Bunge Global S.A. (BG) Q3 2013 Earnings Report, Transcript and Summary

Welcome to the Third Quarter 2013 Bunge Earnings Conference Call. My name is Christine, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the call over to Mr. Mark Haden, Director of Investor Relations. You may begin.

Thank you, Christine. And thank you, everyone, for joining us this morning. Before we get started, I want to inform you that we have prepared a slide presentation to accompany our discussion. It can be found in the Investors section of our website at bunge.com under Investor Presentations. Reconciliations of non-GAAP measures disclosed verbally on this conference call to the most directly comparable GAAP financial measure are posted on our website in the Investors section. I'd like to direct you to Slide 2, and remind you that today's presentation includes forward-looking statements that reflect Bunge's current views with no -- with respect to future events, financial performance and industry conditions. These forward-looking statements are subject to various risks and uncertainties. Bunge has provided additional information in its reports on file with the SEC concerning factors that could cause actual results to differ materially from those contained in this presentation and encourages you to review these factors. Participating on the call this morning are Soren Schroder, Chief Executive Officer; Andrew Burke, Chief Financial Officer. I'll now turn the call over to Soren.

Thank you, Mark, and good morning to everyone. We had some good performances in the third quarter. In agribusiness we served global customers well by leveraging our South American asset network during a period of short Northern Hemisphere supplies. Logistics in Brazil were challenging, but our team managed them well. We also navigated a complex global risk environment with skill. Large North American crops with a prospect for a record soybean harvest in South America next spring are driving a transition in the oilseed and corn markets from very steep inverses [ph] to a period where stock-building is likely. Demand is strong and will be stimulated by more modest price environment. Food & ingredients continues to perform well and is on the path for a record year. We're improving how we work in foods and feel strongly that our base business can be expanded and improved further. The linkage between agribusiness and foods in Bunge is strong and very important to our customers and our profitability. Both segments should have a good fourth quarter and produce returns above cost of capital in 2013. In sugar & bioenergy, we faced a more challenging situation. Our global sugar and ethanol trading and merchandising team is performing well, and over the last few years, we've built a leading global franchise in the same spirit as we have in agribusiness. The risk management capability is strong, as is value chain and customer focus. Our Brazilian sugarcane milling operations, however, continue to be challenged. The excessive rains have hurt ATR and limited crush, and capped ethanol prices limit the ability to compensate for the reduced output. These conditions make it difficult for the milling sector to generate consistent profit and appropriate returns. As a result, we have reduced the sugar & bioenergy segment outlook for…

Thank you, Soren. Let's turn to Page 3, the earnings highlights. Total segment adjusted EBIT was $404 million. Strong performance in agribusiness and food & ingredients were offset by a below-expectation performance in sugar & bioenergy. Agribusiness adjusted EBIT was $335 million versus the record third quarter adjusted EBIT of $406 million achieved in the prior year. Our Brazilian processing and merchandising businesses were the primary driver of results in the quarter as we were able to take advantage of our strong asset and logistic networks in the country and our global supply chain and distribution capabilities. In Argentina, an improvement in oilseed processing results was offset by lower merchandising results due to the poor wheat crop. North American results continued to be negatively impacted by low crop availability due to last year's drought and were the main reason for the shortfall versus prior year. Results in Europe and Asia were similar to last year. Year-to-date adjusted EBIT is $680 million versus a prior year of $904 million, primarily due to the impact of small crops on our Northern Hemisphere businesses and reduced merchandising opportunities in Argentina. Our sugar & bioenergy business incurred an adjusted EBIT loss of $19 million versus a loss of $8 million in the prior year, as improvements in our trading and merchandising business were offset by a decline in our Brazilian sugar milling business. The loss incurred in our milling business was well below our expectation of a solidly profitable quarter. This was caused by 2 primary factors: a decrease in the sucrose content in the cane and a reduction in our crushing volumes caused by more rain days than anticipated. We have accomplished our goals of increasing cane availability to our industrial capacity level and increasing our productivity, although this has been somewhat offset…

[Operator Instructions] Our first question comes from Ann Duignan from JPMorgan. Ann P. Duignan - JP Morgan Chase & Co, Research Division: I wanted to step back and talk a little bit more about the comments you made on the ethanol business in Brazil. I think you said that ethanol prices would need to rise 20% in order for you to achieve your targeted goals. In the big scheme of things, how realistic is this really given the Brazilian government's focus on inflation or lack thereof, and the fact that 2014 will have elections down there?

