Feb 1, 2011
Executives
Dwight Grimestad - Vice President of Investor Relations John Rice - Vice Chairman and Member of Strategic Planning Committee Patricia Woertz - Executive Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Strategic Planning Committee Ray Young - Chief Financial Officer, Senior Vice President and Member of Strategic Planning Committee
Analysts
Christina McGlone - Deutsche Bank AG Vincent Andrews - Morgan Stanley Ian Horowitz - Rafferty Capital Markets, LLC Ann Gurkin - Davenport & Company, LLC Terry Bivens - JP Morgan Chase & Co Robert Moskow - Crédit Suisse AG Todd Duvick - Bank of America Corporation Jeffrey Farmer - Jefferies & Company, Inc. Kenneth Zaslow - BMO Capital Markets U.S.
Bryan Spillane - BofA Merrill Lynch David Driscoll - Citigroup Inc Christine McCracken - Cleveland Research
Operator
Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Archer Daniels Midland Company Earnings Conference Call. My name is Dianna, and I'll be the operator for today.
[Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Dwight Grimestad, Vice President of Investor Relations.
Please proceed.
Dwight Grimestad
Thank you, Dianna. Good morning, and welcome to ADM's Second Quarter Earnings Conference Call.
Before we begin, I would like to remind you that we are webcasting this presentation on our website, adm.com. The replay will also be available at that address.
For those following the presentation, please turn to Slide 2, the company's Safe Harbor statement, which says that some of 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. 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 lists the matters we will discuss in our conference call today. And I will now turn the call over to our Chairman and Chief Executive Officer, Pat Woertz.
Patricia Woertz
Thank you, Dwight, and welcome, everyone, to our second quarter conference call. This quarter, we are hosting our conference call from Europe as we have spent a week with our European team and ADM's Board of Directors reviewing our operations here.
I'll begin as always with safety. During the quarter, we reduced our lost workday injury rate by another 5%, and total recordable incident rate by 15% compared to fiscal 2010.
We continue to make important progress on safety. Turning to our financial results.
This morning, we reported net earnings of $732 million or $1.14 per share on a fully diluted basis, a 30% improvement versus the prior year. Operating profit improved by 40%.
Excluding the large LIFO charge and other specified items that Ray will discuss in a moment, ADM earned $1.29 per share. I'm very happy to say that the ADM team delivered outstanding performance across the board, resulting in record operating profit.
Amid strong demand and regional dislocations, we used our vast global network to deliver for our customers and for our shareholders. During the quarter, we continued executing our strategy to drive profitable growth.
In North America at the end of December, we acquired the remaining 50% interest in Golden Peanut, the largest U.S. handler, processor and exporter of peanuts.
This is a business that fits well with our existing U.S. Oilseed and Export operations, and will support our growth objectives in the global oilseeds business.
We are enhancing our U.S. origination footprint with the construction of an elevator in South Dakota and two elevators in Nebraska.
In South America, we opened the first large-scale fertilizer blending plant in Paraguay. This plant, located on the Paraguay river in Villeta, will strengthen ADM's connection to the country's growing agricultural sector.
The soybean processing facility that we discussed last quarter is being constructed adjacent to the plant. Also in January, we founded the ADM Institute for the Prevention of Postharvest Loss at the University of Illinois.
This global institute will work with farmers in the developing world to help reduce the 10% to 20% of the global grain harvest lost to mishandling and postharvest operations each year. Looking ahead, global markets remain dynamic.
In this environment, we used ADM's exceptional capabilities, our unique global asset base and the insights of our team to drive value and to serve vital needs. Now I'll turn the call over to Ray who will review our results.
Ray Young
Thanks, Pat, and hello to everyone on the call today. I'm very happy to be with you to share our second quarter results.
Slide 5 lists our financial highlights for the quarter. We will discuss the quarterly results but also list the accumulative six-month results for your reference.
Overall, financial results this quarter were very strong. Segment operating profit was $1.36 billion, up $392 million or about 40% from a year ago.
And in a moment, I'll review our results on a segment-by-segment basis. Quarterly net earnings were $732 million, up $165 million from last year's second quarter, and earnings per share we're $1.14 compared to last year's EPS of $0.88.
Looking at our effective income tax rate for the quarter, reported tax is at 27%. Similar to our first quarter and just down over 1% compared to second quarter of last year.
As you can see from the waterfall chart at the bottom of the page, we've called out a few items. You'll note that there was a significant change in our LIFO inventory reserves due to sharp rises in commodity prices over the last three months.
We recorded a charge of $158 million after tax or approximately $0.25 per share compared to a $0.05 charge in the same period last year. Also we had net gains of other specified items of $64 million or $0.10 per share.
These were comprised of: One, a gain of $44 million after-tax or $0.07 per share, as a result of revaluing our prior 50% interest in Golden Peanut to fair value in conjunction with our purchase of the remaining interests; two, mark-to-market gains on interest rate swaps that contributed $34 million after-tax or $0.05 per share; and three, startup cost this quarter of $14 million after-tax or $0.02 per share. We'll discuss these in greater detail when we review our corn segment.
For simplicity, these specified items are grouped together here on the waterfall chart, and we've broken them out for you in the appendix. Adjusting for these specified items, ADM earned a $1.29 per share.
I would also like to note that in the second quarter, we updated our estimates of the remaining service lives of various machinery and equipment assets. The new estimates of the economic lives of these assets are based upon manufacturing, engineering data and analysis from completion of our major investments.
The lower depreciation charge improved second quarter earnings by $24 million after-tax or $0.04 per share, and this change will also favorably impact future quarters by a similar amount. Slide 6 shows the breakdown of our segment operating profit.
