselves, are not forecasting specifically when it's going to unwind. So we thought that was just useful information for you.

Okay. And then Pat, for ethanol, it sounds like E15 may be a bit closer -- just what I've been reading seems a little more optimistic. But I wanted to understand with respect to the RVP waiver, is that a real hurdle? Is that something that needs to happen before we can have Midwest adoption of E15, assuming that the EPA puts it in the registrar?

I don't know, Christina. I'm looking around the table here. To your first point of "looks like it's closer," I think we still believe it's the spring. It looks like it has the opportunity to have the Is dotted and the Ts crossed, so to speak. In all the technical reviews, we don't see any reason why it won't be certified as a fuel. Illinois and Iowa are ready to go, and I believe Pennsylvania is not far behind. So the states are dispensing transport fuels -- or they have rules on dispensing transport fuels as a state component. And they are ready to go as soon as the federal approval is certified. So that part is positive. I don't know about the RVP. We can follow up and get an answer back to you on that.

Okay. And then last question, just on the rapeseed in Europe. One, is that purely a function of the short crop? So then when we get the new crop, I guess, sometime in the summer, it will -- margins will recover? Or is there something else on the demand side? I guess you mentioned the biodiesel in Germany that we should be thinking about.

Yes. I think even when the new crop comes, we still expect it to be tight and needing some imports from Australia to compensate for that. So I think we -- the way I think about it, Christina, is we're going to see a little bit of a margin improvement from the market and we're trying to get a lot of our own margin improvement by the things that we're doing with that. But it's still a difficult environment.

Your next question comes from the line of Ryan Oksenhendler of Bank of America.

Ray, I was just wondering if you can elaborate. You talked a lot -- I know last year at a conference, you talked about changing the framework in the way you make capital allocation decisions, and you provided some expectations for the investments that you were making that year. Do you plan on providing some transparency on the projects that you're spending on now? I just think it would help. I know, Pat, you talked about how you're excited about long-term earnings growth. I think that would help provide some reference for investors, how you get there. And also, do you plan on providing some targets for segments besides the Oilseeds segment?

Yes. A couple of comments, Ryan. We indicated that we were looking at our hurdle rates as part of our improved capital discipline. And Juan has talked about in the past that we have increased our hurdle rates overall. And in addition, we provide some differential hurdle rates reflective of projects that are maybe in new geographic areas or into new product types of areas, so -- and that process has been put in place. And then secondly, we indicated that we're going to continue to do a lot of smaller projects. I mean, I think I highlighted at your conference that there's a core competency within our company about doing these small bolt-on projects. And we continue to focus on a lot of these bolt-on projects, which will provide returns in excess of our hurdle rates. I think the new element that you've recently seen from us is also a focus on allocating more capital towards emerging markets or the growth areas. And so I think that through -- Juan's team, the global operating team, they're looking at all of these projects. We provide a lot more filters towards projects. And I think going forward, I think you will see that reflected in terms of our earnings power at the company, going forward. I mean, the reason why we're investing in all these projects is to drive the earnings power here. So we are going to have blips in certain quarters. I kind of view this quarter as one of these blips, whereby we kind of under-earn relative to our long-term targets. But we continue to have the capital discipline, filter the projects, look very critically in terms of what we're going to invest. I fundamentally believe that it's going to get reflected in our forward earnings in the future.

Okay. And then just, in terms of -- it sounds like you're evaluating some options for some of the smaller businesses like, I guess, your fermentation assets and then, I think, the sugar assets or the ethanol assets in Brazil. I guess, how far along are you in the process of this? I mean, have these businesses been a drag on earnings, or it limited your earnings growth? And kind of how far along are you in that process.?

Yes. Ryan, this is Juan. Obviously, we made the decision on PHA based on these transient change in circumstances that we've seen late last year. And in terms of Brazil and our investment in ethanol from sugarcane, that's an important area for us. That continues to be an area of focus. And we learn a lot by operating that facility on a crop that we were not that familiar with. But fundamentally, we, like everybody in Brazil, we need to have good access to cane supply. So we are not satisfied with our current position and we're looking at options to improve that competitive position. So we are probably a couple of months into looking at that.

