Feb 11, 2009
Executives
Mark Haden – IR Alberto Weisser – Chairman and CEO Jackie Fouse – CFO
Analysts
Vincent Andrews – Morgan Stanley Christina McGlone – Deutsche Bank Ken Zaslow – BMO Capital Markets Jason English – JP Morgan Christine McCracken – Cleveland Research Chris Bledsoe – Barclays Robert Moskow – Credit Suisse Scott Bennett [ph] – Citi Investment Research Steve Byrne – Bank of America
Operator
Good day everyone, and welcome to the Bunge Limited fourth quarter 2008 conference call. Today’s call is being recorded.
At this time for opening remarks and introductions, I’d like to turn the conference over to your host, Mr. Mark Haden.
Please go ahead, sir.
Mark Haden
Thank you, Elizabeth, and thank you everyone for joining us this morning. Welcome to Bunge Limited fourth quarter 2008 earnings 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 fourth quarter results. It can be found in the Investor Information 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 measures are posted on our website in the Investor Information section. I’d like to direct you to slide two and remind you that today’s presentation includes forward-looking statements that reflect 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 its reports on file with the SEC concerning factors that could cause actual results to differ materially from those contained in this presentation, and encourages you to review these factors.
Participating on the call this morning to discuss our fourth quarter results are Alberto Weisser, Bunge’s Chairman and CEO; and Jackie Fouse, Bunge’s Chief Financial Officer. And now I will turn the call over to Alberto.
Alberto Weisser
Good morning everyone. 2008 was a remarkable year and one of the most volatile in recent memory.
Throughout it all, the Bunge team performed well. Our employees produced record earnings of over $1 billion and cash flow from operations of $2.5 billion.
They executed well as exemplified by the strategic and prudent use of working capital during periods of record high commodity prices, and kept a steady eye on the future by making new investments and creating new partnerships. For example, we are very excited about our new sugar and ethanol joint ventures with Itochu in Brazil.
In an industry that is dynamic to begin with, but specially in such a volatile year it is rare that everything will go right. We had a few setbacks in ‘08, but we start ‘09 in a strong position.
The weak global economy will pose challenges, but we have a solid balance sheet, comfortable liquidity, confidence in our team and optimism about improvements in the market. First, fears of low demand for our core products are generally short-lived.
These are staple products necessary to feed the world's growing population. We anticipate demand for soybean meal to improve over the drastic reductions seen in the fourth quarter, when customers were reducing capacity, drawing down existing meal inventories, and using lower-cost feed ingredients.
Our estimates for the 2009 calendar year indicate soybean meal demand growth of about 1.5% when compared to 2008. We also expect demand for vegetable oils to increase about 4% in the calendar year, although soy could continue to face competition from other oils.
Second, global commodity stocks remain tight, and this reality is being exacerbated by weather issues in South America. Even with lower economic growth, the world will need additional supplies of crops.
Current futures prices indicate that the market will provide incentives for farmers to plant and should help encourage fertilizer use. In addition, during periods of tight stocks, there is always the possibility that changes in supply and demand will create interesting opportunities for companies with a global presence and integrated operations.
During the year, we will continue to take steps to lower costs and improve the efficiency of our asset network. We expect that the stronger US dollar should benefit the cost structures of our foreign operations.
We are also investing for the long term in our core businesses and in complementary value chains, such as sugar, but were managing our projects prudently in light of today's volatile conditions. I will turn over the call to Jackie, who will discuss our quarterly and year-end results.
Jackie Fouse
Good morning everyone. Thank you for being on the call this morning.
Moving on to slide three of the presentation, we will start with some highlights from the income statement. The year of 2008 was a record of profit and cash flow year for Bunge and we finished the year with EPS of $7.73, 30% growth over 2007.
The fourth quarter was characterized by a difficult demand environment and we saw that particularly reflected in oilseed processing, fertilizer, and foods where volumes all suffered. Fourth-quarter profits were negatively impacted by lower gross margins across all segments, mostly due to per unit margins with the exception of fertilizer, which was volume driven.
Profits were also adversely affected by provisions for customer and counterparty risks and negative foreign exchange on fertilizer US dollar financing of working capital. With respect to the effective tax rate, fourth-quarter losses in fertilizer significantly impacted the rate for the quarter and for the full year, as we saw a major shift in income between higher tax and lower tax jurisdictions versus what we had seen up until that point.
We continue to drive structural tax planning initiatives, which brought some benefits in the quarter, and which will bring benefits over the long-term. And one should remember that based on our financing approach, we have higher profits in Brazil and a higher tax rate when the real appreciates and the reverse when it depreciates with the latter being what we saw in the fourth quarter of 2008.
Moving on to the segment results, Agribusiness volume increased in the quarter. It was driven by grain origination or some volume was pushed from Q3 to Q4 in North America due to the delayed harvest, and also from additional corn origination in Brazil, as well as we saw the ramping up of our sugar business.
EBIT for this segment was impacted by lower per unit margins in general and by customer and counterparty provisions. For Fertilizer, volume declines resulted from prudent management of credit in a soft market.