You'll note that all segments contributed meaningfully to this quarter's record operating profit. Let's turn to Slide 7 to begin the review of each segment in greater detail.
We'll start with Oilseeds Processing on Slide 7. Oilseeds operating profit in the second quarter was $325 million.
Crushing & Origination results increased $7 million to $200 million for the quarter. We balanced our operating rates by region, which enhanced overall margins.
Our acquisition of the controlling interest in Golden Peanut and the resulting revaluation generated a pretax gain of $71 million, which is included in the Crushing & Origination results. South America gained from improved fertilizer and grain origination results.
European results were lower due to mark-to-market timing effects, essentially, differences in how we account for changes in valuations of inventory and corresponding futures and other contracts. This negative impact was only partially offset by improved margins, including the strong softseed positioning.
Refining, Packaging, Biodiesel and other profit increased $2 million to $78 million for the quarter, on good demand for value-added products and improved European Biodiesel results, offset by weaker results from South America. Oilseed results in Asia declined $36 million to $47 million for the quarter, reflecting ADM's share of the weaker results of our equity investee, Wilmar International Ltd.
Looking at the crop. The U.S.
soybean crop, as reported by the USDA was 3.3 billion bushels with a yield of 43.5 bushels per acre, a slightly lower yield than the prior year. The projected U.S.
soybean [indiscernible] is 140 million bushels, which is a tight supply. In South America, the soybean harvest has begun, and its prospects seem to be improving, given better weather conditions.
Planted acres were up modestly and industry estimates put the South American soybean crop somewhere between 124 million and 127 million metric tons, down from last year's record 134 million metric tons. The global canola and rapeseed stocks-to-use ratio is tight, reflecting good demand and lower supplies.
As you look at current Oilseed Processing market conditions, global protein meal demand is projected to grow by 6% for the '10 and '11 crop year, led by strong demand in Asia. There's been little forward buying by protein meal customers.
And U.S. vegetable oil inventory levels remain high but should be reduced by expected Biodiesel demand.
Moving to Corn Processing on Slide 8. For the quarter, Corn Processing results increased $109 million to $399 million as we were well positioned as corn prices rose.
During the second quarter, Corn Processing volumes were up 24%, reflecting the ramp up of our new dry mills in Columbus, Nebraska and Cedar Rapids, Iowa. Sweeteners & Starches operating profit decreased $52 million from the prior year to $119 million due to lower average selling prices and higher net corn costs.
Sales volumes were up due to improved export sweetener shipments and stronger U.S. demand for industrial starches.
As a reminder, our sweeteners and starches line is impacted by the transfer of starch at a market price to the BioProducts group. A year-over-year decline in this transfer price, while net neutral to Corn Processing segment increased our reported profits in BioProducts while reducing reported profits in Sweeteners & Starches.
BioProducts profit in the quarter rose $161 million to $280 million. In the quarter, our ethanol volumes improved, reflecting the ramp up of our new dry mills.
And our ethanol margins rose as high world sugar prices made U.S. ethanol the most competitive for export.
This resulted in tightening of U.S. supply and demand leading to an increase in prices which kept up with the increase in corn costs.
BioProducts result also benefited from good lysine margins. In the quarter, BioProducts reported $22 million pretax startup cost relating to our PHA facility in our propylene ethylene glycol facility.
Startup cost from these projects should become insignificant by the end of the fiscal year. Now turning to the crop.
The U.S. corn crop as estimated by USDA was 12.5 billion bushels with a yield of about 153 bushels per acre, down from the prior year's yield of 165 bushels per acre.
The corn carryout is projected to be tight at 745 million bushels, which will be a factor as farmers make their planting decisions in the next few months. As we look at current market conditions, ethanol spot margins are at or below unleaded gasoline before the $0.45 per gallon blender's credit.
Spot ethanol margins are near breakeven. U.S.
ethanol industry exports were about 360 million gallons for the calendar year 2010, which help support overall demand. The one-year extension of the blender's credit and the U.S.
EPA's recent decision on enhanced blending, are supportive of ethanol. Exports are expected to grow in 2011 as the U.S.
corn-based ethanol remains the most competitive in the global market. Lysine demand remains strong.
Industry corn sweetener volumes, driven by exports to Mexico and Canada continue at high levels. Industry export volumes to Mexico were about 1.5 million metric tons in 2010, up 90% versus 2009 and are projected to grow slightly in 2011.
ADM has completed sweetener contract discussions for calendar year 2011 and realized an approximately 25% price increase on sweetener contracts, which should be sufficient to improve margins despite increased corn costs. Now let's turn to Slide 9 and review the operating performance of our Agricultural Services business segment.
Profits in Ag Services increased $276 million to $426 million for the second quarter. Merchandising & Handling profit increased $273 million to $376 million.
Conditions were very favorable for Merchandising & Handling in the quarter. ADM's growing global origination and export infrastructure moved large quantities of grain.
We also had record ADM export volumes from the U.S. In addition, the global merchandising team was successful through the quarter navigating the volatile markets.
Favorable conditions included a large U.S. harvest and strong international demand.
Earnings from Transportation operations improved on higher-barge freight rates and volumes. As you look at current market conditions, global supplies of corn, soybeans, canola and rapeseed remain dynamic.
Global supply of wheat is ample, though there is some regional dislocations and quality issues. South American farmers have begun harvesting their crops.
In North America, farmers are considering planting decisions. We're monitoring and will adapt to the many variables that impact global markets, including geopolitics, regional crop conditions and potential changes in export and import regulations.
Slide 10 is an operating profit analysis of our other business units. In the second quarter, profits were $212 million, up $34 million from the prior year.
