Hello, Wayne.
Good morning, and welcome to the Archer Daniels Midland Company Third Quarter 2017 Earnings Conference Call. All lines have been placed on a listen only mode to prevent background noise. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's call, Mark Schweitzer, Vice President, Investor Relations for Archer Daniels Midland Company. Mr.
Schweitzer, you may begin.
Thank you, Jack. Good morning, and welcome to ADM's 3rd quarter earnings webcast. Starting tomorrow, a replay of today's webcast will be available at adm.com. For those following this presentation, please turn to Slide 2, the company's safe harbor statement. Which says that some of our comments constitute forward looking statements that reflect management's current views and estimates of future economic circumstances.
Industry conditions, company performance, and financial results. These statements are based on many assumptions and factors that are subject to risks and uncertainties. ADM has provided additional information in its reports on file with the SEC concerning assumptions and factors that could cause Actual results to differ materially from those in this presentation, and you should carefully review the assumptions and factors in our SEC reports. To the extent permitted on our applicable law, medium assumes no obligation to update any forward looking statements as a result of new information or future events. On today's webcast, our Chairman and Chief Executive Officer, Juan Luciano, will provide an overview of the quarter.
Our Chief Financial Officer, Ray Young, will review financial highlights and corporate results. Then, Juan will review the drivers of our performance in the quarter, provide an update and discuss our forward look. I will now turn the call over to Juan.
This morning, we reported 3rd quarter adjusted earnings per share of $0.45. Our adjusted segment operating profit was 541,000,000, down 17% from the year ago period. Although we created value in a difficult environment this quarter, our results were below our expectations. The operating environment in the third quarter was more challenging than we had anticipated even 3 months ago. Act Services was impacted more than expected by the lack of competitiveness of U.
S. Corn and soybeans in global markets. And in oilseeds, global crush margins were even more compressed than our outlook last quarter, and we continued to experienced tighter denature margins in South America. Through the quarter, we took several actions to be even more competitive in the future. Including restructuring our global workforce, reconfiguring the Peoria Ethanol Complex working to complete several operational startups, driving additional asset monetizations, and further reducing costs through our project readiness initiative.
Some of these actions had only begun to take hold in the third quarter, As we move through the fourth quarter, we are starting to transition from the period of costs and investments in acquisitions, new innovation centers and new facilities to a period of lower capital spending and increasing benefits from these investments. Looking at the external environment, we're starting to see the possible green shoots of recovery in certain areas of our business. However, we are not counting on a significant change in conditions for 2018. We are continuing to drive operational efficiencies and asset monetizations that are lowering our cost of doing business and increasing our allocation among our businesses at an overall reduced capital spending level in 2018, which I will talk about in more detail later in the call. Now, I'll turn the call over to Ray.
Okay, thanks, Juan. Good morning, everyone. Slide 4 provides some financial highlights for the quarter. Adjusted EPS for the quarter was $0.45, down from the $0.59 in the prior year quarter. Excluding specified items, adjusted offering segment operating profit was $541,000,000, down $109,000,000 from the year ago quarter.
The effective tax rate for the 3rd quarter was 13% compared to our forecasted annual tax rate of approximately 28% due primarily to the effect of certain favorable discrete items including return to provision and a favorable outcome of a tax position related to an acquisition, partially offset by changes in the forecasted geographic mix of pretax earnings and shift to higher tax jurisdictions. Our trailing 4 quarter average ROIC of 6.4 percent is 60 basis points higher than the same period last year, and 40 basis points above our 2017 annual WACC of 6.0 percent, thus generating positive EBA of 98,000,000 on a 4 quarter trailing average basis. On Chart 18 in the appendix, you can see the reconciliation of a reported quarterly earnings of $0.34 per share to the adjusted earnings of $0.45 per share. For this quarter, we had $0.12 per share charge related to asset Aethon impairments and restructuring activities, and a $0.02 per share net gain on the sales of assets and businesses, and a $0.01 per share loss on debt extinguishment. Slide 5 provides an operating profit summary in the components of our corporate line Before one discusses the operating results, I'd like to highlight some of the corporate items affecting our quarterly results.
In the corporate lines, net interest expense was relatively flat at $72,000,000 for the full up slightly versus the prior year and below our $140,000,000 per quarter guidance on lower spending for special projects and reduced employment and benefit costs. Minority interest and other charges increased by $9,000,000. Turning to our cash flow statements for the 1st 6 months, 1st 9 months on Slide 6, We generate $1,600,000,000 from operations before working capital changes, similar to the prior year. We had favorable changes in working capital of a bit over $500,000,000. Total capital spending was about $700,000,000.
Our current expectation for fiscal year 2017 is capital spending of approximately $1,000,000,000. Acquisitions to date of $187,000,000 were primarily related to Crosswind Industries, a pet treatment manufacturer, and Chantor, a French producer of wheat based sweeteners and starches. We spent almost $700,000,000 repurchase shares and including dividends, we returned $1,200,000,000 of capital to shareholders in the 1st 9 months. Our average share count for the quarter was 569,000,000 diluted shares outstanding, down 20,000,000 from the same period 1 year ago, At the end of the quarter, we had 566,000,000 shares outstanding on a fully diluted basis. Slide 7 shows the highlights of our balance sheet as of September 30.
