Jul 30, 2007
TRANSCRIPT SPONSOR
Executives
Pat Woertz - Chairman, President and CEO Doug Schmalz - Sr VP and CFO John Rice - VP of Global Marketing and Risk Management Dwight Grimestad - VP of IR
Analysts
Diane Geissler - Merrill Lynch Vincent Andrew - Morgan Stanley Christina McGlone - Deutsche Bank Ann Gurkin - Davenport Robert Moskow - Credit Suisse Michael Piken - Cleveland Research David Driscoll - Citigroup Investment Research Kenneth Zaslow - BMO Capital Markets Pablo Zuanic - J.P. Morgan Ed Roesch - Banc of America Securities
Operator
Good day ladies and gentlemen and welcome to the fourth quarter 2007 Archer-Daniels-Midland Company Earnings Call. My name is Lauren and I will be your coordinator for today.
At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference.
(Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's presentation, Mr.
Dwight Grimestad, Vice President of Investor Relations.
Dwight Grimestad
Thank you, Lauren. Good morning and welcome to ADM's fourth quarter Earnings Call.
Before we begin I would like to remind you that we are webcasting our call and that you can access it at ADM's website admworld.com. 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 explains that some of our comments constitute forward-looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results. These 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.
Slide 3 in our presentation on the website shows the matters we will discuss in our conference call today. And I will now turn the call over to Pat Woertz, Chairman, CEO and President.
Pat?
Pat Woertz
Thank you, Dwight and good morning everyone. Well, this is of course our fourth quarter call.
I thought I would begin with some highlights about the full fiscal year 2007 and that are shown on slide 4. Starting with safety, a big highlight and focus area for us, we closed our fiscal year achieving double-digit improvement in both lost work day rate and recordable incident rate.
And as we continue to improve safety on our wage force world class, I would like to thank all the ADM colleagues who continue to work safely and look out for one another. Turning to financial highlights, this morning ADM announced its third consecutive year of record earnings.
Net earnings for the year were up 65% to a record $2.16 billion or $3.30 per share with all major segments producing record results. Those revenues surpassed $44 billion rising 20%, mostly of course on the strength of commodity pricing and also on modest additional volumes.
The company exceeded its targets for both return-on-net assets and cost per metric ton. And likewise we improved in return-on-equity, return-on-invested capital, EBITDA and EBITDA growth.
The company increased cash dividend payouts in absolute dollars and in cents per share. The company issued $1.15 billion of convertible debt during the year.
The issuance was the first of its kind for ADM, and was a very cost effective borrowing -- it provided funds for a significant share buyback of $15.4 million share of ADM stock. On the strategic front, a formal strategic planning process was established this year.
ADM outlined its long-term, strategic destination to be the global leader in bio-energy while expanding our premier position in the agricultural processing value chain. And we began to flush out the process for that direction specifically to diversify feedstocks, to expand the technology platform, to expand our geographic footprint and to complete our bioenergy project.
On the personnel front, we led -- we hired a senior HR Officer, a Chief Technology Officer who created a lead, strategy and planning role. We realigned IT Corporate Communication and Government Relations.
I think the year has been one of positive change and a solid move forward to building out the long-term value of this company. I would like to recognize the people of ADM for their capability, their performance and for their continuing commitment to growing shareholder value.
Before I turn the call over to Doug Schmalz, our Senior Vice President and Chief Financial Officer for his detailed discussion on the fourth quarter results, let me highlight some of the key items this quarter. Certainly withstanding, with our gain related to the exchange of our China joint venture holding for shares and Wilmar International, this transaction moves us one step forward in our Asia strategy efforts.
Other asset sales -- Agricore United, Tyson, Overseas Shipholding -- continued to pair down non-core assets as we reinvest to align our portfolio with our strategic opportunity. Results in corns this quarter declined, as we dealt with the challenges of higher net corn cost.
Corn prices have come down from recent highs and the USDA forecast of record crop -- that should provide abundant supply for our market needs. Margins were squeezed in European rate seed crushing and biodiesel.
And we continue to see some challenges in these areas. We also see an ample global supply of soybeans and our solid demand from the corn oil going forward.
And we made very good progress on our capital projects this quarter. We will provide an update on the larger projects today, as I mentioned we would in our last call.
Doug will talk about our efforts to ensure that the projects attain all of our expectations for safety, for speed, returns cost and processing efficiency. Our confidence in this strategic direction remains quite strong.
I think agriculture is responding to the unprecedented opportunity with record crops in the ground. Now I’ll turn it over to Doug and after that of course we’ll be happy to take your questions.
Doug?
Doug Schmalz
Thanks Pat, and good morning everybody. As Pat mentioned, solid fourth quarter operating results were achieved during the quarter marked by continued high volatility.
We move to slide 5; it’s a summary of our financial earnings highlights for the quarter. Fiscal year 2007 net sales and other operating income increased 28% to $12.2 billion.
The most significant driver of that increase was the impact of increased selling prices. Gross profit decreased 13% to $718 million, key drivers of the declining gross profit raised $60 million LIFO charge reflecting the increased commodity prices and lower gross profit in oil seeds and corn processing.
Selling general and administrative expenses declined 1% to $293 million as cost reductions exceeded the impact of stronger foreign currencies on translated costs. In line with our strategic focus, asset sales and repositioning of our asset base was significant in the fourth quarter.
Gains on asset sales in fiscal 2000s fourth quarter of $967 million, includes a gain of $440 million on the exchange of our interest in certain Chinese joint ventures for shares of Wilmar International Limited, the largest agricultural processing company in Asia. It also includes the $153 million gain on the sale of the company’s investment in Agricore United.
In addition, we sold our Tyson Foods and Overseas Shipholding common equity positions at a gain of approximately $375 million. We continue to take actions to align our asset portfolio with our strategic directions.
Financing cost net equal to interest expense plus investment income was $45 million, which is comparable to last year. The fiscal year fourth quarter 2007 effective tax rate increased to 31.5% from 29.5% last year.
Our annual effective rate for the full fiscal 2007 year is also 31.5%, which is up slightly from the fiscal year 2006 annual effective rate of 31.2%, excluding the $36 million tax adjustment credit which was included in last year's results. The increase is attributable to shifts in geographic mix of earnings.
Net earnings increased to $955 million or $47 per share, from $410 million, $0.62 per share last year. Moving on to slide 6; 6 is an earnings summary reflecting unusual items impacting the quarterly result.
For your information, all amounts reflected on this slide are on an after-tax basis. Net earnings for the quarter ended June 30, 2007 were $955 million or $1.47 a share, compared to net earnings last year of $410 million or $0.62 per share.
Fiscal 2007 earnings include gains of $616 million on asset sales which I previously mentioned. Abandonment charges of $12 million and LIFO charge of $38 million, and a charge on debt repurchased of $29 million.