Our wheat, cocoa and Gruma processing results were very similar to last year's strong results. Other financial results rose $33 million primarily due to reductions in provisions in our captive insurance subsidiary.
We are carefully assessing the evolving and sensitive situation in Cote d'Ivoire and the impact of the European Union's sanctions on our business. Our primary concern is the safety and welfare of our employees.
And we hope for a quick and peaceful resolution. Turning to Slide 11, the major components of our corporate line.
Market prices for our LIFO-based inventories rose sharply last quarter, resulting in a charge of $254 million compared to a charge of $54 million last year. Interest expense net is higher in the current year by $12 million.
During last year's quarter, approximately $21 million of our interest cost was capitalized in connection with the construction projects in progress. This has declined significantly this year as most of the assets have now been put into service.
Helping to mitigate this effect, interest cost on our long-term debt was down approximately $11 million as a result of debt retirements. We also recognized $55 million of unrealized gains on interest rate swaps which, as we have discussed in our first quarter call, are related to future debt remarketing.
Our corporate cost are up due mainly to a higher eliminations of minority interest income related to improved earnings of non-wholly-owned subsidiaries. Slide 12 shifts to the financial statement view and shows statement of earnings highlights fourth quarter.
Net sales and other operating income increased 32% to almost $21 billion due to generally higher average selling prices associated with higher prices for underlying commodities and higher sales volumes as global demand was strong. Gross profit increased $181 million or 17% this quarter due to improved volumes and higher average selling prices, offset partially by higher costs to acquire agricultural commodities and the $254 million of pretax LIFO charges discussed earlier.
Selling, general and administrative expenses increased 15% to $412 million due primarily to a higher employee and benefit-related costs. Other income increased $87 million to $176 million due in part to the gain on our Golden Peanut transaction, the unrealized gains on interest rate swaps and offset by higher expense for the elimination of minority interests, and I covered the changes in income taxes earlier in the call.
On Slide 13, we're comparing selected balance sheet highlights at December 31 against our June 30 balance sheet. Operating working capital has increased by $6 billion to almost $15 billion, principally on higher inventories.
Inventories have risen by about $5 billion due to a combination of significantly higher commodity prices and the seasonal buildup of inventory from the North American harvest. Inventory includes approximately $8.3 billion of readily marketable commodities as of December 31 compared to $4.9 billion at the end of June.
Total debt increased by $5 billion mainly from borrowings of commercial paper in money market lines to help finance the higher inventory balances. Shareholders' equity increased $1.3 billion during the past six months.
During the second quarter, we increased the size of our U.S. commercial paper program from $4.2 billion to $6.5 billion, and $4.3 billion was drawn at the end of the quarter.
We continue to evaluate options to further increase and diversify our funding sources, including the debt remarketing associated with the equity units we issued in 2008. We will evaluate these funding options in conjunction with our expected needs for liquidity including working capital to support our business and investments.
Although leverage has increased, we continue to have good financial flexibility to support both our ongoing business and growth initiatives. Slide 14 shows the significant items impacting our cash flows for the past six months compared to the prior year's six-month period.
Cash generated from operations was $1.5 billion, down slightly from the prior-year period. Working capital increased $5.6 billion in the past six months due to significantly higher commodity prices and higher inventories including the seasonal buildup associated with the North American harvest.
The increase in working capital was funded with about $5 billion in net debt increase. Investments in property, plant and equipment were $645 million for the past six months, significantly lower than the $939 million spent in the prior-year period.
This reflects the completion of the majority of our greenfield projects. We expect fiscal year 2011 capital spending to be approximately $1.3 billion to $1.4 billion.
And fiscal year 2012 spending is expected to be below fiscal year 2011 levels aside from any significant strategic investments. Also in the six-month period, we bought back 3 million shares for a total spend of $86 million.
In June, our equity units will convert to about 44 million common shares. Consistent with our objective to increase shareholder value, our intent is to continue to buy back shares to offset, within two years of the date of conversion, the impact of the dilution.
Of course, we will want to ensure our balance sheet remains strong enough to support both the underlying business and to undertake significant strategic investments. And that could have an impact on the timing and the number of shares we repurchase.
Turning to Slide 15, which depicts our financial return measure, comparing our historical four-quarter trailing return on invested capital against our trailing four-quarter weighted average cost of capital. As you can see, our ROIC [return on invested capital] was 10%, and our WACC [weighted average cost of capital] is currently running slightly below 7% for a 3% positive return over our cost of capital.
At this time, I'll turn the call back over to Pat.
Patricia Woertz
Thank you, Ray. John Rice, Steve Mills will join Ray and me for our question-and-answer session.
So operator, if you could please open the line for questions.
Operator
[Operator instructions] The first question will come from the line of Vincent Andrews, Morgan Stanley.
Vincent Andrews - Morgan Stanley
First, I just want to try to reconcile some of the statements you made about the ethanol business in the quarter. First and foremost, you talked about being well-positioned on corn, which is a carryover from last quarter as well.
How much longer is that well positioned going to exist? Because some of the other comments you made I want to make sure are relative to the industry versus you in terms of spot ethanol margins being about breakeven, so can we just start there?
John Rice
Sure, Vincent, this is John. When we started the quarter, ethanol margins were positive.
And as we kept going through the quarter, they kept getting closer to a breakeven standpoint. So right now, we're close to, on a overall industry basis when you look at that, fairly close to break even.
Now how the corn would come into play is, like we've mentioned in the past, it's always on a mark-to-market at the end of any given period. So we really have to kind of look at this over a little bit longer period.