These declines weighed on profits and EBIT was further pressured by declining profits and a negative exchange impact mentioned previously. Our foods business volume suffered from soft demand in the quarter, which reduced profits and results were additionally affected by higher cost crude oil inventory and pricing pressure, which together squeezed margins.
Looking at some highlights of the balance sheet, our balance sheet and credit metrics are the strongest thing they have ever been, and our gross [ph] debt levels are at about the level of those of 2003, while we're generating both higher profits and funds from operations. The decline in operating working capital year-over-year was driven by efficient working capital management and lower commodity prices, and our cash cycle declined by three days and gross debt by $1 billion.
With respect to cash flows, shown on slide seven, even with the difficult economic environment we produced strong cash flow during Q4 of 2008 and record cash flow from operations for the full year. The next slide, slide eight of the web cast presentation, shows how our working capital usage fluctuates with commodity prices and how that impacts cash flow.
When we look back over the past six years one can see how we navigated through rising commodity price environments, and one can also see significant growth in funds from operations and that for the last six years combined, we have generated funds from operations of $5.6 billion, and have reinvested those funds in both working capital and CapEx as we have grown our business. Another aspect in addition to balance sheet and cash flow, which is a key component of our financial situation, is liquidity.
Our liquidity position, shown on slide nine, remains very solid and we enter 2009 in a strong financial situation. In the fourth quarter of 2008, we were able to replace the maturing revolving credit facility despite the difficult financial markets, and we retired a $500 million bond maturity, while maintaining more than adequate liquidity to support our business operations.
On the slide, you can see that we had undrawn committed credit facilities totaling $3.5 billion as of 12/31/2008. With respect to the outlook for 2009, we feel good that we will produce a solid year, though the results will be heavily weighted towards the second half of the year.
We think we have seen the trough in our industry and we expect things to improve as we move through the year. Reasons why we expect that improvement include; soy meal demand, which we think will ameliorate over the course of the year coming off a very difficult quarter of 2008 where we estimate that it dropped by about 9% globally.
In addition, we think that good farm economics will support fertilizer demand. As of right now, the breakeven for Mato Grosso is about $8.34 and for Parana it is $5.81.
So you can see Brazilian farmer economics are good. In general, we think low stock-to-use ratios will be supportive for the sector, and for us in particular, the strong US dollar will benefit the cost structure of our international operations.
At the same time, we recognized some headwinds, credit markets continue to be tight and this will affect farmers and customers. The overall global economic environment remains uncertain.
So we have to be somewhat cautious regarding demand in general, and specifically early in the year, our profitability will be impacted by higher cost raw material inventory both in fertilizer and edible oils. As to the (inaudible) guidance, the range for EPS is $6.90 to $7.60 per share based on 138 million shares outstanding.
So it is a fully diluted guidance. We expect depreciation and amortization in the range of about $425 million to $445 million and CapEx of about $950 million [ph] to $1.05 billion of which 30% or so is mandatory investment in maintenance, safety and environment.
We have somewhat lowered the effective tax rate guidance range to 22% to 26%. Previously it was 24% to 28%, which you'll remember.
That range considers basically stable currencies and compares to a 2007 number of 26% as already mentioned for 2008 of 16% was affected by the moment of the real. Linking the EPS guidance to return on invested capital, return on invested capital is a key performance measure for Bunge.
If we look back over our eight year history of returns, we can see that we have produced returns above our weighted average cost of capital in both good years and difficult years. 2008 was a record profit year for us and our ROIC was well above our internal target of two percentage points above weighted average cost of capital.
When we think about 2009, recognizing the challenging environment ahead, our guidance reflects an EPS range, which translates into returns above our weighted average cost of capital with the upper end of the range being about two percentage points above WACC in line with our target and the lower end of the range still being above WACC, but a little less than two percentage points. Thus, we anticipate a solid performance for 2009.
With that we will open the call up to Q&A. Thank you very much.
Operator
(Operator instructions) And we will take our first question from Vincent Andrews with Morgan Stanley.
Vincent Andrews – Morgan Stanley
Hi, good morning everybody.
Alberto Weisser
Good morning, Vincent.
Vincent Andrews – Morgan Stanley
I am wondering maybe Jackie or Alberto if you could just help us, I missed the beginning of the call. So, I apologize if you did this already but if you could just walk through the counterparty risk and the charge that you took and what that covers, where it is, how it happened, what you could do differently in the future to make sure it didn't happen again for you to start there that it will be great?
Jackie Fouse
Thanks Vincent, good morning. The provision was broadly taken on the portfolio of risk in that – in that category, it covers accounts receivable defaults from sales to customers, which would include new [ph] producers, biofuel producers, for example.
It also includes forward sales defaults from customers and counterparty risk on other transactions such as freight counterparties. From a geographic standpoint, it was broadly spread around the world including the US, Europe, Middle East, and Africa, Asia and Brazil.
It should be noted probably that farmer defaults are not part of that number. So, it includes current defaults as well as an estimate that can be thought of like a valuation allowance on forward business as well.
Vincent Andrews – Morgan Stanley
Can you give us a sense of what the current amount was?
