Jul 24, 2008
Executives
Mark Haden - Investor Relations Alberto Weisser - Chairman and Chief Executive Officer Jacqualyn Fouse - Chief Financial Officer
Analysts
Christina McGlone - Deutsche Bank Christine McCracken - Cleveland Research Robert Moskow - Credit Suisse Ken Zaslow - BMO Capital Markets David Driscoll - Citi Vincent Andrews - Morgan Stanley Diane Geissler - Merrill Lynch
Operator
Good day everyone and welcome to the Bunge Limited Second Quarter Conference Call. Today’s call is being recorded.
At this time for opening remarks and introductions, I’d like to turn the call over to Mr. Mark Haden, please go ahead sir.
Mark Haden - Investor Relations
Thank you, Steve and thank you everyone for joining us this morning. Welcome to Bunge Limited second quarter 2008 earning’s conference call.
Before we get started I wanted to inform those of you who may not have seen it in the press release this morning that we have prepared a slide presentation to accompany our discussion of the second quarter results. It can be found in the Investor Information Section of our website, www.bunge.com under Investor Presentation.
Reconciliations of non-GAAP measures disclosed orally on this conference call to the most directly comparable GAAP financial measure are posted on our website in the Investor Information section. I’d like to direct you to slide #2 and remind you that today’s presentation includes forward-looking statements that reflects Bunge’s current views with respect to future events, financial performance and industry condition.
These forward-looking statements are subject to various risks and uncertainties. Bunge has provided additional information in it’s reports on file with the SEC concerning factors that could cause actual results to differ materially from those contained in this presentation and encourages you to review these factors.
Participating on the call with me this morning to discuss our second quarter results are Alberto Weisser, Bunge’s Chairman and CEO, and Jackie Fouse, Bunge’s Chief Financial Officer. Let’s go to slide #3 and now I’ll turn the call over to Alberto.
Alberto Weisser - Chairman and Chief Executive Officer
Good morning everyone. We are very pleased with the second quarter results; Bunge’s strong performance is a reflection of our skilled team and the value of our global and integrated network of operations.
The last four quarters have certainly being a unique and challenging time, participants in the food and agribusiness production chain. The market has been characterized by volatility and high prices caused by increasing demand, tightening supply, high energy prices and temporary disruptions in some regions.
To these environments Bunge require significantly more working capital to serve both farmers and customers and effective risk management is essential. The agribusiness and food market is dynamics because it is global and connected to many fundamental elements of the world economy.
We will always see shifts from period to period as the market through its normal functions adjusts the prevailing conditions. However, the long term trends that drives demand growth in our industry remains steady, the gross population is increasing and living standards among the billions of citizens in developing economies continues to improve.
As demand increases the world will need largest supplies of corps and smooth global trade. Customers will look for strong suppliers that can provide broad product portfolios and flexible global service, consumers will see greater options and affordability in their food purchases.
We see Bunge playing an important one that generates value for shareholders and benefits for all other stakeholders. We can manufacture fertilizer for farmers, so they can produce larger crops on less land acts a physical link among regions that enables the effect of distribution of commodities and process products efficiently and safely so food generally is less expensive for the end consumer.
Over the past eight years as a public company we have invested billions of dollars, so we can serve this role better and profitably. We are created a more global integrated and balanced business that can capitalize on opportunities in numerous geographies, provide customers with broad range of basic and value added products and which has performed well in a variety of market conditions.
We see the positive results of these long term investments in our recent earnings. Our plan combination with corn products is the next logical step.
As slide #4 shows the combination with corn products will create a more global company with greater opportunity. Building on corn products asset base, Bunge will be able to expand its integrated operations into promising markets such as Mexico, Columbia, Korea and Pakistan, where today we have either a small presence on none at all.
Similarly, corn products will be able to leverage Bunge’s business in places like India and Europe where the company does not currently operate to build local operations or to import higher value products. Of course in North America, Brazil, Argentina and China our combined operations will create a stronger presence.
As you can see on slide #5, corn with milling is a complimentary value change, it fits very well with our existing business and by adding it to our operations, we will able to generate additional value from our supply chain and from distribution among other areas. When we established our focus for synergies and incremental profit prior to signing the merge agreement we only included operations in which we had good visibility primarily in US and Brazil.
We believe that as we integrate our two companies additional opportunities should emerge. The alliance we already have in Brazil supplying the bakery industry is a good example of how we can generate incremental value, we have every reason to believe that we pursue similar efforts in all places.
We are really excited about this combination and see it as another transformational step for Bunge adding another platform for growth. Now, I would like to turn the call over to Jackie, who will take you through the second quarter results and outlook.
Jacqualyn Fouse - Chief Financial Officer
Good morning everyone, thank you for joining us on the call today as Mark mentioned you can follow us along with some slides on the webcast. I’ll start my comments with slide #6.
