adm10kfy11.htm

 


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.  20549
FORM 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2011

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from________ to _________

Commission file number 1-44

ADM Logo
ARCHER-DANIELS-MIDLAND COMPANY
(Exact name of registrant as specified in its charter)

Delaware
41-0129150
(State or other jurisdiction of
(I. R. S. Employer
incorporation or organization)
Identification No.)
   
4666 Faries Parkway   Box 1470
Decatur, Illinois
62525
(Address of principal executive offices)
(Zip Code)
   
217-424-5200
(Registrant's telephone number, including area code)
   
Securities registered pursuant to Section 12(b) of the Act:
   
Title of each class
Name of each exchange on which registered
   
Common Stock, no par value
New York Stock Exchange
 
Frankfurt Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:       None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes x   No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes ¨  No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x  No ¨
 

 
 
 

 


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x  No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  x                                                      Accelerated Filer  o
Non-accelerated Filer     o                                                      Smaller Reporting Company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

Common Stock, no par value--$18.7 billion
(Based on the closing sale price of Common Stock as reported on the New York Stock Exchange
as of December 31, 2010)

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Common Stock, no par value—675,797,974 shares
(July 29, 2011)

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the annual meeting of stockholders to be held November 3, 2011, are incorporated by reference into Part III.

SAFE HARBOR STATEMENT

This Form 10-K contains forward-looking information that is subject to certain risks and uncertainties that could cause actual results to differ materially from those projected, expressed, or implied by such forward-looking information.  In some cases, you can identify forward-looking statements by our use of words such as “may, will, should, anticipates, believes, expects, plans, future, intends, could, estimate, predict, potential or contingent,” the negative of these terms or other similar expressions.  The Company’s actual results could differ materially from those discussed or implied herein.  Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Form 10-K for the fiscal year ended June 30, 2011.  Among these risks are legislative acts; changes in the prices of food, feed, and other commodities, including gasoline; and macroeconomic conditions in various parts of the world.  To the extent permitted under applicable law, the Company assumes no obligation to update any forward-looking statements as a result of new information or future events.
 

 
 
 

 

Table of Contents

Item No.
Description
Page No.
     
 
Part I
 
1.
Business
  4
1A.
Risk Factors
11
1B.
Unresolved Staff Comments
15
2.
Properties
15
3.
Legal Proceedings
17
4.
Reserved
17
     
 
Part II
 
5.
Market for Registrant’s Common Equity, Related Stockholder Matters,
  and Issuer Purchases of Equity Securities
 
18
6.
Selected Financial Data
21
7.
Management’s Discussion and Analysis of Financial Condition and
  Results of Operations
 
23
7A.
Quantitative and Qualitative Disclosures About Market Risk
38
8.
Financial Statements and Supplementary Data
40
9.
Changes in and Disagreements With Accountants on Accounting
  and Financial Disclosure
 
89
9A.
Controls and Procedures
89
9B.
Other Information
89
     
 
Part III
 
10.
Directors, Executive Officers and Corporate Governance
90
11.
Executive Compensation
93
12.
Security Ownership of Certain Beneficial Owners and Management
  and Related Stockholder Matters
 
93
13.
Certain Relationships and Related Transactions, and Director Independence
93
14.
Principal Accounting Fees and Services
93
     
 
Part IV
 
15.
Exhibits and Financial Statement Schedules
94
 
Signatures
98
     


 
 

 

PART I

Item 1.
BUSINESS

Company Overview

Archer-Daniels-Midland-Company (the Company) was incorporated in Delaware in 1923, successor to the Daniels Linseed Co. founded in 1902.  The Company is one of the world’s largest processors of oilseeds, corn, wheat, cocoa, and other agricultural commodities and is a leading manufacturer of vegetable oil, protein meal, corn sweeteners, flour, biodiesel, ethanol, and other value-added food and feed ingredients.  The Company also has an extensive grain elevator and transportation network to procure, store, clean, and transport agricultural commodities, such as oilseeds, corn, wheat, milo, oats, and barley, as well as processed agricultural commodities.  The Company has significant investments in joint ventures.  The Company expects to benefit from these investments, which typically aim to expand or enhance the Company’s market for its products or offer other benefits including, but not limited to, geographic or product line expansion.

The Company’s vision is to be the most admired global agribusiness while creating value and growing responsibly.  The Company’s strategy involves expanding the volume and diversity of crops that it merchandises and processes, expanding the global reach of its core model, and expanding its value-added product portfolio.  The Company seeks to serve vital needs by connecting the harvest to the home and transforming crops into food and energy products.  The Company desires to execute this vision and these strategies by conducting its business in accordance with its core values of operating with integrity, treating others with respect, achieving excellence, being resourceful, displaying teamwork, and being responsible.

During the past five years, the Company significantly expanded its agricultural commodity processing and handling capacity through construction of new plants, expansion of existing plants, and the acquisition of plants and transportation equipment.  The Company currently expects to spend approximately $2.0 billion on capital expenditures in fiscal year 2012, primarily for acquisitions and expansions of processing plants as well as for storage facilities, transportation equipment, and other capital projects including projects aimed at improving efficiency.  The Company anticipates that approximately one-half of these investments will relate to non-U.S. operations and a significant portion of the U.S. investments will support the Company’s ability to serve export markets.  There have been no significant dispositions during the last five years.

Segment Descriptions

The Company’s operations are classified into three reportable business segments: Oilseeds Processing, Corn Processing, and Agricultural Services.  Each of these segments is organized based upon the nature of products and services offered.  The Company’s remaining operations, which include wheat processing, cocoa processing, and its financial business units, are not reportable business segments, as defined by the applicable accounting standard, and are classified as Other.  Financial information with respect to the Company’s reportable business segments is set forth in Note 16 of “Notes to Consolidated Financial Statements” included in Item 8 herein, “Financial Statements and Supplementary Data.”



 
 

 


Item 1.
BUSINESS (Continued)

Oilseeds Processing
 
The Oilseeds Processing segment includes activities related to the origination, merchandising, crushing, and further processing of oilseeds such as soybeans and soft seeds (cottonseed, sunflower seed, canola, rapeseed, and flaxseed) into vegetable oils and protein meals.  Oilseeds products produced and marketed by the Company include ingredients for the food, feed, energy, and other industrial products industries.  Crude vegetable oils produced by the segment’s crushing activities are sold “as is” or are further processed by refining, blending, bleaching, and deodorizing into salad oils.  Salad oils are sold “as is” or are further processed by hydrogenating and/or interesterifying into margarine, shortening, and other food products. Partially refined oils are used to produce biodiesel or are sold to other manufacturers for use in chemicals, paints, and other industrial products.  Oilseed protein meals are principally sold to third parties to be used as ingredients in commercial livestock and poultry feeds.  The Oilseeds Processing segment also produces natural health and nutrition products and other specialty food and feed ingredients.  In North America, cottonseed flour is produced and sold primarily to the pharmaceutical industry and cotton cellulose pulp is manufactured and sold to the chemical, paper, and filter markets.  In Europe and South America, the Oilseeds Processing segment includes origination and merchandising activities of a network of grain elevators, port facilities, and transportation assets used to buy, store, clean, and transport agricultural commodities, as adjuncts to its oilseeds processing assets.  In South America, the Oilseeds Processing segment operates fertilizer blending facilities.

The Company has a 16.4% ownership interest in Wilmar International Limited (Wilmar), a Singapore publicly listed company.  Wilmar, a leading agribusiness group in Asia, is engaged in the businesses of oil palm cultivation, oilseeds crushing, edible oils refining, sugar, consumer pack edible oils processing and merchandising, specialty fats, oleo chemicals, biodiesel, fertilizers and soy protein manufacturing, rice and flour milling, and grains merchandising.

Effective December 31, 2010, the Company acquired Alimenta (USA) Inc., and as a result of the transaction, now owns 100% of Golden Peanut Company LLC (Golden Peanut).  Golden Peanut is a major supplier of peanuts and peanut-derived ingredients to both the U.S. and export markets and operator of one peanut shelling facility in Argentina.  The Company began consolidating the operating results of Golden Peanut in the third quarter of fiscal 2011.

The Company has a 50% interest in Edible Oils Limited, a joint venture between the Company and Princes Limited to procure, package, and sell edible oils in the United Kingdom.  The Company also formed a joint venture with Princes Limited in Poland to procure, package, and sell edible oils in Poland, Czech Republic, Slovakia, Hungary, and Austria.

Stratas Foods LLC, a joint venture between the Company and ACH Jupiter, LLC, a subsidiary of Associated British Foods, procures, packages, and sells edible oils in North America.  The Company has a 50% ownership interest in this joint venture.

The Company is a major supplier of agricultural commodity raw materials to Wilmar, Edible Oils Limited, and Stratas Foods LLC.


 
 

 


Item 1.
BUSINESS (Continued)

Corn Processing

The Company’s Corn Processing segment is engaged in corn wet milling and dry milling activities, with its asset base primarily located in the central part of the United States.  The Corn Processing segment converts corn into sweeteners, starches and bioproducts.  Its products include ingredients used in the food and beverage industry including sweeteners, starch, syrup, glucose, and dextrose.  Dextrose and starch are used by the Corn Processing segment as feedstocks for its bioproducts operations.  By fermentation of dextrose, the Corn Processing segment produces alcohol, amino acids, and other specialty food and animal feed ingredients.  Ethyl alcohol is produced by the Company for industrial use as ethanol or as beverage grade.  Ethanol, in gasoline, increases octane and is used as an extender and oxygenate.  Bioproducts also include amino acids such as lysine and threonine that are vital compounds used in swine feeds to produce leaner animals and in poultry feeds to enhance the speed and efficiency of poultry production.  Corn gluten feed and meal, as well as distillers’ grains, are produced for use as animal feed ingredients.  Corn germ, a by-product of the wet milling process, is further processed into vegetable oil and protein meal.  Other Corn Processing products include citric and lactic acids, lactates, sorbitol, xanthan gum and glycols which are used in various food and industrial products.  The Corn Processing segment includes the activities of the Company’s Brazilian sugarcane operations, propylene and ethylene glycol facility, and investments in renewable plastics.

Almidones Mexicanos S.A., in which the Company has a 50% interest, operates a wet corn milling plant in Mexico.

Eaststarch C.V. (Netherlands), in which the Company has a 50% interest, owns interests in companies that operate wet corn milling plants in Bulgaria, Hungary, Slovakia, and Turkey.

The Company has a 50% interest in Telles, LLC (Telles), a joint venture between the Company and Metabolix Inc. to market and sell a corn-based bioplastic, which is being produced in a facility owned by the Company.

The Company entered into Brazilian joint ventures for the purposes of growing sugarcane and the production of sugar and ethanol from sugarcane.  Construction of the joint venture’s ethanol production facility was completed and operations began in December 2009.  In fiscal 2011, ADM obtained 100% ownership of these sugarcane operations.

Red Star Yeast Company, LLC produces and sells fresh and dry yeast in the United States and Canada.  The Company has a 40% ownership interest in this joint venture.

Agricultural Services

The Agricultural Services segment utilizes its extensive U.S. grain elevator and global transportation network to buy, store, clean, and transport agricultural commodities, such as oilseeds, corn, wheat, milo, oats, rice, and barley, and resells these commodities primarily as food and feed ingredients and as raw materials for the agricultural processing industry.  Agricultural Services’ grain sourcing and transportation network provides reliable and efficient services to the Company’s customers and agricultural processing operations. Agricultural Services’ transportation network capabilities include truck, rail, barge, port, and ocean-going vessel handling and freight services.  The Agricultural Services segment also includes the activities related to the processing and distributing of formula feeds and animal health and nutrition products, and the procuring, processing, and distributing of edible beans.

Alfred C. Toepfer International (Toepfer), in which the Company has an 80% interest, is a global merchandiser of agricultural commodities and processed products.  Toepfer has 36 sales offices worldwide and operates inland, river, and export facilities in Argentina, Romania, Ukraine, and the United States.

The Company has a 45% interest in Kalama Export Company, a grain export elevator in Washington.


 
 

 


Item 1.
BUSINESS (Continued)

Other

Other includes the Company’s remaining processing operations, consisting of activities related to processing agricultural commodities into food ingredient products such as wheat into wheat flour, and cocoa into chocolate and cocoa products.  Other also includes financial activities related to banking, captive insurance, futures commission merchant activities, and private equity fund investments.

Gruma S.A.B. de C.V. (Gruma), in which the Company has a 23.2% interest, is the world’s largest producer and marketer of corn flour and tortillas with operations in Mexico, the United States, Central America, South America, and Europe.  Additionally, the Company has a 20% share, through a joint venture with Gruma, in six U.S. corn flour mills and one in Italy.  The Company also has a 40% share, through a joint venture with Gruma, in nine Mexican wheat flour mills.

The Company procures, transports, and processes cocoa beans and produces cocoa liquor, cocoa butter, cocoa powder, chocolate, and various compounds in North America, South America, Europe, Asia, and Africa for the food processing industry.