Jackie Fouse
Of that number, roughly 25% related to current defaults and about 75% to forward.
Vincent Andrews – Morgan Stanley
Okay. How would you characterize the potential ability for that to be a very conservative estimate, especially considering that as far as I can tell your peers, your competitors, have not taken similar charges?
Jackie Fouse
Well, we are trying to be transparent about this and at any point in time when you take a provision obviously, you look at the prevailing circumstances, all in the – some of the forward contracts that are included under consideration here. It would incorporate current mark-to-market tops of figures.
So, we think that given the circumstances being as poor as conditions are in certain areas that it is probably a fairly conservative provision, though we think it is obviously an appropriate provision for the time. And as we negotiate with these selected parties, again these are isolated incidences on specific accounts in the various domains.
We are obviously going to try to get every dollar back from them that we can. So, we will be negotiating hard.
Vincent Andrews – Morgan Stanley
Okay. And then if I could just ask a couple of things around farmer credit, the first piece would just be, you know, I've heard some speculation that when you look at the pattern of fertilizer sales in 2008, farmers bought very early at high prices at high soybean prices and at different real-dollar exchange rates and they weren’t able or didn't through the course of the year sell as much of their beans forward as they would in a normal year, partially from a speculative perspective, partially from a credit perspective and therefore as they come into a difficult harvest they might be upside down from a financial perspective.
Can you characterize whether that is true or possible or how prevalent it is and then the second piece of it I guess, would be can you just about the farmer credit situation today relative to let us say, three of four months ago and relative to 6 or 9 months ago?
Alberto Weisser
I would characterize the situation for the farmers as very positive. When they bought the fertilizer last year, most of them locked in already the margins by selling their commodities.
Those who have not done it are also in a good position because the real revalued. So when they sell now their crops, they will receive a significantly higher amount of domestic, the local currency, and I think it is shown that the forward activities is solid as we are at the moment we are selling fertilizer forward for the second half of the year.
We are locking in also – we are locking in the margins by also selling the grain. So, the environment is quite positive for the farmer in South America.
So, we don't expect any issue there. We have been able to collect some of the bad debts.
So the environment is quite positive.
Vincent Andrews – Morgan Stanley
Okay, and then just the current credit environment, has credit opened up at all?
Alberto Weisser
The government has opened up a little bit more. The local banks also have done a little bit more – been a little bit more generous.
We have kept our posture, the whole industry has kept the posture, the agribusiness sector, the combined, the crop chemicals all of us, we continue being as we were in ‘07, ‘08. We are being very careful, but who has stepped in, there was a little bit more financing from government and a little bit more from banks.
So at the moment we are not seeing any major issue. It is tight but it is moving.
Vincent Andrews – Morgan Stanley
Okay, thank you. I will pass it along.
Alberto Weisser
Thank you.
Operator
We will take our next question from Christina McGlone with Deutsche Bank.
Christina McGlone – Deutsche Bank
Good morning.
Alberto Weisser
Good morning Christina.
Christina McGlone – Deutsche Bank
I guess following on Vincent's line of questioning, you mentioned that farm economics are generally good and will spur fertilizer purchases, but my concern is that with basically wheat, and cotton, and corn acreage shifting in the US to beans that this benefit will really accrue to the US farmer and then by the time the Brazilian farmers are really buying their fertilizer in the major part of the year, you know, July to October that bean prices will be lower, farm economics will be worse. And we really won’t see the pickup in fertilizer volume that maybe we expect.
So I wanted to get your comments on that Alberto and also, what kind of fertilizer volumes are you assuming in your guidance?
Alberto Weisser
We think that it should be fine in the second half. For the South American farmers it is one of the reasons we are seeing the high commodity prices for soybeans and corn.
There is – there might be some pickup in the cotton areas and in some other areas for corn and soybeans in US, but we – all our supply demand analysis, when we look outside the USDA numbers, we still see that the stock-to-use ratio is low. I think it will be not only the northern end of southern hemisphere [ph], I think it will extend even into next year.
So I think there will be – there is a positive environment here.
Christina McGlone – Deutsche Bank
So what kind of fertilizer volumes are you embedding in the guidance?
Alberto Weisser
Look, it is so early in the year but we are working – the industry is working with the scenario of flat growth versus ‘08.
Christina McGlone – Deutsche Bank
Okay. And then you know, there is recent news we have, I guess yesterday the USDA attaché in Argentina reduced the bean crop estimate, and Cordonnier [ph] reduced the Brazilian corn and soybean crop estimate, and then you have China talking about drought conditions hurting their wheat and their ability to plant corn and soybeans, do you foresee a kind of another dislocation scenario starting up again?
Alberto Weisser
Could be, we – this weather issue in southern port of South America including part of Argentina and some parts of Brazil, like Rio Grande do Sul, we start feeling that the crop will be smaller than originally indicated. So everybody is starting to address.
It is a little bit early because we still have the month of February but there is not enough rain. So we do think there will be – there might be some issues and there will, I think, Christina basically there is every year some kind of dislocations that plays in our advantage, and that might be one of them.
