Edgar Filing: ARCHER DANIELS MIDLAND CO

adm10qfy11q2.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2010

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

ARCHER-DANIELS-MIDLAND COMPANY

(Exact name of registrant as specified in its charter)

Delaware	41-0129150
(State or other jurisdiction of incorporation or organization)	(I. R. S. Employer Identification No.)

4666 Faries Parkway Box 1470 Decatur, Illinois (Address of principal executive offices)	62525 (Zip Code)

(217) 424-5200
(Registrant's telephone number, including area code)

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 whether the registrant is a large accelerated filer, an accelerated filer, or 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.

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

Common Stock, no par value – 637,302,277 shares

(January 31, 2011)

PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Archer-Daniels-Midland Company

Consolidated Statements of Earnings

(Unaudited)

	Three Months Ended
	December 31,
	2010			2009
	(In millions, except
	per share amounts)

Net sales and other operating income	$	20,930		$	15,913
Cost of products sold		19,696			14,860
Gross Profit		1,234			1,053

Selling, general and administrative expenses		412			358
Other (income) expense – net		(176	)		(89	)
Earnings Before Income Taxes		998			784

Income taxes		269			223
Net Earnings Including Noncontrolling Interests		729			561

Less: Net earnings (losses) attributable to noncontrolling interests		(3	)		(6	)

Net Earnings Attributable to Controlling Interests	$	732		$	567

Average number of shares outstanding – basic		639			643

Average number of shares outstanding – diluted		641			645

Basic earnings per common share	$	1.15		$	0.88

Diluted earnings per common share	$	1.14		$	0.88

Dividends per common share	$	0.15		$	0.14

See notes to consolidated financial statements.

Archer-Daniels-Midland Company

Consolidated Statements of Earnings

(Unaudited)

	Six Months Ended
	December 31,
	2010			2009
	(In millions, except
	per share amounts)

Net sales and other operating income	$	37,729		$	30,834
Cost of products sold		35,687			28,808
Gross Profit		2,042			2,026

Selling, general and administrative expenses		793			712
Other (income) expense – net		(211	)		(187	)
Earnings Before Income Taxes		1,460			1,501

Income taxes		389			443
Net Earnings Including Noncontrolling Interests		1,071			1,058

Less: Net earnings (losses) attributable to noncontrolling interests		(6	)		(5	)

Net Earnings Attributable to Controlling Interests	$	1,077		$	1,063

Average number of shares outstanding – basic		639			643

Average number of shares outstanding – diluted		641			644

Basic and diluted earnings per common share	$	1.68		$	1.65

Dividends per common share	$	0.30		$	0.28

See notes to consolidated financial statements.

Archer-Daniels-Midland Company

Consolidated Balance Sheets

	(Unaudited)
	December 31,			June 30,
	2010			2010
	(In millions)
Assets
Current Assets
Cash and cash equivalents	$	526			$	1,046
Short-term marketable securities		633				394
Segregated cash and investments		3,224				2,337
Receivables		10,625				6,122
Inventories		12,654				7,611
Other assets		695				624
Total Current Assets		28,357				18,134

Investments and Other Assets
Investments in and advances to affiliates		2,975				2,799
Long-term marketable securities		823				678
Goodwill		587				523
Other assets		674				702
Total Investments and Other Assets		5,059				4,702

Property, Plant, and Equipment
Land		298				277
Buildings		4,364				4,008
Machinery and equipment		15,838				15,107
Construction in progress		662				612
		21,162				20,004
Accumulated depreciation		(11,968	)			(11,292	)
Net Property, Plant, and Equipment		9,194				8,712
Total Assets	$	42,610			$	31,548

Liabilities and Shareholders’ Equity
Current Liabilities
Short-term debt	$	5,632			$	374
Accounts payable		8,141				5,538
Accrued expenses		4,085				2,317
Current maturities of long-term debt		205				344
Total Current Liabilities		18,063				8,573

Long-Term Liabilities
Long-term debt		6,848				6,830
Deferred income taxes		546				439
Other		1,249				1,075
Total Long-Term Liabilities		8,643				8,344

Shareholders’ Equity
Common stock		5,095				5,151
Reinvested earnings		11,242				10,357
Accumulated other comprehensive income (loss)		(451	)			(899	)
Noncontrolling interests		18				22
Total Shareholders’ Equity		15,904				14,631
Total Liabilities and Shareholders’ Equity	$	42,610			$	31,548

See notes to consolidated financial statements.

Archer-Daniels-Midland Company

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended
	December 31,
	2010			2009
	(In millions)
Operating Activities
Net earnings including noncontrolling interests	$	1,071		$	1,058
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities
Depreciation and amortization		463			431
Deferred income taxes		126			202
Equity in (earnings) losses of affiliates, net of dividends		(181	)		(207	)
Gain on Golden Peanut revaluation		(71	)		–
Stock compensation expense		36			31
Pension and postretirement accruals, net		47			45
Deferred cash flow hedges		21			84
Other – net		(2	)		16
Changes in operating assets and liabilities
Segregated cash and investments		(875	)		239
Receivables		(4,025	)		214
Inventories		(4,620	)		(1,274	)
Other assets		(124	)		(35	)
Accounts payable and accrued expenses		4,051			576
Total Operating Activities		(4,083	)		1,380

Investing Activities
Purchases of property, plant, and equipment		(645	)		(939	)
Proceeds from sales of property, plant, and equipment		45			22
Net assets of businesses acquired		(163	)		(57	)
Purchases of marketable securities		(1,051	)		(569	)
Proceeds from sales of marketable securities		693			767
Other – net		(20	)		(4	)
Total Investing Activities		(1,141	)		(780	)

Financing Activities
Long-term debt borrowings		35			10
Long-term debt payments		(237	)		(36	)
Net borrowings (payments) under lines of credit agreements		5,179			(140	)
Purchases of treasury stock		(86	)		–
Cash dividends		(192	)		(180	)
Other – net		5			8
Total Financing Activities		4,704			(338	)

Increase (decrease) in cash and cash equivalents		(520	)		262
Cash and cash equivalents beginning of period		1,046			1,055

Cash and cash equivalents end of period	$	526		$	1,317

See notes to consolidated financial statements.