Net earnings excluding these items were $418 million or $0.65 per share. Last year's fourth quarter earnings included gains on asset sales of $18 million, FIN 47 charge and abandonment charges of $37 million, LIFO income of $1 million and Brazilian transactional tax credits of $17 million.
Earnings for the fourth quarter of fiscal year 2006 excluding those items were $411 million or $0.62 per share. For your convenience, we have included a schedule in the appendix to this slide presentation which should help you analyze these items by segment for the quarter-end fiscal year period.
Slide 7 states our targeted performance objectives. We have two performance objectives which we report on a quarterly basis.
First, we set a Return on Net Assets (RONA) objective, 13% on average. This objective aggressively exceeds our approximately cost of capital by approximately 5%.
For the 12 months ended June 30, 2007 our Return on Net Assets is 15.7%, even though higher commodity price level and significant pre-production capitalized project costs have resulted in higher working capital and fixed asset values, which have the effect of reducing the RONA return. The reported RONA reflects the strong earnings results this year.
Secondly, we set a targeted cost per metric ton of production objective of less than $110. For fiscal year 2007, we achieved a rate of $108.89, which is better than our stated objective.
We continue to meet this objective by challenging all costs and expenses and establishing benchmarks where comparable external data is available. Every $1 change per metric ton translates into approximately $50 million pre-tax dollars on an annual basis.
Details of the calculations of these non-GAAP RONA and cost per metric ton performance metrics can be found in the appendix to this presentation. Slide 8 is a summary of our segment operating profit.
I will not go into a lot of detail here, other than to note that our total operating profit increased 81% to $1.2 billion. On slides 9 to 12 we will review the major drivers which impacted segment earnings for each segment during the fourth quarter.
Moving to slide 9, this is an operating profit analysis of the oilseeds processing segment. As you were awareness, as Pat mentioned, we have been joint venture partners with Wilmar for 15 years, developing a foot print in the oilseed sector in China, as well as palm operations in other regions of Asia.
About a year ago, Wilmar became a publicly listed invested company on the Singapore stock exchange and recently merged with the Kuok Group to become the largest agri business company in Asia. The exchange of our Chinese joint venture interests for share of Wilmar International Limited results in a strategic realignment of our Asian investments, and a gain of $440 million, included in operating profit.
Excluding this gain, operating profit declined to $147 million from $195 million last year. Operationally, our global production volumes were up year-over-year.
Soy crush margins improved globally, or were offset by declines in softseed and biodiesel margins, resulting in a net margin reduction of $30 million. In addition, operating cost increased $19 million, due principally to increased energy and maintenance costs.
The equity earnings of our affiliates, principally our Asian joint venture operations, increased $18 million, reflecting the improved soy and palm oil market conditions. After the abandonment and FIN 47, charges were $4 million in 2007 compared to $14 million in 2006, a reduction of $10 million.
In addition, last year’s results included the $27 million of Brazilian transactional tax credits. I will now discuss current market conditions in the oilseeds complex.
Rapeseed crop in Europe is smaller than expected, and biodiesel imports our entering here. These factors will pressure rapeseed crush and biodiesel margins.
In North America, we saw NOPA industry capacity utilization in the mid-80% range for the quarter, up slightly from last year. Spot soy crush margins are in the $0.63 to $0.65 for bushel range, although cash margins are stronger as a larger supply bean is resulting in a historically low basis.
U.S. census data show high soybean oil inventories.
These should decline as biodiesel production uses increasing volumes of vegetable oil. On a global basis, we are seeing solid demand for both protein meal and vegetable oil.
Slide 10 is an operating profit analysis of our corn processing segment. Corn processing operating profits decreased to $241 million from $286 million last year, due principally to increased net corn cost and lower ethanol sales volumes.
Although sweetener volumes and pricing increased over prior year levels, results declined due to the higher net corn cost. Bioproducts results also declined as the impact of lower sales volumes and higher net corn cost exceeded increased selling ethanol prices.
You will recall, last year we moved inventory in the fourth quarter, soy volumes in that quarter were a little higher than what they would normally be based on a production basis. In addition, our operating cost increased by $9 million due principally to higher energy costs.
Abandonment and FIN 47 charges were $1 million in 2007, compared to $13 million last year, a reduction of $12 million. Looking at current market conditions, we see the corn prices are well off their recent highs.
The USDA reported that farmers planted an incremental 14 million acres in corn this year and they report this crop to be in very good condition at this point of the growing cycle. The USDA is projecting record corn production of 12.8 billion bushels, which should provide sufficient corn to meet all demands.
Restrictions on corn gluten feed shipments to Europe, due to GMO concerns, continues to put pressure however on byproduct credits for corn wet millers. On the product pricing side, our next real change in sweetener and starch selling prices will come with new contracts for 2008.
Anticipated increase in sweetener demand from Mexico should be beneficial to our third quarter '08 and beyond. Current market prices for ethanol have declined and we expect to see lower prices in our first quarter of fiscal '08, but ethanol prices have been stable even as RBOB has declined, making spot ethanol a 0% to 10% per gallon premium gasoline.
Current market prices for corn have also declined. We expect a reduction in net corn cost based on the current conditions.
Slide 11 shows an operating profit analysis of our agricultural services segment. Operating profit of this segment increased to $241 million from $83 million last year due principally to the $158 million of gains from sales of business interest, principally the sale of the company's Agricore United investment.
Global merchandising and handling results improved $49 million due to improved market conditions. These improvements were partially offset by a $20 million decline in transportation as south-bound barge freight rates and volumes declined from prior year level.
In addition, operating costs increased to $25 million. Equity earnings of our affiliates decreased $5 million and last year's result included a $1 million charge on asset abandonment.
With the anticipated large corn crop, we see grain handling opportunities in agricultural services. Therefore, we continue to improve grain receiving, cleaning and drying capabilities, in addition to expanding temporary storage and anticipation of this large corp.
We also see regional imbalances in the global grain markets, where opportunities may present themselves to add values. Slide 12 is an operating profit analysis of our other segments.
Operating profits increased by $10 million to $83 million, from $73 million last year. Margin improvements in food, feed and industrial of $5 million and financial of $19 million were partially offset by operating cost increases of $16 million.
The operating margin of the company's wheat milling and protein specialty businesses improved, but were partially offset by lower cocoa operating results. Financial margin improvements reflect improved captive insurance earnings.
Equity earnings of affiliates increased $8 million and last year's results included a $17 million gain on asset sales. Asset abandonment charges were $13 million in 2007 compared to $29 million in 2006, a reduction of $16 million.
In our wheat milling business, we see potential challenges in processing this year's weather-damaged wheat crop. In cocoa, current market conditions show an improving processing margin outlook.