Our balance sheet remains solid. Our operating working capital of $7,200,000,000 was down slightly from a year ago period. Total debt was about $7,300,000,000, resulting in a net debt balance that is debt less cash of $6,600,000,000. Our leverage position remains comfortable with a net debt to total capital ratio of about 27%. Our shareholders' equity of $17,600,000,000 was similar to the level last year.
We had $4,800,000,000 available global credit capacity at the end of June, If you add available cash, we'd access to $5,600,000,000 of short term liquidity. Next one will take us through a review of business performance. Juan?
Thanks, Ray. Please turn to Slide 8. In the third quarter, we earned $541,000,000 of operating profit excluding specified items, down from $650,000,000 in last year's third quarter. 3rd quarter adjusted segment operating profit was down 17% versus the year ago quarter. Now I'll review the performance of each segment.
Starting on Slide 9, our services results were down compared with the strong prior year period. In merchandising and handling, North America grain results were negatively impacted by the lack of competitiveness of U. S. Corn and soybeans in global markets. This led to a significant reduction in margins and a decrease in export volumes Global trade generated positive earnings as our improvement actions are taking hold, while results declined from the third quarter of 2016.
Global Trade benefited from international origination margins and the expansion of destination marketing businesses. Offset by some losses incurred due to a lack of correlation on certain hedge positions. Transportation results decreased from the prior year period due to a slower start of harvest in North America, which led to lower barge freight volumes and margins. Milline and other earnings were down due to lower volumes, though the business was still a strong contributor and maintained steady product margins. Please turn to Slide 10.
The corn processing team delivered another strong quarter with results up from the year ago period. Sweeteners and starches had a solid performance with strong margins bolstering the North America business and our international operations continuing to provide solid contributions to overall results. Bio Products results were substantially higher than the year ago quarter, with ethanol benefiting from higher margins. Animal Nutrition was up over the previous year, with the specialty feed ingredients benefiting from an improving cost position despite lower amino acid prices. Slide 11, please.
Oilseeds processing results were lower for the quarter in an extremely challenging operating environment. Crushing and origination results were down. Globally, crush margins remain compressed with ample mill supplies. In North America, results were impacted by weak canola margins, partially due to higher seed costs. Our European processing business was down amid competition from significantly increased flow mill imports from Argentina.
In South America, origination remained tight due to continued low commodity prices that reduced the pace of farmer commercialization. Forcing higher basis costs. Refining, Packaging, biodiesel and other results were lower for the quarter. Biodiesel was substantially lower than the year ago quarter, primarily due to mark to market timing losses in the current quarter and weaker margins. Asia was up over the third quarter of 2016 on Wilmar results that were lower than anticipated but still substantially higher than last year's quarter.
On Slide 12, WFSI was down over the prior year period. The Wild Flavors team delivered double digit operating profit growth, driven by strong sales in Asia and the EMEA region. I have been very encouraged with the expansion of our customer base and channels. And our focus on global accounts and targeted segments. On a year to date basis, our wild flavor sales revenues are up more than 5% on a constant currency basis.
While sales revenues for Specialty Ingredients was slightly up for the quarter. Overall, operating profit results were down. We continue to work through the startup of our Campo Grande and TMG facilities which had a negative impact to our 3rd quarter results. It's important to remember that Campo Grande is not really one facility, is a complex of several different production lines, all of which are interconnected. 5 of the 6 lines are now operational, and we expect the 6th to be online before the end of the year.
In Tianjin, we are continuing to work through production bottleneck issues at our specialty fiber facility. Setting aside the startup issues, The Specialty Ingredients business is having a good year growing with sales revenue up for specialty proteins, edible beans, emulsifiers, natural health and nutrition and fibers. Please turn to Slide 13 for an update at on some of our actions this quarter. We have exceeded $300,000,000 of monetizations in 2017 and thus achieved the 2 year $1,000,000,000 monetization target that we announced in 2016. In project revenues, we continue to make significant investments to rollout lean manufacturing processes across our facilities and standardize our business systems.
We have generated operational cost savings of almost $200,000,000 on a run rate basis and are on pace to exceed went live in a second processing business. And we are in the testing and implementation phases of our first European launch set forth for the first half of next year. In Germany, we're expanding our capabilities to meet regional demand from non GMO, so in products, and we're upgrading our Midwest Willing operations. This highlights several of the actions we took in the quarter, We'll continue to update you on our progress as usual. So before we take your questions, I would like maybe to spend some time offering additional perspectives on the balance of the year 2018.
In Ag Services, we expect solid North American soybean exports and improved results in global trade, partially offset by continuing challenges in export markets. Generally, we think Ag Services Q4 performance should be similar to the prior year period. In corn, we are seeing weaker ethanol margins, which should be partially offset by stronger results from sweeteners and starches, and animal nutrition. That will likely lead to a 4th quarter that will be lower than Q4 2016. I would also add that in sweeteners and starches, we are pleased with a good start of 2018 Contracting.
