Fair Value Measurement

12 Months Ended

Sep. 30, 2019

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company used various methods including market, income and cost approaches. Based on these approaches, the Company often utilized certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observable inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy.

The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:


Level 1 -	Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.


Level 2 -	Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.


Level 3 -	Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, including the general classifications of such instruments pursuant to the valuation hierarchy, is set below.

Put Option liability. The put option liability consists of an agreement between the Company and ICM that contains a conditional obligation to repurchase feature. On August 16, 2019, ICM notified SIRE their notice to exercise the put option, but waived their right to determine the fair market value for their units. In past years, the Company calculated the fair value of the put option under Level 3, using a valuation model called the Monte Carlo Simulation. SIRE calculated the liability by utilizing the weighted average purchase price for Fiscal 2019 transactions. Using weighted average purchase prices from Fiscal 2019, the estimated value at September 30, 2019 was $6.0 million, while the Monte Carlo method calculated $5.4 million at September 30, 2018. SIRE settled the transaction on November 15, 2019.

Derivative financial statements. Commodity futures and exchange traded options are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Mercantile Exchange (“CME”) market. Ethanol contracts are reported at fair value utilizing Level 2 inputs from third-party pricing services. Forward purchase contracts are reported at fair value utilizing Level 2 inputs. For these contracts, the Company obtains fair value measurements from local grain terminal values. The fair value measurements consider observable data that may include live trading bids from local elevators and processing plants which are based off the CME market.

The following table summarizes financial instruments measured at fair value on a recurring basis as of September 30, 2019 and 2018, categorized by the level of the valuation inputs within the fair value hierarchy: (dollars in '000s)



	September 30, 2019
	Level 1		Level 2		Level 3
Assets:
Derivative financial instruments	$	368	$	—	$	—

Liabilities:
Derivative financial instruments	364		597		—
Put Option Liability	—		—		6,037


	September 30, 2018
	Level 1		Level 2		Level 3
Assets:
Derivative financial instruments	$	583	$	—	$	—

Liabilities:
Derivative financial instruments	82		1,567		—
Put Option Liability	—		—		5,400

The following table summarizes the assumptions used in computing the fair value of the put option subject to fair value:



	September 30, 2019			September 30, 2018
Expected dividend yield	—			—
Risk-free interest rate	—		%	2.57		%
Expected volatility	—		%	22		%
Expected life (years)	—			1.25
Exercise unit price	$	10,897		$	10,897
Company unit price	$	4,967		$	5,500

The following table reflects the activity for liabilities measured at fair value using Level 3 inputs as of September 30, 2019 and September 30, 2018:



	September 30, 2019		September 30, 2018
Beginning Balance	$	5,400	$	5,700
Change in Value	637		(300		)
Ending Balance	$	6,037	$	5,400

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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