Slide 13 analyzes our corporate costs; our corporate results were an income of $242 million compared to a charge of $55 million last year. Investment income increased $31 million due to higher interest rates and higher levels of invested funds.
The impact of LIFO inventory evaluations was to decrease corporate results by $59 million as current year’s quarter included a LIFO charge of $60 million compared to a $1 million charge last year. Security gains increased to $363 million, principally reflecting the sales of our Tyson and OSG investments.
During the fourth quarter we repurchased $400 million of outstanding high-coupon long-term debt to reposition our debt portfolio. Transaction is present value positive, which resulted in a $46 million charge this quarter.
Moving to the summary of financial conditions on slide 14, our working capital increased 24% to $7.8 billion, due primarily to effective higher commodity prices. That increase is in line with our dollar sales value increase of 28% in this quarter compared to last year.
Working capital includes readily marketable inventories which had a carrying value of approximately $4.4 billion at June 30. The increase in working capital was financed principally with cash generated in operations.
As our capital project spend has increased, our property, plant and equipment has also increased by $717 million. The increase in investment and affiliates of $513 million results primarily from the RONA International Limited transaction discussed previously.
The long-term marketable securities decline of $453 million reflects the sale of our Tyson and Overseas Ship Holding Investments. And long-term debt increased $687 million, reflecting the recent $1.1 billion convertible debt offering, net of the $400 million debt repurchase in the fourth quarter.
Cash flow highlights can be found on slide 15. As I mentioned previously, cash generated from operations was primarily used in support of working capital increases.
Our capital projects spending for the year increased to $1.2 billion. We acquired $15.4 million shares of company stock this past year for $533 million at an average cost of $34.68 per share, and repurchased $400 million of high coupon debt.
We also paid dividends of $281 million. This spending was financed from cash flows generated from operations, sales of marketable securities and other assets of $860 million, and the proceeds from a $1.15 billion convertible debt offering.
Moving now to a review of our capital investment strategies on slide 16, I'll discuss two key elements of our capital investments strategy. One, increasing capacity in key markets, and secondly improving cost efficiencies in two of our large plants.
We are increasing capacities in ethanol with the addition of two 275-million gallon plants and adding to our biodiesel capacity. We are increasing capacity in cocoa with our Hazleton, Pennsylvania plant.
We are also expanding oilseeds crushing in five North American plants and expanding our transportation and logistics network by adding barges, trucks, railcars and expanded grain handling capabilities. And we are also building a new plant to produce biodegradable plastics.
We are also taking cost efficiency steps by converting two of our corn plants from natural gas to coal cogeneration. Coal cogeneration plants typically run at a cost of $4.50 per million.
Coal prices, in addition to being less expensive, have traditionally been much less volatile than natural gas prices, which have ranged from $4 to $14 per million Btu over the past few years. We believe coal cogeneration will give ADM a material cost advantage in our two new ethanol plans under construction.
Now I'd like to move to slide 17. I'll discuss our much disciplined approach to project management.
Our commitment is to construct these plans safely, on time and on budget. We are committed to continuing its improvement and safety for our workforce.
Over the past four years, ADM has reduced our workforce total recordable injury rate by 46%. We continually track spend versus budget and look for new opportunities to achieve efficiencies.
For example, we have locked in over half of our materials and equipment cost. And we now use prefabrication shops to build our process units, as we simultaneously build the on-site structures.
We also use our long-term relationships with contractors to ensure we have the skilled workforce we need to do quality work. These contractors know our operating procedures and safety training requirements.
And we know their project management teams, supervisors and skilled workers. A critical strength to our project success is the combined expertise of ADM's design, construction and operating engineers.
This combined expertise helps ensure the efficient and safe startup of our plans. To achieve excellence in project management, we have placed a team of engineering, accounting, safety and outside design professionals on site at each major project.
Moving to slide 18, this is an update of our major project status since our last quarterly update. I’ll just mention the changes -- our Velva, North Dakota plan is in startup now.
We put the propylene ethylene glycol project on hold for a while, while we evaluated the potential impact of new biodiesel technology, and after a thorough review we reinstated this project and the startup date is now scheduled for January '09 instead of October '08. And since our last conference call we received our construction permit for the Cedar Rapids ethanol plant and we anticipate completion of this project by August '09.
We’ll now move to slide 19, where I will discuss the ADM advantage in dry mill ethanol production. ADM has a unique and sustainable advantage, when it comes to dry mill ethanol production.
Advantages, which come from integrating these facilities into our large Ag processing network and our existing corn processing system. Let me detail some of our advantages.
ADM's extensive corn origination network gives us access to the entire North American crop. Our new units will not only be the largest ethanol production units in the industry, but they will use the existing infrastructure of two established corn wet mills.
We are building coal cogeneration boilers to power our operations with the most cost-effective fuel source. Our ADM unit range gives us a cost advantage in bringing corn to our plants as well as shipping products out from our plants.
Our extensive ethanol terminal network gives us a marketing advantage in meeting our customer needs. And our global feed business gives us the potential of shipping our Digs to the highest valued markets around the world.
We continually reevaluate the rational for all our projects. Our most recent review of these dry mill ethanol projects reconfirmed our advantage relative to many in the industry.
When you add it all up, we have very sustainable advantages in the production and delivery of dry mill ethanol. That completes my comments, and I'll now turn it back to Pat.
Pat Woertz
Thank you, Doug. Operator, please announce that Mr.
John Rice, Doug Schmalz and myself are all here to open up for questions.
Operator
Great, thank you. (Operator Instructions) And your first question comes from the line of Diane Geissler with Merrill Lynch.
Diane Geissler - Merrill Lynch
Yes, good morning.
Pat Woertz
Good morning, Diane.
Diane Geissler - Merrill Lynch
Just a couple of questions, actually clarification here on your comments Doug, on the volume reduction, would you say the volume reduction is more of an inventory build and anticipation of maybe a strengthening in the market here which were crude and wholesale gas is gone or whether just the fourth quarter or your fiscal fourth quarter last year was unusually high and therefore the comp or maybe it was a little bit of both, and could you just give us some clarity around that statement?
Doug Schmalz
And since I have John here, I'll turn over to him, and let him…
Diane Geissler - Merrill Lynch
Sure.
John Rice
Good morning Diane.
Diane Geissler - Merrill Lynch
Good morning.
John Rice
Last year we had high inventories or higher inventories of ethanol just because we are entering new markets because of the ban of MTBE in many parts of the country. So we had built the higher inventories and are working with our customers so they have an adequate supply.
And so the comparables this fourth quarter compared to last four quarters, that’s really the reason for the down trend, we had higher inventories and we've reduced our inventories last year.
Diane Geissler - Merrill Lynch
Okay. And then, I guess, the comment that you expected prices first quarter '08, prices to be down, was that sequentially or year-over-year or both?