In oilseeds, global market conditions will continue to impact Crush and Origination, including South American Origination, Although seasonally, our North American crush operations should experience higher volumes than in third quarter. Our value added oilseed business should deliver a solid performance. Taking altogether, We think oilseed is likely to deliver a similar fourth quarter to the year ago period. Excluding any benefits that we may experience if the biodiesel tax credit is approved retroactively for this In WFSI, we expect white flavors to continue its growth momentum in the 4th quarter, and the Specialty Ingredients business should see improving results and increased contributions from our new facilities. All told, we think WFSI is likely to be higher in the fourth quarter than the year ago period.
So looking into 2018 and beyond, we see several important factors that will positively impact value creation and growth. In terms of market conditions, while we expect some of the conditions that have impacted recent results, could persist into next year. We are beginning to see green shoots of indications that point to some improvement in the margin structures For example, global stocks of soybeans and corn are expected to start coming down after a period of buildup. Amid an environment of strong global demand growth. And the impact of competing feed proteins to soybean meal appears to be lessening.
More importantly than external conditions, however, we believe that 2018 will be the year that we start to benefit from the full impact of recent investments and many of the aggressive actions we have taken in recent years. Let's take them one at a time. First, as I already mentioned, we will begin harvesting the fruits of the investments we have made over the past years. We will see increased contributions from facility startups, particularly Campo Grande throughout 2018. But also improvement in earnings from the Tianjin China complex and various investments across all four of our business segments.
And we are not anticipating any significant startups or acquisition integrations that could drag down earnings in 2018 unlike what we saw in 2018 'sixteen 'seventeen. 2nd, will be completely in the implementation of the cost and efficiency actions that we announced last quarter, and they will deliver increased benefits next year. 3rd, we expect to see continued growth in contributions from the longer term transformation and investments we have made since 2014 as our portfolio management actions and our operational excellence achievements all delivering increased benefits. All of this combined with strong demand, provide us with a positive outlook for 2018 and beyond. Although we mentioned some green shoots, in ag services and oilseeds, we are not counting on significant changes in operated conditions.
And therefore, we are taking further actions. We will reduce our overall capital spending level to approximately $800,000,000 from the recent historic levels of closer to $1,000,000,000 as part of harvesting the benefits of recent investments. And more importantly, we are reallocating capital spending away from the origination and oilseeds crushing businesses where generally there is adequate capacity toward the value added businesses in support of the growth portion of our strategic plan. All told, we expect a period of stronger cash flows and returns, lower CapEx needs, and an environment of strong growth demand, all of which will benefit our shareholders and place ADM on a future path of growth. With that, operator, please
Your first question comes from the line of David Driscoll with Citi.
Thanks guys. Can you give us just a little bit of quantification for the one time cost associated with the recent investments, things like startup costs that have and will occur in 20 17, but won't reoccur in 2018. And related to that, can you also just talk a little bit more with quantification about the operating profits that you expect that these investments could generate next year.
Yes, David. Thank you for the question. So, we've been talking about Campo Grande and Tianjin And it's just not only that is also we've been building the capabilities in this business. It's a business that their value proposition is resonating very strongly with customers. We are having a lot of success in generating new projects in terms of systems and solutions for our customers as they seek higher growth rates.
So, this facility, Campo Grande, for example, in Brazil will be the best specialty proteins facility in the world. Is 6 facilities integrated, very, very sophisticated complex. And I'm very pleased to say that we are in the 5th stage out of 6. So we have only one more to bring to operations in the last quarter. But we also built 3 customer innovation centers with rapid prototyping capabilities We have one in New Jersey here in the U.
S. We have one in Australia. We have another opening up now in November in Singapore, and we're going to have another one in South America. So when you put all these things, David, together, probably for 2017 so far, is have impacted operating profit, but about $30,000,000. So that's a significant number for the business that is relatively new.
So we are very pleased the way, wild flavors have been holding that with double digit operating profit growth and and certainly growing at revenue at the rate of 5%. So, we expect all these facilities that during 2016 'seventeen has been a headwind to that business to actually become a source of profit in 2018. And to be honest, it's not only the cost of those facilities I'm bringing there, but Then you have also the cost of the facilities you use to actually fit the market for those facilities where you lose your normal profit because you take on businesses that have higher freight, if you will. And also these facilities have taken a lot of management attention as we bring the leadership ranks of this and we bring the facility to life. So again, they probably mute how excited we are about WFSI WFSI on a customer front is hitting on all cylinders, and we'll feel very proud and very excited about that in 2018.
So just to be clear, you're saying that in 2017, these all these investments resulting about a negative $30,000,000 impact headwind for the business and much of this is one time in nature. When we go to 'eighteen, those startup expenses go away. And then these businesses actually, can they produce positive operating profits on their own outside of the startup expenses that we would take that negative $30,000,000, reverse it and then add to it some reasonable leasing for in relation to that $30,000,000 of positive impact from those from all those investments. Is that the right way to think about the 'eighteen impact?