Buying growths for the quarter was a little bit more moderate versus the first quarter of this year, that remains quite solid and I would remind you that we compare to a very strong Q2 and ’07 where the fertilizer growth rate were in excess of 50%. So, the fertilizer growth was slightly negative in total for Q2 and I’ll talk a little bit more about that in the segment results.
Profit growth about the EBIDT and net income levels continues to be strong as margins remain high and we’ve performed well in all business units. Our effective tax rates remains in the guidance range of 24% to 28%.
Looking at the segment results for the quarter, agribusiness results were led by oilseeds processing, the grain and oilseed distribution and grain origination also performed particularly well. Agribusiness results also benefited from the $117 million of the transactions tax credit that was booked in the quarter in that segment.
Gross margins in almost all regions of the world remained good and the fundamentals are very solid. Fertilizer posted strong retail volume for the quarter driven mostly in corn and crop demand but these are offset by reduction in wholesale volume versus ‘07 as a result of inventory restocking last year.
Food products overall performance continues to improve versus last year, edible oil volume growth was solid, but was partially offset by lower volumes in wheat milling due to Argentinean flower competition in Brazil. Profit growth was nevertheless good, driven by good margins in wheat milling and edible oils in many geographies continue to benefit from price increases that we were able to take last year though certain parts of the world are feeling some pressure there and there is a bit of a lag with respect to that as we see continued high crude oil process in that segment.
The results in food products also benefited from the Toronto ramp sale and the transactional tax credit booked in the quarter. With respect to balance sheet, we continue to be very focused on managing our balance sheet and working capital as we continue to see a volatile price environment.
But working capital is up over a $2 billion since year end all this is in readily marketable inventories and debt is only up about $1.2 billion as we are generating stronger profits and stronger funds from operations before working capital changes. Equity grew by $1.5 billion and our cash stock improved about 5 days versus the end of the year and about one day versus the year end ’07 cash cycle number.
Looking back to the time the company went public the growth in the business has managed with an average strengthening balance sheet, so you can see the shareholders equity has been growing faster than debt, faster then working capital, faster then sales and our gross debt has been growing slower than operating working capital and sales. Looking at the cash flow for the quarter in the six months ended June 30, as already mentioned strong funds from operation before working capital changes has been driven by better profitability, so we are earning more money on the capital prior to commit to do that.
Cash flow from operations was negative for the quarter and for the year-to-date due to the change in working capital but less so than last year. Given the commodity fast movers during Q2 we think are relative performance as demonstrated by our cash stock flow performance, and our cash flow performance has been good and we remain very focused on this issue.
You saw in the quarter that we spent a little over $200 million in CapEx and some of the major projects that we have going on there include sugar projects in Santa Juliana, a plant in Russia, expansion in Tianjin, and a number of fertilizer projects. So, continuing to invest in our infrastructure and our core industrial assets.
Looking at financial liquidity as of the end of the quarter and these the numbers that you will see on the slide in the web cast slide #11 show availability only under committed facilities we obviously have other sources of liquid funds that this one is a very straight forward one to look out, well strong financial liquidity at the end of the quarter about $1.9 billion and this is within a quarter in which striving process were up 34% from the end of Q1, to end of Q2, corn up 30% and wheat was down about 10%. So, even with the price hikes of June we ended the quarter with a strong liquidity position and as we think process come of some what as you know during the month of July.
So, for that liquidity possession has improved even since the end of the quarter. Our focus for the reminder of the year is to refinance a $1 billion revolving credit facility and $500 million bond maturity that takes place later this year.
With respect to the outlook for the reminder of the year, as Alberto mentioned in his comments the markets fundamentals remain quite solid. We expect good harvest in both the US and Europe.
We continue to see the given levels demand and the demand supply dynamics that acreage needs to expand in South America to ensure surplus. So, process will have support that acreage expansion.
We expect fertilizer fundamentals to continue to be strong and in our food product segment, we expect to continue to show improvement there. There are some challenges still ahead of us, they are the same ones that we have spoken with you about before the Brazilian Real continues to be very strong.
We have to be attentive to managing our cost base in Brazil. Its also the case is strong Real and the higher input cost for corps will pressure Brazilian farmer economics.
We also are seeing higher raw material costs in fertilizer and could put pressure on those margins and edible oils as well for managing that very carefully. As you may have also seeing with respect to the latest SG&A forecast that high agricultural commodity prices may start to put some pressure on demand growth the latest forecast for the ‘08 ‘09 cycle are up 4% for vegetable oil and that 1% for meal.
So, continued growth in demand but it slightly slower rates than we saw for the previous cycle. As we’ve also are seeing this year government policy changes can disrupt price loss.
So, with that we have increased our full year guidance from $9.35 to $9.65 a share to a new range of the $11.60 to $11.90 a share the net income increase of about $300 million and we maintain the effective tax rate guidance range of 24% to 28%. So with that I will open the call up for Questions and Answers.
Operator
(Operator instructions). We will take our first question from Christina McGlone from Deutsche Bank.
Christina McGlone
Good morning.
Alberto Weisser
Good morning, Christina.