Archer-Daniels-Midland-Company

Consolidated Statement of Shareholders’ Equity

(Unaudited)

										Accumulated
										Other							Total
	Common Stock						Reinvested			Comprehensive			Noncontrolling				Shareholders’
	Shares			Amount			Earnings			Income (Loss)				Interests			Equity
										(In millions)

Balance June 30, 2010		639		$	5,151		$	10,357		$	(899	)		$	22		$	14,631

Comprehensive income
Net earnings								1,077							(6	)
Other comprehensive income											448
Total comprehensive income																		1,519
Cash dividends paid-$.30 per share								(192	)									(192	)
Treasury stock purchases		(3	)		(86	)												(86	)
Stock compensation expense					36													36
Other		1			(6	)									2			(4	)
Balance December 31, 2010		637		$	5,095		$	11,242		$	(451	)		$	18		$	15,904

See notes to consolidated financial statements.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements

(Unaudited)

Note 1.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter ended December 31, 2010 are not necessarily indicative of the results that may be expected for the year ending June 30, 2011. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 2010.

Principles of Consolidation

Effective this quarter, one of the Company’s majority-owned subsidiaries changed its accounting period to align with the Company’s reporting period resulting in the elimination of a one-month lag in the reporting of the consolidated subsidiary’s financial results. The effect of this change on after-tax earnings for the quarter and six months ended December 31, 2010 was immaterial.

Adoption of New Accounting Standards

Effective July 1, 2010, the Company adopted the amended guidance in Accounting Standards Codification (ASC) Topic 810, Consolidations, which changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting or similar rights (known as variable interest entities or VIEs) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance and the other entity’s purpose and design. The VIEs in which the Company holds variable interests are not individually considered material to the Company’s consolidated results. As a result of the adoption of this guidance, the Company deconsolidated one VIE with no material effect on the Company’s consolidated financial statements.

Effective October 1, 2010, the Company adopted the amended guidance in ASC Topic 310, Receivables, which requires more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables (excluding trade receivables), and its allowances for credit losses. The new disclosures require additional information for nonaccrual and past due accounts, the allowance for credit losses, impaired loans, credit quality, and account notifications. A financing receivable is defined as a contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the entity’s statement of financial position.

The Company has seasonal financing arrangements with farmers in certain countries around the world. Typically, advances occur during the planting season and are repaid at harvest. As of December 31, 2010, $387 million of receivables under these financing arrangements were outstanding, the majority of which was secured by various forms of collateral. Receivables are placed on non-accrual status when the accounts are in legal dispute. Interest income and losses on these inventory financing arrangements are not material.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 1.

Basis of Presentation (Continued)

The Company also has loans receivable through its wholly-owned subsidiary, Hickory Point Bank and Trust (“HPB”). As of December 31, 2010, $279 million of loans were outstanding. The accrual of interest on loans is discontinued when the loan is 90 days past due unless the credit is well-secured and in the process of collection. Interest income and losses on bank loans are not material

Other than as discussed above, the Company’s financing receivables as of December 31, 2010 were immaterial.

Change in Estimate

During the second quarter of fiscal year 2011, the Company updated its estimate for service lives of certain of its machinery and equipment assets in order to better match the Company’s depreciation expense with the periods these assets are expected to generate revenue based on planned and historical service periods. The new estimated service lives were established based on manufacturing engineering data, external benchmark data and on new information obtained as a result of the Company’s recent major construction projects. These new estimated service lives are also supported by biofuels legislation and mandates in many countries that are driving requirements over time for greater future usage and higher blend rates of biofuels.

The Company accounted for this service life update as a change in accounting estimate as of October 1, 2010 in accordance with the guidance of ASC Topic 250, Accounting Changes and Error Corrections, thereby impacting the current and future quarters. The effect of this change on after-tax earnings and diluted earnings per share for the quarter ended December 31, 2010 was $24 million and $0.04, respectively.

Reclassifications

Certain items in prior years’ consolidated statements of cash flows have been reclassified to conform to the current year’s presentation with no impact to total cash provided by (used in) operating, investing, or financing activities.

Last-in, First-out (LIFO) Inventories

Interim period LIFO calculations are based on interim period costs and management’s estimates of year-end inventory levels. Because the availability and price of agricultural commodity-based LIFO inventories are unpredictable due to factors such as weather, government farm programs and policies, and changes in global demand, quantities of LIFO-based inventories at interim periods may vary significantly from management’s estimates of year-end inventory levels.

Note 2.

New Accounting Standards

Effective July 1, 2011, the Company will be required to adopt the second phase of the amended guidance in ASC Topic 820, Fair Value Measurements and Disclosures, which requires the Company to disclose information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances, and settlements on a gross basis, separately for assets and liabilities. The adoption of this amended guidance will require expanded disclosures in the notes to the Company’s consolidated financial statements but will not impact financial results.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 3.

Acquisitions

During the quarter and six months ended December 31, 2010, the Company acquired two businesses for a total cost of $163 million and recorded a preliminary allocation of the purchase price related to these acquisitions. The acquisition of Alimenta (USA), Inc., the Company’s former 50 percent partner in Golden Peanut Company LLC., was the only significant acquisition during the quarter and six months ended December 31, 2010. This transaction resulted in the Company obtaining the control of the remaining outstanding shares of Golden Peanut Company LLC, the largest U.S. handler, processor and exporter of peanuts. This business fits well with the Company’s existing U.S. oilseed and export operations in its global oilseed business. A pre-tax gain of $71 million was recognized as a result of revaluing the Company’s previously held investment in Golden Peanut Company LLC in conjunction with the acquisition of the remaining 50 percent interest based on the guidance of ASC Topic 805, Business Combinations.