Christina McGlone – Deutsche Bank
Okay, and then my last question Alberto, can you just go may be by region on the agribusiness side, what you are seeing in terms of crush margins, capacity utilization, what players are doing to handle the weakening demand situation, if you could just touch on your major regions?
Alberto Weisser
We believe that North America will take a little bit longer for the demand to pick up. It might be, soybean meal demand might be in the year be a little bit below last year, but at the same time, we're having positive indications that the pricing and the livestock industry, particularly in the chicken area is improving so it is positive.
The herd destruction or the reduction has stopped, same as in ox. So we have a – first half probably we will not, first half of the year probably will not be so easy, but the second half we are optimistic.
But we imagine that the real demand will be below, we will not see a growth. At the same time, the US – the margins are better for exports because especially Argentina is not exporting.
So US is being able to benefit from some export markets. Europe, we expect the demand to be around a little flat or perhaps slightly below last year, but crush margins should be good in soft seeds, and I also expect that the margins during the year should improve for soybeans.
At the moment the margins are decent. The year should be difficult for Argentina because of the short crop.
It should be very positive or let us say not very, let us say positive, it is early to say, for Brazil and should be positive in Asia as well. So that fits a little bit the picture we are seeing with an increase of soybean meal demand of 1.5%, which is a little bit different than USDA because USDA uses not the calendar year, and uses a crop year from October to September.
And we believe that the fourth quarter of this year will be a good quarter.
Christina McGlone – Deutsche Bank
Okay, thank you.
Alberto Weisser
You are welcome.
Operator
We will move on to Ken Zaslow with BMO Capital Markets.
Ken Zaslow – BMO Capital Markets
Hi, good morning everyone.
Alberto Weisser
Good morning Ken.
Jackie Fouse
Good morning Ken.
Ken Zaslow – BMO Capital Markets
I'm scratching my head a little bit here, ADM, if you go back a couple of years ago there was a lot of conversations with ADM of how they were always falling short of expectations, and you guys were killing it. Now, it seems like the reverse has happened.
I guess, the question I have on this is ADM and Cargill’s results seem to be stronger than Bunge’s on two fronts. One is on the crushing side as well as the credit side.
Can you help us understand why there will be such a disparity on those two issues?
Alberto Weisser
Look, we don't know how they operate. We don't know their numbers, and I don't think it would be proper to comment on the other ones.
The only very obvious difference Ken is that in the summer of this year in US, especially in US, we were prudent, we were conservative. You have to remember that until June we didn't – nobody was seeing any crisis and the situation we had was the commodity prices going up and up and up.
And we had these increase in our working capital by $3 billion in a question of weeks. So, we were very careful.
We were managing it very carefully and we had a book, a forward book in the US, which were smaller than we usually have. So, we didn't benefit this year so much from the very strong margins that existed if you booked it in the summer.
At the same time, let us remember that we did benefit, especially in the Europe sequence, in the Europe harvest that we had a strong book at the end of ‘07 that benefited us in the first half of the year. So, I would say you should see the two harvests together.
I think all three companies performed quite well.
Ken Zaslow – BMO Capital Markets
Okay, and what type of, you know, on the risk management side who is responsible for these – and it seems like it was a big number. I mean is there somebody who you kind of single out and say, “Hey, we got to change our risk management practices,” and what level of confidence do you have that we are not, we are done with taking write-offs?
Alberto Weisser
Look, I think two questions – two comments here. First of all, when you look, we are 190 years in business.
And when you look at our performance over the last year, since we have been public, the eight years, I think they speak for themselves that it is solid. Now obviously, there are moments where perhaps we could do better as usual and perhaps, overall the whole book it is perhaps a little bit higher than usual that is why we were highlighting it.
But it was also a dramatic drop in prices. When prices go up dramatically, often we in the industry have issues with farmers and when prices come down dramatically we have issues with customers and counterparties.
Now in some of these areas as we did not have, for example, in the case of freight, we don't have – we didn't have in the past an exchange. We have now.
So this in the future should be less of an issue. So – but when you look around this issue in the freight area is pretty much all over in the industry, not only in our industry but in the steel, iron ore.
So I would say it is a little bit unusual but this affects many people in the industry.
Ken Zaslow – BMO Capital Markets
So what level of confidence you have that we are not going to write down again.
Alberto Weisser
Look, I think we are going to have it every year. As I mentioned, when we – this is part of our business when prices go up, farmers try to default and when prices come down customers default.
But the price into our business has certain amount of it. Now these kinds of situations are very, very unique.
Jackie Fouse
Yes I mean. Can we call that out because it is, it is obviously somewhat higher than per the historical run rate and given the characterization, then I will pull it on, how we took the provision in the portfolio, which includes both current defaults and the forward book of business.
That is what drove it up under this particular spread of circumstances. I think in the future we would expect it to return more to normal levels, wherever normal is, to levels more in line with what we are pricing into the business, but this particular quarter saw some unprecedented circumstances in certain areas, and we wanted to be transparent about how we dealt with that.