Your next question comes from the line of Diane Geissler of CLSA.

I was wondering if you could give us a little color on the CapEx that you've spent year-to-date. Could you break out for us, Juan, sort of what percentage you think was spent on, obviously, maintenance; and then the piece that went towards the smaller bolt-on type projects or the ones that are sort of immediately additive, I'm assuming? And then kind of the game changers like the Paraguay oilseed crush that will take longer to have some kind of return associated with it. Just give us a framework for how those -- the bucket of spending went.

Diane, it's Ray here. I think how we want to think about on a fiscal-year basis is, in terms of just what we call the maintenance and compliance CapEx, we're still thinking we're probably running about -- around a $400 million type of number there for the fiscal year. And I'm looking at the estimates for the fiscal year right now.

Okay, great.

Okay. And then the rest would be really what we'd view as the growth type of investments. And of the growth type of investments, we're still looking to target about half of that outside of the United States, the other half within the United States. We are focused on both the combination of capital spending and M&A, and we've indicated that on the first half of the year, we spent about $200 million in M&A. In Juan's estimates, probably another $100 million to get to about $300 million for the fiscal year. And then, with respect to the organic growth initiatives, generally, how I kind of think through that is, a vast majority of the growth initiatives are smaller types of projects, which we feel very, very comfortable executing. We really -- we got good returns on those and we continue to work on those smaller types of projects, in the ones I defined as less than $25 million.

Okay. So if we think about total CapEx budget of $1.4 billion minus $400 million for maintenance, that leaves $1 billion spend. I mean, you're midway through the year. You should have a pretty good idea about what percentage of that $1 billion will be on the smaller projects. Is it 70%? 80%? Just...

Yes. I think a ballpark number is probably about 3/4 of it is probably in the smaller projects.

3/4. Okay, great. And then I just had a question on the comment on the ethanol business. I think you said you were running above the nameplate in the December quarter. Is that -- it just sort of shocks me because the BioProducts profit was actually below my expectations, despite what seemed to be fairly decent industry results. So I just am -- I'm curious about the thought process that went behind -- with where corn prices are versus where ethanol prices are. You're running above your capacity still, or kind of how are you adjusting to the reduced operating environment?

The industry is running all very hard, to be honest, Diane. And we run very hard through the quarter, in the past quarter, as we saw those spectacular margins. Then obviously demand, especially on exports, disappear on that. We continue to run hard those plants, Diane. Those plants are not similar to the oilseeds plant, that allows for big adjustments in capacity utilization without taking a big hit on costs. Those plants are very big, are very intensive on energy. So we think that we have the cost advantage and we think that in reality, slowing down our plants will not bring a significant benefit to us, as it happens maybe in oilseeds. So we continue to run them hard and I think that we believe that some of the smaller players will slow down. They have slowed down already a little bit during the quarter.

Okay. So it sounds -- the question is, is that 6 months? Or I mean, there was a period, I guess a couple of years ago, where you had basically 4 quarters of losses in that group or in that line item. Is that kind of what we're looking at here? Or is it may be not as bad as it was 2 to 3 years ago?

Yes. I'm thinking, Diane, less than that, certainly. I think that there's going to be a combination. I think that the driving season in the U.S. is going to pick up. I think exports with these ethanol prices will pick up and it's just a matter of putting the programs together take a little bit of time. And I think there also some of the smaller player, the less competitive players will also adjust their capacity. There's also a mid-annual -- or semi-annual shutdown for maintenance of these plants, that normally happen too. So we see that, with all that, probably at the end of this quarter, we should see a little bit of a pickup in the ethanol margin.

Your next question comes from the line of Christine Healy of Scotiabank.

Just a couple of questions for you. First, just on your ag services business. I'm just curious if you're seeing any impact at all from the rise in U.S. on-farm storage? I saw that rose again in 2011. Have you seen since harvest that farmers are holding on to their grain a bit more tightly?