Thanks for the question, Ann. I think it is very hard to predict government policy and when a government will or will not take action. The energy policy is a focus for the Brazilian government. They have a -- they have to support increased gasoline consumption and need to find ways to support that in an economic way for the country, and we believe, eventually, that will lead to support for the ethanol industry. The timing of that is hard to predict, and that is why our base calculation for next year does not include those price increases, and we don't think we'll achieve the target. What we are trying to do is to point out what kind of price increase would be required for us to get there so you and others can gauge that. And we would just also point out that the ethanol price and the Brazilian gasoline prices are still 30% lower than the international parity for those prices. And they are an importer of gasoline. So over the mid and long term, we think it's very likely that we have to see movement in ethanol prices, but in the short term, we're not forecasting that, and it will be a government decision, not a decision of Bunge. Ann P. Duignan - JP Morgan Chase & Co, Research Division: That's a fair point. And my follow-up question is obviously around the comments in the press release that you're now exploring full range of options for the sugar business. Can you just expand on that and give us some more color in terms of defining what you mean by exploring a full range of options?

Ann, this is Soren. It really just means that we will consider all reasonable alternatives in the fullness of time to get us in a better spot. Don't want to get into any specifics on this call. The important message really is that the status quo is unacceptable, and that we will be active in finding better ways to position ourselves. And then we'll come back with more as we know it. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Okay, and if you were to generate some kind of income from whatever you decide to do in that business, is there anything you can do in South America going into next year in preparation for yet another record planting season? I mean, we had such logistical problems this year, and now we're going to plant even more going into this season. Is there anything you can do now in terms of investments that would help you alleviate some of the logistical problems we might face next year? And I'll leave it there.

Okay, thanks, Ann. We do have a new port coming on stream in Brazil in Tefron [ph] in the northern part of Brazil. That will add roughly 1 million tonnes of capacity for Bunge during the next year. It will grow to 2 million tonnes when it's up at full capacity. So that's one extra relief valve, if you wish, for the overflow that is likely to be there again next year in Brazil. For the rest of our network, we learn every year like everybody else does. We've performed well in Brazil this year. We've managed a very complex logistical situation, but we always learn, we always find ways to improve. So anticipating next year's what is likely to be a record soybean crop and pressure on the system, we're building in more flexibility. And I think we'll manage well next year as well.

Our next question comes from Adam Samuelson from Goldman Sachs.

Maybe first off, Soren, maybe -- there's a large fire earlier -- a couple of weeks ago at the Copersucar warehouse at the Port of Santos. Beyond the issues with ethanol pricing and cane crush productivity that you're facing in the sugar business, is there any impact there that we need to be thought -- thinking about in the sugar markets over the next 6 months?

I would say over the next 6 months, probably not so much. We've been able to and I think the market will be able to accommodate the sugar flows that are left for this year in Brazil now that the peak corn and bean shipment period is over. So I don't think it's going to be a big issue between now and, let's say, April next year. The real question would be how do we get up to peak shipping capacity in sugar as we enter the new crop season sometime in April, May, June next year. That's a long time from now. So there's plenty of time to adjust. But for the next 6 months, I don't expect any big impact.

Okay, and then also in sugar, you're talking about kind of more restrained capital spending as you look into 2014. Maybe elaborate on kind of what you're doing there. Is it slowing down the pace of replanting? Are you slowing your fertilizer applications, kind of investments in machinery? And how should we think about the slower CapEx spend as it relates to your kind of future plans for the business?

Well, the CapEx really is focused on cane renewal. And as you know, we've gone through a period here where we have really renewed a lot of cane the last 3 years. So it would be a lower rate of replanting. We don't need it. We've made the investment already. We're not going to cut short anything that brings productivity gains. So fertilizer applications, as you mentioned, for example, that would not be one area we would be -- we would try to save on. But anything that -- so anything that has to do with cane renewal and productivity, reducing our cost per unit to its lowest possible level is still in play, and we will be very thoughtful how we spend that money. But anything that has to do with expansion is off the charts for the time being for sure.

Okay, great. And maybe just finally for me, just switching gears on to crush margins and as we kind of enter the new crop year in the U.S., just maybe an outlook on crush margins looking into 2014 and thoughts kind of where competition from Brazil -- from Chinese crushers and potential changes in biofuel policy here in the U.S. and how that impacts your outlook for crush margins.