Vincent Andrews - Morgan Stanley
And then the other thing I'm trying to piece out of it, is there a cost savings that you're getting from greater economies of scale from these plants that's part of this too? You put up a very big number in that segment this quarter, and I think lots of people are going to want to understand what type of number to put in going forward and whether they should even consider multiplying this by four.
John Rice
Well, I was just out visiting our Columbus plant, and I was very happy with how its operating and how the efficiencies are, and the group is still working on additional cost savings. And as we look at our metrics and what we looked before building this operation, we're very happy on the cost of this plant.
Operator
And the next question will come from the line of Ken Zaslow, BMO Capital Markets.
Kenneth Zaslow - BMO Capital Markets U.S.
You have the big seven projects that are out there that you guys have marginally completed. Can you talk about the return relative to cost on capital for these projects?
When do you think you'll be earning a return above the cost of capital for these projects, and what metrics we should think about?
Patricia Woertz
Well, I'll start, Ken, and maybe Ray or John want to jump in. I think you want to think about always our objective is to beat our cost of capital and in excess of that.
So we looked at that going into these plants. Two of the bigger plant projects, of course, are our two dry ethanol plants.
And that really depends on one's assumptions whether they be yours or the market's assumptions about margins associated with ethanol over the future. We like the long-term future of ethanol and we think that, that is not only why we put these plants in place but why we continue to run the size of our wet Corn Milling business the way we do as one of the options of our products from that.
So we still expect the returns on that business to be above our cost of capital over the long term. And again, it depends on your views about timing of the actual market.
John Rice
The one other thing I'd say too, is also on our two coal Cogeneration operations, they're both up and running. And we're happy with the early results on that, but we're also cognizant of the fact that one time for about a two-month period, natural gas got very cheap and at some of our operations, we're able to shut down our coal boilers and actually run natural gas at those operations.
So we're always looking at running them, whatever makes the most cost-effective operation at any given time.
Kenneth Zaslow - BMO Capital Markets U.S.
And then my next question is on cocoa and wheat, can you talk -- and you didn't you elaborate on what actually happened on the good side there. Can you just talk about, is it sustainable?
What actually happened in the quarter and how sustainable it is?
John Rice
We have been -- I think last quarter, we've been mentioning that cocoa margins have been getting better, have been improving. We're seeing very good demand on the powder side of the business.
So we've been happy and that seems to be the same going forward. And the Milling side, as pretty much everybody knows now that there is quality issues around the world.
And we are working very well within our system to make sure we have very good quality wheat working with our customers. We see the investment pretty steady going -- steady in the past, and we see that the same going forward.
Operator
And the next question will come from the line of Terry Bivens, JPMorgan.
Terry Bivens - JP Morgan Chase & Co
I just want to make sure I understand the discretionary blending picture a little bit here. Can you kind of walk me through that briefly?
And where do you think that goes, given some of the things you talked about this morning with the volumes, the exports, et cetera?
Patricia Woertz
Maybe I'll start a little bit with the update of the situation, Terry, of what I think you're referring to as higher blending levels, the E15, maybe just clarify it, is that what you meant?
Terry Bivens - JP Morgan Chase & Co
Yes and exactly.
Patricia Woertz
Okay. Back in mid-October, the EPA announced their approval of E15 blends for 2007 and newer vehicles.
And then they did another announcement mid-January approving E15 for model years 2001 and newer, so greater number of automobiles. We certainly support E15, but working -- not all cars is not necessarily widely accepted or at speed with which E15 will be within this structure.
So I think it will take some time to see higher levels of blend regularly sort of at the pumps, if you will. Maybe John, you want to comment on the export markets?
John Rice
The export market, as Ray mentioned in his comments, we are very competitive in the world. So that we keep seeing that increase especially with the high price of sugar.
Terry Bivens - JP Morgan Chase & Co
And you would expect that level of export to continue, say, over the next couple of quarters at least?
John Rice
If based on what we see today now, the price of sugar ways come down, things can change relative to the price of corn. But right now, yes, especially with the South American sugar harvest, pretty much complete and the ethanol industry is slowing down, down there right now.
Operator
The next question will come from the line of Christina McGlone, Deutsche Bank.
Christina McGlone - Deutsche Bank AG
John, I wanted to understand Oilseeds a little better. For one, I was confused a little bit about the mark-to-market because I thought usually, there's hedge accounting.
So I wanted to understand that mark-to-market issue and whether it comes back to you in future quarters. And then also, if you could talk about U.S.
crushed margins, because they initially strengthened as the calendar turned. But then, now they seem to have weakened and we have more clarity around biodiesel and the tax incentives, so you would think that crushed margins in the U.S.
would start to be stronger.
Ray Young
Christina, it's Ray. Let me address the mark-to-market one and John can address the margins in the future.
In our inventory valuations, there are certain inventories that we value at mark-to-market and there are certain inventories that we value at cost. And of course, most of them we have offsetting hedge positions on it.
So in the case of the Oilseeds business, we saw some mark-to-market timing effects, which primarily were related to certain inventories which we have to value at cost. And so, the offset was on the other side, which is basically the hedge positions which were mark-to-market, and we took losses on those.
Yes, overtime, these things will reverse, but it's going to be a function of pricing and inventory levels as well. So it's very difficult to determine when and the exact amount, but directionally, you're correct, overtime, this should reverse.
John Rice
And I'll answer the question on the North American crushed margins. Your read was absolutely correct.
We are seeing and we monitored our crushed rates accordingly to balance supply and demand. And what we see going forward with the mandate and the tax credit, we see biodiesel demand growing here in the last half of this year, the last three quarters of this year, and things are looking a bit better right now, totally agree.
Christina McGlone - Deutsche Bank AG
And can you explain, I think, Ray said that biodiesel in South America was weak. And I know you're expanding your capacity there.