Just, if you could clarify that for me?
John Rice
Sequentially.
Diane Geissler - Merrill Lynch
Sequentially?
John Rice
Yes.
Diane Geissler - Merrill Lynch
And then, I guess, I appreciate some of the detail you have given here on the capital project. Doug, I think you said, you spent $1.2 billion this year…?
Doug Schmalz
Right.
Diane Geissler - Merrill Lynch
In capital, could you give us some clarity about -- now that we're moving into fiscal '08, what we should expect, the CapEx this year?
Doug Schmalz
I think it'll be up somewhat in the 1.2, I mean it will depend on how these project proceeds go down through and the spend rate. But I would anticipate that number to be up over the 1.2, I can't say exactly how much, but I would say may be up in the 1.4 range, 1.5 or 6, somewhere, it will all depend on how that comes through Diane.
Diane Geissler - Merrill Lynch
And then with that tail off, would that be the bulk of the capital plans that you have spoken about over the last, I don't know 12 to 18 month, where you talked about it, the $2.5 billion to $3 billion. Or is there more than in fiscal '09 above maintenance?
Doug Schmalz
It all somewhat as listed on that schedule, I mean those are the major ones and those timelines are what we see right now.
Diane Geissler - Merrill Lynch
Okay. And then I guess…
Pat Woertz
I might just comment, I think you could categorize that is the peak is in a rate. But you are right, there are some that will continue to start up in '09.
Diane Geissler - Merrill Lynch
Okay. And if obviously excludes any other, anything you might do on palm oil or sugar-based ethanol, and all which you've talked about wanting to get into but… Right, that's more of a long-range, so that would be incremental to what you have built?
Is that correct?
John Rice
These are the ones we've announced so far, correct.
Diane Geissler - Merrill Lynch
Alright. And then I guess the oilseed crush commentary, if I am reading you correctly it sounds like Europe – biodiesel, you expect that to be a little bit more challenging in the near term?
Could you talk a little bit about, you know, I know we've had build up an edible oil inventories, in light of biodiesel you are expanding capacities, more capacity coming on line just from the industry in general, can you talk about how we should expect that to develop over the course of this next fiscal year, some of the drivers in oilseeds?
John Rice
In Europe, specifically, the rapeseed crop is little bit less because of the heavy rains. Harvest is just about done, we should be finishing up here shortly but the crop is less than expected, and we were seen more imports into Europe of biodiesel, a lot of soybean oil, but now during the winter months, just because of cold flow issues, people will have to burn more rapeseed well.
So we should see more demand for rapeseed oil during the fourth quarter calendar year and first quarter of '08 fiscal calendar year also. So I think it's, you know, the business is not as good as it has been, but it’s still a fairly good business, I want to say.
Diane Geissler - Merrill Lynch
And is that primarily just a build-up of an inventory, the short crop, lack of --?
John Rice
Kind of, it comes from the higher vegetable oil prices also.
Diane Geissler - Merrill Lynch
Okay.
John Rice
We've seen the future's rallying, but we've seen the basis. Cash prices being heavily discounted and worked away into the biodiesel markets just to keep the inventory a little bit less than full capacity.
Diane Geissler - Merrill Lynch
Okay. And you are expanding in five of your oilseed crush plants in North America, is that what you said in your capital review?
John Rice
Yes.
Diane Geissler - Merrill Lynch
How much incremental capacity are you adding -- into three?
Pat Woertz
It’s kind of set in line with that.
Doug Schmalz
It’s in line with that – kind of in line with what the industry is doing.
Pat Woertz
With the industry in total.
Diane Geissler - Merrill Lynch
Alright. Thank you very much.
John Rice
Welcome.
Pat Woertz
Thanks Diane.
Operator
Your next question comes from the line of Vincent Andrew with Morgan Stanley.
Vincent Andrew - Morgan Stanley
Good morning, everyone.
Pat Woertz
Good morning.
Doug Schmalz
Good morning, Vincent, how are you?
Vincent Andrew - Morgan Stanley
I am well, thank you. I am wondering if you’ve got some comment on the fact that we seem to repeatedly read in the press about an ethanol supply line and all the capacity is coming on line.
I am wondering if you could just discuss what it is you are seeing in particular in terms of what the refiners are doing and adding blending infrastructure and to markets that have not traditionally blended gasoline, perhaps if you could just start there?
John Rice
Well, this is John Rice. We are working with all of our customers, we are seeing a little bit more blending coming into Florida, and also in the southeast, but now we still have some issues on the vapor pressure down there.
So we haven't seen everybody go to full blending in Florida. So that should expand the market, and also in California we are working with customers there, where they will increase their blend from 5.7% to 10%.
So, it's just more of a timing issue. We still feel very good long-term that will blend up to the 14 billion gallon, but at times a capacity comes out little quicker than whatever they at such point.
Vincent Andrew - Morgan Stanley
Sure. What I mean, even just from kind of microeconomic perspective, it would seem to me that where RBOB is versus where ethanol is, that I if were a blender, I would be looking to do as much crushing and blending as possible and I would be economically incentivized to add infrastructure, and this is forgetting about even the idea that there would be a step up in the RFS.
I’m sorry, from their perspective, are they -- other than Florida and California, are there other markets that they are looking at now in your view?
John Rice
Yes, what you stated is absolutely correct. I mean they see the returns, so they are looking to blend as much as they can.
Vincent Andrew - Morgan Stanley
But there is time lag between. Obviously you'd like to do it today, but how long does it take to actually get into a new market?
If you are a refiner, in other words if you want to open up in new market, what do you think that time lag is?
Pat Woertz
It's actually, Andrew, it’s being a blender and of course they need the infrastructure build at their terminal so it’s tankage, it’s piping, it’s additional storage, so all that takes some time.
Vincent Andrew - Morgan Stanley
Okay, but there is no real way to quantify that time? Does it vary?
Pat Woertz
How else would they want to blend up to the 10% [U.S. turns] or I guess it just through the summer months, I think is the way to look at it.
Vincent Andrew - Morgan Stanley
Okay, and then in terms of the energy bill, any view on when the House is going to pick that up?
Pat Woertz
Well, most of our indications of course is after they come back from the August recess, in September there will be good discussions. So we are pretty pleased with the way the Senate bill came through and looking towards the House to do some of the same.
Vincent Andrew - Morgan Stanley
Okay. And have you or are you looking to swing any of your ethanol capacity to any of the other corn products which you make, given the theoretically lower ethanol prices that you are seeing sequentially?
John Rice
When that time arrives, if it does arise, we will look at -- especially with Mexico, going to start importing more high-fructose corn syrup. We feel that first part of next year, yes, we will definitely look at that and we are also seeing a little uptick in our lysine pricing.