Well, that's a lot of -- those are a lot of topics but let me start with outlook for crush margins in the U.S. or maybe the Northern Hemisphere in general, because it's kind of the same when you look across Europe to the U.S. to China. Margins are good. They're as good as they've been in a while. So we expect a strong fourth quarter in U.S. crushing. Canada on the back of really an all-time record canola crop should have a favorable crushing environment. In China, very strong demand for soybean meal has led to very favorable margins, at least compared to last year, and in northern Europe, both soybeans -- and southern Europe, both soybean crushing margins, as well as soft seeds, so sun and canola, are looking significantly better than they did last year at the same time. So the crushing environment for the next, I will say, 1 or 2 quarters is favorable.

Our next question comes from Michael Picken from Cleveland Research.

Just wanted to sort of elaborate a little bit more on kind of the crushing side of the business. If Brazil ends up producing record soybean crop as expected, I mean, how do you sort of see crushing margins developing next year in a situation with a lot more global soybean supplies out there and how does that impact your overall business?

Well, I think overall, we would expect that with a record soybean crop in South America that we'll enter a period of more modest prices in general, more modest prices for protein in general. And in a meat production sector globally that is now profitable, there's a big change from where we have been the last couple of years, but if you look across pretty much all geographies, meat production, whether it's poultry or pork, is profitable. So a big crop, somewhat more modest prices to stimulate demand growth back to a level that is more akin to what we saw before we had the big price hikes 2 or 3 years ago. So the overall demand pool should be favorable, and I will say with an excess of soybeans in South America and the stock building generally throughout next year in soybeans, the environment for crushing should, generally speaking, be better.

Okay, and then with respect to kind of your agribusiness volumes, I mean, how should we sort of think about the impact of kind of the larger crops here in North America in terms of specifically on the grain side? What types of volume growth could we sort of expect to see?

Well, I mean, we will enter a period now in North America where we'll get into a more normalized shipping season. The last couple of years have been curtailed by poor crops. But for example EGT, which is our most recent facility on the West Coast, will be running at full speed now this fourth quarter and going into next year as well. Our Nikolayev export terminal in the Black Sea will be running at full -- is already running at full capacity. So overall volumes in agribusiness should continue to grow. I guess, it's somewhere around 5% year-on-year is a reasonable estimate. And as you get into the shipping season in South America starting in February next year, would expect to see similar growth rates year-on-year there, with the startup of the new terminal in the North, and I think an overall better utilization of what we've got.

Our next question comes from Ryan Oksenhendler from Bank of America.

I just wanted to focus on capital allocation a little bit because it looks like, I mean, to me your balance sheet is already kind of at your target levels. You're BBB at the rating agencies. So as you move down to the lower buckets, you're already funding your business. And so when you look at M&A, are you looking at large-scale or small-scale M&A? And if that isn't materializing, what's preventing you from doing a large-scale share repurchase?

Well, we just announced yesterday an acquisition of Altex. I don't know if you saw that or not. But that is the type of acquisitions that we're contemplating. It's a good example exactly of what we want to do, bolt-on acquisitions in an area where we have competence, where we have capabilities, immediate returns, great fit. So we will continue to look at those types of things. As Drew pointed out in his presentation, we will be looking at M&A CapEx and returning money to shareholders, whether through share buybacks or dividends on kind of an even level. They have to compete with each other and of course, in the case of an acquisition like Altex, there's always the timing and strategic element as well. We could not wait until, let's say, February to decide to buy Altex, the opportunity was now and we took it. But share repurchase is part of our capital allocation strategy, and we will aim to maximize shareholder value and that is part of it. So we are not looking at this as a lower bucket. It's an equal consideration.

Okay, that's fair. And then in terms of the strategic alternatives for the sugar business. I guess, how long should we expect that process to go on for before you make a decision?

I don't want to put a timeline on this at this point. I think the important message to you and to others is that we got our eyes open. We are aware of the challenges of the industry. We're going to be active, and we'll take our time and make sure that we end up with a thoughtful conclusion on this in the fullness of time.

Okay, and then just turning to agribusiness, do you expect to benefit -- I know you talked about protein margins. But I know there's been a lot of wheat put into feed rations over the last few years because of the price narrowing relative to corn, but now that you've got that gap opening up again, do you expect that to benefit meal demand and be a positive for you guys next year?

