Derivatives and Other Hedging Instruments

Objectives and Strategies for Holding Derivative Instruments

In the ordinary course of business, the company enters into contractual arrangements (derivatives) to reduce its exposure to foreign currency, interest rate and commodity price risks under established procedures and controls. The company has established a variety of approved derivative instruments to be utilized in each financial risk management program, as well as varying levels of exposure coverage and time horizons based on an assessment of risk factors related to each hedging program. Derivative instruments utilized during the period include forwards, options, futures and swaps. The company has not designated any nonderivatives as hedging instruments.

The company established a financial risk management framework that incorporated the Corporate Financial Risk Management Committee and established financial risk management policies and guidelines that authorize the use of specific derivative instruments and further establishes procedures for control and valuation, counterparty credit approval and routine monitoring and reporting. The counterparties to these contractual arrangements are major financial institutions and major commodity exchanges. The company is exposed to credit loss in the event of nonperformance by these counterparties. The company manages this exposure to credit loss through the aforementioned credit approvals, limits and monitoring procedures and, to the extent possible, by restricting the period over which unpaid balances are allowed to accumulate. The company anticipates performance by counterparties to these contracts and therefore no material loss is expected. Market and counterparty credit risks associated with these instruments are regularly reported to management.

The company hedges foreign currency-denominated revenue and monetary assets and liabilities, certain business specific foreign currency exposures and certain energy feedstock purchases. In addition, the company enters into agricultural commodity derivatives to hedge exposures relevant to agricultural feedstocks.

Foreign Currency Risk

The company's objective in managing exposure to foreign currency fluctuations is to reduce earnings and cash flow volatility associated with foreign currency rate changes. Accordingly, the company enters into various contracts that change in value as foreign exchange rates change to protect the value of its existing foreign currency-denominated assets, liabilities, commitments and cash flows.

The company routinely uses forward exchange contracts to offset its net exposures, by currency, related to the foreign currency-denominated monetary assets and liabilities of its operations. The primary business objective of this hedging program is to maintain an approximately balanced position in foreign currencies so that exchange gains and losses resulting from exchange rate changes, net of related tax effects, are minimized.

Interest Rate Risk

The company uses interest rate swaps to manage the interest rate mix of the total debt portfolio and related overall cost of borrowing.

Interest rate swaps involve the exchange of fixed for floating rate interest payments to effectively convert fixed rate debt into floating rate debt based on USD LIBOR. Interest rate swaps allow the company to achieve a target range of floating rate debt.

Commodity Price Risk

Commodity price risk management programs serve to reduce exposure to price fluctuations on purchases of inventory such as natural gas, copper, corn, soybeans and soybean meal.

The company enters into over-the-counter and exchange-traded derivative commodity instruments to hedge the commodity price risk associated with energy feedstock and agricultural commodity exposures.

Fair Value Hedges

At June 30, 2011, the company maintained a number of interest rate swaps, implemented at the time the debt instruments were issued, that involve the exchange of fixed for floating rate interest payments. These swaps allow the company to achieve a target range of floating rate debt. All interest rate swaps qualify for the shortcut method of hedge accounting, thus there is no ineffectiveness related to these hedges. The company maintains no other significant fair value hedges. At June 30, 2011 and December 31, 2010, the company had interest rate swap agreements with gross notional amounts of approximately $1,000.

Cash Flow Hedges

The company maintains a number of cash flow hedging programs to reduce risks related to foreign currency and commodity price risk. While each risk management program has a different time maturity period, most programs currently do not extend beyond the next two-year period.

The company uses foreign currency exchange contracts to offset a portion of the company’s exposure to certain foreign currency-denominated revenues so that gains and losses on these contracts offset changes in the U.S. dollar value of the related foreign currency-denominated revenues. At June 30, 2011 and December 31, 2010, the company had foreign currency exchange contracts with gross notional amounts of $1,276 and $1,220, respectively.

A portion of natural gas purchases are hedged to reduce price volatility using fixed price swaps and options. At June 30, 2011 and December 31, 2010, the company had energy feedstock and other contracts with gross notional amounts of $87 and $151, respectively.

The company contracts with independent growers to produce seed inventory. Under these contracts, growers are compensated with bushel equivalents that are sold to the company for the market price of grain for a period of time. Derivative instruments, such as commodity futures and options that have a high correlation to the underlying commodity, are used to hedge the commodity price risk involved in compensating growers.