Vincent Andrew - Morgan Stanley
Okay and then on the co-products issue in Europe, is there any visibility on improving on that situation?
John Rice
Not really. I personally thought that we would have this issue resolved, and then June 25th they took a vote, and it failed, so the imports not allowed.
So that kind of caught us by surprise. The next vote comes in the end of September, so we may see a little window of opportunity shift some corn gluten feed into that market.
And with the European crop having some problems, maybe they'll be more likely to vote in favor at this time, but once again during the winter months there could be another issue.
Vincent Andrew - Morgan Stanley
Okay. I think it's -- but still in the last call you were trying to open up new markets with co-products given the issue in your position.
Is that what you were doing during this quarter and is there any kind of update on how that stands?
John Rice
I mean it's going very well. We are converting a lot of customers from other feed products, even from corn.
The same people now buy corn and buy corn gluten feeds. So in the long term this is very positive.
Vincent Andrew - Morgan Stanley
Okay. Thank you.
I'll pass it along.
Pat Woertz
Thanks.
Operator
And the next question comes from the line of Christina McGlone with Deutsche Bank.
Christina McGlone - Deutsche Bank
Good morning.
Doug Schmalz
Good morning.
Christina McGlone - Deutsche Bank
You wouldn’t mind talking about the change that happened in China with your partners? From what I understand you had owned I think 30% of Chinese crushing and then a transition to maybe 18% of Wilmar.
And so what exactly do you own now that you didn’t own before? And how should we think about modeling Chinese oilseed processing in terms of impacts to you going forward?
Doug Schmalz
Yes. Doug here.
The model really doesn’t change other than the percentage ownership changes. We had a number of joint ventures with our joint venture partners down there, which we now sort of consolidated down into this one entity, which now has the ability, the ownership interest in all of the Chinese, as well as the Kuok group assets and so forth.
And what we did is exchange our shares in the joint ventures that we had in China, not in our interest that we had in Wilmar and then we took a direct stake in Wilmar International and exchanged four of those. So, effectively, now we have about a little bit over 16% net ownership in Wilmar International.
Around the same group of assets in there, except for the merger that they had that brought in the Kuok group assets.
Christina McGlone - Deutsche Bank
So, the current difficulty within China with crush margins, even the blue ear disease, how will that impact you going forward?
John Rice
Well, I mean, we were, it have affect -- that's really been an affect almost for about 9 months to a year, I mean, we are still seeing pretty good meal demand over there right now and good all demand. So, I guess, I don't see that it has been a huge issue.
Christina McGlone - Deutsche Bank
Okay. And then also in Argentina they have, I guess, some issues with energy and some oil seed crushes are closing down facility, how is that impacting you?
John Rice
Well, I don't think they are really closing down. Whenever you really look at the statistics, the numbers -- they haven't slowed down the crush as much as what the market was thinking.
And it's really just raising the cost of using fuel oil instead of the natural gas. But because that's really what hurt us in Europe, as a little bit of the vegetable oil going into Europe from Argentina.
Christina McGlone - Deutsche Bank
Okay. So, and we always think about South America crush margins for you looking, I mean, Europe you mentioned there's going to be a challenge, South America should improve sequentially or it should be flat.
And what's the outlook down there?
John Rice
Well, it's going to depend on the crops, I mean, we just have our crush assets in Brazil. We still keep seeing the meal market grow in Brazil.
We also have our new biodiesel plant in Rondonopolis starting up which also helps the oil demand. So, I think it should improve a little in Brazil.
Christina McGlone - Deutsche Bank
Okay. And then last question, in terms of LIFO, in the past you had said that it was about a third corn, or third soybean oil, or the third soybeans, I guess, roughly but charge was higher than we thought this quarter, was there more of an impact from soybean oil or soybeans as that allocation changed?
Doug Schmalz
Yes, it's because of the high run up in oil prices.
Christina McGlone - Deutsche Bank
In soybean oil prices?
Doug Schmalz
Oil prices really worldwide. That was the biggest, I think it was more in six years.
Christina McGlone - Deutsche Bank
Okay. Thank you.
Pat Woertz
Cristina, I might just add a comment on Wilmar, your original questions, it might be worse kind of reading the Wilmar annual report, looking at the Wilmar investor presentations now, since our ownership is in a publicly health company, you can get more data there, on their website and they described sales of $10 billion and earnings of $600 million et cetera. So, when you think about our equity ownership there coming through on an equity basis it might be good to kind of reflect on their public information.
Christina McGlone - Deutsche Bank
Okay. And Pat, you are still going to report that in oilseed a processing in the segment?
Pat Woertz
Correct.
Christina McGlone - Deutsche Bank
Okay. Thank you.
Operator
Your next question comes from the line of Ann Gurkin with Davenport.
Ann Gurkin - Davenport
Good morning.
John Rice
Good morning.
Doug Schmalz
Good morning, Ann.
Ann Gurkin - Davenport
I wanted to ask you about the build out in the ethanol market, where are we in terms of the end users, do you think their build out will keep up with the ethanol production right now in the US?
John Rice
As to what we are seeing in the market just and -- what we are seeing actually in the index going from about 1000 to 1500 to 10 over, I would say yes, it is keeping up.
Ann Gurkin - Davenport
Okay. And so you think by year-end we'll have more of a balanced situation with ethanol supply versus the end-market use?
John Rice
That's just tough to say, a lot depends on win, do we really nice to have two big markets come on, which would be really the South East or the California will have the base impact.
Pat Woertz
We're about 6.5 billion gallons today and we look at about 7 billion by the end of the year so it's a, kind of the market opening is the big question.
Ann Gurkin - Davenport
Okay. And are you switching gram capacity in your wet mills back to Asia, CS right now?
John Rice
No, we are not.
Ann Gurkin - Davenport
Do you anticipate doing that in the next six months?
John Rice
I think a lot of that will depend on how the high fructose pricing goes and with the addition of the new market in Mexico.
Ann Gurkin - Davenport
And do you expect to negotiate HFCS contract sooner this year than contracts were historically negotiated?
John Rice
I would anticipate contract due to be finished kind of like what we saw last year.
Ann Gurkin - Davenport
That was earlier than normal.
John Rice
Yes.
Ann Gurkin - Davenport
Okay. That's great.
Thank you.
John Rice
Welcome.
Operator
The next question comes from the line of Robert Moskow with Credit Suisse.
Robert Moskow - Credit Suisse
Thank you. Could you -- you’ve made some comments about wheat milling probably having some challenges for the next 12 months, having to do with the crop.
Can you give us an idea of just to the extent to which you expect that to be a challenging market, and also to the extent that the input pricing is obviously going to be a lot higher, do you expect your margins to be a lot tighter as a result?
John Rice
Well, most of our wheat milling business is done on the basis of price of -- our flour business is done on the basis of price of wheat. So, we really think we are exceptionally strong in this area now just because of our transportation assets.
