Archer Daniels Midland 2009 Annual Report Download - page 31

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25
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Agricultural Services operating profits decreased 2% to $994 million. Merchandising and handling profit
decreased $41 million. Merchandising margins moderated as demand for commodities slowed following the
downturn in the global economy. Transportation results increased $18 million due to higher barge freight rates.
Other operating profits decreased 101% to a loss of $6 million. Wheat, cocoa, malt, and sugar processing operating
profit decreased $166 million for the year primarily due to equity losses from the Company’s investment in Gruma,
partially offset by improved cocoa and wheat processing margins. Financial operating profit decreased $263
million due to losses on managed fund investments compared to gains for the year ended June 30, 2008, increased
captive insurance loss provisions and decreased interest income and lower marketable security gains of the
Company’s brokerage service business.
Corporate results increased $898 million to $81 million, primarily due to the effects of changing commodity prices
on LIFO inventory valuations which resulted in credits of $517 million for the year ended June 30, 2009, compared
to $569 million of LIFO charges for the year ended June 30, 2008. Unallocated interest expense increased $238
million primarily due to higher long-term debt interest expense and decreased interest income. Corporate interest
income decreased due to lower short-term interest rates and lower working capital requirements of the operating
segments.
The Company’s effective tax rate during 2009 was 32.6% compared to 31.3% during 2008. Income taxes
increased $5 million. Lower pre-tax earnings and positive impacts from favorable changes in geographic mix of
earnings, currency translation impacts in South America, lower tax rates in certain foreign jurisdictions, and return
to provision adjustments, were offset by charges of $158 million resulting from the restructuring of a holding
company in which the Company holds a portion of its equity investment in Wilmar International Limited.
2008 Compared to 2007
As an agricultural commodity-based business, the Company is subject to a variety of market factors which affect
the Company’s operating results. Strong demand for agricultural commodities and processed products challenged
the global supply chain and provided exceptional margin opportunities in 2008. Strong global demand for protein
meal and vegetable oil and strong fertilizer demand in South America positively impacted Oilseeds Processing
results. The market price of corn rose due to increased demand, resulting in higher raw material costs for Corn
Processing which were only partially passed on in the form of increased selling prices for sweeteners and starches.
Average ethanol selling prices decreased due to additional supply entering the market. Large North American
crops combined with global wheat shortages created favorable conditions in agricultural merchandising and
handling operations. Increased commodity costs resulted in larger LIFO inventory valuation reserves.
Earnings before income taxes decreased due principally to gains totaling $1.0 billion before income tax on business
disposals recorded in 2007 including $440 million related to the exchange of the Company’s interest in certain
Asian joint ventures for shares of Wilmar International Limited (the Wilmar gain), a $357 million realized
securities gain from sales of the Company’s equity securities of Tyson Foods, Inc. and Overseas Shipholding
Group, Inc., a gain of $153 million from the sale of the Company’s interest in Agricore United, and a $53 million
gain from the sale of the Company’s Arkady food ingredient business.
Earnings before income taxes for 2008 include a charge of $569 million from the effect of changing commodity
prices on LIFO inventory valuations, compared to a charge of $207 million in 2007. Earnings before income taxes
for 2008 also include a $32 million charge related to abandonment and write-down of long-lived assets, a $38
million gain on sales of securities, and a $21 million gain on the disposal of long-lived assets. Earnings before
income taxes for 2007 include charges of $46 million related to the repurchase of $400 million of the Company’s
outstanding debentures and $21 million related to abandonment and write-down of long-lived assets.