Hickory Point Bank and Trust Company, fsb (Bank), a wholly owned subsidiary of the Company, furnishes public banking and trust services, as well as cash management, transfer agency, and securities safekeeping services, for the Company.  In fiscal 2011, the Company announced the sale of a majority ownership interest in the Bank, which is pending regulatory approval.

Captive insurance, which includes Agrinational Insurance Company (Agrinational), a wholly owned subsidiary of the Company, provides insurance coverage for certain property, casualty, marine, credit, and other miscellaneous risks of the Company and participates in certain third-party reinsurance arrangements.  Agrinational also writes crop insurance for farmers in the United States and South America.

ADM Investor Services, Inc., a wholly owned subsidiary of the Company, is a registered futures commission merchant and a clearing member of all principal commodities exchanges in the U.S.  ADM Investor Services International, Ltd., a member of several commodity exchanges and clearing houses in Europe, and ADMIS Hong Kong Limited, are wholly owned subsidiaries of the Company offering broker services in Europe and Asia.

The Company is a limited partner in various private equity funds which invest primarily in emerging markets.

Corporate

Compagnie Industrielle et Financiere des Produits Amylaces SA (Luxembourg) and affiliates, of which the Company has a 41.5% interest, is a joint venture which targets investments in food, feed ingredients and bioenergy businesses.

The Company has an investment in Agricultural Bank of China to help advance its strategic growth plans in China.

Methods of Distribution

Since the Company’s customers are principally other manufacturers and processors, the Company’s products are distributed mainly in bulk from processing plants or storage facilities directly to customers’ facilities.  The Company has developed a comprehensive transportation system to efficiently move both commodities and processed products virtually anywhere in the world.  The Company owns or leases large numbers of the trucks, trailers, railroad tank and hopper cars, river barges, towboats, and ocean-going vessels used in this transportation system.




 
 

 


Item 1.
BUSINESS (Continued)

Concentration of Sales by Product

The following products account for 10% or more of net sales and other operating income for the last three fiscal years:

   
% of Net Sales and Other Operating Income
 
   
2011
   
2010
   
2009
 
                   
Soybeans
    21%       22%       19%  
Corn
    12%       10%       12%  
Soybean Meal
      9%       12%       11%  

Status of New Products

The Company continues to expand the size and global reach of its business through the development of new products.  The Company does not expect any of the following products to have a significant impact on the Company’s net sales and operating income in the next fiscal year.

For retail and foodservice markets, the Company’s researchers continue to develop custom fats and oils with low levels of trans fats.  This year the Company broadened its portfolio of enzymatically-modified low trans fats.  In addition, the Company is working to develop vegetable oil products with reduced saturated fats.

The Company has finalized an agreement with Burcon Technologies to exclusively manufacture, market and sell Clarisoy®, a unique transparent soy protein.  The Company is building a semi-works production facility and is optimizing the characteristics of Clarisoy® in low pH beverage applications for introduction into the market place.

The Company, along with ConocoPhillips, is piloting a technology to produce renewable transportation biofuels from biomass and has successfully produced quantities of biocrude that can be upgraded to gasoline components.  The Company is continuing to evaluate the economic viability of the technology.

The Company has developed a number of new biosurfactants for several new markets.  One product is an agricultural adjuvant which is used to emulsify herbicides and mineral nutrients in water for spray application on corn and soybean crops.  Another line of biosurfactants was developed for inks, paints, and coatings to serve as dispersants for pigments.

The Company has started producing propylene glycol and isosorbide under its Evolution Chemicals™ line.  The Company’s propylene glycol is an industrial ingredient made from corn or oilseeds that is a drop-in replacement to petroleum-based propylene glycol.  Derived from corn, isosorbide is a versatile chemical building block with wide ranging uses including production of polyesters for use in inks, toners, powder coatings, packaging and durable goods; polyurethanes used in foams and coatings; polycarbonates for durable goods and optical media; epoxy resins for paints and canned food coatings; and detergents, surfactants and additives for personal care and consumer products.

In December 2009, the Company started production of Mirel®, a renewable plastic in its Clinton, Iowa facility.  This new bioplastic is being marketed by Telles, a joint-venture of the Company and Metabolix, Inc.



 
 

 


Item 1.
BUSINESS (Continued)

Source and Availability of Raw Materials

Substantially all of the Company’s raw materials are agricultural commodities.  In any single year, the availability and price of these commodities are subject to factors such as changes in weather conditions, plantings, government programs and policies, competition, changes in global demand resulting from population growth and changes in standards of living, and global production of similar and competitive crops.  The Company’s raw materials are procured from thousands of growers, grain elevators, and wholesale merchants in North America, South America, Europe, Asia, and Africa, pursuant primarily to short-term (less than one year) agreements or on a spot basis.  The Company is not dependent upon any particular grower, elevator, or merchant as a source for its raw materials.

Patents, Trademarks, and Licenses

The Company owns valuable patents, trademarks, and licenses but does not consider any segment of its business dependent upon any single or group of patents, trademarks or licenses.

Seasonality, Working Capital Needs, and Significant Customers

Since the Company is widely diversified in global agribusiness markets, there are no material seasonal fluctuations in the manufacture, sale, and distribution of its products and services.  There is a degree of seasonality in the growing cycles, procurement, and transportation of the Company’s principal raw materials: oilseeds, corn, wheat, cocoa beans, sugarcane, and other grains.  However, the physical movement of the millions of metric tons of these crops through the Company’s global processing facilities is reasonably constant throughout the year.

The Company’s working capital requirements are directly affected by the price of agricultural commodities, which may fluctuate significantly and change quickly.  Because the Company has a higher portion of its operations in the northern hemisphere, principally North America and Europe, relative to the southern hemisphere, primarily South America, inventory levels typically peak after the fall harvest and are generally lower during the summer months.  Working capital requirements have historically trended with inventory levels.  No material part of the Company’s business is dependent upon a single customer or very few customers.  The Company has seasonal financing arrangements with farmers in certain countries around the world.  Typically, advances on these financing arrangements occur during the planting season and are repaid at harvest.

Competition

The Company has significant competition in the markets in which it operates based principally on price, quality, and alternative products, some of which are made from different raw materials than those utilized by the Company.  Given the commodity-based nature of many of its businesses, the Company, on an ongoing basis, focuses on managing unit costs and improving efficiency through technology improvements, productivity enhancements, and regular evaluation of the Company’s asset portfolio.

Research and Development Expenditures

The Company’s research and development expenditures are focused on responding to demand from customers’ product development or formulation needs, improving processing efficiency, and developing food, feed, fuel, and industrial products from renewable agricultural crops.  Research and development expense during the three years ended June 30, 2011, 2010, and 2009, net of reimbursements of government grants, was approximately $60 million, $56 million, and $50 million, respectively.  The Company does not expect these research and development expenses to have a significant effect on net sales and other operating profit in the next year.


 
 

 



Item 1.
BUSINESS (Continued)

The Company is working with the U.S. Department of Energy’s National Energy Technology Laboratory and other key academic and corporate partners on projects to demonstrate carbon capture and sequestration as a viable option for reducing carbon dioxide emissions from manufacturing operations.  The first project, Illinois Basin Decatur Project (IBDP) led by Midwest Geological Sequestration Consortium (MGSC), has finished construction and expects to start operations in the third quarter of calendar year 2011.  The second project, the Illinois Industrial Carbon Capture & Sequestration (IL-ICCS), has met the milestone for completing the front end engineering designs and commenced construction in the second quarter of calendar year 2011. This facility is expected to be operational in the third quarter of calendar year 2013.

The Company is continuing to invest in research to develop a broad range of industrial chemicals with an objective to produce  key chemical building blocks that serve as a platform for producing a variety of commodity chemicals.  The key chemical building blocks are derived from the Company’s starch and oilseed-based feedstocks.  Conversion technologies include utilizing expertise in both fermentation and catalysis.  The chemicals pipeline includes the development of chemicals and intermediates that are currently produced from petrochemical resources as well as new to the market bio-based products. The Company’s current portfolio includes products that are in the early development phase and those that are close to pilot plant demonstration. In an effort to further advance the development of bio-based chemical technologies, the Company has partnered with the Center for Environmentally Beneficial Catalysis (CEBC) at Kansas University.  The Company and Kansas University were awarded a grant from the U.S. Department of Agriculture in May 2011 to develop sustainable catalytic processes to convert biomass into bio-based chemicals.

Environmental Compliance

During the year ended June 30, 2011, $91 million was spent specifically to improve equipment, facilities, and programs for pollution control and compliance with the requirements of various environmental agencies.

On July 31, 2009, the United States Environmental Protection Agency (U.S. EPA) issued a Notice of Violation indicating that one of the Company’s facilities in Memphis, Tennessee, may have violated section 311(j) of the Clean Water Act relating to a release of product that occurred on January 2, 2008.  The Company and the U.S. EPA have reached an agreement to resolve this matter with the payment of a penalty of approximately $120,000.

There have been no material effects upon the earnings and competitive position of the Company resulting from compliance with federal, state, and local laws or regulations enacted or adopted relating to the protection of the environment.

The Company’s business could be affected in the future by national and global regulation or taxation of greenhouse gas emissions. In the United States, the U.S. EPA has adopted regulations requiring the owners of certain facilities to measure and report their greenhouse gas emissions, and the U.S. EPA has begun a process to regulate these emissions under the Clean Air Act.  Globally, a number of countries that are parties to the Kyoto Protocol have instituted or are considering climate change legislation and regulations. Most notable is the European Union Greenhouse Gas Emission Trading System (EU-ETS). The Company has several facilities in Europe that participate in this system.  It is difficult at this time to estimate the likelihood of passage, or predict the potential impact, of any additional legislation. Potential consequences could include increased energy, transportation and raw material costs and may require the Company to make additional investments in its facilities and equipment.

Number of Employees

The number of full-time employees of the Company was approximately 30,700 at June 30, 2011.

Financial Information About Foreign and U.S. Operations

Item 1A, “Risk Factors,” and Item 2, “Properties,” includes information relating to the Company’s foreign and U.S. operations.  Geographic financial information is set forth in “Note 16 of Notes to Consolidated Financial Statements” included in Item 8 herein, “Financial Statements and Supplementary Data”.

 
 

 



Item 1.
BUSINESS (Continued)

Available Information

The Company’s internet address is http://www.adm.com.  The Company makes available, free of charge, through its website, the Company’s annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; Directors and Officers Forms 3, 4, and 5; and amendments to those reports, as soon as reasonably practicable after electronically filing such materials with, or furnishing them to, the Securities and Exchange Commission (SEC).

In addition, the Company makes available, through its website, the Company’s Business Code of Conduct and Ethics, Corporate Governance Guidelines, and the written charters of the Audit, Compensation/Succession, Nominating/Corporate Governance, and Executive Committees.

References to our website addressed in this report are provided as a convenience and do not constitute, or should not be viewed as, an incorporation by reference of the information contained on, or available through, the website.  Therefore, such information should not be considered part of this report.

The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC maintains a website which contains reports, proxy and information statements, and other information regarding issuers that file information electronically with the SEC.  The SEC’s internet address is http://www.sec.gov.

Item 1A.
RISK FACTORS

The availability and prices of the agricultural commodities and agricultural commodity products the Company procures, transports, stores, processes, and merchandises can be affected by weather conditions, disease, government programs, competition, and various other factors beyond the Company’s control and could adversely affect the Company’s operating results.

The availability and prices of agricultural commodities are subject to wide fluctuations due to factors such as changes in weather conditions, disease, plantings, government programs and policies, competition, changes in global demand resulting from population growth and changes in standards of living, and global production of similar and competitive crops.  These factors have historically caused volatility in agricultural commodity prices and, consequently, in the Company’s operating results.  Reduced supply of agricultural commodities due to weather-related factors or other reasons could adversely affect the Company’s profitability by increasing the cost of raw materials and/or limit the Company’s ability to procure, transport, store, process, and merchandise agricultural commodities in an efficient manner.

The Company has significant competition in the markets in which it operates.

The Company faces significant competition in each of its businesses and has numerous competitors.  The Company is dependent on being able to generate net sales and other operating income in excess of cost of products sold in order to obtain margins, profits, and cash flows to meet or exceed its targeted financial performance measures and provide cash for operating, working capital, dividend, or capital expenditure needs.  Competition impacts the Company’s ability to generate and increase its gross profit as a result of the following factors.  Pricing of the Company’s products is partly dependent upon industry processing capacity, which is impacted by competitor actions to bring on-line idled capacity or build new production capacity.  Many of the products bought and sold by the Company are global commodities or are derived from global commodities.  The markets for global commodities are highly price competitive and in many cases the commodities are subject to substitution.  To compete effectively, the Company focuses on improving efficiency in its production and distribution operations, developing and maintaining appropriate market share, and providing high levels of customer service.  Competition could increase the Company’s costs to purchase raw materials, lower selling prices of its products, or reduce the Company’s market share, which may result in lower and more inefficient operating rates and reduced gross profit.

 
 

 


Item 1A.
RISK FACTORS (Continued)

Fluctuations in energy prices could adversely affect the Company’s operating results.