We can work with our customers to be on the move -- wheat from one area to the other area, and be on work on different blends. So I think I would consider this more of a positive for our milling business.
Robert Moskow - Credit Suisse
So, does that mean profit should be higher in the next 12 months?
John Rice
I can't say that, for sure.
Robert Moskow - Credit Suisse
Should I pardon, Doug's comments? The outlook was negative and now you are saying it's more positive?
Doug Schmalz
I said what it was, it's going to be challenging and I think John's right, I mean we are going have to move that wheat crop around and that’s going to be a challenge to be able to get that done, and do it efficiently and effectively.
Pat Woertz
Yes, so we market the challenge and I think John’s point is we have a business that can accommodate and the logistics can accommodate kind of challenging markets, could be an advantage.
Robert Moskow - Credit Suisse
Okay. Thanks.
And regarding Europe, we hear in the headlines about the challenges of operating in Germany with the tax implications changing there, how has that impacted demand for biodiesel in Germany?
John Rice
Well, that’s really impacted demand as much as we are just seeing an increased supply coming in from other parts of the world.
Robert Moskow - Credit Suisse
Right. But are they taxing blenders more aggressively in Germany?
John Rice
The tax-rate came down $0.09 -- throughout $0.09.
Robert Moskow - Credit Suisse
Tax rate was up $0.09, and so does that mean it’s more economic for them to import or does that -- are the two things not related?
John Rice
I’m sorry, I didn’t understand the question.
Robert Moskow - Credit Suisse
I guess if they are taxing the blenders more aggressively in Germany, does it make any difference to them whether they are importing the oil from Argentina or whether they are getting palm oil from Malaysia, or whether they are getting rapeseed domestically?
John Rice
No, it really comes down due to the cold flow issues and rapeseed is a lot better with the specifications in Europe to blend during the winter time.
Robert Moskow - Credit Suisse
Thank you very much.
Pat Woertz
And finally coal is just more expensive with the new tax.
John Rice
Right.
Pat Woertz
Thank you, Rob.
Operator
Your next question comes from the line of Michael Piken with Cleveland Research.
Michael Piken - Cleveland Research
Good morning, I’m calling on behalf of Christine McCracken. I just wanted to touch base a little bit more on the sweetener side of the business, in terms of outlook for 2008, it looks like -- we’ve talked of high capacity here in the United States and Mexico coming on board, but the corn costs have obviously come down.
How do you sort of see the negotiations playing out?
John Rice
We’ve, like I mentioned before, we see Mexico coming on, so we think it should increase the overall demand and tighten of corn. So it's too early to say we haven't come out with our prices yet, we will probably look to doing that maybe in August or September.
Michael Piken - Cleveland Research
Okay. And in terms of some of the co-products, you touched on sort of the situation with gluten feed opening up other markets, but also the other co-products, corn oil and gluten meal have remained pretty strong.
How do you see those markets trending over the remainder of the year?
John Rice
I think you are exactly right. I see in corn gluten meal we are seeing very good demand and good pricing on that and also just because of the high oil prices, corn oil is also staying very high.
Michael Piken - Cleveland Research
Okay. And in terms of, I guess you're moving on to the oilseed business, I mean you had mentioned that the meal demand in China hasn't really swept that much because of the blue ear disease.
Are they extending on the poultry side or is that more of a function of their just rebuilding the herds or how is sort of meal demand kept up, given the number of losses I've heard that are out there?
John Rice
We’ve seen a little bit of a dip, it’s just not a huge percentage. I mean, if you look at the bean imports coming into China, we've seen a very little bit of a dip, but it just hasn't been -- it hasn’t had a huge effect.
We’ve seen a lot of added capacity added in China also the last year.
Pat Woertz
Your ears are looking a little less glued.
Michael Piken - Cleveland Research
I guess a couple of your competitors, North American competitors have recently announced expansion into China. Where are we now today in terms of utilization rights?
And I recognize there are a number of older inefficient plans that are out there in China, but kind of where do you see that going over the course of the next couple of years?
John Rice
Right now we think it’s right around 65%, and I mean those annual growth rates over there are about 8% to 10% a year or so. I mean this should keep utilization, we don’t see a lot more plans being built.
So I think the capacity utilization will keep increasing.
Michael Piken - Cleveland Research
Okay. Thank you very much.
Pat Woertz
Thanks.
Operator
Your next question comes from the line Ed Roesch with Banc of America Securities.
Ed Roesch - Banc of America Securities
Hi, good morning.
John Rice
Good morning.
Ed Roesch - Banc of America Securities
There is a chance that you may have covered this, and I might have missed it. I was in another call.
But just wanted an update out of Europe, because I think in Q1 when there is switch to the tax in on biodiesel, there is an issue where the mandates should not really caught up when you are in overcapacity. Could you comment on kind of where those mandates are relative to industry capacity now?
John Rice
We have seen a lot of additional capacity in the biodiesel come on line. From two years ago, we had very high margins in biodiesel and rapeseed crush margins.
But with the smaller crops and with additional capacity, we are seeing the effects in this.
Ed Roesch - Banc of America Securities
Okay. And the mandates haven’t ratcheted it up enough to kind of offset some of these things?
Pat Woertz
On soy bean.
Ed Roesch - Banc of America Securities
Yes.
John Rice
That’s correct.
Ed Roesch - Banc of America Securities
Okay. Any outlook on when that could occur?
John Rice
I guess I don’t have good handle on that one right now.
Ed Roesch - Banc of America Securities
Okay, thanks. And then I think you've covered a lot of these questions, one last one.
You recently announced, a think a fairly small acquisition of grain elevators around the Illinois area, is that right?
Pat Woertz
Right, Ed.
Ed Roesch - Banc of America Securities
And could you just kind of comment on what that does strategically for ADM?
Pat Woertz
Basically, there is a large corn crop as we said this year, I think positioning ourselves to take advantage of the additional storage, additional transportation and marketing network etcetera. This just fits strategically with our global footprint, but particularly here in the U.S., about 10 million bushels.
John Rice
About 10 million bushels is what it is.
Ed Roesch - Banc of America Securities
Okay. That’s the increased capacity along with your existing business lines?
John Rice
It is the whole origination network.
Ed Roesch - Banc of America Securities
Okay, very good. Alright thanks for your help.
Pat Woertz
Okay.
Operator
Your next question comes from the line of David Driscoll with Citigroup Investment Research.
David Driscoll - Citigroup Investment Research
Hi, good morning everyone.
Pat Woertz
Good morning, David.
John Rice
Good morning, David
David Driscoll - Citigroup Investment Research
Just two questions for you here. I think most of in your financial, back to oilseeds, net when you are taking into account path the decline in profitability in European biodiesel.