The company utilizes agricultural commodity futures to manage the price volatility of soybean meal. These derivative instruments have a high correlation to the underlying commodity exposure and are deemed effective in offsetting soybean meal feedstock price risk.

At June 30, 2011 and December 31, 2010, the company had agricultural commodity contracts with gross notional amounts of $191 and $297, respectively.

Cash flow hedge results are reclassified into earnings during the same period in which the related exposure impacts earnings. Reclassifications are made sooner if it appears that a forecasted transaction will not materialize. The following table summarizes the effect of cash flow hedges on accumulated other comprehensive income (loss) for the three and six months ended June 30, 2011 and 2010:



	Three Months Ended									Three Months Ended
	June 30, 2011									June 30, 2010
	Pre-tax			Tax			After-Tax			Pre-tax			Tax			After-Tax
Beginning balance	$	(11	)	$	2		$	(9	)	$	(147	)	$	52		$	(95	)
Additions and revaluations of derivatives designated as cash flow hedges	(3		)	2			(1		)	10			(3		)	7
Clearance of hedge results to earnings	25			(9		)	16			18			(7		)	11
Ending balance	$	11		$	(5	)	$	6		$	(119	)	$	42		$	(77	)



	Six Months Ended									Six Months Ended
	June 30, 2011									June 30, 2010
	Pre-tax			Tax			After-Tax			Pre-tax			Tax			After-Tax
Beginning balance	$	(47	)	$	16		$	(31	)	$	(101	)	$	36		$	(65	)
Additions and revaluations of derivatives designated as cash flow hedges	6			(1		)	5			(62		)	23			(39		)
Clearance of hedge results to earnings	52			(20		)	32			44			(17		)	27
Ending balance	$	11		$	(5	)	$	6		$	(119	)	$	42		$	(77	)

At June 30, 2011, the pre-tax, tax and after-tax amounts expected to be reclassified from accumulated other comprehensive loss into earnings over the next 12 months are $0, $(1) and $(1), respectively.

Hedges of Net Investment in a Foreign Operation

At June 30, 2011, the company did not maintain any hedges of net investment in a foreign operation.

Derivatives not Designated in Hedging Relationships

The company uses forward exchange contracts to reduce its net exposure, by currency, related to foreign currency-denominated monetary assets and liabilities. The netting of such exposures precludes the use of hedge accounting. However, the required revaluation of the forward contracts and the associated foreign currency-denominated monetary assets and liabilities results in a minimal earnings impact, after taxes. At June 30, 2011 and December 31, 2010, the company had foreign currency contracts with gross notional amounts of $8,242 and $7,449, respectively.

During the quarter ended June 30, 2011, the company entered into cross-currency swaps to hedge foreign currency fluctuations on long-term intercompany loans associated with the acquisition of Danisco. At June 30, 2011 and December 31, 2010, the company had cross-currency swaps with gross notional amounts of $1,074 and $0, respectively.

The company has risk management programs for agricultural commodities that do not qualify for hedge accounting treatment. At June 30, 2011 and December 31, 2010, the company had agricultural commodities contracts with gross notional amounts of $168 and $310, respectively.

For certain acquired Danisco facilities, a portion of electricity purchases are hedged to reduce price volatility using fixed price swaps. At June 30, 2011 and December 31, 2010, the company had energy feedstock contracts with gross notional amounts of $12 and $0, respectively.

Contingent Features

At June 30, 2011, the company did not maintain any derivative contracts with credit-risk-related contingent features.

The following tables provide information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheet and derivative gains and losses in the Consolidated Income Statement:

Fair Values of Derivative Instruments



	Asset Derivatives						Liability Derivatives
	June 30, 2011			December 31, 2010			June 30, 2011			December 31, 2010
Derivatives designated as hedging instruments
Interest rate swaps	$	49	2	$	40	2	$	—		$	—
Foreign currency contracts	23		1	20		1	5		3	3		3
Energy feedstocks	1		2	3		1	37		3	75		3
Total derivatives designated as hedging instruments	$	73		$	63		$	42		$	78

Derivatives not designated as hedging instruments
Foreign currency contracts	$	98	1	$	90	1	$	23	3	$	54	3
Cross-currency swaps	—			—			17		3	—
Energy feedstocks	1		2	—			—			—
Total derivatives not designated as hedging instruments	$	99		$	90		$	40		$	54
Total derivatives	$	172		$	153		$	82		$	132

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¹ Recorded in accounts and notes receivable, net.

² Recorded in other assets.

³ Recorded in other accrued liabilities.