David, that is correct. That is correct. Normally it takes us, you know, with the, we decided on a bolt on an organic growth strategy because we thought M and A in this space were too expensive right now. So we think it's more value creating. I think the issue that is more value creating long term but it's probably more painful short term because every time you build a plant, you have 18 months of basically build and cost And then the forward 6 months or 9 months after startup, you're not making your full your full range of profits from this product.
So again, with different contributions, your, your, assessment is correct. We're going to see the reversal of those costs that will not happen there and we're going to start seeing positive contribution those investments through 2018.
Your next question comes from the line of Ann Duignan with JP Morgan. Your line is open.
Good morning, Ann. Good morning,
Ann. Just to start, just on clarification, you noted that you expect corn performance to be lower in 4q than year ago, but I don't think you told us by specifically the volume.
Ann, I think it's about ethanol. If you look at, for example, same quarter last year. So Q4 last year was a strong ethanol margin environment, probably in the range of maybe $0.20 or something like that. We are looking more now in the single digit type of margins going into Q4. So, that's the biggest delta.
It will be offset partially and by a stronger performance in sweeteners and the start and a better animal nutrition results. So, we have improved our cost position there. But all in all, we will not be able to offset strong ethanol performance of same quarter last year. That's what we're saying.
Okay. I appreciate the color. And then on the reallocation of CapEx away from Ag Services and into the growth year businesses or the value add businesses, One, is this an acknowledgement that Ag Services is facing some structural headwinds, just given the global glut of all three soft commodities?
Yes. And I think we have we have a knowledge that there is a part of Ag Services that is suffering, as you describe, some structural issues. I would say, when we set the reallocation of capital, a couple of things at that. First of all, we do believe that the growth of production with the coming years will come from more yields and less geographic expansion. So as such, we don't foresee to have to build elevator or ports in other areas.
We have built, as you know, a transit or in Argentina. We are investing in Santos and Barcarena in Brazil. So we feel that we are complete from that perspective. So destination marketing, which is our effort, they are doesn't require the same amount of capital. And So in general, we don't see that much of a need.
And if you think about even export capacity in North America, there is enough export capacity if the U. S. Will not have simultaneous export of soybeans and corn. Because we expect South America to be competitive in corn through the first quarter. So that's how we're thinking about it in 20 18.
So we feel that we need less capital going forward in that business.
Okay. I appreciate the color. I'll get back in line in the interest of time. Thank you.
Thank you, Alan.
Your next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is open.
I guess the first I guess the first question on oilseeds and coming back to the 2018 comments, and generally you said seeing some possible benefits of green shoots, but not counting on significant change. And I'm trying to think about and you've talked about redirecting capital away from oilseeds. Now can you talk about the path to the business realizing a higher capacity utilization, both your own and industry level to improve the crush margins? Does the tension have to come from reduced Argentinian exports? Is it is it just you need to couple more years to grow into the meal demand?
Can you help me think about the bridge to, to a better oilseed environment from where we are today?
Yes, sure. So, a couple of things that we're seeing here. First is global mill demand is expected to accelerate in the near term. Obviously, our customers are are very strong and they've seen a strong profitability at this point in time. We've seen global animal protein production growth and some of them are actually have announced increasing productions in new plants.
So we see that coming soon. The other thing that we are seeing less of that I see a lessening effect are some of these substitutes. If you think about the impact of competing proteins that we have last year or this year between ddgs and feed week, feed week, we see that lessening and we think that that's going to continue to help the business. Think about the demand we're seeing in in China being very, very strong for protein. If you think about so far this year when you compare to last year, crush in China has increased 11% and soybean meal destination stocks basically stay flat.
So it means that it has been a true demand growth of 11% in China, which is very strong. And we started to see also in general that price is working its way through the cycle. So price is creating less production, if you will, in some marginal areas, but it's also increasing demand. So it takes a while for soybean meal prices to work its way into the Russian. But we always have to remember that this price is of milk.
Milk is always the preferred choice to feed any of this animal. This is the goal under. So at equal prices or a lower price, it certainly is going to come back into that. So this is just a little bit of the green shoots, the environment. Of course, the business had made several improvements as they went through the year and they have looked at their facilities, they have optimized some things that they needed to be optimized.
And they continue to be very excited about the possibilities that the value add continues to bring into the business because being performing very well. It's been the 2nd best year of that business. And, I would say with with a little bit of a reduction in the substitute milk feeding products, we expect oilseed to become a bigger contributor in profit than they were in 2017. Okay.
And then just a second question, in the last couple of years, you had talked to this earnings construct of fell at a 2:30 or so EPS base with a dollar or a dollar 50 of earnings improvement from things that you could mostly control.
Has the experience year to
date in 2017 led you to change the view of the base or the timing of how long it could take to, to realize some of those, some of those earnings run?
