DERIVATIVE INSTRUMENTS

3 Months Ended

Jan. 31, 2012

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

7.              DERIVATIVE INSTRUMENTS

As of January 31, 2012, the Company has natural gas derivative instruments, which are required to be recorded as either assets or liabilities at fair value in the Condensed Consolidated Balance Sheet. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the derivative instrument and the related change in value of the underlying hedged item and when the Company formally documents, designates, and assesses the effectiveness of transactions that receive hedge accounting initially and on an on-going basis. The Company must designate the hedging instruments based upon the exposure being hedged as a fair value hedge or a cash flow hedge. The Company does not enter into derivative transactions for trading purposes.

The Company enters into corn, ethanol and natural gas derivatives in order to protect cash flows from fluctuations caused by volatility in commodity prices for periods up to 24 months. These derivatives are put in place to protect gross profit margins from potentially adverse effects of market and price volatility on ethanol sales and corn and natural gas purchase commitments where the prices are set at a future date. Although these derivative instruments serve the Company’s purpose as an economic hedge, they are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change. As of January 31, 2012, the notional amount of the Company’s outstanding derivative instruments was approximately 800,000 mmbtu that were entered into to hedge forecasted natural gas purchases through August 2012.  The Company had a liability of $269,185 for derivative instruments at January 31, 2012. The Company had no derivative instruments as of October 31, 2011.

In addition, as of January 31, 2012, the Company had approximately $150,000 of restricted cash related to margin requirements for the Company’s derivative instrument positions.

The following tables provide details regarding the losses from the Company’s derivative instruments included in the Condensed Consolidated Statements of Operations, none of which are designated as hedging instruments:

	Statement of	Three-Months Ended January 31,
	Operations location	2012		2011
Corn contracts	Cost of goods sold	$	7,416	$	166,000
Natural gas contracts	Cost of goods sold	396,014		—
Totals		$	403,430	$	166,000