This is Craig. I think that on-farm storage is an issue, but I think much bigger than that is the farmer's holding on to the crop, period. Whether he was holding onto it on-farm or at the country elevator or at the terminal is insignificant. The farmer's had fairly strong financial results over the past few years and he's capable of holding and he's being bullish. So I don't think -- I think it's obvious that we have continued to have an increase of on-farm storage. But I think it's farmer holding of the crop much more than on-farm storage which has created the strong basis.

And did you see that improve in mid-December, when the prices started to come back up? Has that improved since the last quarter?

Well, the farmer has a situation where he is very strong, but there's a very strong inverse, where the old crop is worth more than the new crops. So he will gradually start selling the new crop because it's a financial hindrance for him to sell new crop.

Okay. And then just moving on to your growth plans here. You recently announced several expansions in Europe, Romania and Poland, Slovakia. Maybe you can talk about Ukraine. Is that a focused market for you? And what opportunities would you see in that particular market? Would that be more likely be a build versus a buy situation?

Christine, this is Juan. We're certainly building our position in Eastern Europe, so you see all these elevators and they're bringing it -- it's building our origination. We already have some processing capacity there. So we try to do more in terms of acquisition because there are smaller players there. So we have a very aggressive team and I think that you're seeing some of those results posted in our announcements over the last couple of months. So we will continue to do that. And acquisition game is a game of percentages, so it's very difficult to forecast. But we feel satisfied with the rate that we're going.

My understanding though, just from some of your competitors, is there's a bit of a lack of opportunities in Ukraine in particular. Do you see that particular market as more tricky to grow?

In terms of acquisition, you have seen that our forecast had been reduced for the rest of the year. So you may say that some of those opportunities that we thought originally were going to be there are either no longer attractive or no longer available, yes.

Your next question comes from the line of Lindsay Drucker Mann of Goldman Sachs.

I just had a couple quick ones. First, you commented on ethanol dynamics post the expiration of the subsidy. I was hoping you can give us an update on the biodiesel side, and whether you're seeing RIN carryover from last year, whether your expectation is that end demand will ultimately be lower than what the mandate called for?

Yes. Lindsay, this is Juan. Certainly, we're seeing a little bit of a hangover from the inventory buildup on Biodiesel 99 at the end of the calendar year in 2001. And we think that, that is weighting heavily on demand for probably the first 2 months of this year. We are starting to see some better business interest, although margins are still not great. I would say, on the -- so we think that we're going to make the 1 billion gallons of the mandate. Certainly, the industry has the ability to do that in a shorter period of time, so they can start midyear and they can still catch up. On the positive side, on biodiesel, I will say, the EPA has finalized the ruling on palm-based biodiesel and have ruled that they do not need the 20% greenhouse gas reduction, emissions reductions. So that will be a positive for the domestic industry since we don't have to compete with palm-based imports.

Great. I also just wanted to clarify, I think you mentioned in your prepared remarks an expectation that South American crop would actually be lower on a year-over-year basis. And I know they are lower than where people had thought they'd be because of some of the weather issues. But unless I'm mistaken, I still thought that we were looking for an increase in the absolute output on a year-over-year basis, at least as far as what WASI [ph] and some of the other organizations are looking for. So do you have a different view? Or am I misunderstanding your expectation?

This is Craig. I think that we are looking for smaller crops than last year. It's all conjecture at this point because we have just started actually bringing the crop in, in Brazil. But the dry weather in Argentina has had an impact on corn for certain, and it had some impact on beans. But as in the United States, it's August rains here. Well, it's the late January and February rains in Argentina that are going to make or break that crop. So we're not necessarily estimating where it will be, but it's going to be lower than we would have said 6 weeks ago, for certain.

Okay. And then one of your competitors in the U.S. announced, I believe, another crushing plant closure. Are you seeing -- first of all, do you have facilities that are in close proximity to that one? Would you expect to see some immediate benefit in terms of your P&L as a result? And are you seeing that impact flow through?