Christina McGlone
I guess first questions Jacqualyn, following on your agribusiness outlook and the volumes in the quarter where should we think about volumes demand versus cross margins kind of in your major regions, how should we think about that as the year progresses?
Jacqualyn Fouse
Well, I think we will continue to see very solid fundamentals for the remainder of the year if you go back and look at the same period of last year I think you will see that the growth rate in agribusiness the quarter in ’07 were pretty strong around 10% and I believe for the six months they are around 12. So, the fact that they are bit more moderate in this quarter compared to last year I think the comp is little bit tough.
So, I think we would expect to see them closer to our stated long term growth range for the second half of the year. That being said, we are seeing little bit of pressure on demand so, you could have a point or two impact there.
Alberto do you want to add something.
Alberto Weisser
So, the crossing margins are solid Christina I think that we have to always remember is that so much of the growth is around the growth, so much of the growth after the globalization really started in 1990, we have a significant additional demand from the developing countries and so, we see a lot of the strong demand, I think even the 1% of the USDA is amazing when you think about the high prices that we all have out there.
Christina McGlone
And so, basically agribusiness is kind of shifted some being driven by maybe at this location opportunity and the merchandizing function, few all of the processing is that correct that what we’re seeing today?
Jacqualyn Fouse
Well, in terms of the relative over performance is it’s probably been a bit stronger in oil seed processing piece of the agribusiness but the distribution results are also still very good as our grain origination, so --
Alberto Weisser
In fact, in this quarter pretty much everything worked very fine with these dramatic increase in prices the high volatility this is exactly the moment where the companies like us are well positioned we have to have the credit lines we have to be ready to serve everybody. So, I was amazed it was obviously stronger then we excepted how well all the business units worked, it was grain origination, it was grain oil seed I would not highlight one specifically, it was everything that was working very well.
Christina McGlone
Okay. And then, shifting to the fertilizer and farm economics in Brazil, what do you, I think, before you had guided 5% to 7% fertilizer volume growth I am not sure if that was Bunge or the industry, is that changing at all given where farmer breakeven is and whereas to having prices that’s fall in to very recently I think farmers would still plan to breakeven but I am not sure if that’s impacted by the fact that they are doing it forward so its more of a negative, can you may be touch on that breakeven level and farm economics, please?
Alberto Weisser
Yeah, the farm economics are fine for the farmers. The industry expect it still to grow 5 to 7% or 5 to 6% that’s the figures from ANDA and the farm economics are good.
You have to remember that for the expansion of the agriculture new land, which we expect to happen something like around to 5%. Soybeans and (inaudible) also have to be at the level above $12.50 per bushel using CBLT and so that’s where the prices are above that level.
So, we see continue of very strong interest from the farmers to expand.
Christina McGlone
Okay, thank you. And, then just last question Alberto, can you talk about Argentina, now that tax was, I guess unexpectedly repelled, what’s going on with that government, are we going to see an energy crisis, is it still going to devalue and how are you preparing yourself for that?
Alberto Weisser
We are very pleased that it was settled in Argentina that the situation was settled in for our global trade in the farewell way, obviously we suffered in this quarter and doing whole of this process in Argentina and I think it will, the market adjusted self issues like energy we have around the world in other countries, we one way or the other we always found a way to adjust ourselves to that. I’m hopeful and I’m positive about hot it evolved.
So, it ended up at the moment being better than we even hop so I’m happy that we see in all the floor of Argentina also come the products out of Argentina.
Christina McGlone
Okay, thank you.
Alberto Weisser
Thank you.
Operator
Our next question will come from Christine McCracken from Cleveland Research.
Christine McCracken
Good morning.
Alberto Weisser
Good morning, Christine.
Christine McCracken
Just on your incremental increasing guidance here, you know, its only been a couple of weeks since you raised it significantly already what change in that period of time that gave you the confidence to raise it here?
Alberto Weisser
I think that the difference is first we performed very well, so, in the quarter we had also some long time items and we are getting closer to the time where the Brazilian farmers are giving signs of how they’ll perform and how they’ll buy, the commodity prices are still high and also the fertilizer prices stayed high. You might remember we mentioned that there is upside if the condition stays the way they are, and the conditions are the state positive.
So, these are all if you add them all together they give us the confidence that we will be able to perform like we will indicate. In addition also we are especially under corn crop in US, we are deeper into the session in a season.
So, we have a little bit more visibility and there is less worry about the weather at the moment, there is still long way to go until the end of August. But, all of this gives us some more confidence that we will perform so well until the end of the year.
Christine McCracken
You are saying that crop prices stayed high but they have felled off pretty hard here in the last couple of weeks, is that affecting your outlook even though it changed or?
Alberto Weisser
I think probably it is even positive, because they are at the level where they are fine for the fertilizer at these prices, and by coming off there is less pressure on working capital, there is also relief for the final customers, to be very honest I’m happy that the prices came a little bit down. Because it was tough out there.