The Effect of Derivative Instruments on the Consolidated Income Statement

Fair Value Hedging



	Amount of Gain or (Loss) Recognized in Income of Derivative			Amount of Gain or (Loss) Recognized in Income on Hedged Item				Amount of Gain or (Loss) Recognized in Income of Derivative			Amount of Gain or (Loss) Recognized in Income on Hedged Item
Derivatives in Fair Value Hedging Relationships	Three Months Ended June 30, 2011			Three Months Ended June 30, 2011				Three Months Ended June 30, 2010			Three Months Ended June 30, 2010
Interest rate swaps	$	20	1	$	(20	)	1	$	34	1	$	(34	)	1
Total	$	20		$	(20	)		$	34		$	(34	)



Derivatives in Fair Value Hedging Relationships	Six Months Ended June 30, 2011			Six Months Ended June 30, 2011				Six Months Ended June 30, 2010			Six Months Ended June 30, 2010
Interest rate swaps	$	9	1	$	(9	)	1	$	39	1	$	(39	)	1
Total	$	9		$	(9	)		$	39		$	(39	)

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¹ Gain (loss) was recognized in interest expense, which offset to $0.

Cash Flow Hedging



	Amount of Gain or (Loss) Recognized in OCI¹ on Derivative (Effective Portion)			Amount of Gain or (Loss) Reclassified from Accumulated OCI¹ into Income (Effective Portion)				Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Derivatives in Cash Flow Hedging Relationships	Three Months Ended June 30, 2011			Three Months Ended June 30, 2011				Three Months Ended June 30, 2011
Foreign currency contracts	$	1		$	(7	)	2	$	—
Agricultural feedstocks	(3		)	(1		)	3	1		3
Energy feedstocks	(1		)	(17		)	3	—
Total	$	(3	)	$	(25	)		$	1



	Six Months Ended June 30, 2011			Six Months Ended June 30, 2011				Six Months Ended June 30, 2011
Foreign currency contracts	$	(20	)	$	(12	)	2	$	—
Agricultural feedstocks	28			(2		)	3	5		3
Energy feedstocks	(2		)	(38		)	3	—
Total	$	6		$	(52	)		$	5



	Amount of Gain or (Loss) Recognized in OCI¹ on Derivative (Effective Portion)		Amount of Gain or (Loss) Reclassified from Accumulated OCI¹ into Income (Effective Portion)				Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Derivatives in Cash Flow Hedging Relationships	Three Months Ended June 30, 2010		Three Months Ended June 30, 2010				Three Months Ended June 30, 2010
Foreign currency contracts	$	5	$	6		2	$	—
Agricultural feedstocks	4		(7		)	3	—
Energy feedstocks	1		(17		)	3	—
Total	$	10	$	(18	)		$	—



	Six Months Ended June 30, 2010			Six Months Ended June 30, 2010				Six Months Ended June 30, 2010
Foreign currency contracts	$	10		$	12		2	$	—
Agricultural feedstocks	(42		)	(21		)	3	(3		)	3
Energy feedstocks	(30		)	(35		)	3	—
Total	$	(62	)	$	(44	)		$	(3	)

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¹ OCI is defined as other comprehensive income (loss).

² Gain (loss) was reclassified from accumulated other comprehensive income into net sales.

³ Gain (loss) was recognized in cost of goods sold and other operating charges.

Derivatives not Designated in Hedging Instruments



	Amount of Gain or (Loss) Recognized in Income on Derivative							Amount of Gain or (Loss) Recognized in Income on Derivative
Derivatives Not Designated in Hedging Instruments	Three Months Ended June 30, 2011				Three Months Ended June 30, 2010			Six Months Ended June 30, 2011				Six Months Ended June 30, 2010
Foreign currency contracts	$	(34	)	1	$	328	1	$	(407	)	1	$	543	1
Cross-currency swaps	(17		)	1	—			(17		)	1	—
Agricultural feedstocks	11			2	8		2	12			2	15		2
Energy feedstocks	(1		)	2	—			(1		)	2	—
Interest rate swaps	(1		)	2	—			(1		)	2	—
Total	$	(42	)		$	336		(414		)		558

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¹ Gain (loss) recognized in other income, net, was partially offset by the related gain (loss) on the foreign currency-denominated monetary assets and liabilities of the company's operations, which were $55 and $285 for the three and six months ended June 30, 2011, respectively, and $(223) and $(408) for the three and six months ended June 30, 2010, respectively.

² Gain was recognized in cost of goods sold and other operating charges.