We think that in general the producers in the U.S. have been reacting to the difficult demand situation and have been disciplined in managing their capacity. So I think that everybody will benefit when we have that situation.

Okay. And then lastly, if you could just maybe go around the horn. I know that you have crushing capability in lots of different regions. So which of your regions, Europe, U.S., is most profitable on a gross margin basis? How would you rank-order them?

I will rank, as I think I said before, U.S., South America and Europe, in that order.

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

The $100 million on timing losses in cocoa that you mentioned, should we assume any timing issues going forward in either corn or soy would be smaller than that, since you haven't called them out?

Yes. Actually, John, if you recall last year, we had quite a bit of mark-to-market impacts in the Oilseeds segment. We've been able to mitigate that impact through some differences in terms of how we're treating the valuation. So that's the reason you should not see mark-to-market impacts or timing impacts flowing through the Oilseed segment going forward. They were very, very significant last year in the second quarter, as you recall. Now going forward in the cocoa segment, we're actually looking at ways to try to mitigate that mark-to-market impact as well. So we're looking at techniques in order to provide a more consistent treatment with respect to the inventories, as well as the hedges. So that's a work in progress and we'll report back when we find a method to try to mitigate that impact. In the corn segment, if you recall last year in the second quarter, we had some fairly significant mark-to-market gains in the corn segment due to our ownership position when prices moved up. I think we highlighted that in this particular quarter, we didn't have the consumer types of ownership gains. But it did have an impact in our net corn costs because we recognized the benefits last year in the second quarter which, economically, one can argue that really would have accrued to this particular quarter. And so remember, John, if you recall at the last quarter's call, we said approximately $100 million of the benefits in the second quarter of last year with respect to hedging would have accrued to really the first and second quarter of this fiscal year.

Okay. I was asking specifically more about the forward couple of quarters here. And there's nothing known, major in soy or corn at this point.

As you know, John, we don't comment on our positions here. So I think -- I just want to make sure you understood some of the accounting issues regarding mark-to-market. But again, we don't comment on our positions going forward.

And again, could you remind us how much high fructose corn syrup -- what the revenue impact is going to be from the pricing rolling forward here in the new contracts?

Well, the price increases are in the -- we say in the low teens, John.

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

Continuing along with HFCS, is that -- does that come in line with expectations or marginally better? Can you give any kind of color on that?

Yes. I would say that when you finish this, this was a long process and there are many people -- or many players involved. When we finish all that, considering where we land in the volumes and the prices, I would say we are satisfied.

Great. And then Pat, and just your comments in the release about growing earnings power of ADM. We've seen 3 quarters now of down earnings year-over-year. And I guess, what is behind that statement? Can you help me reconcile what we're seeing come through the earnings versus that statement?

Well, I think it relates back to also another question earlier. And as Ray responded, we're looking very carefully at all of our future investments and they're all related to creating earnings power in the long term. So the long term doesn't always mean the next quarter. Although it's helpful if you see quarter-to-quarter-to-quarter improvement. This happens to be a down period relative to the external environment. But our costs to -- our objective to be above our cost of capital by 2 points -- 200 basis points is very, very important. We're also under -- if you think about our productivity efforts, which we have underway for a while, we're looking at every aspect of our cost, of our cost lines, looking at the organization structure to allow for even greater productivity. And we expect over the next several quarters to see $100 million pretax benefit from those productivity efforts.

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

Just wanted to touch on a couple of quick things. We've been hearing a little bit about some wheat and soymilk quality issues potentially impacting exports. I'm just wondering if that's going to [ph] be a factor in your business and if you can provide any color around that?

Are you talking international? U.S.?

U.S. wheat. Apparently, there were some issues here over the past few weeks, soy meal specifically as well. We've been hearing some issues possibly impacting exports to China.