The net cash purchase price for these two acquisitions of $163 million plus the acquisition-date fair value of the equity interest the Company previously held in Golden Peanut Company LLC was allocated to working capital, property, plant and equipment, goodwill, other long-term assets, and liabilities for $109 million, $189 million, $58 million, $5 million, and $30 million, respectively.

Note 4.

Fair Value Measurements

The Company determines the fair market value of certain of its inventories of agricultural commodities, derivative contracts, and marketable securities based on the fair value definition and hierarchy levels established in the guidance of ASC Topic 820, Fair Value Measurements and Disclosures. Three levels are established within the hierarchy that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 1 assets and liabilities include exchange-traded derivative contracts, U.S. treasury securities, and certain publicly traded equity securities.

Level 2: Observable inputs, including Level 1 prices that have been adjusted; quoted prices for similar assets or liabilities; quoted prices in markets that are less active than traded exchanges; and other inputs that are observable or can be substantially corroborated by observable market data.

Level 3: Unobservable inputs that are supported by little or no market activity and that are a significant component of the fair value of the assets or liabilities. In evaluating the significance of fair value inputs, the Company generally classifies assets or liabilities as Level 3 when their fair value is determined using unobservable inputs that individually or when aggregated with other unobservable inputs, represent more than 10% of the fair value of the assets or liabilities. Judgment is required in evaluating both quantitative and qualitative factors in the determination of significance for purposes of fair value level classification. Level 3 amounts can include assets and liabilities whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as assets and liabilities for which the determination of fair value requires significant management judgment or estimation.

In many cases, a valuation technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy. The lowest level of input that is a significant component of the fair value measurement determines the placement of the entire fair value measurement in the hierarchy. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the classification of fair value assets and liabilities within the fair value hierarchy levels.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 4. Fair Value Measurements (Continued)

The Company’s policy regarding the timing of transfers between levels, including both transfers into and transfers out of Level 3, is to measure and record the transfers at the end of the reporting period. For the quarter and six months ended December 31, 2010, the Company had no transfers between Levels 1 and 2.

The following tables set forth, by level, the Company’s assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2010 and June 30, 2010.

	Fair Value Measurements at December 31, 2010
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In millions)

Assets:
Inventories carried at market	$	–	$	5,925	$	309	$	6,234
Unrealized derivative gains:
Commodity contracts		1,044		2,969		141		4,154
Foreign exchange contracts		72		90		–		162
Interest rate contracts		–		7		–		7
Marketable securities		1,510		585		–		2,095
Total Assets	$	2,626	$	9,576	$	450	$	12,652
Liabilities:
Unrealized derivative losses:
Commodity contracts	$	1,290	$	2,005	$	49	$	3,344
Foreign exchange contracts		115		51		–		166
Interest rate contracts		–		7		–		7
Inventory-related payables		–		550		3		553
Total Liabilities	$	1,405	$	2,613	$	52	$	4,070

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 4.

Fair Value Measurements (Continued)

	Fair Value Measurements at June 30, 2010
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In millions)

Assets:
Inventories carried at market	$	–	$	3,774	$	458	$	4,232
Unrealized derivative gains:
Commodity contracts		777		1,883		69		2,729
Foreign exchange contracts		162		38		–		200
Marketable securities		1,067		543		–		1,610
Total Assets	$	2,006	$	6,238	$	527	$	8,771
Liabilities:
Unrealized derivative losses:
Commodity contracts	$	937	$	2,161	$	56	$	3,154
Foreign exchange contracts		184		82		–		266
Interest rate contracts		–		26		–		26
Inventory-related payables		–		207		31		238
Total Liabilities	$	1,121	$	2,476	$	87	$	3,684

The Company uses the market approach valuation technique to measure the majority of its assets and liabilities carried at fair value. Estimated fair market values for inventories carried at market are based on exchange-quoted prices, adjusted for differences in local markets, broker or dealer quotations or market transactions in either listed or over-the-counter (OTC) markets. In such cases, the inventory is classified in Level 2. Certain inventories may require management judgment or estimation for a significant component of the fair value amount. In such cases, the inventory is classified as Level 3. Changes in the fair market value of inventories are recognized in the consolidated statements of earnings as a component of cost of products sold.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 4.

Fair Value Measurements (Continued)

The Company’s derivative contracts that are measured at fair value include forward commodity purchase and sale contracts, exchange-traded commodity futures and option contracts, and OTC instruments related primarily to agricultural commodities, ocean freight, energy, interest rates, and foreign currencies. Exchange-traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified in Level 1. The majority of the Company’s exchange-traded futures and options contracts are cash- settled on a daily basis and, therefore, are not included in this table. Fair value for forward commodity purchase and sale contracts is estimated based on exchange-quoted prices adjusted for differences in local markets. These differences are generally determined using inputs from broker or dealer quotations or market transactions in either the listed or OTC markets. When observable inputs are available for substantially the full term of the contract, it is classified in Level 2. When unobservable inputs have a significant impact on the measurement of fair value, the contract is classified in Level 3. Based on historical experience with the Company’s suppliers and customers, the Company’s own credit risk and knowledge of current market conditions, the Company does not view nonperformance risk to be a significant input to fair value for the majority of its forward commodity purchase and sale contracts. However, in certain cases, if the Company believes the nonperformance risk to be a significant input, the Company records estimated fair value adjustments, and classifies the contract in Level 3. Except for certain derivatives designated as cash flow hedges, changes in the fair market value of commodity-related derivatives are recognized in the consolidated statements of earnings as a component of cost of products sold. Changes in the fair market value of foreign currency-related derivatives are recognized in the consolidated statements of earnings as a component of net sales and other operating income, cost of products sold, and other (income) expense – net. The effective portions of changes in the fair market value of derivatives designated as cash flow hedges are recognized in the consolidated balance sheets as a component of accumulated other comprehensive income (loss) until the hedged items are recorded in earnings or it is probable the hedged transaction will no longer occur.