Christine McCracken
Then just on your comments on sales look to be shifting forward in fertilizer at least on the retail side, you know, typically that’s affected the timing a bit in that fertilizer businesses, is it maybe weakening outlook at all for the second half or is it that maybe even incremental to what your expectations are around fertilizer sales going forward?
Alberto Weisser
We are very confident about the second half and we are looking into next couple of years in this area, the affect that we had now two years in a row ’07 and ’08 we are so much will so to the saving farm as in corn at the beginning of the year, it’s probably more related with effect that the farmers anticipated that the prices are high for commodities and there was a risk that it would come down like they happened, also the fertilizer prices would continue to increase. So, I think the farmers took a very good decision about buying a little bit earlier.
Now, because the farmer economics are positive we will see a good second half. Now, longer term we would expect that apparently purchasing power or the purchasing power of the farmers would go back to a more normal situation like 40%, 60% in the second half, one-third, two-thirds, so the last two years has been a little bit different.
Christine McCracken
Okay. I will be back in the queue.
Thank you.
Alberto Weisser
Okay, thank you.
Operator
We will move on to our next question from Robert Moskow from Credit Suisse.
Robert Moskow
Thanks, good morning and congratulations.
Alberto Weisser
Thanks. Hi, Rob.
Robert Moskow
Hi. I had a question about the inventory that you are holding, you know, obviously the value of those inventories are lot higher than they were a year ago because commodity prices have risen but just in the last month commodity prices are falling maybe corn is falling a lot faster than soy, but does that have any implications for your earnings power in the back half of the year, is there any risk that you bought soy at one price and then you have to sell at a lower price later on?
Thanks.
Alberto Weisser
No, it all because I don’t see now we always hedged so fast as metal if it is going up are down, the positive of prices coming down is there is more, clearly, if it stays like this we are going to have a positive cash flow. So, let me tell you I’m happy where it is, so, I don’t see any significant risk on the earning side.
Robert Moskow
Right. And, second question, there was a small news items saying that you are going to start distributing fertilizer in the US, can you review a little bit about the strategic rationale for that and how big you think you want to be in fertilizer in the US?
Alberto Weisser
This is initially going to be a very small venture; but we are because of our large operations in South America we are one of the largest buyer and logistic operator of all these raw materials. And, as US is shifting to become of more an importer of fertilizer we can use our capabilities of doing that.
So, this is much more like a commerce activity using our global infrastructure of freight of supply and also with our relationship inside the country to the different operators. So, we see an opportunity to work in this arena but we don’t expect this to be anything really large.
Robert Moskow
Okay. Thank you very much.
Thank you.
Alberto Weisser
Thank you, Rob.
Operator
And we move on to our next question from Ken Zaslow from BMO Capital Markets.
Ken Zaslow
Hi, good morning everyone.
Alberto Weisser
Good morning, Ken.
Ken Zaslow
I just heard that you might have positive cash flow?
Alberto Weisser
Yes, we have.
Ken Zaslow
What would it take for you to get the positive cash flow, We in this situation where Soybean prices have gone down enough where we should start to see that or would there be an another lag down to Soybean prices that we need to say?
Alberto Weisser
The only thing we need is non-rising prices. The prices have been rising for the last basically three years.
So, the moment the prices stop rising we have positive cash flow.
Ken Zaslow
Okay. And then just on a total different note, I mean what circumstances would CPO be accretive to your earnings since you announced the acquisition I think corn prices have been down roughly 20% or 25%, you just, I think, you said on the call that you didn’t even look at synergies outside of US and I think another market you said, under what circumstances could CPO acquisition be accretive to earnings?
Alberto Weisser
CPO will be accretive to earnings in our call I think we mentioned at the movement we are seeing it 2010 and perhaps even late 2009 depending but I think we said 2010 depending on a certain situations. Now, as we start under wherever is possible on the law to work together and we are getting to know each other better we are quite excited about the opportunities that are out there.
So, we before we signed the agreement and we – the information we gave you about the synergies are from that time, we had to go really on the very safe side and things that are very obvious like in Brazil and US. But, as we talk more in newer areas especially new goals areas and new opportunities in logistics in origination and in new countries I think it is Mexico, Columbia, Korea so they are starting selling corn products in Europe, so I think it will be very interesting later in the year as we evolve and get closer to the closing of the deal will be able to give you much more color.
Jacqualyn Fouse
Yeah, I think Ken with respect to the synergies, where we have been probably light as I can call it that is on the revenue side and how we came up with what we included in the range that we gave of a 100 to 120 million of which about a third or so is revenue related are really more what I had almost called profit opportunities that when we look at the existing businesses managing common customers and some things as just know we should be able to do in the fairly short term. Those are the common things that we’ve included in that number, so as Alberto said incremental growth opportunities even looking at Asia which we didn’t really quantify some of those all of that is not in there.
So, it’s probably pretty interesting in terms of upside. The other thing with respect to increasing dilution is obviously when we did the acquisition analysis and our forecast for corn products, profits on a go forward basis we made certain assumptions about corn process and profitability and so all of them are baked into the analysis and are in different scenarios on that to be able to come up with that as well.