The Company’s operating costs and the selling prices of certain finished products are sensitive to changes in energy prices.  The Company’s processing plants are powered principally by electricity, natural gas, and coal.  The Company’s transportation operations are dependent upon diesel fuel and other petroleum-based products.  Significant increases in the cost of these items, including any consequences of regulation or taxation of greenhouse gases, could adversely affect the Company’s production costs and operating results.

The Company has certain finished products, such as ethanol and biodiesel, which are closely related to, or may be substituted for, petroleum products.  Therefore, the selling prices of ethanol and biodiesel can be impacted by the selling prices of gasoline and diesel fuel.  A significant decrease in the price of gasoline or diesel fuel could result in a significant decrease in the selling price of the Company’s ethanol and biodiesel and could adversely affect the Company’s revenues and operating results.

The Company is subject to economic downturns, political instability and other risks of doing business globally which could adversely affect the Company’s operating results.

The Company conducts its business and has substantial assets located in many countries and geographic areas. The Company’s operations are principally in the United States and developed countries in Western Europe and South America, but the Company also operates in, or plans to expand or develop its business in, emerging market areas such as Asia, Eastern Europe, the Middle East, and Africa. Both developed and emerging market areas are subject to impacts of economic downturns, including decreased demand for the Company’s products, reduced availability of credit, or declining credit quality of the Company’s suppliers, customers, and other counterparties.  In addition, emerging market areas could be subject to more volatile economic, political and market conditions.  Economic downturns and volatile conditions could adversely affect the Company’s operating results and ability to execute its business strategies.

The Company’s operating results could be affected by changes in trade, monetary, fiscal and environmental policies, laws, and regulations, and other activities of governments, agencies, and similar organizations.  These conditions include but are not limited to changes in a country’s or region’s economic or political conditions, trade regulations affecting production, pricing and marketing of products, local labor conditions and regulations, reduced protection of intellectual property rights, changes in the regulatory or legal environment, restrictions on currency exchange activities, currency exchange fluctuations, burdensome taxes and tariffs, enforceability of legal agreements and judgments, trade barriers, adverse tax, administrative agency or judicial outcomes, and regulation or taxation of greenhouse gases.  International risks and uncertainties, including changing social and economic conditions as well as terrorism, political hostilities, and war, could limit the Company’s ability to transact business in these markets and could adversely affect the Company’s revenues and operating results.

Government policies and regulations, in general, and government policy and regulations specifically affecting the agricultural sector and related industries, could adversely affect the Company’s operating results.

Agricultural production and trade flows are subject to government policies and regulations. Governmental policies affecting the agricultural industry, such as taxes, tariffs, duties, subsidies, incentives, and import and export restrictions on agricultural commodities and commodity products, including policies related to genetically modified organisms, renewable fuel, and low carbon fuel mandates, can influence the planting of certain crops, the location and size of crop production, whether unprocessed or processed commodity products are traded, the volume and types of imports and exports, the availability and competitiveness of feedstocks as raw materials, the viability and volume of production of certain of the Company’s products, and industry profitability.  In addition, international trade disputes can adversely affect agricultural commodity trade flows by limiting or disrupting trade between countries or regions. Future government policies may adversely affect the supply of, demand for, and prices of the Company’s products, restrict the Company’s ability to do business in its existing and target markets, and could adversely affect the Company’s revenues and operating results.


 
 

 


Item 1A.
RISK FACTORS (Continued)

The Company is subject to industry-specific risks which could adversely affect the Company’s operating results.

The Company is subject to risks which include, but are not limited to, product quality or contamination; shifting consumer preferences; federal, state, and local food processing regulations; socially unacceptable farming practices; environmental, health and safety regulations; and customer product liability claims.  The liability which could result from certain of these risks may not always be covered by, or could exceed liability insurance related to product liability and food safety matters maintained by the Company.  The occurrence of any of the matters described above could adversely affect the Company’s revenues and operating results.

Certain of the Company’s merchandised commodities and finished products are used as ingredients in livestock and poultry feed.  The Company is subject to risks associated with the outbreak of disease in livestock and poultry.  An outbreak of disease could adversely affect demand for the Company’s products used as ingredients in livestock and poultry feed.  A decrease in demand for these products could adversely affect the Company’s revenues and operating results.

The Company is subject to numerous laws and regulations globally which could adversely affect the Company’s operating results.

The Company does business globally, connecting crops and markets in over 75 countries.  In addition, the Company distributes product to countries in which we do not operate facilities.  The Company is required to comply with the numerous and broad-reaching laws and regulations administered by United States federal, state and local, and foreign governmental authorities.  The Company must comply with other general business regulations such as those directed toward accounting and income taxes, anti-corruption, anti-bribery, global trade, handling of regulated substances, and other commercial activities, conducted by the Company’s employees and third party representatives globally.  Any failure to comply with applicable laws and regulations could subject the Company to administrative penalties and injunctive relief, and civil remedies including fines, injunctions, and recalls of its products.

The production of the Company’s products requires the use of materials which can create emissions of certain regulated substances, including greenhouse gas emissions.  Although the Company has programs in place throughout the organization globally to guard against non-compliance, failure to comply with these regulations can have serious consequences, including civil and administrative penalties as well as a negative impact on the Company’s reputation, business, cash flows, and results of operations.

In addition, changes to regulations or implementation of additional regulations, for example the imposition of regulatory restrictions on greenhouse gases, may require the Company to modify existing processing facilities and/or processes which could significantly increase operating costs and adversely affect operating results.

The Company is exposed to potential business disruption, including but not limited to disruption of transportation services, supply of non-commodity raw materials used in its processing operations, and other impacts resulting from acts of terrorism or war, natural disasters, severe weather conditions, and accidents which could adversely affect the Company’s operating results.

The Company’s operations rely on dependable and efficient transportation services.  A disruption in transportation services could result in difficulties supplying materials to the Company’s facilities and impair the Company’s ability to deliver products to its customers in a timely manner.  In addition, if certain non-agricultural commodity raw materials, such as certain chemicals used in the Company’s processing operations, are not available, the Company’s business could be disrupted.  Certain factors which may impact the availability of non-agricultural commodity raw materials are out of the Company’s control including, but not limited to, disruptions resulting from economic conditions, manufacturing delays or disruptions at suppliers, shortage of materials, and unavailable or poor supplier credit conditions.

The assets and operations of the Company could be subject to extensive property damage and business disruption from various events which include, but are not limited to, acts of terrorism or war, natural disasters and severe weather conditions, accidents, explosions, and fires. The potential effects of these conditions could adversely affect the Company’s revenues and operating results.

 
 

 


Item 1A.
RISK FACTORS (Continued)

The Company’s business is capital intensive in nature and the Company relies on cash generated from its operations and external financing to fund its growth and ongoing capital needs.  Limitations on access to external financing could adversely affect the Company’s operating results.

The Company requires significant capital to operate its current business and fund its growth strategy.  The Company’s working capital requirements are directly affected by the price of agricultural commodities, which may fluctuate significantly and change quickly.  The Company also requires substantial capital to maintain and upgrade its extensive network of storage facilities, processing plants, refineries, mills, ports, transportation assets and other facilities to keep pace with competitive developments, technological advances, regulations and changing safety standards in the industry.  Moreover, the expansion of the Company’s business and pursuit of acquisitions or other business opportunities may require significant amounts of capital.  If the Company is unable to generate sufficient cash flow or raise adequate external financing, including as a result of significant disruptions in the global credit markets, it may restrict the Company’s current operations and its growth opportunities which could adversely affect the Company’s operating results.

The Company’s risk management strategies may not be effective.

The Company’s business is affected by fluctuations in agricultural commodity prices, transportation costs, energy prices, interest rates, and foreign currency exchange rates.  The Company engages in strategies to manage these risks.  However, these strategies may not be successful in mitigating the Company’s exposure to these fluctuations.  See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”

The Company has limited control over and may not realize the expected benefits of its equity investments and joint ventures.

The Company has $3.2 billion invested in or advanced to joint ventures and investments which the Company has limited control as to the governance and management activities of these investments.  Net sales to unconsolidated affiliates during 2011 was $7.1 billion.  The Company faces certain risks, including risks related to the financial strength of the investment partner, loss of revenues and cash flows to the investment partner and related gross profit, the inability to implement beneficial management strategies, including risk management and compliance monitoring, with respect to the investment’s activities, and the risk that the Company may not be able resolve disputes with the investment partner.  The Company may encounter unanticipated operating issues or financial results related to these investments that may impact the Company’s revenues and operating results.

The Company’s information technology systems, processes, and sites may suffer interruptions or failures which may affect the Company’s ability to conduct its business.

The Company’s information technology systems, some of which are dependent on services provided by third parties, provide critical data connectivity, information and services for internal and external users.  These interactions include, but are not limited to, ordering and managing materials from suppliers, converting raw materials to finished products, inventory management, shipping products to customers, processing transactions, summarizing and reporting results of operations, human resources benefits and payroll management, complying with regulatory, legal or tax requirements, and other processes necessary to manage the business.  The Company has put in place disaster recovery plans for its critical systems.  However, if the Company’s information technology systems are damaged, or cease to function properly due to any number of causes, such as catastrophic events, power outages, security breaches, or cyber-based attacks, and the Company’s disaster recovery plans do not effectively mitigate on a timely basis, the Company may suffer interruptions in the ability to manage its operations, which may adversely impact the Company’s revenues, operating results, and financial condition.



 
 

 



Item 1B.
UNRESOLVED STAFF COMMENTS

The Company has no unresolved staff comments.

Item 2.
PROPERTIES

The Company owns or leases, under operating leases, the following processing plants and procurement facilities:

   
Processing Plants
   
Procurement Facilities
 
   
United
   
International
   
Total
   
United
   
International
   
Total
 
   
States
               
States
             
Owned
    147       115       262       236       115       351  
Leased
    1       1       2       18       28       46  
      148       116       264       254       143       397  

The Company’s operations are such that most products are efficiently processed near the source of raw materials.  Consequently, the Company has many plants strategically located in agricultural commodity producing areas.  The annual volume of commodities processed will vary depending upon availability of raw materials and demand for finished products.

To enhance the efficiency of transporting large quantities of raw materials and finished products between the Company’s procurement facilities and processing plants and also the final delivery of products to our customers around the world, the Company owns approximately 1,500 barges, 14,400 rail cars, 700 trucks, 1,500 trailers, and 8 ocean going vessels; and leases, under operating leases, approximately 200 barges, 11,700 railcars, and ocean going vessels.

Oilseeds Processing

   
Processing Plants
   
Procurement Facilities
 
   
United States
   
International
   
Total
   
United States
   
International
   
Total
 
                                     
Owned
    60       70       130       64       90       154  
Leased
                            19       19  
      60       70       130       64       109       173  

The Company operates thirty-two U.S. and twenty-four international oilseed crushing plants with a daily processing capacity of approximately 100,000 metric tons (4 million bushels).  The U.S. plants are located in Alabama, Georgia, Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Carolina, North Dakota, Ohio, South Carolina, Tennessee, and Texas.  The international plants are located in Argentina, Bolivia, Brazil, Canada, Czech Republic, Germany, India, Mexico, the Netherlands, Poland, Ukraine, and United Kingdom.

The Company operates fourteen U.S. oilseed refineries in Georgia, Illinois, Indiana, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and Tennessee, as well as nineteen international refineries in Bolivia, Brazil, Canada, Czech Republic, Germany, India, the Netherlands, Poland, and United Kingdom.  The Company packages oils at ten international plants located in Bolivia, Brazil, Germany, India, Peru, Poland, and United Kingdom.  The Company operates three U.S. and six international biodiesel plants located in Missouri, North Dakota, Brazil, Germany, and India.  In addition, the Company operates five fertilizer blending plants in Brazil and Paraguay.



 
 

 


Item 2.
PROPERTIES (Continued)


The Oilseeds Processing segment operates fourteen U.S. country grain elevators as adjuncts to its processing plants.  These elevators, with an aggregate storage capacity of approximately 11 million bushels, are located in Illinois, Missouri, North Carolina, Ohio, and South Carolina.  Also included in this segment are fifty U.S. and one international peanut procurement facilities with an aggregate storage capacity of approximately 321,000 metric tons.  The U.S. peanut procurement facilities are located in Alabama, Florida, Georgia, North Carolina, Oklahoma, Texas, and Virginia.  The international peanut procurement facility is located in Argentina.

This segment also operates 108 international elevators, including port facilities, in Bolivia, Brazil, Canada, India, Germany, the Netherlands, Paraguay, and Poland.  These facilities have a storage capacity of approximately 136 million bushels.  These merchandising and transportation facilities are included in the Oilseeds Processing segment in South America and Europe because they are managed in a more integrated nature in these regions.

The Company operates three soy protein specialty plants in Illinois and one plant in the Netherlands.  Lecithin products are produced at six U.S. and four international plants in Illinois, Iowa, Nebraska, Canada, Germany, and the Netherlands.  The Company produces vitamin E, sterols, and isoflavones at two plants in Illinois.  The Company also operates a specialty oils and fats plant in France that produces various value-added products for the pharmaceutical, cosmetic and food industries.