Is that the factor that's going to be prevalent in the outlook for the next year or do you see improving crush margins in North America particularly being more than enough to offset those declines?
Pat Woertz
Well, we don't give guidance but I think you've got it right on, as far as where the improvements are in North America and obviously if we are adding to our capacity here we feel strongly about North America. Europe will continue to be a challenge for oilseed helping come up and of course our improved China investments position us with heavier weighting in palms.
So you'd even argue that the Asia peak there -- while which servicing holdings there is of a nature of a little different variety and I think will be strong.
David Driscoll - Citigroup Investment Research
And then my second question. Doug you might want to answer this question, the financial segment has had profit that have grown, I think, this year profits came in reported profits just add $200 million back in '04.
These profits relate to $33 million, can you really talk us through here a little bit about what's driving this segment overall, though there is a lot in that segment and quite frankly, a lot hear how you go about trying to forecast what's happening in that segment and any color you could provide on the sustainability of a very helpful giving the type of profit it has been producing?
Doug Schmalz
Well, and included in that is our ADMIS or to trade operation up in Chicago and that has -- and very markets that moving a lot and so forth, they have done better going forward. We see that business remaining relatively the same.
We have had funds jump around lots, so funds really drove a big increase this year, about $50 million of the increase this year for the four years in fund. So the rest of that is pretty consistent, it doesn't change a lot in the insurance area and so forth you may have some ups and downs because it is a captive insurance.
So, we have losses, we're on the way, we can take charges as they occur. So, we have reserves on the bulks that we feel we are adequate but we have to refinance those reserves.
In important time we got, we use them. But, the main two things that moves or I think the funds and then ADMIS is been a relatively good performer.
David Driscoll - Citigroup Investment Research
Great. Thanks a lot everybody.
Doug Schmalz
Welcome.
Pat Woertz
Thanks David.
Operator
The next question comes from the line of Kenneth Zaslow with BMO Capital Markets.
Kenneth Zaslow - BMO Capital Markets
Hi, good morning everyone.
John Rice
Good morning.
Pat Woertz
Hi, Ken.
Kenneth Zaslow - BMO Capital Markets
I'd just like to ask more of a holistic question. I know last quarter you talked a lot about challenging environment, this quarter there doesn't seem to be as much talk about the challenging side of the environment.
Would you consider on a holistic point of view that things are getting better, worse or indifferent relative to the last quarter?
Pat Woertz
I'll tell you, I think this whole year has been a big challenge and I think if anything we can just truly manage through the volatility and its relative to all markets, not only the commodity markets, it's a kind of challenging time. So, maybe your guess is as good as mine going forward, but I think the strength that we have to manage through that, I am still as much if not more confident than ever.
Kenneth Zaslow - BMO Capital Markets
Okay. And then in terms of the Ag services business, there is definitely a pretty significant rebound order, historical level.
Is that something in '08, '09 and beyond, it's something that if they are working days to grow up or is it going to be more cyclical around the historical average?
Pat Woertz
I guess I shouldn’t be a smart Alec, and can say the ice has melted on the river, should I? I think with this large crop coming forward, there are even opportunities for us to take advantage of our strong network here and of course that’s -- we said we made a small acquisition as well.
So we continue to build out storage and the opportunity to handle. So I think Ag service is a key part of our business going forward, it will have its ups and downs too, but I think it’s key.
Kenneth Zaslow - BMO Capital Markets
And just on barge rates and volumes, any improvement in that on the outlook or is it still barge rate looking like they are going to be similar to press?
Pat Woertz
Barge rates are somewhat off, right?
Doug Schmalz
Yes. And with the large crop you should see movements.
Kenneth Zaslow - BMO Capital Markets
Okay, great.
John Rice
That’s to make our transportation assets work there much more and just because the timing of the harvest, so when it comes we are in great shape to be able to move the crops around.
Pat Woertz
Yes, more corn and more bushels.
Kenneth Zaslow - BMO Capital Markets
So again, the outlook for Ag services should be growing after this base, not volatility around this base, is I guess as what I’m trying to figure out?
Pat Woertz
When you handle a crop this big, it should have some upside potential.
Kenneth Zaslow - BMO Capital Markets
Great. Thank you very much.
Pat Woertz
Thank you, Ken.
Operator
And your next question comes from the line of Pablo Zuanic, with J.P. Morgan.
Pablo Zuanic - J.P. Morgan
Good morning, everyone.
Pat Woertz
Good morning.
John Rice
Good morning.
Pablo Zuanic - J.P. Morgan
Couple of questions on the financials and then strategic, and for me to get to your $0.65 pro forma EPS, I have to -- where we are at 23% tax-rate, I think additionally when you total before the tax rate, it should be much higher than that? Can you just explain why the tax rate was so low this quarter?
Doug Schmalz
Only 3%.
Pat Woertz
Yeah, I am afraid so.
Pablo Zuanic - J.P. Morgan
Yeah, because what you did, your reported tax rate is 31.5%, but when you gave us the charges that you gave pre-tax and after tax…?
Pat Woertz
Their net of rate of effective -- it comes from where it is, I mean, there are some of those items that have no tax…
Pablo Zuanic - J.P. Morgan
Excuse me -- I don’t want to waste your time, but the question is the core tax rate is 23% and that’s -- I just want to understand why the tax rate relying on your ongoing business was so low?
Doug Schmalz
I guess, I am not following what you are saying because…
Pablo Zuanic - J.P. Morgan
Well, let me explain. In your report when your charges -- the way that you disclose your charges, the after-tax charges and before-tax charges, if I take those numbers then I am getting $537 million, if you take those numbers, the pre-tax number you are using taxes of 36% there?
Pat Woertz
Right.
Pablo Zuanic - J.P. Morgan
And the reported numbers in the statement, you are using 31.5, as a result to get to your $0.65 I have to use 23%. I want to understand, I mean, I’ve more -- hopefully most of these questions to ask you but I want to understand why was the tax rate so low on your pro-forma numbers?
Doug Schmalz
The specific items that occurred in this pro-forma items column there, basically most of them are at U.S. rate and…
John Rice
U.S. rate is 38%.
Doug Schmalz
Look at the operations, the operations rate is declined because we do have tax advantages in our export sales companies and so forth that reflect directly to our operations, really don’t reflect to the one-off type issues when we sell shares in a security it's going to be taxed at the U.S. rate of 35%.
Pablo Zuanic - J.P. Morgan
Okay. So, in the…
Doug Schmalz
So we specially do that.
Pablo Zuanic - J.P. Morgan
Yes. But I don’t think your effective tax figures would benefit…?
Doug Schmalz
Always follow-up offline on that.
Pablo Zuanic - J.P. Morgan
It’s just kind of misleading, I mean, we don’t really expect that anything is misleading to put a pro forma EPS number of $0.65, using a tax rate of 23%, okay?
