Fair Value Measurements

12 Months Ended

Jun. 30, 2011

Fair Value Measurements

Fair Value Measurements

Note 3. Fair Value Measurements

The Company determines the fair value of certain of its inventories of agricultural commodities, derivative contracts, and marketable securities based on the fair value definition and hierarchy levels established in the guidance of ASC Topic 820, Fair Value Measurements and Disclosures.  Three levels are established within the hierarchy that may be used to measure fair value:

Level 1:  Quoted prices (unadjusted) in active markets for identical assets or liabilities.  Level 1 assets and liabilities include exchange-traded derivative contracts, U.S. treasury securities and certain publicly traded equity securities.

Level 2:  Observable inputs, including Level 1 prices that have been adjusted; quoted prices for similar assets or liabilities; quoted prices in markets that are less active than traded exchanges; and other inputs that are observable or can be substantially corroborated by observable market data.

Level 3:  Unobservable inputs that are supported by little or no market activity and that are a significant component of the fair value of the assets or liabilities.  In evaluating the significance of fair value inputs, the Company generally classifies assets or liabilities as Level 3 when their fair value is determined using unobservable inputs that individually or when aggregated with other unobservable inputs, represent more than 10% of the fair value of the assets or liabilities.  Judgment is required in evaluating both quantitative and qualitative factors in the determination of significance for purposes of fair value level classification.  Level 3 amounts can include assets and liabilities whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as assets and liabilities for which the determination of fair value requires significant management judgment or estimation.

In many cases, a valuation technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy.  The lowest level of input that is a significant component of the fair value measurement determines the placement of the entire fair value measurement in the hierarchy.  The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the classification of fair value assets and liabilities within the fair value hierarchy levels.

The Company’s policy regarding the timing of transfers between levels, including both transfers into and transfers out of Level 3, is to measure and record the transfers at the end of the reporting period.  For the period ended June 30, 2011, the Company had no transfers between Levels 1 and 2.

The following tables set forth, by level, the Company’s assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2011 and 2010.

	Fair Value Measurements at June 30, 2011
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In millions)
Assets:
Inventories carried at market	$	–	$	5,153	$	762	$	5,915
Unrealized derivative gains:
Commodity contracts	1,198		1,457		112		2,767
Foreign exchange contracts	–		237		–		237
Interest rate contracts	–		3		–		3
Marketable securities	1,628		328		–		1,956
Total Assets	$	2,826	$	7,178	$	874	$	10,878
Liabilities:
Unrealized derivative losses:
Commodity contracts	$	1,317	$	1,193	$	44	$	2,554
Foreign exchange contracts	–		178		–		178
Inventory-related payables	–		278		45		323
Total Liabilities	$	1,317	$	1,649	$	89	$	3,055

	Fair Value Measurements at June 30, 2010
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In millions)
Assets:
Inventories carried at market	$	–	$	3,774	$	458	$	4,232
Unrealized derivative gains:
Commodity contracts	777		1,883		69		2,729
Foreign exchange contracts	162		38		–		200
Marketable securities	1,067		543		–		1,610
Total Assets	$	2,006	$	6,238	$	527	$	8,771
Liabilities:
Unrealized derivative losses:
Commodity contracts	$	937	$	2,161	$	56	$	3,154
Foreign exchange contracts	184		82		–		266
Interest rate contracts	–		26		–		26
Inventory-related payables	–		207		31		238
Total Liabilities	$	1,121	$	2,476	$	87	$	3,684

The Company uses the market approach valuation technique to measure the majority of its assets and liabilities carried at fair value.  Estimated fair values for inventories carried at market are based on exchange-quoted prices, adjusted for differences in local markets, broker or dealer quotations or market transactions in either listed or over-the-counter (OTC) markets.  In such cases, the inventory is classified in Level 2.  Certain inventories may require management judgment or estimation for a significant component of the fair value amount.  In such cases, the inventory is classified in Level 3.  Changes in the fair value of inventories are recognized in the consolidated statements of earnings as a component of cost of products sold.