Yes, that's a good point. In fact, wheat prices are -- have moved back to sort of bread prices. In other words, moving out of feed rations in most places of the world, which is a good thing. So it should mean that, everything else being equal, that protein demand for soybean meal should increase on the back of this. And the impacts are a little different depending on where you are in the world but, overall, it is not an insignificant impact. So it's a positive.

And then just my last question, I'll get back in the queue, but can you talk about what you're seeing in terms of farmer selling in the U.S. regarding corns and soybean and how that impact volumes?

I think as we've gotten into the harvest year, yield reports have continued to improve, and we are looking at a very large harvest, no doubt. Farmer selling, I would say, has been modest so far. Prices in corn, as you know, have come down significantly from where they were a year ago, and so I imagine many farmers are hesitating a little bit. We're buying what we need, but I would say it is not a willing sellout to the extent that you've seen, for example, in South America earlier this year. So a little bit of retention is probably the right way to express it.

Our next question comes from Ken Zaslow from BMO Capital.

So what was the catalyst to make you reconsider your efforts in sugar?

There's no particular catalyst, Ken. We've been thinking and analyzing this for a while, and sort of with the benefit of a fresh look from myself, have really spent some time with the team here over the last months and sort of digging into the industry dynamics. And thought it was important that we expressed our sort of unbiased and neutral view, and this is what we are.

Okay. You have $1.5 billion of cash on your balance sheet. And you started talking about that returning capital to shareholders as share repurchases is an important part. That's really never been part of the Bunge story. Can you talk about the timing to which you expect to deploy cash towards share repurchases?

I think, Ken, we're still going through the valuation of when we do that. It's very much on our agenda, but we haven't made a specific determination. I think the one thing I would point out with the cash is most of that cash right now is the fertilizer proceeds of which we have targeted the debt reduction to get ourselves at a strong, stable BBB rating. We have not gone and paid down that debt yet because we want to do it in the most cost-efficient way, and we need to be able to move the cash to debt repayments at the right timing. So we expect that will happen in the fourth quarter. And as we get to the end of the year and these crops are finished, we're going to get a lot better idea of what our cash flows are, et cetera, but we are actively looking at when it would make sense to make a move in that direction.

Would it be fair to say that by the end of the fourth quarter, you will relay that message to Wall Street, is that fair?

Yes. Maybe the first quarter call, Ken, to be precise, but yes.

Exactly, that's what I expect. If you guys know by the end of year quarter, you don't report till after the quarter. No, that's fine. That's what I was implying. And then in terms of Argentina, I guess, my question there, and this is my last question, is how is the selling going there? What is the crush outlook? Because it seems like everywhere else around the world, things are humming really nicely, and that's the only issue probably in your crushing and logistic issue. Can you just talk to that and when you think it will be resolved and how you think things are going to play out in Argentina?

Well, farmer retention in Argentina is very strong, and we don't actually expect that to change anytime soon. It's a hedge against inflation, the expectation of a devaluation. We've seen it before. The Argentine farmer has the capability of carrying over large amounts of soybeans from one crop to the other if that feels that is the best way of hedging the economic exposure to them in Argentina, and that's exactly where we are right now. We do expect a significantly improved crop next year. So with that, as of March, no doubt we will see loosening up of farmer selling and movement to the ports and the crushing industry. But in the near term, don't really see any change. On the other hand, you can also say that part of the effects of this retention and the reduced crush rates in Argentina is actually what's benefiting North America and, to some extent, Europe as well. There's no question that quite a bit of yield demand has been shifted from South America, Argentina specifically, to the U.S. and will be executed over the next 3 to 4 months and is leading to what we believe will be an export pace that will be as good as last year's. So it's -- for Bunge, this is not altogether bad.

Our next question comes from Tim Tiberio from Miller Tabak. Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division: Maybe we can touch a little bit more on the recent acquisition. How should we think about the potential incremental EBIT for 2014 from that business? And as we look out longer-term, it seems like this is going to be an area of focus on the M&A side. What size of a business do you want to grow this to over the next 2 or 3 years?

