Risk Management

The Company’s activities expose it to a variety of market risks, including the effects of changes in commodity prices. These financial exposures are monitored and managed by the Company as an integral part of its overall risk management program. The Company’s risk management program focuses on the unpredictability of commodity markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.

The Company maintains a risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by market fluctuations. The Company’s specific goal is to protect the Company from large moves in the commodity costs.

To reduce price risk caused by market fluctuations, the Company generally follows a policy of using exchange-traded futures and options contracts to minimize its net position of merchandisable agricultural commodity inventories and forward purchases and sales contracts.

Exchange traded futures and options contracts are designated as non-hedge derivatives and are valued at market price with changes in market price recorded in operating income through cost of goods sold for corn derivatives and through revenue for ethanol derivatives.

Derivatives not designated as hedging instruments as of September 30, 2013 and 2012 are as follows:



	2013			2012
Derivative assets - primarily corn contracts	$	193,060		$	134,050
Derivative liabilities - corn contracts	(394,699		)	—
Cash held by (due to) broker	633,115			(62,072		)
Total	$	431,476		$	71,978

The effects on operating income from derivative activities is as follows for the years ending September 30, are as follows:



	2013			2012			2011
Increase (decrease) in revenue due to derivatives related to ethanol sales:
Realized	$	—		$	(7,308	)	$	(2,655,034	)
Unrealized	12,550			—			1,528,367
Total effect on revenue	12,550			(7,308		)	(1,126,667		)

(Increase) decrease in cost of goods sold due to derivatives related to corn costs:
Realized	1,255,616			(1,134,488		)	(2,946,138		)
Unrealized	(214,189		)	134,050			(44,125		)
Total effect on cost of goods sold	1,041,427			(1,000,438		)	(2,990,263		)

Total (decrease) increase to operating income due to derivative activities	$	1,053,977		$	(1,007,746	)	$	(4,116,930	)

Unrealized gains and losses on forward contracts, in which delivery has not occurred, are deemed “normal purchases and normal sales”, and therefore are not marked to market in the Company’s financial statements, but are subject to a lower of cost or market assessment.