No, listen. Let's review the 4 buckets for a second, so for everybody's sake. The first bucket was wild flavors $0.10 per year accretion. And while flavor has been growing, operating profit 20% every year that we own them. So we are very happy with that.
That's going in the right direction. The second bucket was operational excellence and we continue to deliver those $100,000,000 of run rate improvements every year. So that's on track. The 4th bucket was and I'm going to get back to the third one in a second. But the 4th bucket was buybacks and obviously, we generating the cash flow to do that.
The 3rd bucket is where I think I need to call your attention and that's the one that's coming a little bit slower just because we mentioned the contribution of those assets that were $0.10 on average, the problem that we have, I explained to you before when I answered Dave's question is, in order to get those $0.10, you go through a couple of years in which you have negative impact to the P and L because you're building that plant. So in reality, that hits you a little bit later. And We took those charges in 2016 2017 as we were building those projects. That's why to a certain degree now, we are turning a page from that period of investments and having those costs that we never adjusted out because they are normal cost of operations. And now in 2018, we're not going to have all those.
So we were integrating we see small acquisitions and we were building plans. Now you're going to see that 3rd bucket hitting our P and L on a positively positive perspective from 2018 or from Q4 onwards versus what it was a negative impact, if you will, during 2016 2017 as we were in And this was a conscious decision, as I said before, because we thought that we have an opportunity there to grow. We needed to build a abilities that, as I said, are resonating with the customers. But we thought it was more value creating to do it organically than given the current multiples and to do it through an acquisition in the ingredient space.
Yes, that's helpful. I'll pass it on.
Your next question comes from the line of Ken Zaslow with Bank of Montreal. Your line is open.
Hey, good morning, everyone. Good morning,
Ken.
Good morning, Ken. I guess what I think about is the oilseed business, talk about the improvement or kind of holding it out next year, but can you talk about the new capacity that's coming online over the next call it, you know, 12 months from AGP, Purdue, all that stuff. And how does that play out? Because it seems to me that the disconnect between the forward and the cash may be implied by that? And how are you thinking about the recovery there with the new capacity coming online?
Yes, Ken, it's Ray here. I mean, clearly, there is capacity coming online, but that's also a little bit of recognition that there is global protein growth around the world. I mean, if you look at the trends like 4% to 5% growth in terms of, meal demand and for teen demand. From our perspective, I mean, some of the recent, the quarter's results, they've been impacted by other factors. I mean, clearly, when we take a look at our results in Q3 for, for oilseeds, we've seen that as an example, a lot of pressure in terms of the South American crop impacting particularly the European operation.
A lot of meal, actually from Argentina went over to Europe and actually caused us to have one of our lowest quarters from a crush perspective over in Europe. We actually think that over time will equalize itself. We actually think production levels will adjust in order to take that into account. We've also seen, for example, in the oilseeds results, part of it is just due to the Simply South American Origination, We actually entered the 3rd quarter being more optimistic regarding farmer commercialization. In fact, at the time of the last earnings call, we're actually seeing some good movements in terms of the crops.
But what happened was the currency actually moved the other way as we move through August. And then the farmers actually just really slowed down commercialization. And that really resulted in our South America results being a lot lower than what we had thought. We also, in the case of Walmart, I mean, they had a good quarter, but clearly below our own internal expectations. And it was about a $35,000,000 impact versus our own internal expectations.
So I think, Ken, when we look at the quarter, I think that there are certain factors that clearly impacted us. It doesn't really change our longer term perspective on oilseeds, which is really, demand continues to be robust for a protein. We're seeing China continue to be very, very strong in terms of demand side We do believe that while there's some capacity additions, we actually think that's going to be limited in some respects as the market really adjusts to the crush mark levels. And I think we actually get to a level whereby there's going to be better balance and we're going to see industry margins actually recover in their crush business.
Okay. That's interesting. The second point question I have is when I think about China and the ethanol, they're going to be in 2020. Can you talk about the impact that would have on either corn, ethanol, and DDGs and how that will affect your business?
Yes, Ken. So, so today, China, consumption is about 2,600,000 tons, right, ethanol is accepted or or used in about 11 provinces in the country. So when they declare that they're going to try to be E10 2020. That means going from 2.6 that they are today to about 12,000,000 tons. The current estimate of capacity being built there is that they're going to get to 4,000,000 tons in 2019.
So And then the government has declared their intention that by 2025, I think they would like to have its cellulosic ethanol So it seems difficult to see that if they're going to have 4,000,000 tons of domestic capacity in 20 19 and by 25, they're going to be 100 percent cellulosic that makes sense to build 8,000,000 tons of ethanol capacity in for a couple of years, if you will. So, and don't forget also, you know, their ethanol is both corn and rice. So I'm just assuming that everything is going to go corn. So I think at this point in time, if I think about China, if ethanol is important for reducing pollution, there are going to be better ways to reduce pollution than using corn because that is using a disproportionate amount of water that China doesn't have. If I'm a strategic guy in China, why will I use water to grow corn?