The Company’s marketable securities are comprised of U.S. Treasury securities, obligations of U.S. government agencies, corporate and municipal debt securities, and equity investments. U.S. Treasury securities and certain publicly traded equity investments are valued using quoted market prices and are classified in Level 1. U.S. government agency obligations, corporate and municipal debt securities and certain equity investments are valued using third-party pricing services and substantially all are classified in Level 2. Security values that are determined using pricing models are classified in Level 3. Unrealized changes in the fair market value of available-for-sale marketable securities are recognized in the consolidated balance sheets as a component of accumulated other comprehensive income (loss) unless a decline in value is deemed to be other-than-temporary at which point the decline is recorded in earnings.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 4.

Fair Value Measurements (Continued)

The following tables present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended December 31, 2010 and 2009.

	Level 3 Fair Value Measurements at December 31, 2010
	Inventories Carried at Market, Net			Commodity Derivative Contracts, Net			Total
	(In millions)

Balance, September 30, 2010	$	371		$	35		$	406
Total gains (losses), realized or unrealized, included in earnings before income taxes*		(27	)		62			35
Purchases, issuances and settlements		43			1			44
Transfers into Level 3		2			(1	)		1
Transfers out of Level 3		(83	)		(5	)		(88	)
Ending balance, December 31, 2010	$	306		$	92		$	398

* Includes gains of $122 million that are attributable to the change in unrealized gains or losses relating to Level 3 assets and liabilities still held at December 31, 2010.

	Level 3 Fair Value Measurements at December 31, 2009
	Inventories Carried at Market, Net			Derivative Contracts, Net			Total
	(In millions)

Balance, September 30, 2009	$	530		$	(45	)	$	485
Total gains (losses), realized or unrealized, included in earnings before income taxes*		(49	)		74			25
Purchases, issuances and settlements		14			(8	)		6
Transfers in and/or out of Level 3		105			56			161
Ending balance, December 31, 2009	$	600		$	77		$	677

*Includes gains of $98 million that are attributable to the change in unrealized gains or losses relating to Level 3 assets and liabilities still held at December 31, 2009.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 4.

Fair Value Measurements (Continued)

	Level 3 Fair Value Measurements at December 31, 2010
	Inventories Carried at Market, Net			Derivative Contracts, Net			Total
	(In millions)

Balance, June 30, 2010	$	427		$	13		$	440
Total gains (losses), realized or unrealized, included in earnings before income taxes*		4			98			102
Purchases, issuances and settlements		114			3			117
Transfers in to Level 3		8			–			8
Transfers out of Level 3		(247	)		(22	)		(269	)
Ending balance, December 31, 2010	$	306		$	92		$	398

* Includes gains of $169 million that are attributable to the change in unrealized gains or losses relating to Level 3 assets and liabilities still held at December 31, 2010.

	Level 3 Fair Value Measurements at December 31, 2009
	Inventories Carried at Market, Net			Derivative Contracts, Net			Total
	(In millions)

Balance, June 30, 2009	$	468		$	(2	)	$	466
Total gains (losses), realized or unrealized, included in earnings before income taxes*		(42	)		44			2
Purchases, issuances and settlements		(28	)		(17	)		(45	)
Transfers in and/or out of Level 3		202			52			254
Ending balance, December 31, 2009	$	600		$	77		$	677

*Includes gains of $96 million that are attributable to the change in unrealized gains or losses relating to Level 3 assets and liabilities still held at December 31, 2009.

Transfers into Level 3 of assets and liabilities previously classified in Level 2 were due to the relative value of unobservable inputs to the total fair value measurement on certain products and derivative contracts rising above the 10% threshold. Transfers out of Level 3 were primarily due to the relative value of unobservable inputs to the total fair value measurement on certain products and derivative contracts falling below the 10% threshold and thus permitting reclassification to Level 2.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 5.

Derivative Instruments and Hedging Activities

The Company recognizes all of its derivative instruments as either assets or liabilities at fair value in its consolidated balance sheets. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. The majority of the Company’s derivatives have not been designated as hedging instruments. For those derivative instruments that are designated and qualify as hedging instruments, a reporting entity must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, a cash flow hedge, or a hedge of a net investment in a foreign operation. As of December 31, 2010, the Company has certain derivatives designated as cash flow hedges. Within the Note 5 tables, zeros represent minimal amounts.

Derivatives Not Designated as Hedging Instruments

The Company generally follows a policy of using exchange-traded futures and exchange-traded and OTC options contracts to minimize its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts to reduce price risk caused by market fluctuations in agricultural commodities and foreign currencies. The Company also uses exchange-traded futures and exchange-traded and OTC options 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 contract defaults, and volatility of freight markets. Exchange-traded futures, exchange-traded and OTC options contracts, and forward cash purchase and sales contracts of certain merchandisable agricultural commodities accounted for as derivatives are stated at fair value. Inventories of certain merchandisable agricultural commodities, which include amounts acquired under deferred pricing contracts, are stated at market value. Inventory is not a derivative and therefore is not included in the tables below. Changes in the market value of inventories of certain merchandisable agricultural commodities, forward cash purchase and sales contracts, exchange-traded futures, and exchange-traded and OTC options contracts are recognized in earnings immediately. Unrealized gains and unrealized losses on forward cash purchase contracts, forward foreign currency exchange (FX) contracts, forward cash sales contracts, and exchange-traded and OTC options contracts represent the fair value of such instruments and are classified on the Company’s consolidated balance sheets as receivables and accrued expenses, respectively.

At March 31, 2010, the Company de-designated and discontinued hedge accounting treatment for certain interest rate swaps. At the date of de-designation of these hedges, $21 million of after-tax gains was deferred in accumulated other comprehensive income (AOCI). These gains will remain in AOCI until the hedged transactions occur or it is probable the hedged transaction will not occur. The Company recognized in earnings $55 million and $24 million of pre-tax gains from these interest rate swaps during the quarter and six months ended December 31, 2010, respectively.