So…
Ken Zaslow
So, is there a quarter level and the synergy level that would actually make the CPO acquisition accretive in year one?
Alberto Weisser
There are scenarios, but obviously we need much more time to analyze this and we have seen scenarios and I am very pleased also we have seen two days ago, [Sam] announcing the earnings, they are doing well so we are very excited about it.
Ken Zaslow
Great, I appreciate it, thank you.
Alberto Weisser
Thank you.
Operator
And we will move to our next question from David Driscoll from Citi.
David Driscoll
Good morning, everyone.
Alberto Weisser
Good morning, Dave.
David Driscoll
Congratulations on the great results.
Alberto Weisser
Thank you.
David Driscoll
Alberto, can you give us a little bit more color on your trading operations, really my question here is kind of just like to hear bit more discussion on how you are generating the upside, I think by my calculations this business over the last the two years has seen total profit change in all of agribusiness of just shy of $900 million and then I think that a very substantial portion of its coming from the trading operations, but I am not clear exactly what the genesis of that in the near term here and then, sorry for the long question here, but I am trying to drive do those of us on the outside look at this thing in terms of sustainability?
Alberto Weisser
I would say that in the last two years or last four quarters almost of the profitability has come from what we call more structural from physical transactions. Now, when you talk about trading I suspect that you are talking about proprietary trading.
So, the proprietary trading this is a very small component of our business very, very small.
David Driscoll
Alberto, I can you tell that that’s actually not what I am looking for, I am looking for the fiscal trading business that you guys are in right now and the fact that there has been so much volatility as you described in your comments? That still with lot of upside, so its not the proprietary piece that I am interested in?
Alberto Weisser
Okay, the physical. That amount as you can see from the volume that’s continued increasing and in an environment that we are in with rising prices, volatility, it is very important to be global integrated and lot of good knowledge so the risk component was very important.
I would say that obviously in this quarter it has been clearly above normal and it has been exceptional performance. But, as I look forward the environment is positive Dave, I am not so sure exactly if I understood your question.
Jacqualyn Fouse
Dave, I think, as I mentioned all our in response I think to our questions be if you will take the volatile over performance as a individual categories within agribusiness so far this year the relative over-performance is greater in oilseed processing. But, the other categories are outperforming as well.
So, if you are trying to get to is oil seed processing performing normally and the other once from a relative standpoint doing much, much better is not bad. Oil seed processing is very biggest relative out performer and they are all outperforming so far this year.
David Driscoll
Right, that’s very helpful. If I then kind of try to skin the cattle the different direction when I look at first half results for Bunge looks to be about $6.84 excluding the tax benefit.
Now if I look at the guidance that implies back half earnings of $4.34. How do you explain the slowdown especially in light of the fact that the third and the fourth quarters historically have been the most profitable?
Alberto Weisser
I don’t see it as a slow down Dave, I am sorry if did I agree. I think that first half has been extremely powerful.
We see the second half very strong, obviously last year we had some -- it was also very strong last year when you compare what we expect to do this year, last year vis-à-vis all the past years it continues to be very strong. Now, obviously last year we had also some additional benefits like none of the mark-to-market issues that reversed in the second half that we had losses in the first half.
So, there were a couple of things that make it a little bit more comparable, but I see the second half of this year quite strong. Now, obviously it is not as strong as the first, but the first has been exceptional.
David Driscoll
And that’s really the heart of what I am trying to get to. So, Jackie if you said that Agribusiness is really being driven by processing, then I really would not understand why any would expect to see the earnings in the second half a client by $2.50 relative to the first half and in the light of the fact that you should be realizing substantial higher fertilizer prices.
So, there is incongruity here that third and fourth quarters have always been your strongest quarter and you go back a long history Alberto Weisser, you said it many times on these conference calls.
Alberto Weisser
But you also have to understand that some of these profits, they also move between quarters. That’s why it’s so difficult to talk about quarters.
So, we do anticipate the business, we do for our business and then because of the mark-to-market we have to book the earnings at that time. So, that is why it makes it a little bit more difficult to talk on a quarter or half year basis and I am sure there is some shift from the second half into the first half of the earnings.
But you are right, there has been a little bit more of a shift vis-à-vis previous year’s strong first half. But when I look at the second half, if you are seeing is there more upside potential, it’s a little bit more difficult to see now that there is more upside potential than we would see in the beginning of the year because we have much visibility how it will be.
Look, second half is above -- at least 2 points above our RONA. So, it is very strong performance.
David Driscoll
Alberto, can you make a comment in light of these earnings in the guidance that you have given for ’08, how we should think about 2009? I know you probably don’t want to give exact numbers here, but again I am trying to get direction right on this, is this something where you think that ’09 can just continue to build on ’08, is that a fair statement?