No. I don't -- quality is always an issue, but I don't see anything outside the norm. As we've -- as we get later in the crop at Eastern Europe, we're seeing a few quality issues over there. But certainly nothing outside the norm. And on wheat, it's been mostly a competitive issue, not a quality issue as getting U.S. wheat competitive in the world markets. And it's basically in that neighborhood right now.

All right. And then what do you make of China's move yesterday to ban Indian rapeseed import due to quality issues specifically? Is that a retaliatory measure or do you think there's something -- a real concern there?

Probably some of both, as in most decisions that come out of China. But there is a quality issue and there's probably politics there also. But it's just part of the markets.

And do you see that as a potential benefit then? Any way to quantify how a big of a potential opportunity that might be for some of your markets?

Any dislocation can be an opportunity, it depends on degree.

Fair enough. And then one last one, a separate question on the low carbon fuel standard decision in California, I know that's being appealed. But have you seen any change as it relates to your business and that announcement?

Well, I'll take that, Christine. The courts have ruled on that and while there'll probably always be an appeal process in California, I think it's a positive for the industry that the level playing field, so to speak, kind of was the successor at the end of the day. And that should be positive for U.S. ethanol as opposed to a lot of imported ethanol into California.

But nothing specific is moving into that market at this point?

Nothing in the current place. We're still shipping and we have good ethanol moving into the California market.

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

Just 2 quick questions. Ray, on the cocoa, just to make sure I'm clear on this one. So the mark-to-market that you took there is related to a hedge that's in place. And the reason why you've said what you said is that in the future, as the hedge plays through, you will not be penalized by the 100 -- what, I forget if the number was $130 million, $140 million of mark-to-market because there's the other side of the hedge, which reverses this thing out. But the accounting rules are forcing you to take the mark-to-market in the quarter. Did I say that about right?

You're absolutely right. It's just a mismatch in terms of the treatment of the hedge relative to these underlying asset that you're hedging. You're absolutely right.

So maybe one suggestion then. Since you guys have made the effort to go and do an adjusted earnings number, I was curious almost why you didn't just take that $0.51 and then add, I think, it's $0.13 to it, which would put us at $0.64 on kind of an underlying economic rationale for the quarter itself. Would you guys, I mean -- would you generally agree that my logic is reasonable?

Yes, generally reasonable. The issue, David, is there's a lot of [indiscernible] across the board in all of our segments. And it would be difficult for us to try to highlight that on adjusted earnings for every little bit. And so what we felt will be useful was for us to highlight just the significant ones when they occur. And frankly, we're trying to figure out a means in order to mitigate this impact, so these things don't impact the results going forward. So that's what we're working on right now, David. And I mean hopefully, our finance and accounting teams will be able to find a solution and we'll be able to report back to you in the future.

I think your logic though, David, is the right one. If you think about the significant timing adjustment in this quarter, you could argue that's an adjusted item. But since there are small ones in other places, we didn't put that in as part of our adjusted EPS.

I see what you're saying. So you're just being concerned about, hey, if you add that $0.13, then you should have gone through in every other segment and take into account mark-to-market gains or losses. And since that disclosure is not currently available, you don't include it in the adjusted number. But logically, the economics are what we've said.

Yes, correct. And like I said, we try to highlight the material ones in order to help you out.

I appreciate that. On the high fructose corn syrup, my last, I guess, question or 2 would just be, so the pricing comes in low-teens. That sounds good, especially in context of expanding margins. Can you talk a little bit about your expectations for volumes? And I missed it if you said what sweetener volumes did in the quarter year-over-year. Did you say sweeteners volumes were up or down? I apologize I missed that.

We didn't say. But David, in terms of volumes, when we're finished with our negotiation, we are about -- our volumes for next year are intact. I mean, so we get the price increase. Whatever we conceded in one side, we got it on exports. So our volume in grind overall was up like 5%. But I think in sweeteners, we were flat quarter-over-quarter. So we finished, as I said before, satisfied the negotiations. We achieved our price increases. We didn't give up any volumes. So we will still have a strong demand for our wet milling portfolio.