I'd rather go into electric vehicles or importing corn So to me, it's going to be more the impact of importing corn than actually the local production of ddgs naturally, if there is a more consumption of or production of domestic ethanol, you're going to have some DDGs, but I don't expect the impact at this point in time, given the numbers and given the dynamics I just describe to be big. I probably think that that's going to be a positive for us in terms of it's going to create a big ethanol market that every now and then, I think we're going to, we're going to export to like we've been doing to Brazil. So, and I think it's going to take some imports of corn from the U. S. As I said, when you have 22% of the world population and 6% of the water, I don't think it makes a lot of sense to use that water to create the fuel that you're going to burn.
I think you're going to create you're going to use that water to feed your population.
So you don't think they're going to end up using corn to make ethanol to reach that 2020,
I think they're going to use it can to reduce their stocks. I think on a forward basis, to me, personally, it doesn't make a lot of sense, as I said, to use water for that. The inventory that they have that they need to reduce, sure, I think they're going to use that. I'm not sure they're going to be building a lot of plants beyond 3,000,000 or 4,000,000 tons of capacity. I'm not sure I'm going to see 12,000,000 tons of capacity in ethanol being built in China.
That's what I'm saying.
And but if you have even that in the short term, wouldn't that affect wouldn't that create a lot of DDGs, which would affect the soybean meal demand? I know you said that soybean meal demand is going to be very strong. Is that not a competitor of it?
Yes. I think in the short term, yes, but all I'm saying is if they get to E10, that could be impactful. But right now, it could be a couple of 1,000,000 tons of DDGs, so no more than that. It's not 10,000,000 tons of DTG. That's what I'm saying.
It's manageable. With the crush, I mean, with the demand that is growing 11% per year, if that I think is to be the most important factor when we think about China. If demand continues to grow, all these things are sorted out and will be absorbed.
Perfect. Thank you.
You're welcome.
Your next question comes from the line of Faiza Islam with Stephens, Inc. Your line is open.
Hello, Farah. Are you there?
Could we just continue on the ethanol question and, just talk about potential of U. S. Ethanol in Mexico how is that market developing?
Yes, I mean, in Mexico, as you probably heard, for the government is actually looking towards introducing more ethanol into the market. There's about 3 cities that, they're not looking to put in right now, but outside those three cities, we're looking actually to actually bring in additional ethanol blends. Up to 10% in those areas there. So we're rather encouraged that we should see incremental growth in that area. I know there's been some talk regarding some injunctions out there, but we think that's going to get sorted out.
We do believe, for example, Mexico is one of these markets whereby vehicle sales will continue to grow. And so basically consumption is going to grow in Mexico. And given the pollution considerations in Mexico, we believe ethanol is actually a fairly clean field that will actually help them address some of their pollution issues.
So how much FL would you anticipate going into Mexico in 2019 and longer term?
Think it's a couple of 100,000,000 gallons. I mean, I think that's what we're thinking about right now.
Okay. And then I think, what you're going to see that the current price is definitely trading in the U. S. I think we're going to continue to buy, to buy demand and to open up market I mean, we're trading what the $0.30 below gasoline. So imagine versus all the other oxygenates.
So I think that between pollution in whether it's China, India, or Mexico and the low price of ethanol, we're going to continue to see an export market that's going to be vibrant because we're going to open up new destinations.
That's helpful. And then could we just talk about ag servicesoilseeds? And clearly, the origination patterns for grain have changed, in North America and South America with farmers tending to hold onto their, grains How is ADM planning for the South American harvest differently this year versus the last harvest? And how are you thinking about changing your organization in, the U. S.
To accommodate kind of more sporadic farmer selling rather than this consistent selling we saw historically.
Let me take a stab at that, Farha. And so in North America, I would say, we've seen a little bit of a shift maybe in the way the farmer uses ADM, if you will, and the times of the year in which the farmer uses ADM. Farmers that have consolidated have become a little bit larger, maybe has less of a need for, for in certain parts of the country for ADM to be in, for example, a track elevator but we continue to be very important as a rail elevator, if you will, or as a process or as an export terminal. So, we see how, for example, our marketing services, the marketing offering that we are giving the farmer has become a much more complete and much more sophisticated as it has become more difficult for the farmer to make money. The level of sophistication and how they need to make decisions has increased.
And in that, our relationship has become more sophisticated, if you will. So, so I think that basic things like maybe drawing or storage, sometimes we do less of. But we do more sophisticated things. So, we see, for example, the growth of our stevidoring operations, the growth of our destination market in the growth of our farmer services. So, that's an evolution that happened over time.
It's not something that happened at one shot. In terms of, South America and how are we dealing with that? South America has 2 elements. 1 is the pricing and that the pricing of the crop, the second is the currency. And we are, of course, making decisions on how to handle that differently every year.
And at times we get it right and at times maybe like this year, we don't get we didn't get it right. So The teams are there continuing to look for that. Markets have become farmers have become larger So as I said, also in South America, the level of the discussion and the way in which they use our Ag Services continues to evolve into more sophisticated risk management, more sophisticated commercialization contracts that we have. And as I said, some services that we are providing are giving us benefits that maybe we didn't get in the same proportion before. Like for example, in the U.