Corn Processing

   
Processing Plants
   
Procurement Facilities
 
   
United States
   
International
   
Total
   
United States
   
International
   
Total
 
                                     
Owned
    17       1       18       5             5  

The Company operates five wet corn milling plants and four dry corn milling plants with a daily grind capacity of approximately 66,000 metric tons (2.6 million bushels). The Company also operates corn germ extraction plants, sweeteners and starches production facilities, a glycols production facility, a polymer production facility, and bioproducts production facilities in Illinois, Iowa, Minnesota, Nebraska, North Carolina, and North Dakota and a sugarcane processing plant in Brazil.  The Corn Processing segment also operates five U.S. grain terminal elevators as adjuncts to its processing plants.  These elevators, with an aggregate storage capacity of approximately 13 million bushels, are located in Minnesota.

Agricultural Services

   
Processing Plants
   
Procurement Facilities
 
   
United States
   
International
   
Total
   
United States
   
International
   
Total
 
                                     
Owned
    33       7       40       167       19       186  
Leased
    1             1       18       6       24  
      34       7       41       185       25       210  

The Company operates 152 U.S. terminal, sub-terminal, country, and river elevators covering the major grain producing states, and also operates eight grain export elevators in Florida, Louisiana, Ohio, and Texas.  Elevators are located in Arkansas, Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Montana, Nebraska, North Dakota, Ohio, Oklahoma, Tennessee, and Texas.  These elevators have an aggregate storage capacity of approximately 422 million bushels.  The Company has six grain export elevators in Argentina, Mexico, Romania and Ukraine that have an aggregate storage capacity of approximately 39 million bushels.  The Company has eleven country elevators located in the Dominican Republic, Ireland, Romania, and Ukraine.  In addition, the Company has eight river elevators located in Romania and Ukraine.


 
 

 


Item 2.
PROPERTIES (Continued)

The Company operates twenty-five U.S. edible bean procurement facilities located in Colorado, Idaho, Michigan, Minnesota, North Dakota, and Wyoming.

The Company operates a rice mill located in California, an animal feed facility in Illinois, and an edible bean plant in North Dakota.  The Company also operates thirty-one U.S. and seven international formula feed and animal health and nutrition plants.  The U.S. plants are located in Colorado, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Montana, Nebraska, Ohio, Pennsylvania, Texas, Washington, and Wisconsin.  The international plants are located in Canada, China, Puerto Rico, and Trinidad & Tobago.

Other

   
Processing Plants
   
Procurement Facilities
 
   
United States
   
International
   
Total
   
United States
   
International
   
Total
 
                                     
Owned
    37       37       74             6       6  
Leased
          1       1             3       3  
      37       38       75             9       9  

The Company operates twenty-three U.S. wheat flour mills, a U.S. bulgur plant, two U.S. corn flour mills, two U.S. milo mills, and nineteen international flour mills with a total daily grain milling capacity of approximately 28,000 metric tons (1.0 million bushels).  The Company also operates six bakery mix plants.  These plants and related properties are located in California, Illinois, Indiana, Kansas, Minnesota, Missouri, Nebraska, New York, North Carolina, Oklahoma, Pennsylvania, Tennessee, Texas, Washington, Barbados, Belize, Canada, Grenada, Jamaica, and United Kingdom.  The Company operates two formula feed plants as adjuncts to the wheat flour mills in Belize and Grenada, a rice milling plant in Jamaica, and a starch and gluten plant in Iowa and in Canada.  The Company also operates a honey drying operation in Wisconsin.

The Company operates four U.S. and twelve international chocolate and cocoa bean processing plants with a total daily production capacity of approximately 3,000 metric tons.  The U.S. plants are located in Pennsylvania and Wisconsin, and the international plants are located in Belgium, Brazil, Canada, Germany, Ghana, Ivory Coast, the Netherlands, Singapore, and United Kingdom.  The Company operates nine cocoa bean procurement and handling facilities/port sites in Brazil, Indonesia, and Ivory Coast.

Item 3.
LEGAL PROCEEDINGS

Since August 2008, the Company has been conducting an internal review of its policies, procedures and internal controls pertaining to the adequacy of its anti-corruption compliance program and of certain transactions conducted by the Company and its affiliates and joint ventures, primarily relating to grain and feed exports, that may have violated company policies, the U.S. Foreign Corrupt Practices Act, and other U.S. and foreign laws.  The Company initially disclosed this review to the U.S. Department of Justice, the Securities and Exchange Commission, and certain foreign regulators in March 2009 and has subsequently provided periodic updates to the agencies.  The Company engaged outside counsel and other advisors to assist in the review of these matters and has implemented, and is continuing to implement, appropriate remedial measures.  In connection with this review, government agencies could impose civil penalties or criminal fines and/or order that the Company disgorge any profits derived from any contracts involving inappropriate payments.  These events have not had, and are not expected to have, a material impact on the Company’s business or financial condition.

The Company is a party to routine legal proceedings that arise in the course of its business.  The Company is not currently a party to any legal proceeding or environmental claim that it believes would have a material adverse effect on its financial position, results of operations, or liquidity.

Item 4.
RESERVED


 
 

 

PART II


Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock Market Prices and Dividends

The Company’s common stock is listed and traded on the New York Stock Exchange and the Frankfurt Stock Exchange. The following table sets forth, for the periods indicated, the high and low market prices of the common stock as reported on the New York Stock Exchange and common stock cash dividends declared per share.

               
Cash
 
   
Market Price
   
Dividends
 
   
High
   
Low
   
Per Share
 
                   
Fiscal 2011-Quarter Ended
                 
   June 30
  $ 37.28     $ 28.98     $ 0.16  
   March 31
    38.02       30.13       0.16  
   December 31
    34.03       28.53       0.15  
   September 30
    33.54       25.02       0.15  
                         
Fiscal 2010-Quarter Ended
                       
   June 30
  $ 29.26     $ 24.22     $ 0.15  
   March 31
    31.89       28.06       0.15  
   December 31
    33.00       27.66       0.14  
   September 30
    32.13       26.00       0.14  

The number of registered shareholders of the Company’s common stock at June 30, 2011, was 12,740.  The Company expects to continue its policy of paying regular cash dividends, although there is no assurance as to future dividends because they are dependent on future earnings, capital requirements, and financial condition.


 
 

 
 
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES (Continued)

Issuer Purchases of Equity Securities

               
Total Number of
   
Number of Shares
 
   
Total Number
   
Average
   
Shares Purchased as
   
Remaining to be
 
   
of Shares
   
Price Paid
   
Part of Publicly
   
Purchased Under the
 
Period
 
Purchased (1)
   
per Share
   
Announced Program (2)
   
Program (2)
 
                         
April 1, 2011 to
April 30, 2011
    70,705     $ 34.462       70,260       93,068,340  
                                 
May 1, 2011 to
May 31, 2011
    6,289,094       32.590       6,288,107       86,780,233  
                                 
June 1, 2011 to
June 30, 2011
    209       31.598       184       86,780,049  
                                 
Total
    6,360,008     $ 32.611       6,358,551       86,780,049  

(1)  Total shares purchased represents those shares purchased in the open market as part of the Company’s publicly announced share repurchase program described below and shares received as payment for the exercise price of stock option exercises.  During the three-month period ended June 30, 2011, the Company received 1,457 shares as payment for the exercise price of stock option exercises.
 
(2)  On November 5, 2009, the Company’s Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to 100,000,000 shares of the Company’s common stock during the period commencing January 1, 2010 and ending December 31, 2014.



 
 

 


Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES (Continued)

Performance Graph

The graph below compares five-year returns of the Company’s common stock with those of the S&P 500 Index and the S&P Consumer Staples Index.  The graph assumes all dividends have been reinvested and assumes an initial investment of $100 on June 30, 2006.  Information in the graph is presented on a June 30 fiscal year basis.

Graph
Graph produced by Research Data Group, Inc.


 
 

 


Item 6.
SELECTED FINANCIAL DATA

Selected Financial Data
(In millions, except ratio and per share data)

   
2011
   
2010
   
2009
   
2008
   
2007
 
Net sales and other operating income
  $ 80,676     $ 61,682     $ 69,207     $ 69,816     $ 44,018  
Depreciation
    827       857       730       721       701  
Net earnings attributable to controlling
  interests
    2,036       1,930       1,684       1,780       2,154  
Basic earnings per common share
    3.17       3.00       2.62       2.76       3.31  
Diluted earnings per common share
    3.13       3.00       2.62       2.75       3.28  
Cash dividends
    395       372       347       316       281  
Per common share
    0.62       0.58       0.54       0.49       0.43  
Working capital
  $ 14,286     $ 9,561     $ 10,523     $ 10,833     $ 7,254  
Current ratio
    2.1       2.1       2.2       1.7       1.9  
Inventories
    12,055       7,871       7,782       10,160       6,060  
Net property, plant, and equipment
    9,500       8,712       7,950       7,125       6,010  
Gross additions to property, plant, and
  equipment
    1,512       1,788       2,059       1,789       1,404  
Total assets
    42,193       31,808       31,582       37,052       25,114  
Long-term debt, excluding current maturities
    8,266       6,830       7,592       7,443       4,468  
Shareholders’ equity
    18,838       14,631       13,653       13,666       11,446  
Per common share
    27.87       22.89       21.27       21.22       17.80  
Weighted average shares outstanding-basic
    642       643       643       644       651  
Weighted average shares outstanding-diluted
    654       644       644       646       656  

Significant items affecting the comparability of the financial data shown above are as follows:

·    
Net earnings attributable to controlling interests for 2011 include a gain of $71 million ($44 million after tax, equal to $0.07 per share) related to the acquisition of the remaining interest in Golden Peanut, start up costs for the Company’s significant new greenfield plants of $94 million ($59 million after tax, equal to $0.09 per share), charges on early extinguishment of debt of $15 million ($9 million after tax, equal to $0.01 per share), gains on interest rate swaps of $30 million ($19 million after tax, equal to $0.03 per share) and a gain of $78 million ($49 million after tax, equal to $0.07 per share) related to the sale of bank securities held by the Company’s equity investee, Gruma S.A.B de C.V.  During the second quarter of fiscal year 2011, the Company updated its estimates for service lives of certain of its machinery and equipment assets.  The effect of this change in accounting estimate on pre-tax earnings for the year ended June 30, 2011 was an increase of $133 million ($83 million after tax, equal to $0.13 per share).  Basic and diluted weighted average shares outstanding for 2011 include 44 million shares issued on June 1, 2011 related to the Equity Unit conversion.  Diluted weighted average shares outstanding for 2011 include 44 million shares assumed issued on January 1, 2011 as required using the “if-converted” method of calculating diluted earnings per share for the quarter ended March 31, 2011.  See Note 9 in Item 8, Financial Statements and Supplementary Data (Item 8), for earnings per share calculation.

·    
Net earnings attributable to controlling interests for 2010 include a charge of $75 million ($47 million after tax, equal to $0.07 per share) related to loss on extinguishment of debt resulting from the repurchase of $500 million in aggregate principal amount of the Company’s outstanding debentures, and start up costs for the Company’s significant new greenfield plants of $110 million ($68 million after tax, equal to $0.11 per share).

 
 

 



Item 6.
SELECTED FINANCIAL DATA (Continued)

·    
Net earnings attributable to controlling interests for 2009 include a non-cash charge of $275 million ($171 million after tax, equal to $0.27 per share) related to currency derivative losses of the Company’s equity investee, Gruma S.A.B. de C.V., and a $158 million income tax charge (equal to $0.24 per share) related to the reorganization of the holding company structure in which the Company holds a portion of its equity investment in Wilmar.  For further information concerning Wilmar-related tax matters, see Note 13 in Item 8.

·    
Net earnings attributable to controlling interests for 2007 include a gain of $440 million ($286 million after tax, equal to $0.44 per share) related to the exchange of the Company’s interests in certain Asian joint ventures for shares of Wilmar, realized securities gains of $357 million ($225 million after tax, equal to $0.34 per share) related to the Company’s sale of equity securities of Tyson Foods Inc. and Overseas Shipholding Group Inc. and a $209 million gain ($132 million after tax, equal to $0.20 per share) related to the sale of businesses.

 
 

 

Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Company Overview

This MD&A should be read in conjunction with the accompanying consolidated financial statements.

The Company is principally engaged in procuring, transporting, storing, processing, and merchandising agricultural commodities and products.  The Company uses its significant global asset base to originate and transport agricultural commodities, connecting to markets in more than 75 countries.  The Company also processes corn, oilseeds, wheat and cocoa into products for food, animal feed, chemical and energy uses.  The Company uses its global asset network, business acumen, and its relationships with suppliers and customers to generate returns for our shareholders, principally from margins earned on these activities.

The Company’s operations are organized, managed and classified into three reportable business segments: Oilseeds Processing, Corn Processing, and Agricultural Services.  Each of these segments is organized based upon the nature of products and services offered.  The Company’s remaining operations, which include wheat processing, cocoa processing, and its financial business units, are not reportable segments, as defined by the applicable accounting standard, and are classified as Other.