The following table sets forth the fair value of derivatives not designated as hedging instruments as of December 31, 2010 and June 30, 2010.

	December 31, 2010				June 30, 2010
	Assets		Liabilities		Assets		Liabilities
	(In millions)				(In millions)

FX Contracts	$	162	$	166	$	200	$	266
Interest Contracts		7		7		–		26
Commodity Contracts		4,153		3,343		2,727		3,152
Total	$	4,322	$	3,516	$	2,927	$	3,444

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 5.

Derivative Instruments and Hedging Activities (Continued)

The following tables set forth the pre-tax gains (losses) on derivatives not designated as hedging instruments that have been included in the consolidated statements of earnings for the quarter and six months ended December 31, 2010 and 2009.

	Three months ended December 31,
	2010			2009
	(In Millions)

Interest Contracts
Other income (expense) – net	$	55		$	1

FX Contracts
Net sales and other operating income	$	27		$	(5	)
Cost of products sold		5			18
Other income (expense) – net		(4	)		20

Commodity Contracts
Cost of products sold	$	(1,158	)	$	(584	)
Total gain (loss) recognized in earnings	$	(1,075	)	$	(550	)

	Six months ended December 31,
	2010			2009
	(In Millions)

Interest Contracts
Other income (expense) – net	$	24		$	2

FX Contracts
Net sales and other operating income	$	(7	)	$	(20	)
Cost of products sold		64			25
Other income (expense) – net		32			28

Commodity Contracts
Cost of products sold	$	(1,807	)	$	(409	)
Total gain (loss) recognized in earnings	$	(1,694	)	$	(374	)

Derivatives Designated as Cash Flow Hedging Strategies

For derivative instruments that are designated and qualify as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (OCI) and reclassified into earnings in the same line item affected by the hedged transaction and in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss of the derivative instrument that is in excess of the cumulative change in the cash flows of the hedged item, if any (i.e., the ineffective portion), hedge components excluded from the assessment of effectiveness, and gains and losses related to discontinued hedges are recognized in the consolidated statement of earnings during the current period.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 5.

Derivative Instruments and Hedging Activities (Continued)

For each of the commodity hedge programs described below, the derivatives are designated as cash flow hedges. The changes in the market value of such derivative contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of the hedged item. Once the hedged item is recognized in earnings, the gains/losses arising from the hedge will be reclassified from AOCI to either net sales and other operating income, or cost of products sold. As of December 31, 2010, the Company has $17 million of after-tax gains in AOCI related to gains and losses from commodity cash flow hedge transactions. The Company expects to recognize all of these after-tax gains in the statement of earnings during the next 12 months.

The Company, from time to time, uses futures or options contracts to fix the purchase price of anticipated volumes of corn to be purchased and processed in a future month. The objective of this hedging program is to reduce the variability of cash flows associated with the Company’s forecasted purchases of corn. The Company’s corn processing plants currently grind approximately 75 million bushels of corn per month. During the past 12 months, the Company hedged between 13% and 100% of its monthly anticipated grind. At December 31, 2010, the Company has hedged 100% of its anticipated monthly grind of corn over the next 3 months.

The Company, from time to time, also uses futures, options, and swaps to fix the purchase price of the Company’s anticipated natural gas requirements for certain production facilities. The objective of this hedging program is to reduce the variability of cash flows associated with the Company’s forecasted purchases of natural gas. These production facilities use approximately 3.5 million MMbtus of natural gas per month. During the past 12 months, the Company hedged between 47% and 77% of the quantity of its anticipated monthly natural gas purchases. At December 31, 2010, the Company has hedged portions of its anticipated monthly purchases of natural gas over the next 9 months, ranging from 9% to 50% of its anticipated monthly natural gas purchases.

To protect against fluctuations in cash flows due to foreign currency exchange rates, the Company from time to time will use forward foreign exchange contracts as cash flow hedges. Certain production facilities have manufacturing expenses and some sales contracts denominated in non-functional currency. To reduce the risk of fluctuations in cash flows due to changes in the exchange rate between functional versus non-functional currency, the Company will hedge some portion of the forecasted foreign currency expenditures and/or receipts. At December 31, 2010, the amount in AOCI related to foreign exchange contracts designated as cash flow hedging instruments as of December 31, 2010 was immaterial.

The Company, from time to time, uses treasury-lock agreements and interest rate swaps in order to lock in the Company’s interest rate prior to the issuance or remarketing of its debentures. Both the treasury-lock agreements and interest rate swaps were designated as cash flow hedges of the risk of changes in the future interest payments attributable to changes in the benchmark interest rate. The objective of the treasury-lock agreements and interest rate swaps was to protect the Company from changes in the benchmark rate from the date the Company decided to issue the debt to the date when the debt will actually be issued. At December 31, 2010, AOCI included $26 million of after-tax gains related to treasury-lock agreements and interest rate swaps, of which $21 million relates to the interest rate swaps that were de-designated at March 31, 2010 as discussed earlier in Note 5. The Company will recognize the $26 million of gains in its consolidated statement of earnings over the terms of the hedged items or when it is probable the hedged transactions will not occur.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 5.

Derivative Instruments and Hedging Activities (Continued)

The following table sets forth the fair value of derivatives designated as hedging instruments as of December 31, 2010 and June 30, 2010.

	December 31, 2010				June 30, 2010
	Assets		Liabilities		Assets		Liabilities
	(In millions)				(In millions)

Commodity Contracts	$	1	$	1	$	2	$	2
Total	$	1	$	1	$	2	$	2

The following tables set forth the pre-tax gains (losses) on derivatives designated as hedging instruments that have been included in the consolidated statement of earnings for the quarter and six months ended December 31, 2010 and 2009.