So you can talk to that, is that short-term or what exactly happened?
John Rice
That was a short-term oversupply in the market issue. But as they keep growing their mandate, we see that not being a problem going forward.
I believe that's just more of a timing issue, quarter-to-quarter maybe.
Christina McGlone - Deutsche Bank AG
And then, just on Ag Services. If I think about the conditions in the December quarter, it seems like they're even getting better in March in terms of wheat dislocations, because now, there's less European milling wheat to compete with.
And I'm wondering if I'm reading that right, if we can think that the conditions we saw in December are as good or if not better currently?
John Rice
Well, as you know that's always tough say. Things are always dynamic.
They're moving. We have harvest, will be coming here this summer.
And so, a lot has to do with how people are inventoried. Did they overbuy?
But I think for the short term, here for the next couple, two, three months, I do agree that the U.S. has the most high-quality milling wheat in the world.
So I do expect wheat exports out of the United States.
Christina McGlone - Deutsche Bank AG
And John, are you seeing anything with Egypt? We're hearing about port disruptions and maybe revised LOC [limitation of costs] requirements from Egyptian traders?
Ray Young
We're monitoring that situation right now. I mean, there's nothing -- we do not have any boats in the port right now.
And anything we have going over there, we can always divert if the situation doesn't resolve itself here.
Christina McGlone - Deutsche Bank AG
Last year, you had a mark-to-market gain in the wheat and cocoa division, and I'm curious just going back to Ken Zaslow's question. If you had any sort of gain in this quarter or if this is just purely a function of good fundamentals?
John Rice
There were some mark-to-market effects, but it was immaterial from our perspective. And that's the reason why we didn't call it out.
Operator
And the next question will come from the line of Jeff Farmer, Jefferies.
Jeffrey Farmer - Jefferies & Company, Inc.
It sounded like you were very well positioned in the December quarter, especially with corn. Is it fair to assume that a big chunk of that positioning rolled into the March quarter?
John Rice
No. I'm sitting here trying to think exactly how to answer that question.
We buy corn as we make our sales, and timing difference can come on how you bring your raw material cost to market.
Patricia Woertz
Jeff, we don't provide guidance, so we're really only talk about current conditions, not expectations for our quarter's results or positioning.
Jeffrey Farmer - Jefferies & Company, Inc.
And then in terms of your contracted sweeteners, you mentioned that, that was up 25%. Can you give us some sense of what percentage of your volume in the Sweeteners & Starches segment that would represent or actually falls under that umbrella of the contract?
John Rice
Somewhere between 50% to 60%.
Jeffrey Farmer - Jefferies & Company, Inc.
And then just finally, obviously, the HFCS pricing has been reset at a higher level, so the discount of sugar is going to narrow. Based on past experience, what, if anything like this means spot demand in coming quarters?
I guess I'm really trying to get at -- could demand or volume growth begin to trail off now that, that delta between again HFCS and spot sugar has narrowed?
John Rice
It has not narrowed enough yet for people to switch out. And we keep seeing more of the demand coming from Mexico.
As Mexico blends high fructose, and then ships their sugar up to the United States. So that delta hasn't narrowed enough to affect it.
Operator
And the next question will come from the line of Bryan Spillane, Bank of America.
Bryan Spillane - BofA Merrill Lynch
Just a couple of follow up questions on Corn Processing, the first one is just the differential in the profit trends, I guess year-on-year, between BioProducts and Sweeteners and Starches? And I guess, my basic question is, if you are well positioned in Corn, and the pricing and supply-demand dynamic in Sweetener and starches was so good, why the profitability wasn't better compared year-on-year?
Is it just purely a function of the transfer between Sweeteners and Starches and BioProducts, or is the corn you're using in Sweeteners and Starches more, I don't know, higher cost than the corn in BioProducts? I was just trying to get a better clarification on that.
John Rice
Annual contracting, first of all, and then last year, there was a different contract or transfer price between our Sweeteners and Starches division over to our BioProducts. So that was probably the biggest difference there.
Bryan Spillane - BofA Merrill Lynch
So the transfer price is probably the bigger difference?
John Rice
Yes.
Bryan Spillane - BofA Merrill Lynch
And then just in terms of the HFCS contracts for calendar 2011, are the tolling rates up 25% or is that 25% for the contracts for the customers that don't toll? I'm trying to get a sense for whether some of your customers that have tolling arrangements are going to see that same rate of inflation or not.
John Rice
We don't necessarily break everything down that way to everyone.
Bryan Spillane - BofA Merrill Lynch
I was under the understanding that there were some customers that actually had two-year contracts last year, is that true?
John Rice
Yes.
Bryan Spillane - BofA Merrill Lynch
Okay, so they wouldn't necessarily have seen much of a change in their contracts or are there escalator clauses, anything that, that would've caused the rates to go up?
John Rice
It depends on the contract. Most contracts it varies.
Operator
The next question will come from the line of David Driscoll, Citi Investment Research.
David Driscoll - Citigroup Inc
Can you talk about your expectations for a volume improvement in the Starches and Sweeteners operations? The way I looked at it is in certain areas within Starches and Sweeteners, this is not just a fructose question, we have not actually seen a full rebound back to 2008 levels.
That's my impression. Is that impression correct?
And would you expect volume growth in calendar 2011?
John Rice
You're correct, David. We're still not back to the 2008 levels, and I think it's tied to the economy.
As the economy keeps growing, I think our volumes will keep increasing.
David Driscoll - Citigroup Inc
So it's generally a positive for -- the way I want to phrase this whole situation up, this contract pricing went very well and you're looking for the continued volume growth in 2011. Is that fair?