S, the U. S. Right now being less competitive on a global basis, we are using a lot of our a lot of our storage capacity for caries. And those caries are strong and they're giving us maybe a higher percentage of profitability that maybe export margins were giving us last year, for example. So I would say it's a complex business in terms of it continues to shift and evolve.
But Maybe the problem that we're having with that is that some of this evolution doesn't happen as quickly as we would like in order to offset the decline. We are very pleased with, as I said before, with destination marketing, for example, is growing 10% per year and is exceeding probably our expectations for 2 or 3 consecutive years, but it takes time when all of a sudden you need to offset the fact that the U. S. Is not competitive in corn, which is such a big volume crop. So, so I think it's an evolution.
I think over couple of years, we are not worried about it. In the particular short term, it becomes a little bit more painful, like it happened in this quarter.
That's helpful. Thank you.
Your next question comes from the line of Heather Jones with Vertical Group. Your line is
open. Good morning.
Good morning, Heather.
I apologize if I may ask questions have been answered both on another call earlier. But, I wanted to start with, Ethanol. I was just wondering if the recent EPA comments regarding the RVO and, with biodiesel, ethanol, etcetera, do you think those targets, those mandates are gonna necessitate a much more aggressive rollout of E15 over the next, 2 or 3 years. I mean, my math was to just so, but I would love to get y'all's, thought on that.
No, I just think that with the RBOs, I mean, we're talking about, again, 10,000,000,000 gallons in the case of ethanol here. We're seeing the U. S. Gasoline. It continues to grow.
Albeit at a slower rate, but it continues to grow. On the export side, looking at next year, we're probably looking for some modest growth versus the, say, the 1,300,000,000 gallons that we're seeing this year 2017. So we could be up to about 1,400,000,000 gallons. And then there's upside, in terms of some other markets that will such as Mexico and as Juan even indicated in the case of China, they may decide to open up bringing in ethanol as opposed to grown corn using their water in order to make their own ethanol. So like over time, we do see, total demand for US Ethanol continue to move up over the medium term compared to kind of where we are at this point in time.
I think I wasn't clear in how I phrased my question. I'm seeing the 15,000,000,000 gallon mandate in our domestic, the domestic use have fallen well short of that for a sustained period of time. And biodiesel has tended to fill that gap. But as that, you know, as we get less imports in on the biodiesel side because anti dumping duties and all, it just seems like that gap is going to become more difficult for biodiesel to fill And so my question is, do you think that's going to necessitate a more aggressive rollout of E15 here in the U. S?
To meet that domestic mandate?
I mean, I think that, again, looking at domestic gasoline demand, currently about 14 point $4,000,000,000 in terms of the ethanol blend, that's probably going to move up to 14.6% next year. So therefore, I mean, the demand side is moving up towards the 15,000,000,000 gallon level, which will be the mandate in 2018. So we do believe that there is growth in the domestic market. It will be approaching the 15,000,000,000 gallon don't necessarily need to have like some of the biodiesel in order to meet that particular, those RBLs there.
I think if your question is if you see excess ring inventory dwindle to lower levels and I think that blending of E15 and higher level blends will be required going forward. If that's what you're referring to that, to the need
Yes, that was yes, that's what I want. Thank you.
So I think that's a logical conclusion and we are ready to increase those levels from a perspective.
Okay. And then moving to China, your comments on the meal demand there. So clearly, I mean, if you look at their poultry production, their beef production, just livestock production in general, it's not up that much. So that growth is, it's up actually less than 1%. So the growth has been driven by you know, commercialization of their livestock production as well as a move into aquaculture.
And so I was just wondering if you If you guys have any insight on how far along we are in that, that transition, you know, within their livestock production, so we could get a sense of, how many more years we have of that kind of robust growth there?
Yes. I'm not sure that I have done level of granularity top of my head, Heather, to answer you. So we may get back to you later on that. When I see a production, in the world. And we analyze this, that macro numbers, I'm encouraged not only by the whole growth demand in China, but also the rest of the world is when you look at the next 10 years, it's a very significant percentage and it's actually probably twice the size of the China market in that sense.
So we not only see that growth in China, and we promise we're going to get you the granularity on those bispecifics in China. But also the rest of the world, don't forget that. That is a significant number. When we look at the numbers to when you look at the macro numbers together to fit the world, we cannot forget some of these locations when you add all up in 10 years, we need another Brazil in terms of production in order to fit the world. Think about that.
We don't need Brazil to grow. We need another Brazil. Where we're going to get another Brazil is the biggest question, to be honest, not where demand is going to be there. Is where we're going to get another Brazil. And that's what we when you look at the demand in the rest of the world is If you think about in 1,000,000 tons, we're going to go in the rest of the world from about 130,000,000 tons to about 160,000,000 tons in the next 80 years or something like that.
So that's a significant number, and I'm not even mentioning China, that number. So we feel that the demand side is not going to be the problem. The problem is can we adjust the supply side and can we do it in a way that we can fit the world over the next 8 to 10 years.