Alberto Weisser
That is a very tough question and we are not ready to answer that in a detailed way. We are just starting our business plan, so you remember that in Januarys when we talk about ’09, but let me give you a picture of how I see the overall environment starting with fertilizer.
I think fertilizer will continue strong, the demand is out there, we see around the world the demand for food, for grains increasing. I would like to remember that we should think that -- see the number that 80% of the global population earns less than $5000 a year.
So, what we are seeing is that developing countries, the poor countries are growing, becoming richer, for the first time this year more than half of the GDP is going to come from the developing countries. That has never happened before.
So, as these economies shift a little bit away from just grains to meat. This is an additional demand of 4 to 8 times the demand of what they were consuming before.
So, there is a strong sustainable demand out there, and this means there is a bigger need for fertilizer. Now, the supply chain or the increase in production in fertilizer takes a little bit longer because they have to open minds and until everything comes up on stream.
So, I believe that the environment into next year and the year after is going to continue to be strong in fertilizer. In Agribusiness also, I think it will stay strong, but don’t think about the second quarter, I think it would be much more like it was in the second half and as we are expecting the second half of next year and the second half of this year, so the environments are positive.
And also, we have remember we have been investing a lot and many of our projects are coming up in stream, finally we are starting to see -- starting to have our first tests with our plants in Russia and the Spanish plants, around the world we are expanding our operation. So, it’s a little bit early, so I am sorry if I am rambling, but I am optimistic about -- I am relatively optimistic about next year.
David Driscoll
If I could get one more question in on a different topic all together.
Alberto Weisser
Sure Dave.
David Driscoll
I am just getting a tremendous number of questions on the corn product steel. In particular, you know, there is -- Alberto, you certainly watch the stock, you’ve raised guidance $5.50, yet the stock is down $15 from the time when you announced the deal.
If we make the presumption that you want to arbitrage on overvalued stock price. I’d just like to hear your thoughts on the idea that Bunge perhaps could have monetized the piece of their fertilizer asset instead of buying corn products, this would have reduced Bunge’s risk to high crop prices, brought cash in the door and highlighted the value of the remaining fertilizer operation, can you just give a little comment on that I mean this is truly just a shareholder value question?
Alberto Weisser
Look, we have to our role at Bunge is to maximize the net present value of future cash flow. So, we see that this transaction is very strategically very interesting and it will add value to the company and okay, I cannot react to at the moment the prices are very high on federalize this or that.
So, these are the kind of things we cannot react but I have to all the time think about how do I maximize the net present value to little five pieces of the portfolio that might be an interesting decision but this does not maximize the net present value of future cash flow of the existing shareholders.
David Driscoll
Thanks for all the comment.
Alberto Weisser
Thank you.
Operator
We will move on to our next question Vincent Andrews from Morgan Stanley.
Vincent Andrews
Hi, good morning everyone.
Alberto Weisser
Good morning, Vincent.
Vincent Andrews
I have bunch left over questions to you maybe Jacqualyn I’ll just start with you and you can just help us understand, what you are actually doing internally to improve the working capital dynamics?
Jacqualyn Fouse
I have got a very nice sort of finance structure or system put into place now, where the commercial and finance people work very closely together to analog the business that we’re doing the profitability on that business, the amount of capital has to be committed to it for how long and we’re just doing more robust analysis that we have in the past and the team has come together very nicely when you get that analysis right and people then come and see, how rich pieces of business are contributing them also obviously start to focus on dollars more. So, we have trend off bits of business but at the margin we are not that interesting and we have been able to redeploy the capital elsewhere or keep it for drop orders so to speak.
Then you got, so that’s one aspect of it just with respect to the business that we are doing including the split between spot business and farmer business and then we have done obviously each one of the processing facilities where people are very focused on managing inventories tightly as I can both in agribusiness and in food products particularly. So that’s basically what we are doing and its becoming part of our DNA I would say.
People are very focused on it. Pricing the business appropriately, if we are taken on more risks and the farmers taking almost trying to help our price, price more appropriately, price the higher capital commitment and the length of the capital commitment.
Vincent Andrews
What in that kind of got into my next question. What in kind of agribusiness valuation to some where is the leverage that’s allowing you to as you put more capital into the business get a commensurate return on that, I mean where is that leverage coming from?
Jacqualyn Fouse
Well, I would say one of the things that’s helping is the certainly the major players in the industry all kind of doing the same thing. So, you have seen comments about this in the public domain from a lot of competition you will this at certain behaving more or less the same way with respect to our appetite for forward business and help more out, we will go with it and things like that.
So, when you have that degree of rationality being seen in the marketplace and that helps. But, it's also the case because we have got the industrial asset base, because we have got the ability to be efficient with the logistics and everything that we do, we just can look at the whole value chain and leverage all of that.
Alberto Weisser
I would add Vincent that in moments like this obviously the farmers would like to much more fuller business that they usually would do and its really difficult to tell them, no, because we have this limitation of working capital so there is a real pressure there at the same time you have to own the additional remuneration for, we are using not only working capital -- debt for the working capital in environment like this you also have to use equity. So, we are also using lot of equity.