Okay, well, in the case of Altex in Mexico, that's probably what you're referring to, I would expect that the EBIT contribution for this business next year will be somewhere around $35 million, maybe a little bit more. It will make Mexico an important part of Bunge's North American portfolio. Added to La Espiga, which we acquired a year before last, it really gives us a very nice national position in Mexico, makes us a leading wheat miller with the best assets. It's a business that has steady EBITDA margins. It is very much linked to agribusiness. Our ability to procure and manage risk around wheat flows is strong, and it fits our focus on B2B customers in North America and globally as well. So this is a very nice acquisition that fits what we're good at, and yes, we would like to proceed -- pursue more of the same kind. We are actually quite optimistic that we can grow significantly the run rate earnings of food & ingredients quite substantially over the next 2 to 3 years. I don't want to put a number on it, but our ambitions are not small. Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division: Okay, and are there any other regions where you see the opportunity, I guess, near term to backfill your footprints, I guess, both on the edible oils and milling side, how should we think about that?

We have a very strong position in Brazil that we want to protect and enhance. So you will see activities in Brazil that will cement our position and our strong position there. I think in North America in general, we have a strong milling presence and would be open to add whether that is in rice, whether that is in wheat or whether that is in corn. There are other parts of the world that we are looking as well, I don't want to get into those details at the moment, but we're actively scanning for these types of opportunities in growth markets and, again, where they have close linkage to our B2B customer base and agribusiness.

Our next question comes from Matthew Korn from Barclays.

Just want to ask a little bit, could you talk maybe a little bit more about downstream kind of food product demand as you're seeing it, all the drivers of demand for oils and margarines and corn flour? Because we hear a lot about the economic uncertainty in Latin America, just kind of want to see your take on whether the buys and staples have shown any kind of signs of weakness.

No, we don't actually. In Mexico, let's say, Mexico and Brazil in particular, which is where we really have insight to this, demand is strong across all the categories. I'd say, Mexico in particular, one of the reasons we're so excited about the Altex acquisition is because Mexico really does have some of the more important growth dynamics and trends of the South American economies. But both in Brazil and Mexico, we feel good about both oil and flour consumption, and we are coming from relatively low levels per capita consumption. So plenty of room to grow really.

Got it. And then just as a follow-up, as the new crop soybean here in North America harvest has progressed, have you seen the opportunity for kind of tick up utilization of your North American crushing plants? I mean, there's been scattered reports of pending restarts throughout the Midwest. I kind of wanted to see if those are in fact getting brought back online.

Yes, well, all our facilities are up and running and running essentially at full speed, and we believe that, that will be the way they'll run for at least the next, I will say, 4, maybe 5 months.

Our next question comes from Brett Wong from Piper Jaffray.

Just a couple of follow-ups. Just wondering for the agribusiness, when you see year-over-year growth in volumes with supply replenishing, is it in the fourth quarter this year, more into next year? Just kind of a little more detail on that.

I think it starts this quarter, yes, in the fourth quarter, and then it will continue throughout the South American harvest season and probably into the tail end of the summer next year, given the size of the crop in South America. But it starts now.

Great. And then just another one on sugar & bioenergy, your expected loss for this fourth quarter, how does that compare to third quarter? Do you see it more or less pronounced?

I think at the end of the day, that is going to depend a little bit on how much we can crush here and during into the rainy season in Brazil. So it's a matter of when the rainy season comes and how much ends up being crushed. But order of magnitude, range, around the third quarter number it seems reasonable.

Yes, that's right.

Our next question comes from Vincent Andrews from Morgan Stanley.

If I could just ask, Soren, are you sort of philosophically opposed to -- let's assume hypothetically that you find a great way to exit the sugar business. Are you philosophically opposed to Bunge just sort of being the core agribusiness operations, as well as the sort of the existing food & ingredients business?

I'm not philosophically opposed to anything that's right for shareholders. So we'll consider all reasonable alternatives as we said in the fullness of time. But I don't want to prejudice any outcome at this point.

Okay, I just asked because the sort of -- the history was you got out of fertilizer, you got into sugar, and it just didn't seem like at the time that the direction of the company was just going to be status quo with a lot of return of capital, so I was just curious if your review was different. I just have a couple of quick ones. Can you tell me how much debt is allocated to the sugar business today?

We tend to manage our debt profile on more of an overall basis, Vincent. To give you a feeling for the sugar business and how you would like to allocate it, there is about just under $2 billion of fixed assets, property, plant and equipment in the sugar business, plus some working capital which isn't that large. But it's not small, maybe another $500 million.