Alberto Weisser
And just what happened from time to time, you remember in ’04, we had the issue with the customers in Asia on counterparty customers. So this is part of the business from time to time and will happen.
Ken Zaslow – BMO Capital Markets
Okay. And then another question is in terms of acquisitions, any thoughts on CPO, you both seem to have had your issues, any reason not to revisit that.
Alberto Weisser
Look, by the fact that we tried to merge last year shows that this is very much part of our strategy to invest not only in our core business, but also in complimentary value chain. We still – we feel very positive about Corn Products.
Nothing has changed, in fact it probably made us understand it much better and think it fits us, but look this is the way life is. It didn't work last year.
We have to be prudent this year, but we will be – always be looking at opportunities in the future.
Ken Zaslow – BMO Capital Markets
My last question. Any issues with covenants or anything like that with your debt structure, anything that, you know, something up against anything that we should know about?
Jackie Fouse
No. In fact as I mentioned earlier [ph], the credit metrics are the best we have ever been.
We have got a very strong balance sheet and financial situation. So, no issues whatsoever.
Ken Zaslow – BMO Capital Markets
Great. I appreciate it.
Operator
We will go next to Terry Bivens with JP Morgan.
Jason English – JP Morgan
Hi, good morning guys.
Alberto Weisser
Good morning Terry.
Jason English – JP Morgan
Yes, this is actually Jason English pitching in for Terry this morning. A couple of quick questions, first on fertilizer if I can, I just want to understand the FX offset here.
You guys took a charge of $361 million on the financing side, but the net FX that you report is $225 million. Is the $136 million difference essentially offset you realized from the prior quarter?
Jackie Fouse
Yes, that is the recovery of prior quarter impact. That is correct.
Jason English – JP Morgan
Okay.
Alberto Weisser
And in the quarter.
Jackie Fouse
And in the quarter. So you're constantly recovering as you go along, some of which were related to the prior quarter and some were recovered in the quarter itself.
Jason English – JP Morgan
So over the last two quarters, I think you guys have taken a hit of around $630 million, you recovered $136 now. Is it safe to assume then your carrying almost $500 million of accrued benefit into ‘09.
Jackie Fouse
No. It is significantly less than that.
Alberto Weisser
What you – you're probably referring to the $600 million, it includes the agro business. The agro business foreign exchange is immediately offset because we revalue the inventories.
The inventories are valued in dollars. So – and that is immediately as you see it in gross margins.
So, we highlighted the 225 because this is the only one where there is a timing issue and that we will recuperate in – during this year in the first and second quarters mainly.
Jason English – JP Morgan
You know, I'm looking at the 270 hit from the third quarter and the 361 from the fourth quarter. I mean it is something that you recouped this quarter was a bit of a carryover from the last quarter?
Mark Haden
Jason it is Mark. Think about the third quarter as being the 215 that we identified in the text, and then in this quarter think about the 225.
That this –
Jason English – JP Morgan
Okay.
Mark Haden
Difference on the segment data has already been recognized.
Jason English – JP Morgan
I got you. Okay.
Well, thanks, it is helpful. So back on fertilizer this quarter, we've got $136 million kind of FX benefit, offsetting $361.
If I back that out of the gross profit for this quarter, I essentially come up with neutral gross profit in the fertilizer segment. So it's sort of FX clean, if you will, on the gross profit line.
Two questions; one is that a fair way to look at it and secondly why was – if it is why was the FX clean gross profit essentially neutral.
Mark Haden
Well, you've got the 33% decline in volume for the quarter. So that is part of it when you compare.
Are you doing comp comparing back or you’re doing just the absolute value for the quarter?
Jason English – JP Morgan
Just the absolute value. So I’ve got 135 of reported gross profit plus the 136 FX offset.
Alberto Weisser
But, you know, to your point that is exactly what happens. The prices, international prices came down, not all of it.
You have to remember we have two pieces of the business; one is the retail business and one is our own mines. So on the retail part of the business, inventories were bought at higher prices and international prices were lower.
So in some of them we really had losses and that is the explanation on the gross profit.
Jason English – JP Morgan
That it, thanks. That is kind of what I was thinking.
So essentially your inventory value was kind of close to what you were selling it at. I'm sure there were some other factors, but assuming that is the case and you're still, as you mentioned, your release carrying some relatively high priced inventories.
If we see further erosion in the market prices for this, could we be facing a write-down issue?
Jackie Fouse
Well, I mean it is a good question. In terms of how we look at that, we look at the portfolio of inventory, we look it at on an average cost basis that is still below market value if you had a significant further decline in market process, the answer is theoretically yes.
You could have a write-down as of – we are monitoring that very closely as of – right now we think it is fine, the related issue and with respect to the first-quarter profits and we know that we've got that higher cost inventory to work through during the first quarter. And on the fertilizer side, I think even though we expect some improvement in process over the course of the year during the first quarter, they are where they are and that will impact our profitability.
Alberto Weisser
Now in the last couple of weeks or two weeks fertilizer prices have come back. There has probably been a significantly destocking and we have seen already first shipments into India, and so we believe that we don't have to make a write-down because we don't see at the moment a further reduction in prices.