Ray Young
When it comes to the Starch business, the way we see today, yes.
David Driscoll - Citigroup Inc
On the Cocoa and Wheat and Other segment, last quarter, you were $46 million in profit. Ray, John, you both made it sound like the profit margins in these businesses from last quarter to this quarter were unchanged.
I mean, the sequential change in profit is absolutely enormous. Can you just help me out in understanding why?
I mean, there's some of the -- I mean it's a good news, because it's such a big profit number but there's a little bit of whiplash going on here in trying to make the models work. How do you go from $46 million to $200 million?
Ray Young
Well, I guess part of it is just due to the mark-to-market timing effects that kind of distorts some of the numbers from the prior quarter. When we look at the fundamental business in the Cocoa business, we are seeing improving pressed margins in the business.
And so, from our perspective, we believe that the business is actually running well and the trend is actually favorable for business as we see it.
David Driscoll - Citigroup Inc
So then what gives rise to those big mark-to-market? Can you just describe the situation that we all should be looking for, so that we're not punching in $200 million in profits and then next quarter it's $46 million.
Ray Young
Well it's similar to the Oilseeds, there is going to be certain effects relating to how we mark their inventory relative to how we mark the offsetting hedge positions. For Cocoa, it's a little bit complicated.
There's some other complexities in the Cocoa accounting, which is probably not worth the while talking about today. But all I'm saying is there are timing effects.
And as a result, when you see volatility in terms of prices, you do see some effects going through the reported statements.
David Driscoll - Citigroup Inc
Ray, if there's any way we could follow-up on this one, I'd appreciate it, because I'm having a hard time with that segment. So last question, Pat, you said E15, I think you made comments and you said that this is going to be a slow build.
I want to translate that comment in saying that E15 is not likely in calendar '11. This is something like a 2012 event at the earliest because of all the state gasoline regulations that have to change.
Am I saying, basically, the same thing that you were saying earlier?
Patricia Woertz
Well, I think it's a slow go. Maybe I'll ask John for a recent update if customers are having any pull.
A few customers have said that they are interested and even buying, but I think as a wholesale infrastructure basis, so to speak, it's going to be slow.
John Rice
Yes, I agree with what Pat said. But it is positive news to have out there just as the power fleet keeps getting more turned over.
We should see more of our customers put up an E15, especially with the price spread we see right now.
Operator
And the next question will come from the line of Todd Duvick, Bank of America Merrill Lynch.
Todd Duvick - Bank of America Corporation
I wanted to ask about your debt structure, if I could. The last time the industry saw a similar run up in commodity prices, you had a working capital build.
And I think, at that time in 2008, you decided to term out about $3 billion of debt in the long-term debt capital markets. And so far, this time, you have not issued any long-term debt.
And so, I'm wanting to know if you can talk a little bit about what may be different today? Do you see greater visibility for the direction of commodity prices?
And how are you thinking about the long-term debt capital markets?
Ray Young
Yes, Todd, I mean right now, as we are looking at our capital plans, we're analyzing, of course, where we think commodity prices are going. We're analyzing where we're heading in terms of potentially strategic investments.
Of course, we have a debt remarketing decision coming up in front of us, which we've made no decision yet, so far. And so, there's a number of variables that we're analyzing right now in terms of determining what our actual capital raising strategy will be.
This actually will be something that we'll be working on, frankly, over the next several quarters. And so, the important thing is we do have a lot of financial flexibility.
We've got a lot of funding options, so stay tuned. We'll update you as we start moving through some of these different options.
Todd Duvick - Bank of America Corporation
And then, I guess related to that, you have, as a company, talked about your acquisition appetite over the last year or so. And I'm just wondering if the elevated short-term debt level, if it somewhat tempers your aquisition appetite in the near term or maybe for larger acquisitions?
Can you comment on that?
Ray Young
Yes, I mean, a lot of our short-term debts is really designed for working capital funding or higher inventory balances associated with the seasonal buildup. I mean, we will see our inventories come down over the next couple of quarters as we sell off some of our North American stock.
As you know, there's a cycle in terms of our inventory balance as against our short-term borrowings. So from our perspective, we believe we've got flexibility in order to enter into strategic investments.
Patricia Woertz
It's always important, Todd, to keep our balance sheet strong, and we always want to undertake the underlying business. We don't feel though that, that will hamper our ability to do our M&A.
Operator
Your next question will come from the line of Christine McCracken, Cleveland Research.
Christine McCracken - Cleveland Research
You guys mentioned several times the tight global balance sheets for Oilseeds and Corn. I'm just wondering, are you seeing any signs of rationing of demand at the higher levels?
We've seen a few disease outbreaks in Asia that could impact demand, but I'm just wondering, like big picture, if you're seeing anybody kind of pull back at the higher prices?
John Rice
Overall demand, we've seen maybe a little bit of slowdown in China but they also had very large arrivals in the previous month. We're also coming into the Chinese new year.
But right now, we're really seeing more people looking at substitution maybe more pea and wheat instead of corn, DDGs [distiller's dried grains] instead of corn, lysine instead of soybean meal. So we're seeing more of that, but I guess the overall demand still seems to be very good.
Christine McCracken - Cleveland Research
And just on the Argentina situation, I know it seems to happen every year with these port strikes, but it does sound like it's slowing things down into some of the crushing facilities down there, and kind of mucking things up. I'm just wondering, is this kind of a short-term situation that you don't expect to have a material impact on the quarter?
Or is it just too soon to say?
John Rice
I think you are right on your first comment. That seems to be an ongoing situation of fluid down there.
That always seems to work itself out. I mean, I'd say I think that's the best answer I can give at this time.