The Oilseeds Processing segment includes activities related to the origination, merchandising, crushing, and further processing of oilseeds such as soybeans and soft seeds (cottonseed, sunflower seed, canola, rapeseed, and flaxseed) into vegetable oils and protein meals.  Oilseeds products produced and marketed by the Company include ingredients for the food, feed, energy, and other industrial products industries.  Crude vegetable oils produced by the segment’s crushing activities are sold “as is” or are further processed by refining, blending, bleaching, and deodorizing into salad oils.  Salad oils are sold “as is” or are further processed by hydrogenating and/or interesterifying into margarine, shortening, and other food products. Partially refined oils are used to produce biodiesel or are sold to other manufacturers for use in chemicals, paints, and other industrial products.  Oilseed protein meals are principally sold to third parties to be used as ingredients in commercial livestock and poultry feeds.  The Oilseeds Processing segment also produces natural health and nutrition products and other specialty food and feed ingredients.  In North America, cottonseed flour is produced and sold primarily to the pharmaceutical industry and cotton cellulose pulp is manufactured and sold to the chemical, paper, and filter markets.  In Europe and South America, the Oilseeds Processing segment includes origination and merchandising activities of a network of grain elevators, port facilities, and transportation assets used to buy, store, clean, and transport agricultural commodities, as adjuncts to its oilseeds processing assets.  In South America, the Oilseeds Processing segment operates fertilizer blending facilities.  Effective December 31, 2010, the Company acquired Alimenta (USA) Inc., and as a result of the transaction, now owns 100% of Golden Peanut, the leading U.S. peanut sheller and oil refiner and operator of one peanut shelling facility in Argentina.  The Oilseeds Processing segment began consolidating the operating results of Golden Peanut, its previously 50% owned joint venture, in the third quarter of fiscal 2011.  The Oilseeds Processing segment also includes the Company’s share of the results of its equity investment in Wilmar and its share of results for its Edible Oils Limited and Stratas Foods, LLC joint ventures.


 
 

 


ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The Company’s Corn Processing segment is engaged in corn wet milling and dry milling activities, with its asset base primarily located in the central part of the United States.  The Corn Processing segment converts corn into sweeteners and starches, and bioproducts.  Its products include ingredients used in the food and beverage industry including sweeteners, starch, syrup, glucose, and dextrose.  Dextrose and starch are used by the Corn Processing segment as feedstocks for its bioproducts operations.  By fermentation of dextrose, the Corn Processing segment produces alcohol, amino acids, and other specialty food and animal feed ingredients.  Ethyl alcohol is produced by the Company for industrial use as ethanol or as beverage grade.  Ethanol, in gasoline, increases octane and is used as an extender and oxygenate.  Bioproducts also include amino acids such as lysine and threonine that are vital compounds used in swine feeds to produce leaner animals and in poultry feeds to enhance the speed and efficiency of poultry production.  Corn gluten feed and meal, as well as distillers’ grains, are produced for use as animal feed ingredients.  Corn germ, a by-product of the wet milling process, is further processed into vegetable oil and protein meal.  Other Corn Processing products include citric and lactic acids, lactates, sorbitol, xanthan gum, and glycols which are used in various food and industrial products.  The Corn Processing segment includes the activities of the Company’s Brazilian sugarcane operations, propylene and ethylene glycol facility, a bioplastic facility, and other equity investments in renewable plastics.  This segment includes the Company’s share of the results of its equity investments in Almidones Mexicanos S.A., Eaststarch C.V., and Red Star Yeast Company LLC.

The Agricultural Services segment utilizes its extensive U.S. grain elevator and global transportation network to buy, store, clean, and transport agricultural commodities, such as oilseeds, corn, wheat, milo, oats, rice, and barley, and resells these commodities primarily as food and feed ingredients and as raw materials for the agricultural processing industry.  Agricultural Services’ grain sourcing and transportation network provides reliable and efficient services to the Company’s customers and agricultural processing operations. Agricultural Services’ transportation network capabilities include truck, rail, barge, port, and ocean-going vessel handling and freight services.  The Agricultural Services segment includes the activities of Alfred C. Toepfer International, an 80% owned global merchant of agricultural commodities and processed products.  The Agricultural Services segment also includes the Company’s share of the results of its Kalama Export Company joint venture, activities related to the processing and distributing of formula feeds and animal health and nutrition products, and the procuring, processing, and distributing of edible beans.

Other includes the Company’s remaining processing operations, consisting of activities related to processing agricultural commodities into food ingredient products such as wheat into wheat flour, and cocoa into chocolate and cocoa products.  Other also includes financial activities related to banking, captive insurance, futures commission merchant activities, private equity fund investments, and the Company’s share of the results of its equity investment in Gruma S.A.B de C.V.

Corporate results principally include the impact of LIFO-related inventory adjustments, unallocated corporate expenses, unallocated net interest costs, and the after-tax elimination of income attributable to mandatorily redeemable interests in consolidated subsidiaries.

Operating Performance Indicators

The Company’s oilseeds processing, agricultural services, and wheat processing operations are principally agricultural commodity-based businesses where changes in selling prices move in relationship to changes in prices of the commodity-based agricultural raw materials.  Therefore, changes in agricultural commodity prices have relatively equal impacts on both net sales and other operating income and cost of products sold.  Thus, changes in margins and gross profit of these businesses do not necessarily correspond to the changes in net sales and other operating income amounts.

The Company’s corn processing operations and certain other food and animal feed processing operations also utilize agricultural commodities (or products derived from agricultural commodities) as raw materials.  In these operations, agricultural commodity market price changes can result in significant fluctuations in cost of products sold, and such price changes cannot necessarily be passed directly through to the selling price of the finished products.

 
 

 


Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The Company conducts its business in over 75 countries.  For the majority of the Company’s subsidiaries located outside the United States, the local currency is the functional currency.  Revenues and expenses denominated in foreign currencies are translated into U.S. dollars at the weighted average exchange rates for the applicable periods.  For the majority of the Company’s business activities in Brazil, the functional currency is the U.S. dollar, however certain transactions, including taxes, occur in local currency and require conversion to the functional currency.  Fluctuations in the exchange rates of foreign currencies, primarily the Euro, British pound, Canadian dollar, and Brazilian real, as compared to the U.S. dollar can result in corresponding fluctuations in the U.S. dollar value of revenues and expenses reported by the Company.

The Company measures the performance of its business segments using key financial metrics such as segment operating profit, return on invested capital, and cost per metric ton.  The Company’s operating results can vary significantly due to changes in factors such as fluctuations in energy prices, weather conditions, crop plantings,  government programs and policies, changes in global demand resulting from population growth, general global economic conditions, changes in standards of living, and global production of similar and competitive crops.  Due to these unpredictable factors, the Company does not provide forward-looking information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

2011 Compared to 2010

As an agricultural commodity-based business, the Company is subject to a variety of market factors which affect the Company’s operating results.  In 2011, prices for certain agricultural commodities were higher in response to growing global demand and tighter crop supplies.  The projections of lower 2011 carryover stocks for certain key commodities, coupled with regional crop supply dislocations for certain commodities, also led to high commodity price volatility.  Global demand for agricultural commodities grew in 2011, resulting in increased sales volumes for most of the Company’s products.  The large 2010 North American harvest resulted in global merchandising, handling, and processing opportunities.  Protein meal markets for commercial livestock producers in the U.S., particularly poultry producers, faced challenging conditions.  Biodiesel markets in Europe and South America, together with the 2011 extension of the U.S. biodiesel blender’s credit, helped support global demand for refined and crude vegetable oils.  Sweeteners and starches demand remained strong in 2011 due primarily to U.S. exports of sweeteners and improved demand for industrial starches.  Ethanol sales volumes, including increased volumes as the Company’s new dry mills ramped up, were supported by favorable gasoline blending economics in the U.S. and good export demand.

Net earnings increased $106 million to $2.0 billion due principally to a $782 million increase in segment operating profit partially offset by a negative impact from changing LIFO inventory valuations and higher income taxes.  In 2011, the Company successfully managed through significant increases in market prices for most of its agricultural commodity raw materials, resulting in increased segment operating profit.  Earnings before income taxes includes charges of $368 million from the effect of increasing agricultural commodity prices on LIFO inventory valuation reserves, compared to credits of $42 million in the prior year caused by decreasing agricultural commodity prices.  Income taxes increased $331 million due to a higher effective income tax rate and higher earnings before income taxes.  The effective income tax rate of 33.1% for 2011 was the result of changes in the geographic mix of earnings and unfavorable specific tax items.

The fully diluted earnings per share calculation for 2011 was impacted by the completion of the Company’s debt remarketing related to the $1.75 billion Equity Units.  While the approximately 44 million new common shares related to the $1.75 billion Equity Units were not issued until June 1, 2011, the “if converted” method of accounting for diluted earnings per share required diluted EPS to be calculated as if the Company issued the shares on January 1, 2011, and this assumption resulted in a dilutive impact of $0.04 on earnings per share (See Note 9 in the accompanying consolidated financial statements).


 
 

 


Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Analysis of Statements of Earnings

Prior year net sales and other operating income by segment has been reclassified to conform to the current year’s presentation resulting in reclassified net sales and other operating income at the segment level with no impact to total net sales and other operating income or operating profit.

Net sales and other operating income by segment are as follows:

    2011     2010     Change  
     (In millions)  
Oilseeds Processing
                 
Crushing and Origination
  $ 16,924     $ 14,487     $ 2,437  
Refining, Packaging, Biodiesel and
  Other
    9,476       7,133       2,343  
Asia
    262       190       72  
Total Oilseeds Processing
    26,662       21,810       4,852  
                         
Corn Processing
                       
Sweeteners and Starches
    3,766       3,264       502  
Bioproducts
    6,142       4,610       1,532  
Total Corn Processing
    9,908       7,874       2,034  
                         
Agricultural Services
                       
Merchandising and Handling
    37,705       26,589       11,116  
Transportation
    222       167       55  
Total Agricultural Services
    37,927       26,756       11,171  
                         
Other
                       
Processing
    6,069       5,147       922  
Financial
    110       95       15  
Total Other
    6,179       5,242       937  
Total
  $ 80,676     $ 61,682     $ 18,994  

Net sales and other operating income increased $19.0 billion, or 31%, to $80.7 billion.  Net sales and other operating income increased $14.2 billion due to higher average selling prices, primarily related to higher underlying commodity costs, and increased $4.8 billion due to increased sales volumes, including sales volumes from acquisitions.  Agricultural Services sales increased 42% to $37.9 billion due to higher average selling prices of agricultural commodities and higher global sales volumes.  Oilseeds Processing sales increased 22% to $26.7 billion primarily due to higher average selling prices for vegetable oils, soybeans, biodiesel, and protein meal.  Corn Processing sales increased 26% to $9.9 billion due to higher average selling prices and increased sales volumes of ethanol and other corn products, in part due to the Company’s two new ethanol dry mills coming on-line.  Other sales increased 18% to $6.2 billion primarily due to higher average selling prices of cocoa and cocoa products and wheat flour; and increased sales volumes of cocoa and cocoa products.


 
 

 


ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Cost of products sold increased 32% to $76.4 billion due to higher costs of agricultural commodities, negative impacts resulting from changes in LIFO inventory valuations, and higher manufacturing costs.   Cost of products sold includes charges of $368 million from the effect of increasing agricultural commodity prices on LIFO inventory valuation reserves, compared to credits of $42 million in the prior year caused by decreasing agricultural commodity prices.  Manufacturing expenses increased $410 million due primarily to higher processed volumes, including the volumes of the Company’s new greenfield operations coming on-line, and higher average unit costs for certain chemicals and fuels used in the Company’s processing and transportation operations.  During the second quarter of fiscal 2011, the Company updated its estimates for service lives of certain of its machinery and equipment assets.  This change in estimate resulted in a $133 million decrease in depreciation expense compared to the amount of depreciation expense the Company would have recorded using the previously estimated service lives.  Manufacturing expenses included $94 million in fiscal 2011 related to the start up of new plants compared to $110 million in the prior year.

Selling, general and administrative expenses increased 15% to $1.6 billion.  This increase was due to higher employee-related costs and higher administrative expenses.  Higher employee-related costs principally reflect the increase in number of employees during the year and included higher salaries and wages, higher accruals for performance-based compensation and higher benefit expenses.

Equity in earnings of unconsolidated affiliates declined 3% to $542 million.  The decline in earnings from the Company’s equity investee, Wilmar, were partially offset by higher earnings of the Company’s equity investee, Gruma, in part due to a gain on disposition of assets.

Interest income increased 8% to $136 million principally resulting from higher interest earned on advances to affiliates.

Interest expense increased 14% to $482 million.  Interest costs capitalized as a component of major construction projects in progress was $7 million compared to $75 million in the prior year.  Interest incurred on long-term debt declined $24 million as a result of debt retirements while interest incurred on short-term debt increased $15 million due to higher average borrowings driven by higher working capital requirements.