	Consolidated	Three months ended
	Statement of	December 31,
	Earnings Location	2010			2009
		(In millions)
Effective amounts recognized in earnings
FX Contracts	Other (income) expense – net	$	0		$	0
Interest Contracts	Other (income) expense – net		0			0
Commodity Contracts	Cost of products sold		156			(8	)
	Net sales and other operating income		(2	)		0
Ineffective amount recognized in earnings	Cost of products sold		16			30
Total amount recognized in earnings		$	170		$	22

	Consolidated	Six months ended
	Statement of	December 31,
	Earnings Location	2010		2009
		(In millions)
Effective amounts recognized in earnings
FX Contracts	Other (income) expense – net	$	0	$	(1	)
Interest Contracts	Other (income) expense – net		0		0
Commodity Contracts	Cost of products sold		221		(50	)
	Net sales and other operating income		4		0
Ineffective amount recognized in earnings	Cost of products sold		33		22
Total amount recognized in earnings		$	258	$	(29	)

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 5.

Derivative Instruments and Hedging Activities (Continued)

The following tables set forth the changes in AOCI related to derivatives gains (losses) for the quarter and six months ended December 31, 2010 and 2009.

	Three months ended
	December 31,
	2010			2009
	(In millions)
Balance at September 30	$	56		$	(11	)
Unrealized gains		135			81
Losses (gains) reclassified to earnings		(154	)		8
Tax effect		6			(24	)
Balance at December 31	$	43		$	54

	Six months ended
	December 31
	2010			2009
	(In millions)
Balance at June 30	$	30		$	(13	)
Unrealized gains		247			58
Losses (gains) reclassified to earnings		(225	)		51
Tax effect		(9	)		(42	)
Balance at December 31	$	43		$	54

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 6.

Marketable Securities and Cash Equivalents

			Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In millions)
December 31, 2010

United States government obligations
Maturity less than 1 year	$	596	$	–	$	–		$	596
Maturity 1 to 5 years		69		1		–			70
Government–sponsored enterprise obligations
Maturity 1 to 5 years		108		2		–			110
Maturity 5 to 10 years		83		2		–			85
Maturity greater than 10 years		255		8		(1	)		262
Corporate debt securities
Maturity 1 to 5 years		41		–		–			41
Other debt securities
Maturity less than 1 year		164		–		–			164
Maturity 1 to 5 years		4		–		–			4
Maturity 5 to 10 years		7		–		–			7
Equity securities
Available-for-sale		160		70		(10	)		220
Trading		24		–		–			24
	$	1,511	$	83	$	(11	)	$	1,583

			Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In millions)
June 30, 2010

United States government obligations
Maturity less than 1 year	$	395	$	–	$	–		$	395
Maturity 1 to 5 years		33		1		–			34
Government–sponsored enterprise obligations
Maturity 1 to 5 years		111		3		–			114
Maturity 5 to 10 years		122		4		–			126
Maturity greater than 10 years		232		9		–			241
Corporate debt securities
Maturity less than 1 year		10		–		–			10
Maturity 1 to 5 years		46		2		–			48
Other debt securities
Maturity less than 1 year		659		–		–			659
Maturity 1 to 5 years		2		–		–			2
Maturity 5 to 10 years		6		–		–			6
Equity securities
Available-for-sale		54		48		(15	)		87
Trading		20		–		–			20
	$	1,690	$	67	$	(15	)	$	1,742

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 6.

Marketable Securities and Cash Equivalents (Continued)

Of the $11 million in unrealized losses at December 31, 2010, $1 million arose within the last 12 months. The market value of the investments that have been in an unrealized loss position for less than 12 months and for 12 months and longer is $49 million and $23 million, respectively. The market value of government-sponsored enterprise obligations with unrealized losses as of December 31, 2010 is $49 million. The $1 million in unrealized losses associated with government-sponsored enterprise obligations are not considered to be other-than-temporary because the present value of expected cash flows to be collected is equivalent to or exceeds the amortized cost basis of the securities. The market value of available-for-sale equity securities with unrealized losses as of December 31, 2010 is $23 million. The $10 million in unrealized losses associated with available-for-sale equity securities is related to the Company’s investment in one security. The Company does not intend to sell this equity security, and, based upon its evaluation, the Company does not believe it is likely that the Company will be required to sell the investment before recovery of its amortized cost basis.

Note 7.

Debt and Financing Arrangements

The Company has outstanding $1.15 billion principal amount of convertible senior notes (the Notes) due in 2014. As of December 31, 2010, none of the conditions permitting conversion of the Notes had been satisfied. Therefore, no share amounts related to the conversion of the Notes or exercise of the warrants sold in connection with the issuance of the Notes were included in diluted average shares outstanding.

The Company also has outstanding $1.75 billion principal amount of Equity Units (the Units). The Units are a combination of (a) debt and (b) forward purchase contracts for the holder to purchase the Company’s common stock. The forward purchase contracts issued in connection with the Units will be settled for the Company’s common stock no later than June 1, 2011. Until settlement of the forward purchase contracts, the shares of stock underlying each forward purchase contract are not outstanding. The forward purchase contracts will only be included in the computation of diluted earnings per share to the extent they are dilutive. As of December 31, 2010, the forward purchase contracts were not considered dilutive and therefore were not included in the computation of diluted earnings per share.

At December 31, 2010, the fair value of the Company’s long-term debt exceeded the carrying value by $739 million, as estimated using quoted market prices or discounted future cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

At December 31, 2010, the Company had lines of credit totaling $8.4 billion, of which $3.3 billion was unused. Of the Company’s total lines of credit, $6.5 billion support a commercial paper borrowing facility, against which there was $4.3 billion of commercial paper outstanding at December 31, 2010. At June 30, 2010, the Company had lines of credit totaling $6.0 billion, of which $4.2 billion supported a commercial paper borrowing facility. The Company expanded its overall commercial paper borrowing capacity with a $2.3 billion increase in short-term credit facilities in the quarter ended December 31, 2010.