In fact, at the moment we are seeing prices coming a little bit back when I look at (inaudible), it is something around $350 when the low was around $300, and I think the market realizes that prices in first-rate area have to be higher because for the necessary expansions probably they have to be closer to the $500 per ton for the industry to invest in it today. The new plant, Greenfield plant that will be necessary for the future demands requires a price closer to $500 per ton.
So, we don't see at the moment a further reduction in prices, quite the opposite is a small recuperation.
Jason English – JP Morgan
Okay. That is helpful.
Thank you. I'll pass it on.
Alberto Weisser
Thank you.
Operator
And we have a question from Christine McCracken with Cleveland Research.
Christine McCracken – Cleveland Research
Good morning.
Alberto Weisser
Good morning Christine.
Christine McCracken – Cleveland Research
I wanted to ask a follow-up on the latest comments relative to, you know, in terms of expansion plans, you know, we have roughly 50% or so I think of global phosphate production idled at the moment, and I guess I'm a little concerned that we actually given some of the constraints around containment, actually end up in a shortage situation going forward. I'm wondering can you just comment on, you know, where we are relative to that and if you have any concerns relative to kind of tight supplies, maybe not a concern, maybe your expectation relative to pricing.
Alberto Weisser
The reason why we announced this expansion of our phosphate production was exactly the way we saw the global supply demand. We do see that there is going to be shortage.
So there is a need for additional productions. So we, and as we are starting to see also the demand in grains and – stabilizing and even if it is flat or slightly up this year, this all means we will need to have more fertilizer, and we also have to remember that the pressure on usage of water, pressure of usage of land, it all means that we need more technology not less.
So we have a – we continue having a very optimistic view on, not optimistic, a realistic view that we will need more phosphate production in the future. Remember that until 2050 we have to double production of food and I am sure we will have to use less land.
So this issue at the moment, we see it a very, very short-term issue of – in fact we even think that there is some significant destocking, and the need for the additional phosphate will be necessary soon.
Christine McCracken – Cleveland Research
But just in the near-term outlook, when you look at current run rates on production and where we are in terms of inventory of phosphate currently and the demand that you could see over the next 12 months. Are you worried at all the supply wouldn't be there for producer needs or is it that –
Alberto Weisser
I was not worried until a couple of weeks ago, I started to think about it because too much production or a lot of production was idled in US, in Morocco, and other parts of the world, and we don't know exactly how much the inventories, how much the pipeline has been de-stocked. So, we will see it over the next couple of weeks.
There is a risk. I don't know how big it is, but there is a risk for that.
Operator
And we'll take our next question from Chris Bledsoe with Barclays.
Chris Bledsoe – Barclays
Good morning.
Alberto Weisser
Good morning Chris.
Chris Bledsoe – Barclays
Good morning. Can you maybe just help me understand why historical ROIC, these are more reliable metrics for gauging EPS than another measure like historical profit per ton?
The reason I ask is because you are basing ‘09 EPS guidance on a sort of historical range around your ROIC since your IPO. But when I look at, you know, average profit per ton in that same period, it implies an EPS level, you know, that looks to be well below the low end of your ‘09 guidance range.
Alberto Weisser
Let me try it and I might need the help of Jackie. Look, I think one of the reasons why this is like this is that this is the most important bonus criteria in the industry, especially in the case of Bunge, everybody is based on returns.
So, everybody is looking at it and if you, if the returns are significantly higher, you start seeing additional investments in capacity. If they are lower, people shut down capacity.
You saw, we shut down two plants this year. So there is a very natural tendency to get close to cost of capital.
The reason we think we have the competitive advantage and we are above cost of capital is because of the size, the logistical network, the ports, and the way we operate it. So we have some advantage vis-a-vis probably some smaller players, but it is pretty much everybody thinks in terms of risk, rewards, always returns.
So that is probably one of the reason. So if we see something that is not returning, we go after it and we start eliminating all the issues that are around it.
So that is the way we are – we run the business.
Jackie Fouse
And just given the volatility that we sometimes see on the EPS side, we wanted to, you know, link those concepts as well so that when one thinks about our asset base and the level of profit that we expect to be able to generate on that and, you know, “a normal environment” whenever that is and you look back at the track record, it makes a lot of sense from that standpoint. In any given year if you have highly positive circumstances I can push your returns significantly up as we saw in 2008, as Alberto said if that would last for any length of time, then you could get capacity coming in to drive them somewhat back down and you could have a year where things are particularly challenging and the returns are a little bit lower than our target of 2 percentage points above WACC.
But – so it is linking those two concepts to try to give more than one dimensions on the way that we think about the profits that we should be able to generate on our asset base.
Chris Bledsoe – Barclays
And just to follow up on that. I assume that in the last couple of years you had seen a pretty substantial increase in construction costs for your projects and, you know, the industry as well, which would then naturally required greater dollar returns anywhere to maintain what would be the kind of the same ROIC in percentage terms.