Other (income) expense – net increased $255 million primarily due to the $71 million gain resulting from the revaluation of the Company’s previously held equity interest in Golden Peanut upon acquisition of the remaining 50% interest, gains on interest rate swaps of $30 million compared to a loss of $59 million in the prior year, and a decrease in charges related to early extinguishment of debt from $75 million in the prior year to $15 million in the current year.

Income taxes increased $331 million to $997 million due to a higher effective income tax rate and higher pretax earnings.  The Company’s effective income tax rate increased to 33.1% during 2011 compared to 25.8% in fiscal 2010.  The increase in the current year rate is primarily due to a geographic mix of earnings that shifted more to the U.S., a higher U.S. effective income tax rate, income tax expense associated with foreign currency re-measurement of non-monetary assets in Brazil, and adjustments to deferred income tax balances.


 
 

 


Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Operating profit by segment is as follows:

    2011     2010     Change  
          (In millions)        
Oilseeds Processing
                 
Crushing and Origination
  $ 1,013     $ 818     $ 195  
Refining, Packaging, Biodiesel and
   Other
    329       291       38  
Asia
    182       291       (109 )
Total Oilseeds Processing
    1,524       1,400       124  
                         
Corn Processing
                       
Sweeteners and Starches
    320       529       (209 )
Bioproducts
    742       193       549  
Total Corn Processing
    1,062       722       340  
                         
Agricultural Services
                       
Merchandising and Handling
    818       583       235  
Transportation
    104       85       19  
Total Agricultural Services
    922       668       254  
                         
Other
                       
Processing
    474       403       71  
Financial
    39       46       (7 )
Total Other
    513       449       64  
Total Segment Operating Profit
    4,021       3,239       782  
Corporate (see below)
    (1,006 )     (654 )     (352 )
Earnings Before Income Taxes
  $ 3,015     $ 2,585     $ 430  

Corporate results are as follows:

   
2011
   
2010
   
Change
 
   
(In millions)
 
                   
LIFO credit (charge)
  $ (368 )   $ 42     $ (410 )
Unallocated interest expense - net
    (335 )     (283 )     (52 )
Unallocated corporate costs
    (326 )     (266 )     (60 )
Charges on early extinguishment of debt
    (8 )     (75 )     67  
Gains (losses) on interest rate swaps
    30       (59 )     89  
Other
    1       (13 )     14  
Total Corporate
  $ (1,006 )   $ (654 )   $ (352 )

Oilseeds Processing operating profit increased 9% to $1.5 billion.  Crushing and origination results increased $195 million to $1.0 billion, which include the $71 million gain on the revaluation of the Company’s equity interest in Golden Peanut as a result of the acquisition of the remaining 50% interest.  Improved North American crushing results, particularly for cotton seed and canola, were partially offset by lower crushing margins in South America and Europe.  Margins globally were enhanced by good positioning and by improved origination results.  In South America, fertilizer results improved due to higher margins and volumes.  Refining, packaging, biodiesel and other results increased $38 million to $329 million due principally to higher packaged oils margins and improved North American and European biodiesel results.  Asia results decreased $109 million due principally to decreased earnings from the Company’s equity investee, Wilmar.

 
 

 


Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Corn Processing operating profit increased 47% to $1.1 billion, which includes favorable impacts from ownership positions, which were allocated to sweeteners and starches and bioproducts based on total grind.  Sweeteners and starches operating profit decreased $209 million to $320 million due to higher net corn costs partially offset by higher sales volumes.  Sales volumes increased due to U.S. export shipments of sweeteners and improved U.S. demand for industrial starches. Bioproducts operating profit improved $549 million primarily due to higher ethanol sales volumes and higher average selling prices leading to increased ethanol and lysine margins.  Bioproducts margins were also enhanced by favorable corn ownership positions.  Bioproducts results included startup costs related to the Company’s new plants of $94 million in the current year compared to $107 million in the prior year.

Agricultural Services operating profit increased 38% to $922 million.  Merchandising and handling results increased due to higher corn and wheat sales volumes and higher margins.  A large 2010 U.S. harvest combined with strong international demand resulted in higher U.S. export shipments.  Merchandising and handling results this year include an insurance recovery of $67 million related to property damage and business interruption resulting from an October 2008 explosion at the Company’s Destrehan, Louisiana export facility.  International merchandising results were weaker in part due to positions impacted by unexpected shifts in crop supply caused by weather conditions and government actions in the Black Sea region.  Transportation results increased $19 million to $104 million primarily due to higher barge freight rates and higher barge utilization levels, in part due to higher U.S. export volumes.

Other operating profit increased 14% to $513 million.  Other processing operating results improved in the Company’s wheat milling and cocoa business units due principally to increased equity earnings from the Company’s equity investee, Gruma, which include a $78 million gain related to the disposal of Gruma assets.    Other financial operating profit decreased $7 million primarily due to higher captive insurance loss provisions principally related to a $67 million loss related to the Company’s Destrehan, Louisiana export facility insurance claim.

Corporate results decreased $352 million primarily due to the negative impact from changing LIFO inventory valuations and higher unallocated interest expense - net.  The effects of changing commodity prices on LIFO inventory reserves resulted in charges of $368 million compared to credits of $42 million for the prior year.  Corporate unallocated interest expense increased $52 million mostly due to lower capitalization of interest costs for construction projects in progress.  Partially offsetting the higher LIFO and unallocated interest costs were $30 million of gains on interest rate swaps compared to prior year losses on interest rate swaps of $59 million.  In addition, the prior year included charges of $75 million on early debt extinguishment compared to $8 million of similar charges in the current year.

2010 Compared to 2009

As an agricultural commodity-based business, the Company is subject to a variety of market factors which affect the Company’s operating results.  Market expectations throughout most of fiscal 2010 for fewer global crop supply and demand imbalances, coupled with continuing uncertainty about short-term demand, led to generally lower and less volatile agricultural commodity market prices and conditions.  In addition, the late, extended U.S. harvest reduced profit opportunities.  North American oilseed exports and U.S. crushing volumes were enhanced in 2010 by the poor supply of 2009 crop year soybeans in South America.  Increased government mandates for the use of biodiesel in South America and Europe resulted in increased biodiesel demand and helped keep overall demand for refined and crude vegetable oil steady in these regions.  However, in North America, demand for vegetable oils remained weak in 2010 due to low consumption of oils in the food service and biodiesel industries, in part due to the expiration of the biodiesel blending credit in the U.S. on January 1, 2010.  Soybean protein meal demand improved, particularly in Asia.  Market prices for corn decreased in 2010 resulting in lower raw material costs for corn processing and decreased average selling prices for sweeteners and starches.  Lower energy, fuel and chemical costs per unit positively impacted the Company’s manufacturing costs.  More favorable ethanol blending economics together with increased ethanol merchandising activity resulted in increased demand, higher ethanol sales volumes, and improved margins.


 
 

 


Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Earnings before income taxes for 2010 include a credit of $42 million from the effect of changing commodity prices on LIFO inventory valuations, compared to a credit of $517 million in 2009.

Income taxes decreased $146 million due to a lower effective income tax rate, partially offset by higher pretax earnings.  Income taxes for 2009 included a $158 million charge resulting from the restructuring of a holding company in which the Company holds a portion of its equity investment in Wilmar.

Analysis of Statements of Earnings

Net sales and other operating income by segment for 2010 and 2009 have been reclassified to conform to the current year’s presentation resulting in reclassified net sales and other operating income at the segment level with no impact to total net sales and other operating income or operating profit.

Net sales and other operating income by segment are as follows:

    2010     2009     Change  
          (In millions)        
Oilseeds Processing
                 
Crushing and Origination
  $ 14,487     $ 15,013     $ (526 )
Refining, Packaging, Biodiesel and
   Other
    7,133       8,756       (1,623 )
Asia
    190       179       11  
Total Oilseeds Processing
    21,810       23,948       (2,138 )
                         
Corn Processing
                       
Sweeteners and Starches
    3,264       3,690       (426 )
Bioproducts
    4,610       3,938       672  
Total Corn Processing
    7,874       7,628       246  
                         
Agricultural Services
                       
Merchandising and Handling
    26,589       32,007       (5,418 )
Transportation
    167       242       (75 )
Total Agricultural Services
    26,756       32,249       (5,493 )
                         
Other
                       
Processing
    5,147       5,272       (125 )
Financial
    95       110       (15 )
Total Other
    5,242       5,382       (140 )
Total
  $ 61,682     $ 69,207     $ (7,525 )

Net sales and other operating income decreased 11% to $61.7 billion due principally to lower average selling prices in 2010 in line with year-over-year declines in underlying commodity costs.  Oilseeds Processing sales decreased 9% to $21.8 billion, due principally to lower average selling prices for soybeans, protein meal, refined oil, and biodiesel partially offset by increased sales volumes of soybeans and fertilizer.  Corn Processing sales increased 3% to $7.9 billion primarily as a result of increased sales volumes of ethanol and lysine partially offset by lower average selling prices of ethanol, sweeteners, and starches.  Agricultural Services sales decreased 17% to $26.8 billion, due to lower average selling prices, in line with year-over-year declines in underlying commodity prices and lower sales volumes.  Other sales decreased 3% to $5.2 billion, primarily due to lower average selling prices of wheat flour partially offset by increased wheat flour sales volumes and higher average selling prices and sales volumes for cocoa products.



 
 

 


Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Cost of products sold decreased 11% to $57.8 billion, due principally to decreased agricultural commodity costs including the impact of changes in LIFO inventory valuations which reduced cost of products sold by $42 million in 2010 compared to $517 million in 2009.  Manufacturing expenses decreased 1% or $60 million, primarily due to lower energy, chemical and fuel costs partially offset by higher employee-related costs and a $124 million increase in depreciation and amortization expense.  In 2010, manufacturing expenses included additional costs associated with the Company’s new greenfield plants.

Selling, general and administrative expenses decreased 1% to $1.4 billion, due principally to decreased provisions for doubtful accounts partially offset by increased expenses for legal, professional, and commercial services.

Equity earnings of unconsolidated affiliates increased $416 million to $561 million primarily due to the absence of a non-cash charge of $275 million in 2009 related to currency derivative losses of the Company’s equity investee, Gruma S.A.B. de C.V.

Interest income declined $55 million to $126 million primarily due to lower average interest rates.

Interest expense declined $47 million to $422 million primarily due to lower average interest rates.

Other expense – net increased $91 million due to pre-tax charges of $75 million related to the early extinguishment of debt and $59 million for unrealized losses on interest rate swaps (for more information on the charges related to the early extinguishment of debt, see Note 8 in Item 8, Financial Statements and Supplementary Data).

Income taxes decreased $146 million due to a lower effective income tax rate partially offset by higher pretax earnings.  The Company’s effective income tax rate during 2010 was 25.8%.  In 2009, the effective income tax rate was 32.5% which included $158 million of income tax charges related to the partial restructuring of the holding company structure through which the Company holds a portion of its equity investment in Wilmar.  Excluding these Wilmar charges, the Company’s effective income tax rate for 2009 was 26.2%.  For more information concerning Wilmar tax matters see Note 13 in Item 8.



 
 

 


Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Operating profit by segment is as follows:

    2010     2009     Change  
          (In millions)        
Oilseeds Processing
                 
Crushing and Origination
  $ 818     $ 767     $ 51  
Refining, Packaging, Biodiesel and
   Other
    291       265       26  
Asia
    291       248       43  
Total Oilseeds Processing
    1,400       1,280       120  
                         
Corn Processing
                       
Sweeteners and Starches
    529       500       29  
Bioproducts
    193       (315 )     508  
Total Corn Processing
    722       185       537  
                         
Agricultural Services
                       
Merchandising and Handling
    583       832       (249 )
Transportation
    85       162       (77 )
Total Agricultural Services
    668       994       (326 )
                         
Other
                       
Processing
    403       51       352  
Financial
    46       (57 )     103  
Total Other
    449       (6 )     455  
Total Segment Operating Profit
    3,239       2,453       786  
Corporate (see below)
    (654 )     47       (701 )
Earnings Before Income Taxes
  $ 2,585     $ 2,500     $ 85  

Corporate results are as follows:

   
2010
   
2009
   
Change
 
   
(In millions)
 
                   
LIFO credit
  $ 42     $ 517     $ (475 )
Unallocated interest expense - net
    (283 )     (192 )     (91 )
Unallocated corporate costs
    (266 )     (252 )     (14 )
Charges on early extinguishment of debt
    (75 )           (75 )
Unrealized losses on interest rate swaps
    (59 )           (59 )
Other
    (13 )     (26 )     13  
Total Corporate
  $ (654 )   $ 47     $ (701 )

Oilseeds Processing operating profit increased 9% to $1.4 billion.  Crushing and origination results increased $51 million due to higher North American soybean crushing margins and favorable soft seed commodity positioning, partially offset by lower soybean crushing margins in Europe and South America.  Refining, packaging, biodiesel and other operating profit increased $26 million due primarily to higher South American biodiesel results and improved margins in Europe.  Oilseeds processing results in Asia increased $43 million to $291 million due principally to improved equity earnings of Wilmar.