And as regards to Mexico, so you did cite the strong export volumes which are going to Mexico. When you look forward and you think about the demand from that country -- as I understand it, right, it's a substitution effect as we're taking sugar out, putting fructose in. There's a mix issue though. It's like 100% of the sugar in the carbonated soft drinks does not come out day one. It takes years, I think, for this to occur. If I'm right about those pieces, would you agree that we should continue to see export growth in calendar '12 and '13 and probably for a number of years to come, given the relative attractiveness of high fructose versus local Mexican sugar.

Yes, David. Our forecast is for export to continue to be strong and continue to provide a tight balance for sweeteners, yes.

[Operator Instructions] Your next question comes from the line of Ian Horowitz of Topeka Capital Markets.

Ray, you commented on the CapEx going forward will be much more leaning towards your traditional lines of business. In that last wave of CapEx that we did on a large scale a few years ago, there were a couple projects beyond the PHA that weren't really kind of in that mainstream. And the one I think about the most is the propylene glycol business. We haven't heard a lot about that. I'm not sure it's anywhere near the size of what the PHA investment was. But if we could just kind of talk about that and maybe any other things that may kind of spring up as potential issues here in the future?

Sure. Ian, this is Juan. We're very satisfied with the propylene glycol project. We announced, I think in the past quarter, that for the first time, we have a biobased propylene glycol USP, so United States pharmacopeia grade that will increase not only the usage of that product but certainly it commands a premium price versus industrial grade. That's the one that we used to have. So we are very satisfied with that. We think that there is a big market for that. If you know propylene glycol and maybe a difference to other products, it's used in a myriad of applications and it doesn't require a lot of qualification or a lot of testing or a lot of application development because it's a liquid and you'll replace the petroleum-based liquid with a biobased liquid, one-on-one, would make it very easy the market penetration. So it's a completely different project in that sense to the PHA introduction into the market. So we are very satisfied with it and it's going and growing.

Would the product be priced at parity to the petroleum product or at premium to it?

That's the million dollar question, Ian. So it depends on the application and depends on the customers. I won't say more than that.

Okay. And then like I said, just a quick question. On global crush capacity, we're still fairly underutilized. If we were to simply grow into the capacity from demand, what is your internal kind of forecast as when we should tighten up this overall crush supply?

Well, I think you can -- I can help you with the calculation. If you think that probably the industry runs at about 80-something percent, and you have a demand growing at about 4% to 6% per year, if I quote the USDA, that's how it's going to take. But I think that it's something that my teachers here have taught me in this market, is that you can have that. But every year, you have a reset with the difference in crops in the U.S. versus South America and all that. So you have a bad South American crop and all of a sudden, the U.S. gets an extra boost in demand that closes that gap significantly. So it all depends where do you have your asset base geographically distributed and what happens with the crops around the world. But again, the fundamental demand is growing at around 4% to 6% per year around the globe.

Sure. I understand the different geographies. But could you assume that now going forward, that capacity shut-ins may start to slow down or the rate of them -- of you and your competitors shutting any capacity will slow down due to the fact that there's kind of that light at the end of the tunnel? That you'll kind of make it through, slog through these next couple of quarters of difficult or overcapacity, thinking that you're going to kind of grow -- the demand is going to grow into it?

Ian, I cannot speak for our competitors. But certainly, from our perspective, our view is we're still in the mode of adjusting capacity and taking it down or reviewing our operations on which plant we keep running or not versus adding. And I think that in general, I will imagine that the industry needs a period of recovery after this versus just investing. So I don't think anybody is out there thinking on the next plant.

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

In your sort of BioProducts profitability, if I look at the margin structure that was during this quarter relative to last year, it was actually higher but your profitability came in lower. Can you just talk about why the dynamics in the stock market are so different than what you guys are actually experiencing on the magnitude? I know directionally, it's kind of in the realm. But it just seems that there's something -- you would have thought it would have been a better quarter given the ethanol margin structure that we're seeing out there.