So, I guess I'm just wondering why with, you know, so much investment in recent years, why should historical ROIC hold up in the next year or two in a downturn if, you know, the denominator had risen so much on a per metric ton basis over, you know, that over the last five years or so that you are using to or 7 years that you are using to gauge the ROIC.
Alberto Weisser
You know, these high investment costs we compensated by other kind of components. Logistics is extremely important to us.
You saw a major expansion in Argentina. Argentina is probably the most efficient system in oilseeds.
The same happened in Eastern Europe. All the plants we built in Eastern Europe meant that the smaller, inefficient ones had to be shut down.
They disappeared. So it is a qualitative change that we were able to do compensate the additional investment costs.
You have to add very important is the grain origination and distribution logistics pose. It starts becoming part of a system and it was dramatic the efficiency that we brought to the system by bringing more products from Argentina and expand – and changing the whole system in Eastern Europe.
Chris Bledsoe – Barclays
And then, just for in the quarter, I apologize if you already gave it, ROIC in the quarter and maybe if you have that kind of on (inaudible) basis excluding some of the non-recurring type of items that you have called out.
Jackie Fouse
We look at it on an annual basis. That is the only way it makes sense.
So we don't do it just for the quarter.
Chris Bledsoe – Barclays
Or even like on a trailing –
Alberto Weisser
Trailing 12-month, that is the way we look at it, yes.
Chris Bledsoe – Barclays
Okay, all right, and so, you know, if I were – if I were an ad processor that had a, you know, an acceptable ROIC say in 2002 based on the average profit per metric ton in 2002, and I didn't develop, and I did not add any, you know, any projects or invested capital during that period, then the ROIC or an average profit per metric ton would be acceptable to me, but what you are saying is the industry has added to its cost base in recent years, and that cost has gotten more expensive, and therefore to justify continuing to operate at that – at the same levels requires a greater profit per metric ton, which if not achieved you would see the industry back off of production rates.
Alberto Weisser
If I understood your question correctly this one (inaudible) processor in ‘02 who didn't invest probably by now the returns would be below cost of capital, and so, I think I made gave the example of a similar one here on the call in the past in the case of Spain. When we put together Bunge and another at that time Cereol, several of our facilities at the early 90s, it was covering cost of capital.
When we bought Cereol in ’02, it was significantly below and we shut down four plants and built two new ones. So you have to adjust, you have to improve, you have to move.
So that is part of our business. That's why you always going to see new plants in different locations, and always it is all about more efficiency and link to logistics, not always size, it is location logistics.
So there has, you will always see investments in the arena. But it is probably more a little bit growth, the long-term the growth rate of this industry is 4%, but you will also see investments because of efficiency.
Chris Bledsoe – Barclays
It's helpful, thank you.
Alberto Weisser
Welcome.
Operator
Our next question comes from Robert Moskow with Credit Suisse.
Robert Moskow – Credit Suisse
Hi thank you. Hi Alberto, I want to know if you could comment a little bit about the sugar industry in Brazil.
What we are hearing is that a lot of small processors are having a lot of trouble getting financing, that the financing costs when you can get it are incredibly high and then there is a couple of properties out there that it sounds like you’re still bidding on. What kind of competitive advantage do you have because your financing is lower than what the local players have, and if you have that, is this the time to start accelerating since the acquisitions that you are making in the region.
Thanks.
Alberto Weisser
Yes. Hi Rob.
Let us correct the – the amount of credit not to the farmers, the credit of the farmers has been less affected but to the industries we operate there is – it is much tighter. So it has become a little bit more difficult.
Also the ethanol margins are lower and so some of the players in the industry are having a little bit more trouble and that means you immediately saw that many of the expansions have been halted. So it is, the environment now is much more for a buyer than for a seller.
So we are looking at it like many others, but also you have to remember that the cost of capital has gone up. So we expect higher returns.
So at the same time, we continue expanding our mills, the two mills we bought and the one the Greenfield. So we're not stopping with that because similar to the previous question, I think it is very important to have the right size plant in the right place to have the lowest cost.
So, not everything that is in the market is interesting from a long-term point of view in terms of returns. So, prices have to come significantly down if you want to pick up one of the less efficient plants.
So I think we have shown in the past, we are disciplined, we want to continue being disciplined. There are going to be opportunities.
We are on the lookout, but we have to be careful, we have to be prudent with the current general environment.
Robert Moskow – Credit Suisse
Is that fair to say though that your cost of capital, even though it has gone up, it is still lower than say what a local player would face or do you think of Bunge Brazil cost of capital.
Alberto Weisser
Yes. Especially being a global company, investment grade, our cost of capital is significantly lower than the local market.
Jackie Fouse
But we do also look at the projects factoring in the risk of the particular geography that we are looking at. So it is a bit of a balancing act to get that right but –
Robert Moskow – Credit Suisse
Doesn’t sound like you're seeing a lot of sellers like high-quality sellers. So, we're seeing a lot of low quality sellers.
Is that fair?
Alberto Weisser
I would prefer not to comment. This is too specific but we, I think we now have a very good team, it is a large team and we have much more insight than we had three years ago and we are, look we don't need to buy.