So, the returns have to be higher in these tremendous escalation of prices and volatility.
Vincent Andrews
Okay. And then, just to shift gears a little bit, I mean, Alberto there is a lot of talk about expansion of acreage in Brazil how that will affect the fertilizer industry business and so forth.
But, to certain extent don’t assume you are focusing a little more on application rates on existing acreage as well in other words, isn’t Brazilian soil and fertilizer are huge incentive from a price perspective now for the Brazilian farmer just to be using more on its current acreage, is that reason what you thinking about?
Alberto Weisser
Yes. In fact, you’re right and I do the same mistake, I’ll talk about acreages expansion and we are working very close with local agencies, government agencies, research institutes and different organizations is to convert pasture to agriculture in fact, doing it even combined pasture to end agriculture in the same area so this is probably more where the expansion is happening and we are incentivising that is obviously also very interesting you don’t have to open new land which is always more expensive and you are right.
So, one we should think about more about the conversion of pasture, second one about application rate. The application rate is going up as the commodity prices are good, farmers are using more fertilizer but we should not forget the ’05, ’06 crisis is still in the abeyance and not everybody is completely out of the Woodstock so some of the farmers are still struggling and they still debt.
So, it takes more time, its takes more time and to be honest I prefer that it takes more time because its there from more solid.
Vincent Andrews
I guess my point, what I want to say was just so, when we think about breakeven, the breakeven price of $12.50 is for existing acreage, I mean for new acreage, but around $12.50 or below the farmer would probably still be out to put more fertilizer on its existing land simply because there is leverage to the yield response curve, is that correct?
Alberto Weisser
Absolutely and I think its where the industry is limiting because of credit concerns but we are limiting how much we are selling so probably if there was imitation on funding the farmers would be buying more.
Vincent Andrews
Okay. And seeing the funding, I mean the Brazilian government I think has announced over the last month or so that they are going to get more involved in funding of the farmer can you just kind of quantify or somehow qualify the impact that will have on the industry in general and perhaps on your credit?
Alberto Weisser
The government is probably, they announced that they will do more but this probably covers mostly only the increase in prices, the very positive development that we have see here has been more and more banks are getting involved. In the past until one, two years ago one third of the funding to the farmers in Brazil was done by the government, one third by banks and one third by the agribusiness companies like us among Santo Caterpillar and so on and what we are seeing is that the banks are stepping in, not only domestic banks but a couple of foreign banks and so we don’t need to expand in fact our needs to funds really has in fact in relative terms diminished a little bit.
So, we are happy about this, we continue serving the farmers as we continue working with the banks so we continue earning our fees and I think this combination working directly with the banks is a positive new development, but it is shifted more to the banks at the moment.
Jacqualyn Fouse
You shouldn’t expect this to make a dramatic shift from one day to the next, but we are seeing that and we expect that to continue over time. So, you should see that reflected in our details that you found in the queue with respect to the amount outstanding for the farmer credits.
Vincent Andrews
Okay, and may be I will just take a last crack at the guidance, we were not terribly surprised to see you come out with these numbers given some analysis that we have done better typically these guidance increases come on caveat that by way you are telling to be conservative and what you are worried about is a little bit to the back half of the year, so could you just remind us what those might be with this new set of guidance?
Alberto Weisser
As we come deeper into the year I think you will become more - you will have more visibility and the level of confidence grows and I have 15 years in the industry and things go up and down. So you have to give a realistic view and this one was an exceptional look.
I don’t think we can repeat often quarters like this. So, I would say if I’ve been accused of being conservative but overall we had been more right than wrong in terms of where we have been come out and I would consider that we are deeper in the year.
We know more about it. So, we are sharpening our pencil.
Vincent Andrews
Okay. And then if we did kind of look a little bit beyond the year my listing at 12 month from a fertilizer perspective supply and demand of this nutrients is going to remain tight and if we have seen commodity prices remain about where we are, that sort implies that that piece of the business is sustainable and contentionally even get better.
We have just seen the price go to 400 to 500 bucks a ton in the last month and what if -- so I think about agribusiness then, you have to think about the crush margins which continue to get better so, why are they continuing to get better. I know its demand driven but what -- can you tell us more than just its demand orientation I mean what in the chain is causing a leverage to get the margins wider that might be similar to the question we have talked about in logistics piece and then also how do you see the edible oil business recovering or is just that going to be a collateral consequence of better results in agribusiness?
Alberto Weisser
Vincent Andrews
Okay. And then lastly and then I will pass along, what you consider your cost of capital to be these days?
Alberto Weisser
It’s around 8% if I’m not mistaken so, that Jacky, its around 8% here.
Vincent Andrews
Okay, thank you so much guys.
Alberto Weisser
Thank you.
Operator
And we move on to our next question Diane Geissler with Merrill Lynch.
Diane Geissler
I am sorry if I missed it but just a quick question on your current -- your new guidance. Does that excludes the extraordinary item in the second quarter correct?