The Company’s derivative contracts that are measured at fair value include forward commodity purchase and sale contracts, exchange-traded commodity futures and option contracts, and OTC instruments related primarily to agricultural commodities, ocean freight, energy, interest rates, and foreign currencies.  Exchange-traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified in Level 1.  The majority of the Company’s exchange-traded futures and options contracts are cash-settled on a daily basis and, therefore, are not included in this table.  Fair value for forward commodity purchase and sale contracts is estimated based on exchange-quoted prices adjusted for differences in local markets.  These differences are generally determined using inputs from broker or dealer quotations or market transactions in either the listed or OTC markets.  When observable inputs are available for substantially the full term of the contract, it is classified in Level 2.  When unobservable inputs have a significant impact on the measurement of fair value, the contract is classified in Level 3.  Based on historical experience with the Company’s suppliers and customers, the Company’s own credit risk and knowledge of current market conditions, the Company does not view nonperformance risk to be a significant input to fair value for the majority of its forward commodity purchase and sale contracts.  However, in certain cases, if the Company believes the nonperformance risk to be a significant input, the Company records estimated fair value adjustments, and classifies the contract in Level 3. Except for certain derivatives designated as cash flow hedges, changes in the fair value of commodity-related derivatives are recognized in the consolidated statements of earnings as a component of cost of products sold.  Changes in the fair value of foreign currency-related derivatives are recognized in the consolidated statements of earnings as a component of net sales and other operating income, cost of products sold, and other (income) expense–net.  The effective portions of changes in the fair value of derivatives designated as cash flow hedges are recognized in the consolidated balance sheets as a component of accumulated other comprehensive income (loss) until the hedged items are recorded in earnings or it is probable the hedged transaction will no longer occur.

The Company’s marketable securities are comprised of U.S. Treasury securities, obligations of U.S. government agencies, corporate and municipal debt securities, and equity investments.  U.S. Treasury securities and certain publicly traded equity investments are valued using quoted market prices and are classified in Level 1.  U.S. government agency obligations, corporate and municipal debt securities and certain equity investments are valued using third-party pricing services and substantially all are classified in Level 2.  Security values that are determined using pricing models are classified in Level 3.  Unrealized changes in the fair value of available-for-sale marketable securities are recognized in the consolidated balance sheets as a component of accumulated other comprehensive income (loss) unless a decline in value is deemed to be other-than-temporary at which point the decline is recorded in earnings.

The following tables present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the twelve months ended June 30, 2011 and 2010.

	Level 3 Fair Value Measurements at June 30, 2011
	Inventories Carried at Market, Net			Derivative Contracts, Net			Total
	(In millions)
Balance, June 30, 2010	$	427		$	13		$	440
Total gains (losses), realized or unrealized, included in earnings before income taxes*	171			79			250
Purchases, issuances and settlements	254			(2		)	252
Transfers into Level 3	300			23			323
Transfers out of Level 3	(435		)	(45		)	(480		)
Ending balance, June 30, 2011	$	717		$	68		$	785

* Includes gains of $109 million that are attributable to the change in unrealized gains or losses relating to    Level 3 assets and liabilities still held at June 30, 2011.

	Level 3 Fair Value Measurements at June 30, 2010
	Inventories Carried at Market, Net			Derivative Contracts, Net			Total
	(In millions)
Balance, June 30, 2009	$	468		$	(2	)	$	466
Total gains (losses), realized or unrealized, included in earnings before income taxes*	7			30			37
Purchases, issuances and settlements	(29		)	(26		)	(55		)
Transfers in and/or out of Level 3	(19		)	11			(8		)
Ending balance, June 30, 2010	$	427		$	13		$	440

*Includes gains of $6 million that are attributable to the change in unrealized gains or losses relating to Level 3 assets and liabilities still held at June 30, 2010.

Transfers into Level 3 of assets and liabilities previously classified in Level 2 were due to the relative value of unobservable inputs to the total fair value measurement of certain products and derivative contracts rising above the 10% threshold.   Transfers out of Level 3 were primarily due to the relative value of unobservable inputs to the total fair value measurement of certain products and derivative contracts falling below the 10% threshold and thus requiring reclassification to Level 2.