Okay. Thank you for that. And my final question is sticking with all seeds in the U. S. Going back to Ken's question about expansion, the majority of its expansion is being done by smaller players.
So
and that's tended to be one of the problems in Brazil and Argentina is the fragmentation and just and the smaller players being less rational. So I was wondering if that is a concern of you guys for North America because it has been such a strong market And you, you pay in a very convincing picture of the long term demand outstripping supply was wondering if you have any concerns over the next, say, 2 to 3 years of there being at least some temporary dislocate and the supplydemand balance in the North American market?
Yes, Heather. Always, as we look at the dynamics of every market, the competitive pressures we receive, we have some pressures coming at different times. As the last year, we feel the pressure of substitutes. Certainly, some of these smaller players trying to fill up their capacity will have to make their space at the beginning. We continue to have very well integrated facilities, not only integrated with the feedstocks or but also integrated into refineries.
With the sewing capacity. So we feel strongly about in the long, medium term, long term gain. We have the position to stay there. Will we have disruptions with some of these small players get into the market? Yeah, they will be localized disruptions and we will have to manage that.
But we tend to manage that. As I said, every year, there is something that we need to manage. So overall, I think we're going to be all right.
Okay, perfect. Thank you so much.
Your final question comes from the line of Eric Larson with Buckingham Research. Your line is open.
Yes. Good morning, everyone. Hey, Eddie. How are you? Good.
Thanks. I just want to talk a little bit more, just get a little bit more cadence on the, on the Ag Services business in the quarter. I noticed in your working capital that, it was a significant cash contributor in the quarter. And this is typically a quarter where you start using a little cash, not not obviously as significant as the 4th quarter, but there were just so many moving parts in that Ag Services business in the third quarter. We saw, we saw, Significant farmers selling early on in the quarter.
Then we had the water problems on the Mississippi and the Ohio. Raised our, costs. So we were even less competitive in export markets. We had a delayed harvest. There were just, just a whole confluence of just, unusual events year over year.
And, you mentioned that your storage number should look pretty good. Which I would definitely agree to. Can you just kind of connect the dots for us, Juan, or Ray, you know, as to the dynamics in that third quarter, and you gave us a little bit of what the fourth quarter is going to look like, but how does this all play out for 'eighteen for your ag services with a very unusual third quarter.
So just made some perspectives on the 3rd quarter. First of all, you're right. I mean, it's actually a favorable environment for us to have ownership. And when you actually take a look at our inventory levels, it actually went up. So we actually did have good ownership in order to take advantage of carries.
Now, our total working capital did not go up because we actually managed the rest of the working capital, including receivables and payables very, very effectively to offset the increase in terms of ownership that we had on the inventory side. The other aspects of Ag Services in the third quarter was, I mean, clearly, it was below our expectations. A part of it is just due to the fact that just handling volumes were actually down during the quarter versus our initial expectations. In fact, handling volumes about down 20% versus where we thought we would be. And with lower volumes, that had an impact on our margins.
And so average margins versus where we thought we would be were about 50% lower, in the U. S. Just a lot of it's volume driven. The other factor is like in global trade. I mean, we had a very good quarter in global trade, but we kind of had a one off item here in the sense we had some hedges on some Black seed sales on both corn and wheat.
We hedged it off some North American exchanges and there was there was kind of like a lack of correlation between the hedge and the underlying movement. And that was about like that was over a $20,000,000 impact for us, which is within the quarter here. So, but as we kind of look forward, we do have good ownership. There are carries in the market. We know our volumes are going to be moving up in the fourth quarter, both in terms of soybean handling.
And even in the case of corn, we're actually starting to see U. S. Becoming more competitive in December now. So that's going to be a positive story for us. And that's what gives us more confident.
Frankly, we also have more visibility in terms of our book looking into the last 2 months of this year than we had, in terms of visibility of looking into August September at the time of our second quarter earnings call. So that's what gives us more confidence in terms ag services for, for 4th quarter in terms of, an improvement versus kind of what we're seeing right now. Looking at 2018, again, it's still early into 2018, but we do believe that our strong ownership position with carry into the new year. And frankly, we're still seeing great global demand. And so that should translate into some good numbers We're seeing stocks to use ratios, maybe stabilizing, maybe coming down.
So that could also point towards the situation whereby the markets may actually start normalizing a little bit and provide us with more opportunities in order to merchandise.
Thanks, Ray. I got the sense that your book has to be better as well as your carry. I mean, obviously, we can see that in the cash market. So That's what I thought was the answer and I appreciate the clarity. Thank you.
Hello? Hello? Okay, Jack.
Thank you.
It seems like the backup line was playing music. I would now like to turn the call back over to Juan Luciano for closing remarks.
Thank you, Jack. So thank you for joining us today. Slide 15 notes an upcoming investor event where we'll be participating in Chicago. As always, please feel free to follow-up with Mark if you have any other questions. Have a good day, and thanks for your time and interest in ADM.
This concludes today's conference call. All participants may now disconnect.