For further information on the Notes and Units, refer to Note 8 “Debt and Financing Arrangements” in the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended June 30, 2010.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 8.

Income Taxes

The Company’s effective tax rate for the quarter and six months ended December 31, 2010, was 27.0% and 26.6%, respectively compared to 28.4% and 29.5% for the quarter and six months ended December 31, 2009, respectively. The decrease in the Company’s effective tax rate is primarily due to changes in the geographic mix of pretax earnings.

The Company is subject to income taxation in many jurisdictions around the world. The Company is also subject to routine examination by domestic and foreign tax authorities and frequently faces challenges regarding the amount of taxes due. These challenges include questions regarding the timing, nature and amount of deductions and the allocation of income among various tax jurisdictions. Resolution of the related tax positions through negotiation with relevant tax authorities or through litigation may take years to complete. Therefore, it is difficult to predict the timing for resolution of tax positions. In its routine evaluations of the exposure associated with various tax filing positions, the Company recognizes a liability, when necessary, for estimated potential additional tax owed by the Company in accordance with ASC 740, Income Taxes. However, the Company cannot accurately predict or provide assurance as to the ultimate outcome of these ongoing or future examinations.

In December 2009, the Company’s wholly-owned subsidiary, ADM do Brasil Ltda. (“ADM do Brasil”), received a tax assessment from the Brazilian Federal Revenue Service (“BFRS”) in the amount of $503 million (subject to interest and variation in currency exchange rates) consisting of tax, penalty, and interest, challenging the tax deductibility of commodity hedging losses incurred by ADM do Brasil in 2004. Commodity hedging transactions can result in gains, which are included in ADM do Brasil’s calculations of taxable income in Brazil, and losses, which ADM do Brasil deducts from its taxable income. In June 2010, the BFRS initiated an audit related to the same matter for the tax years 2005, 2006, and 2007 resulting in an assessment for the tax years 2006 and 2007 in the amount of $105 million (subject to interest and variation in currency exchange rates). No assessment was received for tax year 2005, which included taxable net hedging gains. In addition, the statute of limitations for tax year 2005 expired on December 31, 2010. If the BFRS were to challenge commodity hedging deductions in tax years after 2007, the Company estimates it could receive additional claims of approximately $104 million (as of December 31, 2010 and subject to interest and variation in currency exchange rates).

In January 2010, ADM do Brasil filed an administrative appeal of the 2004 assessment with the BFRS. A decision in favor of the BFRS was received in November 2010 and a second-level administrative appeal has been filed. Additionally, an administrative appeal will be filed in February 2011 for the assessment related to the years 2006 and 2007. If ADM do Brasil continues to be unsuccessful in the administrative appellate process, further appeals are available in the Brazilian federal courts. While the Company believes that its consolidated financial statements properly reflect the tax deductibility of these hedging losses, the ultimate resolution of this matter could result in the future recognition of additional payments of, and expense for, income tax and the associated interest and penalties.

The Company has evaluated its tax position regarding these hedging transactions and concluded, based upon advice from Brazilian legal counsel, that it was appropriate to recognize both gains and losses resulting from hedging transactions when determining its Brazilian income tax expense. Therefore, the Company has continued to recognize the tax benefit from hedging losses in its financial statements and has not recorded any tax liability for the amounts assessed by the BFRS. The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 2007.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 9.

Comprehensive Income

The components of comprehensive income, net of related tax, are as follows:

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2010			2009			2010			2009
	(In millions)

Net earnings including noncontrolling interests	$	729		$	561		$	1,071		$	1,058
Unrealized gain (loss) on investments		(9	)		1			13			16
Deferred gain (loss) on hedging activities		(13	)		65			13			67
Pension liability adjustment		11			3			(2	)		(5	)
Foreign currency translation adjustment		(65	)		(27	)		424			122
Comprehensive income		653			603			1,519			1,258
Less: Comprehensive income (loss) attributable to noncontrolling interests		(3	)		(6	)		(6	)		(5	)
Comprehensive income attributable to controlling interests	$	656		$	609		$	1,525		$	1,263

Note 10.

Other (Income) Expense - Net

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2010			2009			2010			2009
	(In millions)

Interest expense	$	115		$	105		$	232		$	203
Investment income		(41	)		(36	)		(65	)		(66	)
Gain on Golden Peanut revaluation		(71	)		–			(71	)		–
Equity in earnings of affiliates		(138	)		(139	)		(263	)		(291	)
Unrealized gains on interest rate swaps		(55	)		–			(24	)		–
Other – net		14			(19	)		(20	)		(33	)
Other (Income) Expense - Net	$	(176	)	$	(89	)	$	(211	)	$	(187	)

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 11.

Segment Information

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, which include wheat processing, cocoa processing, and its financial business units, are not reportable segments, as defined by ASC Topic 280, Segment Reporting, and are classified as Other.

Intersegment sales have been recorded at amounts approximating market. Operating profit for each segment is based on net sales less identifiable operating expenses, including an interest charge related to working capital usage. Also included in segment operating profit is equity in earnings of affiliates based on the equity method of accounting. Certain Corporate items are not allocated to the Company’s reportable business segments. Corporate results include the impact of LIFO inventory adjustments, the after-tax elimination of income attributable to mandatorily redeemable interests in consolidated subsidiaries, unallocated corporate expenses, and unallocated net interest costs.

For detailed information regarding the Company’s reportable segments, see Note 15 to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended June 30, 2010.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 11.