Okay, that's very helpful. And in terms of where U.S. crush utilization rates are, it sort of was masked a little bit over the last couple of years with the tough crops. And if you go back several years ago, we were in a period of oversupply because new capacity have come online. Is your expectation that in 2014, utilization rate in the U.S. will be, let's say high 80s, low 90s, or do you have any sense of where it's going to be?

I think next year will not be so different than this one actually in that we'll probably have a very strong Q1. And then because we have essentially a record pool on soybeans again this year for export, chances are that we'll be limited by soybean availability again sometime late spring, early summer, and so the summer rates of crush will be low. Maybe not as low as they were this year, but they will be seasonally lower than usual, and then rebound strongly again in Q4 2014. So on average, I would say utilization rates will be better than last year, but not by a large -- they will be very seasonal. So strong Q1, not so strong Q2, probably a weak Q3 and a strong Q4 again.

Okay. And then lastly, I know you didn't disclose the purchase price of Altex. But over the years there have been a number of acquisitions sort of with undisclosed financial terms. Can you give us a sense of sort of where your head is on the sort of risk-adjusted return requirements for these types of deals?

Well, I mean, the returns obviously have to cover fully our cost of capital, and they do. And our hurdle rates are set accordingly. So this is a very accretive acquisition. It is an acquisition that is also in the space where we feel very comfortable. So we consider the risks in achieving those returns to be very modest. That's really the best way I can answer your question.

And what's the timeframe in terms of achieving cost of capital plus return, is that immediately, in a year, 2 years?

Within the first 2 years, for sure, maybe even sooner.

Our next question comes from Robert Moskow from Crédit Suisse. Robert Moskow - Crédit Suisse AG, Research Division: By the way, if the stock continues to trade flat today, I think that might be the first time it's been flat on an earnings announcement in about 6 years. So I guess that's neither good nor bad. But I wanted to know, Soren, if you would take a look at ADM's experience with Gruma in relation to entering into the Mexico wheat milling business, Gruma's not exactly the same kind of business but their investment didn't end quite so well. And I just wanted to know, as you looked at assets there, why this and why not others, and what do you think the risks are of operating in the market?

Well, we have studied all that. Believe me, we've been studying Mexico intensely for the last several years. So this wasn't a quick decision that we reached. We've been able to absorb and look at the Mexican flour milling industry through the eyes of La Espiga for a number of years. We've been -- we were partners there first for well over 10 years, and so understanding the Mexican flour milling business, I think, we got from the inside, that's what gave us the confidence to acquire the majority in that business a couple of years ago. And based on that and some, I think, very diligent and thorough work on the industry itself, we reached the conclusion that the collection of assets that Altex represents really would be the best way for us to expand. It is quite a different business than Gruma, as you correctly pointed out. So I don't think you can really compare them, but I would give you confidence or comfort that we've studied this, and we think we know what we're doing. Robert Moskow - Crédit Suisse AG, Research Division: Okay, and as you -- is one of the reasons that you're putting more effort into M&A in this kind of area to reduce the volatility of the overall portfolio? Is that part of your consideration?

Well, that certainly is one of the considerations. Stable businesses, more stable margins, nice complement to our agribusiness upstream. There's a very strong linkage between agribusiness and this kind of a food business and, all else equal, should lead to more stable returns and ultimately a better multiple.

Our next question comes from David Driscoll from Citi Research.

This is Cornell Burnette, on the line for David. Just wanted to quickly talk about the current environment for agribusiness. So soy crush margins on the Chicago Board of Trade are very strong, and you actually confirm that you're seeing this. You also said that your U.S. soy crushing plants are running at full capacity and throughout the Northern Hemisphere, including Europe and China, crushing margins are very good and benefiting from less competition from Argentina. In addition, we have a very big crop in the Northern Hemisphere which should drive volumes higher. My question is, when I look at this, it seems to be one of the best environment, I would say, for agribusiness that we've seen in quite some time. I wanted to know if you agreed with that assessment of the situation, and if you thought that could potentially help drive something like record profitability in your agribusiness segment in the fourth quarter because currently, things look very strong.

That was a nice summary. I think we share the positive outlook for the fourth quarter. I wouldn't draw the line to records at this point, that's too early. But it does look like it's a very favorable operating environment in general in North America in crush, and certainly in Europe. China, as you know, can change quickly. It is better than it has been. Certainly, it's better than it was last year, but it's very, very volatile. So it's probably a little dangerous to draw too many conclusions for an extended period of time there. But it does feel like it is a very, very constructive operating working environment, with profitability really across the chain extending into the meat sector, and clearly, demand for protein is up across the spectrum. So you're correct in being optimistic about the fourth quarter, especially as it relates to crush.