Jacqualyn Fouse
No its included.
Diane Geissler
Okay. So if we were to strip out the I guess its about $0.75 the pro forma number would be 10.90 to 11 help me out here 15 something on that?
Jacqualyn Fouse
Its $0.72 so.
Diane Geissler
Okay. It would be below the 11.60 to 11.90.
Jacqualyn Fouse
Right.
Diane Geissler
Okay. And then the other question I had really was on the just a commentary about you are happy with where current soybean prices are and even if they moved down a little that would be beneficial from cash from a cash real perspective but then when I Jackie you made a comment about oilseeds and trading and that whole side of the business which seems to do very well when crop prices are high.
I guess, and you know between the two which you rather have lower prices and positive cash flow or higher prices and the benefits to earnings from higher prices or where do you draw the optimal position I guess in terms of what crop prices are.
Alberto Weisser
Let me answer that because Jackie clearly prefers cash flows so, but joke aside, but what I think we do like to see, in fact the prices have to be high enough that the farmers are happy so that they buy fertilizers. So, that’s why we talk so much about the breakeven in the expansion of (inaudible).
Now, overall what you have to think is that we are in the middle we are -- so when prices are very high we don’t benefit, it’s the farmer who benefits. When the prices are very low, it’s the consumer who benefits.
So we are in the middle and we make a margin and a very good example is in 2004 when the prices came down very fast and we had a very good year. So, it is not that we make money because prices are going up.
So, obviously I think we have the skill to sail through well the team is very good at sailing through very volatile markets and it is but overall we don’t depend on the level of the prices. We don’t correlate with that.
So the only thing is caveat is the farmers need to make enough money so that they buy the fertilizer.
Diane Geissler
Yes but presumably if we look at 2008.and we look at the benefits fertilizers had from sort of soybeans prices have sort of skyrocketed and demand for fertilizers expansion of acreage etcetera you definitely benefited. I mean if I look between 2008 and 2004 I’d much rather have 2008 but $11 in earnings than $4.20 so I guess?
Alberto Weisser
You are right in terms of fertilizer but I understood your question in terms of agribusiness, food and agribusiness which represents 60% of our business. In fertilizer you are right, high prices benefit; high prices do benefit the fertilizer sector.
Diane Geissler
Okay so when we think about it in aggregate and the whole Bunge consolidated. Where would we draw that optimal line between having prices be low enough, that we can stimulate demand versus prices that are high enough where we get incremental acreage and trading opportunities because the market is volatile?
Alberto Weisser
The sweet point is high enough so that the farmers are happy but not high too high that the customers continue increasing the demand. So, I have a feeling that where we are at the moment is probably healthier than where we were.
A long term healthier than where we were in the first half. Because you also have to remember there is tremendous pressure on funding we had to expand our working capital by 4 or 5 billion dollars over the years.
This is a tremendous pressure on the whole system.
Diane Geissler
Ok. All right.
Thank you very much.
Alberto Weisser
Thank you, Diane.
Operator
And we have more time for one more question. Our next question would be a follow up from Robert Moskow from Credit Suisse.
Robert Moskow
Just very quickly Alberto, you said many times that you think returns have to be higher in this type of environment because you are cost of carry is so much higher. Can you take a shot at trying to estimate processing margins, how much higher do you think they should be and then also origination margins, logistics margins, order magnitude you think you need to be 10% higher, 15% higher?
Alberto Weisser
We have doing like this but by the way Jacky was explaining we look together between finance and the promotional team because it becomes limited the amount of funding we make available usually could give much, much (inaudible) but we have to find a way for them so much you could if you reserve how much we want to, how much risk you want to take so naturally what happens is if you are remit there is pressure on the margins to expand so we have not quantified this, we have not done, this is much more than direct. Jackie?
Jacqualyn Fouse
We are in the apple that we are trying to do those so the price will be taken consideration, the amount of capital that has to be committed and how that can vary pricing effect that we hedge and if the pricing will move the additional capital you have commit because of margin calls on the hedge, I mean for how long that capital is committed. So, we have done a better job of including considerations for those couple of things on the floor of business I would say.
Robert Moskow
And since you operate in a very consolidated market it seems like your competitors are doing the same thing so perhaps everyone is requiring a higher margin in order to do business, so maybe I can...
Jacqualyn Fouse
Economic rationale, you shouldn't be doing that.
Alberto Weisser
We have seen a couple of players went too far and I have seen the trouble select that [Vencor] had, so you know it is very, very tough decision to limit it for the business and when you re-look at the business you will be seeing it in last year but the farmers want to be more than normal and that is so difficult to solve.
Robert Moskow
Thank you very much.
Operator
That concludes the question and answer session. At this time I would like to turn the call back over to Mr.
Mark Haden, please go ahead.
Mark Haden
Great, thank you Steve. And thank you everyone for joining us this morning.
Operator
And this does concludes this morning conference and thank you for participation. Have a great day.