Christine McCracken - Cleveland Research
And nothing tied to the smaller crop than in Argentina that would have any material impact on your outlook for South American margins?
John Rice
Well, it's going to depend on the size of the crop, but February weather is also still very important in the Argentine crop, and they have been getting some rains lately.
Operator
And the next question will come from the line of Ann Gurkin, Davenport.
Ann Gurkin - Davenport & Company, LLC
I wanted to start, just to make sure I understand, were there any pullthroughs of future orders into this quarter that would impact the second half? Is there any material movement in the business that we should be worried about?
John Rice
No, there was no -- nothing that you mentioned in terms of pulling ahead of orders or pulling ahead sales. No.
Ann Gurkin - Davenport & Company, LLC
On the Corn side, John do care to comment at all on expectations for you as plantings of the corn crop or yield? Do you have any insight?
John Rice
No. We have opinions but I guess right now is not the time to share.
Ann Gurkin - Davenport & Company, LLC
In terms of swing volume for the wet mill, can you comment where that excess volume? Is that going towards sweeteners or ethanol right now?
John Rice
Just due to the pickup in the Mexican shipments, we tend to see more sweetener shipments to Mexico. And it tends to balance out the peaks and valleys a little bit more than what we've seen in the past.
So it's still very fluid, but it's not unusual to be shipping more steady volumes year-round to Mexico. In the United States, it still tends to peak a little bit more in the summer.
Operator
The next question will come from the line of Ian Horowitz, Rafferty Capital Markets.
Ian Horowitz - Rafferty Capital Markets, LLC
Ray, just a quick question, you mentioned the start-up charges at the PHA and the propylene glycol facilities. Do you have those broken out at all?
Ray Young
Well, they're pretty small. I mean, I'm not sure, where there's a -- in terms of breaking out between the two, the different plants, no.
I mean, I think typically, we referred to those as start up costs. Again, they're pretty small, and they're going to be phased out with the remainder of the fiscal year.
So from our perspective, fairly insignificant.
Ian Horowitz - Rafferty Capital Markets, LLC
I understand and I'm just trying to look from the other side of that perspective, especially on the PHA side.
Ray Young
We're not going to break it out. I mean, I think that from our perspective, again, the key is that they're being phased out, the startup cost.
Ian Horowitz - Rafferty Capital Markets, LLC
And then, on the Ag Services segment, a fantastic quarter to say the least. I'm just wondering from a throughput standpoint, will any growth that we have kind of going forward, come more from a pricing and a rate basis rather than a volume or utilization basis?
I mean, were these assets basically maxed out throughout the quarter?
John Rice
We did see record exports, and we have increased the capacity at our Destrehan facility. And we have added another export elevator that we did have idle here about two years ago.
We brought that online last year. So we had very good volumes through it, but a lot has to do with the weather, the type of ships, when the barges, when the railcars come, the group did a fantastic job on handling a lot of the logistics, and that helped with the volume.
Patricia Woertz
And you might want to keep in mind that's a global origination and transportation network as well. And so I think that allows for our utilization of those assets and we have added more.
Ian Horowitz - Rafferty Capital Markets, LLC
Sure, so when we look out to build our forecast, we can still see a volume increase going forward.
John Rice
I think it depends on where the shipments are coming out. If it's coming out of United States, South America or Europe.
You have to find out who's the most competitive at any given time.
Ray Young
I mean, it's normally seasonal -- there's certainly seasonal pattern in the U.S. harvest, and I mean, normally, if that would be translating to higher volumes through the U.S.
network there as well.
Ian Horowitz - Rafferty Capital Markets, LLC
John, can you kind of comment on the 2011 Ethanol business? Kind of what do you think, I know it's kind of early in the year but how much of the business do you think is going to be supplied by financial versus physical?
And then, kind of on a follow-up to that, how do you see the business right now? Is it very prompt?
Has it elongated at all? And is it different than we've seen in recent years?
John Rice
I don't think much of it is going to be financial. Just currently, depending on the markets here, and you could be easily $0.10 to $0.20 for getting the blender's credit underneath unleaded gasoline.
So people are going to still blend as much as they can. I think, maybe a little bit more of the dynamic we're seeing this year is we've had very poor weather in the East so we have seen a little bit of slowdown in demand there.
But if overall, we still have a little bit extra capacity in the market, so that is going to put a damper on the market. But long-term, as E15 comes more into play, exports are there.
We're still very positive on the business and we're very happy with the efficiency of our plants. And the market still is a very, very spot buyers.
You'll always get some people wanting to buy a little forward but it's very spot.
Ian Horowitz - Rafferty Capital Markets, LLC
Do you have any understanding or estimate on how many RINs [renewable identification numbers] are available this year?
Patricia Woertz
About 2.4 billion RINs are available. That could be used to offset future purchase.
Ian Horowitz - Rafferty Capital Markets, LLC
I know that the E15 uptick is going to be kind of elongated or slower, however you want to put it, but what percentage or what volume of gasoline does 2001 or earlier represent currently?
John Rice
Well it's a car. Ray has a better handle, I think the fleet turns over, every...
Patricia Woertz
I think it's about 60% of the fleet. I don't know if I have that number handy.
Ray Young
Yes, and I think, there's been a lot of studies that sounds about right. And I mean, as you would expect, I mean, it's going to quickly decrease.
I mean these cars are getting pretty old, so they just kind of quickly decrease over the next three or four years.
Ian Horowitz - Rafferty Capital Markets, LLC
So right now, 60% of the fleet in 2001 or earlier and would that kind of represent a linear percentage or...
Patricia Woertz
The newer vehicles are the larger number. I think it's greater than 50% but I -- sorry, what was your question Ian?