Okay, and then secondly, just looking at things going a little bit further out, you had mentioned that the pace of utilizations and crushing operations in the Northern Hemisphere will kind of look similar to the way they did last year in that will be very strong crushing in the first part of the season but as we get into the summer, things will kind of be below normal, I would say, given that -- where the crop sizes are at. But I would say, do you think that overall on the agribusiness segment, one of the things that's different this time relative to last year is just that overall, we have a much bigger crop in the U.S. with corn and so forth and wheat. And so when you look at your merchandising volumes in the second half of the year or over the summer months, do you think that there's the possibility that they'll be much better than what we saw this year?

I think the overall agribusiness operating environment in the U.S. in particular this coming year will be better than it was last year. Soy is unique in that while we have a decent crop, a nice crop, we will run into a constraint in availability sometime in Q2 and Q3. But for corn and wheat, it should be sort of more normalized merchandising volumes and handling margins. So the U.S. soy is unique. Europe is a big difference to last year in that we will have ample seed supplies in both rape, canola and sun to crush at full rates and most likely with reasonable margins, all the way through the year, which was not the case last year.

Our final question comes from Diane Geissler from CLSA.

I wanted to ask sort of a more of philosophical question, and I missed the first part of your call, so I apologize for that if this has already been covered, but could you just talk about where you are in terms of the 2014 budgeting process? And then, obviously, the commentary this morning is more about allocation of capital than I think we've ever seen, and I think, Soren, that's sort of your focus, new on board here. So can you just talk about how do you tease out better operations just because of a better operating environment versus this is a business line we should be in because over the longer term, the returns are superior to, say, something else we could potentially do with our capital? Because I think it's clear that the coming 12 months are going to be a pretty good operating environment for agribusiness and obviously sugar, you're sort of taking a second look at. But I just -- because it's kind of a new stance for you and I just want to get an idea about sort of how you think about that and then kind of how is it playing out in the budget you're setting for 2014.

I think, Diane, there are 2 streams that you're referring to here. One, we're in the middle of finalizing our forecast process for '14. That at this point is mainly impacted by the asset base we have in place and how we optimize and maximize the returns from that asset base. And there's capital allocation decisions around where we want to invest working capital because that's still flexible at this point and will clearly deploy the working capital to the highest-return areas. So when you come to the budget process, that is the case, and we continue to look at performance management in that and where we can improve margins, where we can reduce costs, et cetera. So the normal things you would expect us to be doing, we're doing around '14. When we look forward on the capital allocation process, we are always looking at the macro environment in all of our industries. As you know, we're in agribusiness and basic foods. Those are heavily driven by population and income growth, so we look at which markets are going to be the consumers on that basis, and we see very good growth in a lot of markets across the world, Mexico, obviously, being primarily one of them, when you look at their income and population growth and put it out in the future. But in the last few years, we've invested a lot of money in the various countries in Asia. We've done a lot in China, we've done a lot in India, Vietnam, in those -- what countries that fit that profile. So we're looking for places that have the right long-term macroeconomics and that we believe long term will have a strong margin structure. And the year-to-year margin structures in our business fluctuate as you know. But…

I appreciate that, but I guess, a follow on and I think this sort of touches to what Vince said earlier, which is basically to me, when I look at the sugar business, it seems like a comparable business to agribusiness. It's growing crops and processing them and making food items that you sell to the same customer base. So I guess, I'm just a little confused as to like why you can make it work in agribusiness but why it's been so difficult to bring that same skill set into sugar.

I think we are bringing that same skill set into sugar, but there are a couple of pieces of the sugar equation that are very difficult to manage risk around. One is the agriculture itself. We are farmers, and so this past season is a good example of just how volatile it is. So the agricultural aspect in sugar, we don't -- we are not exposed to in agribusiness. And the second thing is really government policy on pricing, particularly pricing of gasoline, which knocks on ethanol. So those are 2 additional variables that really determine the outcome that are difficult, if not impossible, to manage. And so that would be the defining difference between agribusiness and sugar as we see it today.

I would now like to turn the call back over to Mark Haden for closing comments.

Great. Well, thank you, everyone. This completes the call.

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