Doug Schmalz
Off line.
Pablo Zuanic - J.P. Morgan
All right. Can I ask another question, if I may?
In terms of this discussion about sugar ethanol, how should we think about Archer-Daniels trying to get into a resilient sugar ethanol? Is that a hedge in the sense that someday the U.S.
market perhaps will open to Brazilian ethanol? How should we think about that?
Pat Woertz
Well, I think you should think about it as an opportunity for profitable growth for us, regardless of what happens in the U.S. market, although you could also think of it as a compliment to our U.S.
ethanol business. If we want to be the global leader in bioenergy, I think the largest -- one of the largest ethanol markets in the world and obviously largest crops to produce ethanol is in Brazil.
So I think you can think of it as a profitable growth opportunity on its own, as well as the great compliment to our U.S. and growing global business.
Pablo Zuanic - J.P. Morgan
That’s helpful. And then just to -- what do you think of the government potentially with new targets that are being proposed 35 billion gallons, 36 billion gallons.
What do you think is the reasonable number to expect that corn could meet that total number eventually?
Pat Woertz
Well, generally speaking, we talk about 14 billion to 15 billion gallons. And that’s based on the view not only of ourselves but national corn growers and others who look at the market with corn and the technology today.
To advance beyond that, we will need and assume that that will happen over time, greater yield per acre and then moving to sort of second generation technology or other technologies to produce biofuels.
Pablo Zuanic - J.P. Morgan
Okay. And just one last one if I may, I want to follow up on that question that came out over the elasticity.
The elasticity -- when you have this issue in ethanol that the gap between the ethanol and the RBOB is so low, do you expect the refiners to accelerate? And obviously there are some structural issues that you talked about.
What do you think it’s a -- I don’t know if you can talk about the natural growth rate or what the cap is in that growth rate? If incentives are so good, why weren’t the blenders be save now 10%, I mean, how does that work?
I mean what is the -- how should we think in terms of the those impediments and how do we cap the potential growth rates?
Pat Woertz
Though last quarter was $0.10 under, this quarter it is $0.10 out or $0.10 over. I think you can think of it as maybe you described, there was an earlier question which was that blenders will do what's economic, but they will also do what their system can accommodate and that's a system from sort of the beginning to the end, from the refinery gate all the way to these various large marketing distribution systems.
So sometimes that includes pipeline changes, that includes terminal changes, that includes truck and barge and rail and long-term, contracts and spot contracts and who they are importing from and what they can get locally. So it's a great optimization model and yes, they should take more as the economic prices drive them to and they probably do take as much as they can, but again the structural implications are an obvious physical issue.
Pablo Zuanic - J.P. Morgan
That was very helpful. Pat if I may, just one last one, and I'll pass it on.
The volume data it's probably, I think from the year-to-date, I think what we have is only through April. I think the number is about 40%, 41% year-to-date.
Obviously, we don't have May and June yet, so I cannot compare with your quarter, but let's assume that the industry was still at above 40% in the June quarter and your volumes are down. I understand this issue of volume will include the adjustment, but why would be there such difference between ADM trends, the industry leader and the rest of the industry?
Or is it just that ADM is losing share or there are some contracts that are being done at a rate that is not attractive to you. How should we think about that?
John Rice
Our trends are -- you are comparing last year’s fourth quarter with this year's fourth quarter, and last year fourth quarter we had built large inventories because our customers were blending out of MTBE. And so last year fourth quarter we shipped a lot of ethanol out of our inventories.
Pablo Zuanic - J.P. Morgan
But wouldn't that be something that applies to the rest of the industry also? And your competitor AVR was assigned -- you would think that they went through the same thing, right?
John Rice
Last year the industry wasn't as large as it is now either.
Pablo Zuanic - J.P. Morgan
Right, thank you.
John Rice
You are welcome.
Pat Woertz
Thank you, Pablo.
Operator
Your next question is a follow-up from the line of Christina McGlone with Deutsche Bank.
Christina McGlone - Deutsche Bank
Thanks for taking the follow-up. John, last quarter you said that year-end ethanol production was 8.6 billion gallons.
Did I misunderstand it, now you guys just said that it's going to be 7 billion gallons?
John Rice
It's always -- the market is constantly moving, and we are just taking our best guess. So I think construction is --
Pat Woertz
It's in our page number eight.
John Rice
Yeah, that's in our page number eight. And construction slowed down a little bit at certain places, so it’s early to move the target.
Christina McGlone - Deutsche Bank
So from $8.6 billion to $7 billion that would be your new union target, 7 billion? That's a pretty sizeable drop?
John Rice
Yes.
Pat Woertz
Not ours, Christina just to be clear.
Christina McGlone - Deutsche Bank
Okay.
Pat Woertz
That's all we comment -- the RFA takes all of the industry data and kind of takes it blind and indicates that on the website. So, I guess it's an adjustment if you will from the industry.
Christina McGlone - Deutsche Bank
Okay. Thank you.
Pat Woertz
Welcome.
Operator
(Operator Instructions) And your next question is a follow-up from the line of Diane Geissler with Merrill Lynch.
Diane Geissler - Merrill Lynch
Hi. Thank you for taking the follow-up.
Just one question on the equity investments or the fund investments, my understanding of those, as those stretch back to the 1990s and that benefits we’re seeing from those now from long-term investments. Is there a point where those funds sort of repay what they plan to repay and then the benefit from that goes away and how should we think about the impact of the funds on your earnings over the next two to three years?
Doug Schmalz
That's eventually if they terminate the effect, those funds do go away and they distribute out and that's -- I think there might be some that are still here that will go another two or three years, but at the end of that point in time, we basically will be out of them. Our carrying values are quite low right now in relation to where they were at one point in time.
So we still could see some uptick in those as they roll-out investments and so forth, or we could see some down too if the markets run bad. Okay?
Diane Geissler - Merrill Lynch
But over the course of the next two to three years, you really expect them to be fully distributed?
Doug Schmalz
They should be, that's correct.
Diane Geissler - Merrill Lynch
Okay, perfect, thank you.
Pat Woertz
Operator is there…?
Operator
I apologize. (Operator Instructions) No ma'am, there are no further questions in the queue.
Pat Woertz
Okay, thank you so much. Well, thank you everyone for being on the call and let me also apologize for scheduling this call on top of another call I know that you need to listen to as well.
We will review that next time and make sure that that's clear. So, thanks, I appreciate the questions and the attention.
This year we did define our strategic destination -- our record performance I think reaffirms our strength and the opportunities in that position. I think we can truly manage through volatility and we enter fiscal 2008 with confidence and momentum.
So, thank you all for joining us this morning. Good day.
Operator
Thanks for your participation in today's conference. This concludes the presentation.
You may now disconnect. And have a great day.