Yes. Ken, this is Juan. Yes, you're right. On average -- I mean, it was a probably highly volatile quarter from an ethanol margin perspective. So we climbed to very, very high margins by, I think I said, Thanksgiving. And then, it collapsed faster and steeper than what we thought. I will say, if you look at quarter-over-quarter, the biggest difference is our net corn costs are up. And that's mostly, I will say, different positioning gains versus last year.

So in the sweeteners and starches, it's the high fructose corn syrup less the starch product. But in the ethanol, it's the ethanol minus corn prices. I thought there was a transfer pricing that was different between the 2. I thought I got it backwards. I thought your net corn costs are in your starch but maybe on your sweeteners. Did I have that backwards?

No, it's in BioProducts.

Okay. And then the sweeteners, it's sweeteners less the starch, not the corn, right? I thought you -- there was a transfer pricing differential between the 2 divisions. No?

Both take net corn costs.

Okay. I don't know why I had it in my head that there was something that was a different transfer pricing. But even as we go forward, so the other implication kind of, I think with Diane's question, is that you could actually expect negative ethanol profitability going forward until there's a supply-demand rebalancing? Is that the other implication that you were saying with Diane?

No. I don't recall exactly what we said. But basically, we expect -- current margins for ethanol are depressed right now. And we expect it probably -- they are depressed right now. We expect a slowly climbing out of that maybe in 2 or 3 months. And when you know -- when supply and demand balance itself either by shutting down some capacity or growing exports and growing domestic demand based on more driving mileage.

But it will it be relative -- if gross margins are roughly breakeven-ish, you would argue that your profitability in that business should be somewhat in that breakeven to up and down a little bit, but nothing even at the level that we're at right now, that they had in this current quarter. Is that fair?

Yes. It should get better after the quarter goes by.

Okay. And then my final question truly is the workforce reduction, you guys decided to cut the workforce by 3%. Part A of that is why 3%, not 5%, not 1%? Like what was the thought process behind that? And where will we and when will we see the benefit of the cost reduction? Again, I guess I use the word benefit not as a positive word. But where would you see lower cost coming into the income statement?

Well, Ken, first of all, we have offered a voluntary retirement program to some of our employees and we don't have the outcome of that program yet. But after that, we're looking at restructuring that allows for at least 1,000-person reduction or about 3%, which was our estimate at where we could find the benefits of further work process improvements, further efficiencies, further reporting lines and span of control improvements. And I'd say the majority of that is at the sort of SG&A kind of lines or corporate and administrative types of roles. And the "when" is within the next 9 to 12 months when the -- I would have said [ph] , the majority of it in the first 6 months and then the balance in the last 6 months, as we see folks -- these positions roll off the payroll and have reduced costs.

Your next question comes from the line of Lindsay Drucker Mann of Goldman Sachs.

Just quickly, I was curious if you could give a couple of remarks on the Chinese market, just 2 points there. Number one, we're hearing about some excess inventory of vegetable oil there. I was curious if you had any perspective on what that dynamic is about, and if it's getting better. And then number two, just your view on what Chinese crushing capacity is going to do this year.

Well, crushing margins in China have not been terrific. They reflect the rest of the world to some extent. The short term -- the oil problem is, to me, it's just a short-term problem. Their demand for oil continues to be strong and I consider just a short-term issue.

And then first of all, what is the short-term issue? And then secondly, if you have a view on Chinese crushing capacity.

Well, we consider Chinese crushing capacity as the margins themselves are weak, I would say. But some were better than Europe. And as far as the oil glut that you talked about, that's just a short-term trading issue. I don't see it to be a significant overall issue.

There are no further questions at this time. I will now turn the conference over to Pat Woertz for closing remarks.

Well, thank you, everyone, for joining us today. Please, as always, feel free to follow up with Dwight if you have any further clarification or questions. We do have a note on Slide 16 that shows our upcoming webcast events. We'll be presenting at CAGNY on February 21, and also we'll be hosting a global oilseeds business review in Hamburg on March 28. Have a great day and thanks for your time.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Good day.