 
 

 


Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Corn Processing operating profit increased $537 million to $722 million.  Bioproducts operating profit increased $508 million due to improved ethanol and lysine sales volumes and improved ethanol margins resulting from lower net corn costs and decreased manufacturing costs.  Ethanol sales volumes increased due to favorable gasoline blending economics and increased merchandising activity.  Sweeteners and starches operating profit increased $29 million due to lower net corn and manufacturing costs due principally to lower energy and chemical prices.  These lower manufacturing costs were partially offset by lower average selling prices.

Agricultural Services operating profit decreased $326 million to $668 million.  Merchandising and handling results decreased $249 million.  Enhanced volume and margin opportunities created by 2009’s volatile commodity markets and tight credit markets did not recur.  Volumes and margins in 2010 benefited from strong demand for U.S. soybean exports following the short South American 2009 crop.  Transportation results decreased $77 million due to lower barge freight rates and decreased barge utilization levels resulting from weaker U.S. economic conditions and the late, extended North American harvest.
 
 
Other operating profit increased $455 million to $449 million.  Other processing operating profit increased $352 million due to improved equity earnings from the Company’s investment in Gruma, improved wheat milling margins, and improved cocoa processing results.  Financial operating profit increased $103 million due primarily to the absence of losses experienced in 2009 from managed fund investments and captive insurance operations.

Corporate results decreased $701 million.  The effects of changing commodity prices on LIFO inventory valuations resulted in a credit of $42 million for the year ended June 30, 2010, compared to a credit of $517 million for the year ended June 30, 2009.  Unallocated interest expense – net increased $91 million reflecting a reduction in corporate interest income caused by lower short-term interest rates and lower working capital requirements of the operating segments.  In March 2010, the Company repurchased $500 million of long-term debt which generated a $75 million pretax charge on early extinguishment of debt.  In connection with a debt remarketing planned for 2011, the Company entered into interest rate swaps to fix the interest rate on a portion of the planned remarketing which resulted in $59 million of unrealized losses on interest rate swaps.

Liquidity and Capital Resources

A Company objective is to have sufficient liquidity, balance sheet strength, and financial flexibility to fund the operating and capital requirements of a capital intensive agricultural commodity-based business.  The primary source of funds to finance the Company’s operations and capital expenditures is cash generated by operations.  In addition, the Company maintains a commercial paper borrowing facility and has access to equity and debt capital from public and private sources in both U.S. and international markets.

At June 30, 2011, the Company had $1.4 billion of cash, cash equivalents, and short-term marketable securities and a current ratio, defined as current assets divided by current liabilities, of 2.1 to 1.  Included in working capital is $7.1 billion of readily marketable commodity inventories.  Cash used in operating activities was $2.3 billion for the year compared to cash provided by operating activities of $2.7 billion last year.  Working capital increased in the current year due principally to higher agricultural commodity market prices.  Cash used in investing activities of $1.7 billion, principally for capital expenditures, businesses acquired, and investments, was in line with last year.  Cash provided by financing activities was $3.6 billion for the year compared to cash used in financing activities of $1.0 billion last year.  Net borrowings increased primarily to fund higher working capital.  Short-term borrowings increased due principally to higher commercial paper borrowings, and long-term borrowings increased primarily as a result of the issuance of $1.5 billion of 18-month floating rate notes in February 2011.  In addition, the Company issued common stock and received $1.75 billion under the forward stock purchase component of the Company’s Equity Units (see Note 8 in Item 8).

At June 30, 2011, the Company’s capital resources included net worth of $18.8 billion and lines of credit totaling $6.9 billion, of which $5.7 billion was unused.  The Company’s ratio of long-term debt to total capital (the sum of the Company’s long-term debt and shareholders’ equity) was 30% at June 30, 2011 and 32% at June 30, 2010.  This ratio is a measure of the Company’s long-term indebtedness and is an indicator of financial flexibility.  Of the Company’s total lines of credit, $4.6 billion support a commercial paper borrowing facility, against which there were $620 million of commercial paper outstanding at June 30, 2011.

 
 

 


Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The Company has outstanding $1.15 billion principal amount of convertible senior notes.  As of June 30, 2011, none of the conditions permitting conversion of these notes had been satisfied.  The Company has purchased call options and warrants intended to reduce the potential shareholder dilution upon future conversion of the notes.  As of June 30, 2011, the market price of the Company’s common stock was not greater than the exercise price of the purchased call options or warrants related to the convertible senior notes.

On July 1, 2011, the Company entered into a 364-day accounts receivable securitization facility.  The facility provides the Company with up to $1.0 billion in liquidity.  Under the facility, the Company’s U.S.-originated trade accounts receivable are sold to a wholly-owned bankruptcy-remote entity which then sells an undivided interest in the receivable as a collateral for any borrowings under the facility.  Any borrowings under the facility will be recorded as secured borrowings.  As of August 24, 2011, the Company had not used the facility.  This facility expands the Company’s access to liquidity through efficient use of its balance sheet assets.

The Company’s credit facilities and certain debentures require the Company to comply with specified financial and non-financial covenants including maintenance of minimum tangible net worth as well as limitations related to incurring liens, secured debt, and certain other financing arrangements.  The Company is in compliance with these covenants as of June 30, 2011.

Contractual Obligations and Off-Balance Sheet Arrangements

In the normal course of business, the Company enters into contracts and commitments which obligate the Company to make payments in the future.  The following table sets forth the Company’s significant future obligations by time period.  Purchases include commodity-based contracts entered into in the normal course of business, which are further described in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” energy-related purchase contracts entered into in the normal course of business, and other purchase obligations related to the Company’s normal business activities.  The following table does not include unrecognized income tax benefits of $79 million as of June 30, 2011 as the Company is unable to reasonably estimate the timing of settlement.  Where applicable, information included in the Company’s consolidated financial statements and notes is cross-referenced in this table.
 
           
Payments Due by Period
 
Contractual
Item 8
Note
       
Less
than
     1 - 3      3 – 5    
More
than
 
Obligations
Reference
 
Total
   
1 Year
   
Years
   
Years
   
5 Years
 
     
(In millions)
 
Purchases
                                   
Inventories
    $ 17,457     $ 16,593     $ 807     $ 43     $ 14  
Energy
      456       340       76       22       18  
Other
      398       168       186       35       9  
Total purchases
      18,311       17,101       1,069       100       41  
                                           
Short-term debt
      1,875       1,875                    
Long-term debt
Note 8
    8,444       178       2,875       46       5,345  
Estimated interest payments
      7,177       384       690       646       5,457  
Operating leases
Note 14
    1,163       233       334       225       371  
Estimated pension and other
  postretirement plan
  contributions  (1)
 
 
Note 15
    167       55       19       21       72  
Total
    $ 37,137     $ 19,826     $ 4,987     $ 1,038     $ 11,286  
 
(1) Includes pension contributions of $47 million for fiscal 2012.  The Company is unable to estimate the amount of pension contributions beyond fiscal year 2012.  For more information concerning the Company’s pension and other postretirement plans, see Note 15 in Item 8.

At June 30, 2011, the Company estimates it will spend approximately $2.8 billion through calendar year 2014 to complete currently approved capital projects which are not included in the table above.  The Company also has outstanding letters of credit and surety bonds of $620 million at June 30, 2011.

 
 

 


Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

In addition, the Company has entered into agreements, primarily debt guarantee agreements related to equity-method investees, which could obligate the Company to make future payments.  The Company’s liability under these agreements arises only if the primary entity fails to perform its contractual obligation.  The Company has collateral for a portion of these contingent obligations.  At June 30, 2011, these contingent obligations totaled approximately $121 million.  Amounts outstanding for the primary entity under these contingent obligations were $69 million at June 30, 2011.

Critical Accounting Policies

The process of preparing financial statements requires management to make estimates and judgments that affect the carrying values of the Company’s assets and liabilities as well as the recognition of revenues and expenses.  These estimates and judgments are based on the Company’s historical experience and management’s knowledge and understanding of current facts and circumstances.  Certain of the Company’s accounting policies are considered critical, as these policies are important to the depiction of the Company’s financial statements and require significant or complex judgment by management.  Management has discussed with the Company’s Audit Committee the development, selection, disclosure, and application of these critical accounting policies.  Following are the accounting policies management considers critical to the Company’s financial statements.

Inventories and Derivatives

Certain of the Company’s merchandisable agricultural commodity inventories, forward fixed-price purchase and sale contracts, and exchange-traded futures and exchange-traded and over-the-counter options contracts are valued at estimated market values.  These merchandisable agricultural commodities are freely traded, have quoted market prices, and may be sold without significant additional processing.  Management estimates market value based on exchange-quoted prices, adjusted for differences in local markets.  Changes in the market values of these inventories and contracts are recognized in the statement of earnings as a component of cost of products sold.  If management used different methods or factors to estimate market value, amounts reported as inventories and cost of products sold could differ materially.  Additionally, if market conditions change subsequent to year-end, amounts reported in future periods as inventories and cost of products sold could differ materially.

The Company, from time to time, uses derivative contracts designated as cash flow hedges to fix the purchase price of anticipated volumes of commodities to be purchased and processed in a future month, to fix the purchase price of the Company’s anticipated natural gas requirements for certain production facilities, and to fix the sales price of anticipated volumes of ethanol.  The change in the market value of such derivative contracts has historically been, and is expected to continue to be, highly effective at offsetting changes in price movements of the hedged item.  Gains and losses arising from open and closed hedging transactions are deferred in other comprehensive income, net of applicable income taxes, and recognized as a component of cost of products sold and net sales and other operating income in the statement of earnings when the hedged item is recognized.  If it is determined that the derivative instruments used are no longer effective at offsetting changes in the price of the hedged item, then the changes in the market value of these exchange-traded futures and exchange-traded and over-the-counter option contracts would be recorded in the statement of earnings as a component of cost of products sold.  See Note 4 in Item 8 for additional information.

 
 

 


Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Employee Benefit Plans

The Company provides substantially all U.S. employees and employees at certain international subsidiaries with pension benefits.  Eligible U.S. employees with five or more years of service prior to January 1, 2009 participate in a defined benefit pension plan.  Eligible U.S. employees hired on or after January 1, 2009 (and eligible salaried employees with less than five years of service prior to January 1, 2009) participate in a “cash balance” pension formula.  The Company provides eligible U.S. employees who retire under qualifying conditions with access to postretirement health care, at full cost to the retiree (certain employees are “grandfathered” into subsidized coverage).  In order to measure the expense and funded status of these employee benefit plans, management makes several estimates and assumptions, including interest rates used to discount certain liabilities, rates of return on assets set aside to fund these plans, rates of compensation increases, employee turnover rates, anticipated mortality rates, and anticipated future health care costs.  These estimates and assumptions are based on the Company’s historical experience combined with management’s knowledge and understanding of current facts and circumstances.  Management also uses third-party actuaries to assist in measuring the expense and funded status of these employee benefit plans.  If management used different estimates and assumptions regarding these plans, the funded status of the plans could vary significantly, and the Company could recognize different amounts of expense over future periods.  See Note 15 in Item 8 for additional information.

Income Taxes

The Company frequently faces challenges from U.S. and foreign tax authorities regarding the amount of taxes due.  These challenges include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions.  In evaluating the exposure associated with various tax filing positions, the Company records reserves for estimates of potential additional tax owed by the Company.  As an example, a subsidiary of the Company received tax assessments in the amount of $665 million consisting of  tax, penalty, and interest (adjusted for interest and variation in currency exchange rates) from the Brazilian Federal Revenue Service challenging the deductibility of commodity hedging losses incurred by the Company for tax years 2004, 2006 and 2007.  The Company evaluated its tax position regarding these hedging transactions and concluded, based in part upon advice from Brazilian legal counsel, that it was appropriate to recognize the tax benefits of these deductions (See Note 13 in Item 8 for additional information).

Deferred tax assets represent items to be used as tax deductions or credits in future tax returns, and the related tax benefit has already been recognized in the Company’s income statement.  The realization of the Company’s deferred tax assets is dependent upon future taxable income in specific tax jurisdictions, the timing and amount of which are uncertain.  The Company evaluates all available positive and negative evidence including estimated future reversals of existing temporary differences, projected future taxable income, tax planning strategies, and recent financial results.   Valuation allowances related to these deferred tax assets have been established to the extent the realization of the tax benefit is not likely. To the extent the Company were to favorably resolve matters for which accruals have been established or be required to pay amounts in excess of the aforementioned reserves, the Company’s effective tax rate in a given financial statement period may be impacted.

Undistributed earnings of the Company’s foreign subsidiaries and the Company’s share of the undistributed earnings of affiliated corporate joint venture companies accounted for on the equity method amounting to approximately $8.2 billion at June 30, 2011, are considered to be permanently reinvested, and accordingly, no provision for U.S. income taxes has been provided thereon.  If the Company were to receive distributions from any of these foreign subsidiaries or affiliates or determine the undistributed earnings of these foreign subsidiaries or affiliates to not be permanently reinvested, the Company could be subject to U.S. tax liabilities which have not been provided for in the consolidated financial statements.