Ian Horowitz - Rafferty Capital Markets, LLC
Would that represent a similar percentage of the gasoline pool? Or do newer cars drive further miles?
Older cars are kind of local commuter or not, I mean it's...
Patricia Woertz
The answer is yes, and we have those numbers. I think they're on the renewable fuels.
The association website, but I don't have them handy. We can get that to you, Ian.
Operator
The next question will come from the line of Robert Moskow, Credit Suisse.
Robert Moskow - Crédit Suisse AG
You guys have given us a lot of possible places for allocating capital, and some you've already done, and some that might be that in the future. You've got grain elevators in South Dakota, Nebraska.
You have acquisitions, which I think will be in emerging markets and oilseeds. If you took over the other part of Golden Peanut, you also talked about buying back stock and then remarketing the debt.
Can you just give us, how do you look at the return profile of these different possibilities? And I know you say want to update us later, but I mean, is it fair to say anyway that the acquisitions would be higher return investments with maybe a longer-term profile, and maybe grain elevators in South Dakota, Nebraska, I mean, I imagine those are safe bets but lower return ideas.
Patricia Woertz
Maybe I'll start, and Ray can jump in. I think your theory is actually kind of right on, that you could look at different investments over a different time frames and chunk them into sort of short and sooner or lower and farther and more strategic for the emerging markets.
So we look at all of that along with always comparing to kind of a share buyback as another option. So when you listed those off, we're nodding yes, because they all fit into the strategy of filling out the global footprint, which includes both the global network, which continued to add to storage transportation, et cetera, in the Ag Services arena.
And then also the emerging markets in our 7% to 10% growth we want to do in crushed.
Ray Young
Yeah, I think it's fair to say that we have a portfolio approach towards growth. They weren't simply not going to M&A our way to growth.
Yes, we found that there's been a lot of fundamental investments, smaller investments that actually tend to have very, very good returns and very low risks. And that's a basic foundation of how we're growing ADM from a profitability perspective.
And so we're going to continue to allocate capital to these areas, recognizing that some of the strategic investments that we're going to look at -- that we're looking at right now, we may have a very different risk tolerance because strategically, we may feel that we need to enter these types of markets or these types of areas. And so there's not one-size-fit-all approach to towards how we evaluate investments.
It really is a portfolio approach that we're taking to this.
Operator
[Operator Instructions] We do have a follow-up question from the line of Christina McGlone, Deutsche Bank.
Christina McGlone - Deutsche Bank AG
John, I wanted to ask how you thought oilseed processing utilization rates will progress as we move through this calendar year. And I guess, as we look to the fall, are we able to get back to the 90%, 95% utilization rate?
John Rice
I think that's going to depend on the South American harvest, and how that comes. The protein demand, as you know, has not been real good in the United States, but we have with this Biodiesel demand increasing, it could make the crush rates go up and actually make our protein meal more competitive to the world market.
So I think we still have to see but the possibilities are there, yes.
Operator
And the next question is also a follow-up question from the line of Vincent Andrews, Morgan Stanley.
Vincent Andrews - Morgan Stanley
John, I just wanted to ask you, in the last Ag Services cycle, your balance sheet and credit availability, and maybe it was more towards the tail end, but it was a distinct advantage. Is that the case here as well?
John Rice
I'm sorry, I didn't understand the question.
Vincent Andrews - Morgan Stanley
My question was, the size of your balance sheet or your commercial paper access and so forth during the last sort of Ag Services boom was a distinct advantage to you relative to some of your competitors who don't enjoy the same type of access. Is that as impactful situation here as well in the current environment?
John Rice
I don't think it's as impactful this time as last time. We haven't seen that.
But still when you have commodity prices running up and people having to make margin calls, it is tougher for them to hold inventories.
Vincent Andrews - Morgan Stanley
And then just another follow up on that same line, in the last cycle, freight costs were very high and many believe that there were sort of a freight arbitrage of you guys having long-term freight contracts, of being able to charge the spot. And now freight is very low.
So is that actually a disadvantage to you if you have longer-term contracts or have you been able to sort of change your contracts around?
John Rice
We're always looking at hedging freight, so we're always monitoring that market on a global basis. And we're always charging it out to customers at market prices, so I wouldn't say it's an advantage or disadvantage.
Vincent Andrews - Morgan Stanley
And then lastly on this line, is there anything in particular that was positive about this particular Ag Services cycle that's unique to today relative to something that we didn't see last time around that you want to call out for us?
Patricia Woertz
I think volumes continue to be something we talked about, record exports in the U.S. and our global system moving a lot of grains.
I think this quarter generally should beat that discussions relative to the total earnings power of ADM's global network. It's global demand and it's a global network that's ready to serve that.
Vincent Andrews - Morgan Stanley
And then lastly for Ray, just on interest expense. Is this quarter, assuming commodity prices flat line from here, would this be a run rate or is it going to trend a little higher from here?
Ray Young
Well, as you know, I mean, we've increased our short-term borrowings so this is going to be a little higher interest expense, but it's going to be insignificant in the whole scheme of things. So from our perspective, whether this is a run rate or not, I mean, it's probably going to be indicative.
Operator
This concludes today's question-and-answer session. I will now turn the call back to Pat Woertz, Chairman and CEO for closing remarks.
Patricia Woertz
Great. Well, thank you, everyone for your time today.
We appreciate all your questions. Slide 17 shows our upcoming Investor Conferences, and we certainly look forward to talking with you on our next call on May.
Bye now.
Operator
And ladies and gentlemen, this concludes today's conference call. Thank you again for your participation.
You may now disconnect. Have a great day.