Derivative Instruments

Derivative Instruments Held

Coffee-Related Derivative Instruments

The Company is exposed to commodity price risk associated with its price to be fixed green coffee purchase contracts, which are described further in Note 2 to the consolidated financial statements in the 2017 Form 10-K. The Company utilizes forward and option contracts to manage exposure to the variability in expected future cash flows from forecasted purchases of green coffee attributable to commodity price risk. Certain of these coffee-related derivative instruments utilized for risk management purposes have been designated as cash flow hedges, while other coffee-related derivative instruments have not been designated as cash flow hedges or do not qualify for hedge accounting despite hedging the Company’s future cash flows on an economic basis.

The following table summarizes the notional volumes for the coffee-related derivative instruments held by the Company at September 30, 2017 and June 30, 2017:



(In thousands)	September 30, 2017	June 30, 2017
Derivative instruments designated as cash flow hedges:
Long coffee pounds	35,925	33,038
Derivative instruments not designated as cash flow hedges:
Long coffee pounds	465	2,121
Total	36,390	35,159

Coffee-related derivative instruments designated as cash flow hedges outstanding as of September 30, 2017 will expire within 15 months.

Effect of Derivative Instruments on the Financial Statements

Balance Sheets

Fair values of derivative instruments on the Company’s condensed consolidated balance sheets:



	Derivative Instruments Designated as Cash Flow Hedges				Derivative Instruments Not Designated as Accounting Hedges
	September 30, 2017		June 30, 2017		September 30, 2017		June 30, 2017
(In thousands)
Financial Statement Location:
Short-term derivative assets(1):
Coffee-related derivative instruments	$	57	$	66	$	—	$	—
Long-term derivative assets(2):
Coffee-related derivative instruments	$	22	$	66	$	—	$	—
Short-term derivative liabilities(1):
Coffee-related derivative instruments	$	2,137	$	1,733	$	225	$	190
Long-term derivative liabilities(2):
Coffee-related derivative instruments	$	109	$	446	$	—	$	—

________________

(1) Included in “Other assets” on the Company’s condensed consolidated balance sheets.

(2) Included in “Other long-term liabilities” on the Company’s condensed consolidated balance sheets.

Statements of Operations

The following table presents pretax net gains and losses for the Company’s coffee-related derivative instruments designated as cash flow hedges, as recognized in accumulated other comprehensive income (loss) “AOCI,” “Cost of goods sold” and “Other, net”:



	Three Months Ended September 30,						Financial Statement Classification
(In thousands)	2017			2016			Financial Statement Classification
Net (losses) gains recognized in AOCI	$	(365	)	$	726		AOCI
Net losses recognized in earnings	$	(7	)	$	(466	)	Costs of goods sold
Net gains recognized in earnings (ineffective portion)(1)	$	48		$	13		Other, net

________________

(1) Amount included in three months ended September 30, 2017 relates to trades terminated prior to the adoption of ASU 2017-12. See Note 2.

For the three months ended September 30, 2017 and 2016, there were no gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge effectiveness or as a result of reclassifications to earnings following the discontinuance of any cash flow hedges.

Net losses on derivative instruments in the Company’s condensed consolidated statement of cash flows also includes net losses on coffee-related derivative instruments designated as cash flow hedges reclassified to cost of goods sold from AOCI in the three months ended September 30, 2017. Gains and losses on derivative instruments not designated as accounting hedges are included in “Other, net” in the Company’s condensed consolidated statements of operations and in “Net losses on derivative instruments and investments” in the Company’s condensed consolidated statements of cash flows.

Net gains and losses recorded in “Other, net” are as follows:



	Three Months Ended September 30,
(In thousands)	2017			2016
Net gains (losses) on coffee-related derivative instruments	$	97		$	(35	)
Net (losses) gains on investments	(9		)	227
Net gains on derivative instruments and investments(1)	88			192
Other losses, net	(1		)	(1		)
Other, net	$	87		$	191

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(1) Excludes net losses on coffee-related derivative instruments designated as cash flow hedges recorded in cost of goods sold in the three months ended September 30, 2017 and 2016.

Offsetting of Derivative Assets and Liabilities

The Company has agreements in place that allow for the financial right of offset for derivative assets and liabilities at settlement or in the event of default under the agreements. Additionally, the Company maintains accounts with its brokers to facilitate financial derivative transactions in support of its risk management activities. Based on the value of the Company’s positions in these accounts and the associated margin requirements, the Company may be required to deposit cash into these broker accounts.

The following table presents the Company’s net exposure from its offsetting derivative asset and liability positions as of the reporting dates indicated:



(In thousands)		Gross Amount Reported on Balance Sheet		Netting Adjustments			Cash Collateral Posted		Net Exposure
September 30, 2017	Derivative Assets	$	79	$	(79	)	$	—	$	—
	Derivative Liabilities	$	2,471	$	(79	)	$	—	$	2,392
June 30, 2017	Derivative Assets	$	132	$	(132	)	$	—	$	—
	Derivative Liabilities	$	2,369	$	(132	)	$	—	$	2,237

Cash Flow Hedges

Changes in the fair value of the Company’s coffee-related derivative instruments designated as cash flow hedges, to the extent effective, are deferred in AOCI and reclassified into cost of goods sold in the same period or periods in which the hedged forecasted purchases affect earnings, or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. Based on recorded values at September 30, 2017, $(2.5) million of net losses on coffee-related derivative instruments designated as cash flow hedges are expected to be reclassified into cost of goods sold within the next twelve months. These recorded values are based on market prices of the commodities as of September 30, 2017. Due to the volatile nature of commodity prices, actual gains or losses realized within the next twelve months will likely differ from these values.