Segment Information (Continued)

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2010			2009			2010			2009
	(In millions)

Sales to external customers
Oilseeds Processing	$	6,220		$	4,880		$	12,680		$	11,238
Corn Processing		2,485			2,029			4,663			3,945
Agricultural Services		10,757			7,640			17,291			12,962
Other		1,468			1,364			3,095			2,689
Total	$	20,930		$	15,913		$	37,729		$	30,834

Intersegment sales
Oilseeds Processing	$	36		$	18		$	53		$	37
Corn Processing		9			8			17			17
Agricultural Services		797			703			1,257			1,148
Other		38			37			74			74
Total	$	880		$	766		$	1,401		$	1,276

Net sales
Oilseeds Processing	$	6,256		$	4,898		$	12,733		$	11,275
Corn Processing		2,494			2,037			4,680			3,962
Agricultural Services		11,554			8,343			18,548			14,110
Other		1,506			1,401			3,169			2,763
Intersegment elimination		(880	)		(766	)		(1,401	)		(1,276	)
Total	$	20,930		$	15,913		$	37,729		$	30,834

Segment operating profit
Oilseeds Processing	$	325		$	352		$	633		$	636
Corn Processing		399			290			740			478
Agricultural Services		426			150			558			325
Other		212			178			196			305
Total segment operating profit		1,362			970			2,127			1,744
Corporate		(364	)		(186	)		(667	)		(243	)
Earnings before income taxes	$	998		$	784		$	1,460		$	1,501

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 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, cottonseed, sunflower seeds, canola, rapeseed, peanuts, flaxseed, and palm into vegetable oils and protein meals. The Oilseeds Processing segment principally produces and markets processed oilseed products as ingredients for the food, feed, energy, and other industrial products industries. Crude vegetable oil is sold "as is" or is 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 oil is used to produce biodiesel or is 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 needs. 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 utilizes a network of grain elevators, port facilities, and transportation assets to buy, store, clean, and transport agricultural commodities, as adjuncts to its processing assets. In South America, the Oilseeds Processing segment also operates fertilizer blending facilities. This segment includes the Company’s share of the results of its equity method investment in Wilmar International Limited (WIL). Also included is the Company’s share of results for its Golden Peanut Company LLC, Edible Oils Limited, and Stratas Foods, LLC joint ventures. 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, the leading U.S. peanut sheller and oil refiner. The Company will begin consolidating the operating results of Golden Peanut Company LLC beginning with the third quarter of fiscal 2011.

The Company’s Corn Processing segment is engaged in corn wet milling and dry milling activities, primarily in the United States, related to its production of ingredients used in the food and beverage industry including syrup, starch, glucose, dextrose, and sweeteners. Dextrose is also used by the Company as a feedstock for its bioproducts operations. 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 as an oilseed into vegetable oil and protein meal.

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 to beverage grade or for industrial use as ethanol. In gasoline, ethanol increases octane and is used as an extender and oxygenate. Amino acids, such as lysine and threonine, are vital compounds used in swine feeds to produce leaner animals and in poultry feeds to enhance the speed and efficiency of poultry production. The Corn Processing segment also produces, by fermentation, astaxanthin, a product used in aquaculture to enhance flesh coloration. The Corn Processing segment produces 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. This segment also includes the Company’s share of the results of its equity method investments in Almidones Mexicanos S.A., Eaststarch C.V., and Red Star Yeast Company LLC.

ITEM 2.

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

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, 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 agricultural processing operations and customers. Agricultural Services’ transportation network capabilities include ground, rail, river, and ocean freight services. The Agricultural Services segment also includes activities related to procuring, processing, and distributing edible beans, and the processing and distributing of formula feeds and animal health and nutrition products. In addition, the Agricultural Services segment includes the activities of Alfred C. Toepfer International, a global merchant of agricultural commodities and processed products, and the Company’s share of the results of its Kalama Export Company joint venture.

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, private equity fund investments, futures commission merchant activities, and the Company’s share of the results of its equity method investment in Gruma S.A.B de C.V.

Certain Corporate items are not allocated to the Company’s reportable business segments. Corporate results include the impact of LIFO-related inventory adjustments, the after-tax elimination of income attributable to mandatorily redeemable interests in consolidated subsidiaries, unallocated corporate expenses, and unallocated net interest costs.

Operating Performance Indicators

The Company is exposed to certain risks inherent to an agricultural-based commodity business. These risks are further described in Item 1A, “Risk Factors” included in the Company’s annual report on Form 10-K for the year ended June 30, 2010.

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 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.

The Company conducts its business in over 60 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 will result in corresponding fluctuations in the U.S. dollar value of revenues and expenses reported by the Company.

ITEM 2.

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

The Company measures the performance of its business segments using key financial metrics such as segment operating profit, return on invested capital, return on fixed capital investment, return on equity, 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.”

Three Months Ended December 31, 2010 Compared to Three Months Ended December 31, 2009

Net earnings attributable to controlling interests increased $165 million to $732 million due principally to a $392 million increase in segment operating profit, partially offset by increased charges associated with changes in LIFO inventory valuations caused by increasing agricultural commodity prices. Earnings before income taxes for the three months ended December 31, 2010, include a LIFO charge of $254 million, compared to a LIFO charge of $54 million in the prior year.

Income taxes increased $46 million due to higher earnings before income taxes partially offset by a lower effective income tax rate, which resulted from changes in the geographic mix of earnings.

Market Factors Influencing Operations or Results

As an agricultural commodity-based business, the Company is subject to a variety of market factors which affect the Company’s operating results. Prices for certain agricultural commodities were higher this quarter in response to projections of good global demand and tighter supplies. The projections of lower carryover stocks for certain commodities, coupled with regional crop supply dislocations for certain commodities, also led to generally more volatile commodity markets. The large North American harvest along with strong global demand resulted in improved global merchandising, handling, and processing opportunities and increased volumes. Protein meal demand was underpinned by good demand in Asia. Biodiesel markets continued to develop in Europe and South America in response to increasing government mandates which supported demand for refined and crude vegetable oils. Corn sweetener sales volumes were higher due primarily to strong U.S. export demand. Ethanol margins and volumes improved as gasoline blending economics were favorable. Relatively high world wheat and sugar prices made U.S. corn ethanol the most competitive ethanol for world markets.

ITEM 2.

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

Analysis of Statements of Earnings

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

Three Months Ended
December 31,
2010	2009	Change