If the opportunity is right, we would, but otherwise we will continue with our program. We are very, very happy with our decision to buy and build the ones we have in the Northern part of Brazil, in Manaus [ph] and in Matto Grasso too.
I think it has validated our strategy. We're going to have a competitive advantage there.
Robert Moskow – Credit Suisse
Okay, thank you.
Alberto Weisser
Thank you.
Operator
We will go next to David Driscoll with Citi Investment Research.
Scott Bennett – Citi Investment Research
Alberto Weisser
Good morning.
Scott Bennett – Citi Investment Research
Just wanted to understand, earlier I believe you indicated that the industry in Brazil was looking for kind of flattish growth in fertilizer volumes off of last year's week base. Given that sort of circumstances what would give you confidence that we could start to see maybe somewhat of a uptick in fertilizer prices from current levels?
Alberto Weisser
It is much too early to indicate what kind of volumes we will see in the year, but we're talking about flat because we are considering all kind of things, credit, all kind of considerations, but you could make a case that the world would need a little bit, would need more crops. So, you could make the case that there might be more sales in fertilizer, and I would say also in terms of the prizes probably we have now a bias.
Especially in phosphate and urea and ammonia there is probably an up bias on the upside. Obviously, in the case of potash, it is already at a high level.
They have come down probably a little bit too much in phosphate and urea.
Scott Bennett – Citi Investment Research
Okay. And then just another correction, you know, you had indicated that you are seeing four crushing margins in the US.
You expect that to continue next year, Argentina should be weak because of shorter crop but you indicated that, you know, soft seed crushing results in Europe should be pretty good and Brazil should be fine as well. Just wanted to know what was driving things in those markets in Argentina, excuse me, in Brazil and Europe.
Alberto Weisser
In Europe it is the – it is the right supply and demand, the right – let us call it rapeseed, some seeds and the soybeans that are needed, the soybean meal. We have a situation where the market is more or less than in balance.
So you can have normal kind of margins. In the case of Brazil, it is a – the country has continued growing.
There is a very large meat industry domestically and Brazil has become a very large also exporter of meat. So you will continue seeing a good domestic demand.
Brazil is becoming in the soybean meal area, the markets domestically are expanding at 10% per annum, the meat industry because of – as the country is getting richer and the lower-income population is having access to more funds and eating more proteins. So this is a – it is a much more domestic situation of good profitability.
And in the US, I think we will see a good second half, for sure a good fourth quarter but from now until then it will be a little bit more difficult because the livestock industry is suffering, but we think it bottomed and it is starting to look better. So for the next probably one, two, perhaps three quarters it will not be that easy, but the fourth-quarter is going to look healthy.
Scott Bennett – Citi Investment Research
Okay, thank you.
Alberto Weisser
You're welcome.
Operator
And we will take our last question from Steve Byrne with Bank of America.
Steve Byrne – Bank of America
Hi. Were the reductions that you saw in your fertilizer shipments in the year and particularly in the quarter in line with what you expect were lower application rates in your key end-markets or do you believe application rates were even worse, given buildup of channel inventory levels?
Alberto Weisser
We – we have on purpose reduced, Bunge on purpose has reduced its sales because we didn't want to have any credit issues. So, we lost a little bit market share, but everybody was careful.
So I would say that the yield will suffer. It is very difficult to say, but everybody was so careful the farmers would have loved to buy.
They really wanted it, they need it. The farm economics are fine.
So they could see how to make money, but it was much more the supply-side keeping it back, not the farmers not wanting to buy. So, it is too early to say but we think there will be a yield issue in Brazil.
Steve Byrne – Bank of America
And so if application rates were below normal once the inventory and the channel has worked through, do you expect an increase in those application rates in 2009.
Alberto Weisser
Yes and I expect a little bit more application rates and all the indications until now, it is very early, January is very early but all – how should I say, the mood is good between the fertilizer sellers and the farmers. So we were very worried in December, but it looks a little bit brighter now.
We're a little bit more comfortable with the outlook.
Steve Byrne – Bank of America
And what would you estimate the current operating rates of your fertilizer manufacturing facilities?
Alberto Weisser
There are very dull and we shut down plants, blending facilities. We even, for the first time we even reduced the production of all our mines.
We don't want to have a build-up of any inventory. We have probably from ‘08 three months of inventories we want to work just on the first before we do it, but we will start producing – we will start producing soon.
So we will ramp this up.
Steve Byrne – Bank of America
And then just lastly with the JV with OCP, how is the value of the rock transferred to the joint-venture. Is that a cost or market value based?
Alberto Weisser
It is at market – it is transferred to market. Obviously, there are some special discounts because of volume and so on, but it is basically on market, on the market level.
Steve Byrne – Bank of America
Okay, thank you.
Alberto Weisser
Thank you.
Operator
And that conclude today's question and answer session. With that, I'll turn it back to Mr.
Mark Haden for any closing remarks.
Mark Haden
Okay. Thank you everyone.
Thank you, Elizabeth. We will see you next quarter.
Operator
That concludes today's Bunge conference call. We thank you for your participation and have a wonderful day.