Archer Daniels Midland 2006 Annual Report Download - page 27

2006 Annual Report 25
MANAGEMENT’S DISCUSSION OF
OPERATIONS AND FINANCIAL CONDITION - JUNE 30, 2006
COMPANY OVERVIEW
The Company is principally engaged in procuring, transporting,
storing, processing, and merchandising agricultural commodities
and products. 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 are aggregated and classified as Other.
The Oilseeds Processing segment includes activities related to
processing oilseeds such as soybeans, cottonseed, sunflower seeds,
canola, peanuts, and flaxseed into vegetable oils and meals
principally for the food and feed industries. In addition, oilseeds may
be resold into the marketplace as a raw material for other processors.
Crude vegetable oil is sold “as is” or is further processed by refining,
bleaching, and deodorizing into salad oils. Salad oils can be further
processed by hydrogenating and/or interesterifying into margarine,
shortening, and other food products. Partially refined oil is sold
for use in chemicals, paints, and other industrial products. Refined
oil can be further processed for use in the production of biodiesel.
Oilseed meals are primary ingredients used in the manufacture of
commercial livestock and poultry feeds.
The Corn Processing segment includes activities related to the
production of sweeteners, starches, dextrose, and syrups for the food
and beverage industry as well as activities related to the production,
by fermentation, of bioproducts such as alcohol, amino acids, and
other specialty food and feed ingredients.
The Agricultural Services segment utilizes the Company’s extensive
grain elevator and transportation network to buy, store, clean, and
transport agricultural commodities, such as oilseeds, corn, wheat,
milo, oats, and barley, and resells these commodities primarily as
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
agricultural processing operations. Also included in Agricultural
Services are the activities of A.C. Toepfer International, a global
merchandiser of agricultural commodities and processed products.
Other includes the Company’s remaining operations, consisting
principally of food and feed ingredient businesses and financial
activities. Food and feed ingredient businesses include Wheat
Processing with activities related to the production of wheat flour;
Cocoa Processing with activities related to the production of
chocolate and cocoa products; the production of natural health
and nutrition products; and the production of other specialty food
and feed ingredients. Financial activities include banking, captive
insurance, private equity fund investments, and futures commission
merchant activities.
Operating Performance Indicators
The Company is exposed to certain risks inherent to an agricultural-
based commodity business. These risks are further described in
the “Critical Accounting Policies” and “Market Risk Sensitive
Instruments and Positions” sections of “Management’s Discussion of
Operations and Financial Condition.”
The Company’s Oilseeds Processing, Agricultural Services, and Wheat
Processing operations are principally agricultural commodity-
based businesses where changes in segment 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 cost of products sold and minimal impact on the gross profit of
underlying transactions. As a result, changes in net sales amounts of
these business segments do not necessarily correspond to the changes
in gross profit realized by these businesses.
The Company’s Corn Processing operations and certain other food
and feed processing operations also utilize agricultural commodities
(or products derived from agricultural commodities) as raw
materials. In these operations, agricultural commodity 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. For products such as ethanol,
selling prices bear no direct relationship to the raw material cost of
the agricultural commodity from which it is produced.
The Company conducts its business in many 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. Fluctuations in the exchange rates of foreign
currencies, primarily the Euro and British pound, as compared to the
U.S. dollar will result in corresponding fluctuations in the relative
U.S. dollar value of the Company’s revenues and expenses. The
impact of these currency exchange rate changes, where significant,
is discussed below.
The Company measures the performance of its business segments
using key operating statistics such as segment operating profit and
return on fixed capital investment. The Company’s operating results
can vary significantly due to changes in unpredictable factors such as
weather conditions, plantings, government (domestic and foreign)
farm 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. Due to these
unpredictable factors, the Company does not provide forward-
looking information in “Management’s Discussion of Operations and
Financial Condition.”