 
 

 


Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Asset Abandonments and Write-Downs

The Company is principally engaged in the business of procuring, transporting, storing, processing, and merchandising agricultural commodities and products.  This business is global in nature and is highly capital-intensive.  Both the availability of the Company’s raw materials and the demand for the Company’s finished products are driven by factors such as weather, plantings, government programs and policies, changes in global demand resulting from population growth and changes in standards of living, and global production of similar and competitive crops.  These aforementioned factors may cause a shift in the supply/demand dynamics for the Company’s raw materials and finished products.  Any such shift will cause management to evaluate the efficiency and cash flows of the Company’s assets in terms of geographic location, size, and age of its factories.  The Company, from time to time, will also invest in equipment, technology, and companies related to new, value-added products produced from agricultural commodities and products.  These new products are not always successful from either a commercial production or marketing perspective.  Management evaluates the Company’s property, plant, and equipment for impairment whenever indicators of impairment exist.  Assets are written down after consideration of the ability to utilize the assets for their intended purpose or to employ the assets in alternative uses or sell the assets to recover the carrying value.  If management used different estimates and assumptions in its evaluation of these assets, then the Company could recognize different amounts of expense over future periods.

Goodwill and other intangible assets

The Company accounts for its goodwill and other intangible assets in accordance with ASC Topic 350, Intangibles - Goodwill and Other.  Under this standard, goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests.  The Company evaluates goodwill for impairment at the reporting unit level in the fourth quarter of each fiscal year or whenever there are indicators that the carrying value of the assets may not be fully recoverable.  Definite-lived intangible assets are amortized over their estimated useful lives.  If management used different estimates and assumptions in its impairment tests, then the Company could recognize different amounts of expense over future periods.

Valuation of Marketable Securities and Investments in Affiliates

The Company classifies the majority of its marketable securities as available-for-sale and carries these securities at fair value.  The Company applies the equity method for investments over which the Company has the ability to exercise significant influence.  These investments in affiliates are carried at cost plus equity in undistributed earnings and are adjusted, where appropriate, for amortizable basis differences between the investment balance and the underlying net assets of the investee.  For publicly traded securities, the fair value of the Company’s investments is readily available based on quoted market prices.  For non-publicly traded securities, management’s assessment of fair value is based on valuation methodologies including discounted cash flows and estimates of sales proceeds.  In the event of a decline in fair value of an investment below carrying value, management is required to determine if the decline in fair value is other than temporary.  In evaluating the nature of a decline in the fair value of an investment, management considers the market conditions, trends of earnings, discounted cash flows, trading volumes, and other key measures of the investment as well as the Company’s ability and intent to hold the investment.  When such a decline in value is deemed to be other than temporary, an impairment loss is recognized in the current period operating results to the extent of the decline. See Notes 5 and 6 in Item 8 for information regarding the Company’s marketable securities and investments in affiliates. If management used different estimates and assumptions in its evaluation of these marketable securities, then the Company could recognize different amounts of expense over future periods.


 
 

 


Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The market risk inherent in the Company’s market risk sensitive instruments and positions is the potential loss arising from adverse changes in: commodity market prices as they relate to the Company’s net commodity position, foreign currency exchange rates, and interest rates as described below.

Commodities

The availability and prices of agricultural commodities are subject to wide fluctuations due to factors such as changes in weather conditions, disease, plantings, government programs and policies, competition, changes in global demand resulting from population growth and changes in standards of living, and global production of similar and competitive crops.

The Company enters into derivative and non-derivative contracts with the primary objective of managing the Company’s exposure to adverse price movements in the agricultural commodities used for, and produced in, our business operations.    The Company will also use exchange-traded futures and exchange-traded and over-the-counter option contracts as components of merchandising strategies designed to enhance margins.  The results of these strategies can be significantly impacted by factors such as the volatility of the relationship between the value of exchange-traded commodities futures contracts and the cash prices of the underlying commodities, counterparty contracts defaults, and volatility of freight markets. In addition, the Company, from time-to-time, enters into derivative contracts which are designated as hedges of specific volumes of commodities that will be purchased and processed, or sold, in a future month. The changes in the market value of such futures contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of the hedged item. Gains and losses arising from open and closed hedging transactions are deferred in other comprehensive income, net of applicable taxes, and recognized as a component of cost of products sold or net sales and other operating income in the statement of earnings when the hedged item is recognized.

The Company’s commodity position consists of merchandisable agricultural commodity inventories, related purchase and sales contracts, energy and freight contracts, and exchange-traded futures and exchange-traded and over-the-counter option contracts including contracts used to hedge portions of production requirements, net of sales.

The fair value of the Company’s commodity position is a summation of the fair values calculated for each commodity by valuing all of the commodity positions at quoted market prices for the period, where available, or utilizing a close proxy.  The Company has established metrics to monitor the amount of market risk exposure, which consist of volumetric limits, and value-at-risk (VaR) limits.  VaR measures the potential loss, at a 95% confidence level, that could be incurred over a one year period.  Volumetric limits are monitored daily and VaR calculations and sensitivity analysis are monitored weekly.

In addition to measuring the hypothetical loss resulting from an adverse two standard deviation move in market prices (assuming no correlations) over a one year period using VaR, sensitivity analysis is performed measuring the potential loss in fair value resulting from a hypothetical 10% adverse change in market prices.  The highest, lowest, and average weekly position for each of the last two years together with the market risk from a hypothetical 10% adverse price change is as follows:


   
2011
   
2010
 
  Long/(Short)
 
Fair Value
   
Market Risk
   
Fair Value
   
Market Risk
 
   
(In millions)
 
Highest position
  $ 2,388     $ 239     $ 738     $ 74  
Lowest position
    368       37       (183 )     (18 )
Average position
    1,644       164       216       22  

The change in fair value of the average position for 2011 compared to 2010 was principally the result of changes in average quantities underlying the weekly commodity position.


 
 

 


Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)

Currencies

The Company conducts its business in over 75 countries.  For the majority of the Company’s subsidiaries located outside the United States, the local currency is the functional currency.  To reduce the risks associated with foreign currency exchange rate fluctuations, the Company enters into currency exchange contracts to minimize its foreign currency position related to transactions denominated primarily in Euro, British pound, Canadian dollar, and Brazilian real currencies.  These currencies represent the major functional or local currencies in which recurring business transactions occur.  The Company does not use currency exchange contracts as hedges against amounts permanently invested in foreign subsidiaries and affiliates.  The currency exchange contracts used are forward contracts, swaps with banks, exchange-traded futures contracts, and over-the-counter options.  The changes in market value of such contracts have a high correlation to the price changes in the currency of the related transactions. The potential loss in fair value for such net currency position resulting from a hypothetical 10% adverse change in foreign currency exchange rates is not material.

The amount the Company considers permanently invested in foreign subsidiaries and affiliates and translated into dollars using the year-end exchange rates is $8.2 billion at June 30, 2011, and $6.4 billion at June 30, 2010.  This increase is due to the appreciation of foreign currencies versus the U.S. dollar and an increase in retained earnings of the foreign subsidiaries and affiliates.  The potential loss in fair value, which would principally be recognized in Other Comprehensive Income, resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates is $837 million and $639 million for 2011 and 2010, respectively.  Actual results may differ.

Interest

The fair value of the Company’s long-term debt is estimated using quoted market prices, where available, and discounted future cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. Such fair value exceeded the long-term debt carrying value. Market risk is estimated as the potential increase in fair value resulting from a hypothetical 50 basis points decrease in interest rates.  Actual results may differ.

   
2011
   
2010
 
   
(In millions)
 
Fair value of long-term debt
  $ 9,108     $ 7,700  
Excess of fair value over carrying value
    842       870  
Market risk
    333       289  

The increase in fair value of long-term debt in 2011 resulted principally from the issuance of $1.5 billion of 18-month floating rate notes in February 2011.

 
 

 



Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements
Page No.
   
Consolidated Statements of Earnings
41
   
Consolidated Balance Sheets
42
   
Consolidated Statements of Cash Flows
43
   
Consolidated Statements of Shareholders’ Equity
44
   
Notes to Consolidated Financial Statements
45
   
Reports of Independent Registered Public Accounting Firm
87



 
 

 

Archer-Daniels-Midland Company

Consolidated Statements of Earnings
   
Year Ended June 30
 
   
2011
   
2010
   
2009
 
   
(In millions, except per share amounts)
 
                   
Net sales and other operating income
  $ 80,676     $ 61,682     $ 69,207  
Cost of products sold
    76,376       57,839       65,118  
                      Gross Profit
    4,300       3,843       4,089  
                         
Selling, general and administrative expenses
    1,611       1,398       1,412  
Interest expense
    482       422       469  
Equity in earnings of unconsolidated affiliates
    (542 )     (561 )     (145 )
Interest income
    (136 )     (126 )     (181 )
Other (income) expense - net
    (130 )     125       34  
                      Earnings Before Income Taxes
    3,015       2,585       2,500  
                         
Income taxes
    997       666       812  
                      Net Earnings Including Noncontrolling Interests
    2,018       1,919       1,688  
                         
Less:  Net earnings (losses) attributable to noncontrolling interests
    (18 )     (11 )     4  
                         
                      Net Earnings Attributable to Controlling Interests
  $ 2,036     $ 1,930     $ 1,684  
                         
                         
                         
Average number of shares outstanding – basic
    642       643       643  
                         
Average number of shares outstanding – diluted
    654       644       644  
                         
Basic earnings per common share
  $ 3.17     $ 3.00     $ 2.62  
                         
Diluted earnings per common share
  $ 3.13     $ 3.00     $ 2.62  


See notes to consolidated financial statements.

 
 

 

Archer-Daniels-Midland Company

Consolidated Balance Sheets

   
June 30
 
   
2011
2010
 
   
(In millions)
 
Assets
           
Current Assets
           
Cash and cash equivalents
  $ 615     $ 1,046  
Short-term marketable securities
    739       394  
Segregated cash and investments
    3,396       2,337  
Receivables
    9,816       6,122  
Inventories
    12,055       7,871  
Other assets
    883       624  
Total Current Assets
    27,504       18,394  
                 
Investments and Other Assets
               
Investments in and advances to affiliates
    3,240       2,799  
Long-term marketable securities
    666       678  
Goodwill
    602       523  
Other assets
    681       702  
Total Investments and Other Assets
    5,189       4,702  
                 
Property, Plant, and Equipment
               
Land
    305       277  
Buildings
    4,413       4,008  
Machinery and equipment
    16,245       15,107  
Construction in progress
    765       612  
      21,728       20,004  
Accumulated depreciation
    (12,228 )     (11,292 )
Net Property, Plant, and Equipment
    9,500       8,712  
Total Assets
  $ 42,193     $ 31,808  
                 
Liabilities and Shareholders’ Equity
               
Current Liabilities
               
Short-term debt
  $ 1,875     $ 374  
Accounts payable
    7,550       5,538  
Accrued expenses
    3,615       2,577  
Current maturities of long-term debt
    178       344  
Total Current Liabilities
    13,218       8,833  
                 
Long-Term Liabilities
               
Long-term debt
    8,266       6,830  
Deferred income taxes
    859       439  
Other
    1,012       1,075  
Total Long-Term Liabilities
    10,137       8,344  
                 
Shareholders’ Equity
               
Common stock
    6,636       5,151  
Reinvested earnings
    11,996       10,357  
Accumulated other comprehensive income (loss)
    176       (899 )
Noncontrolling interests
    30       22  
Total Shareholders’ Equity
    18,838       14,631  
Total Liabilities and Shareholders’ Equity
  $ 42,193     $ 31,808  

See notes to consolidated financial statements.


 
 

 
Archer-Daniels-Midland Company

Consolidated Statements of Cash Flows

   
Year Ended June 30
 
   
2011
   
2010
   
2009
 
   
(In millions)
 
Operating Activities
                 
Net earnings including noncontrolling interests
  $ 2,018     $ 1,919     $ 1,688  
Adjustments to reconcile net earnings to net cash provided by
  (used in) operating activities
                       
Depreciation and amortization
    877       912       780  
Deferred income taxes
    521       30       20  
Gain on Golden Peanut revaluation
    (71 )            
Equity in (earnings) losses of affiliates, net of dividends
    (397 )     (326 )     54  
Stock compensation expense
    47       45       65  
Pension and postretirement accruals (contributions), net
    4       (110 )     (161 )
Charges on early extinguishment of debt
    15       75        
Deferred cash flow hedges
    (1 )     49       (235 )
Other – net
    (121 )     84       48  
Changes in operating assets and liabilities
                       
Segregated cash and investments
    (1,035 )     74       (426 )
Receivables
    (2,882 )     740       3,680  
Inventories
    (3,412 )     (404 )     1,899  
Other assets
    (257 )     (211 )     152  
Accounts payable and accrued expenses
    2,354       (193 )     (2,223 )
Total Operating Activities
    (2,340 <