Note 2. Fair Value Measurements

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 September 30, 2012 and June 30, 2012.



	Fair Value Measurements at September 30, 2012
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
			(In millions)

Assets:
Inventories carried at market	$	-	$	5,653	$	1,755	$	7,408
Unrealized derivative gains:
Commodity contracts		1,393		1,697		282		3,372
Foreign exchange contracts		-		222		-		222
Interest contracts		-		1		-		1
Marketable securities		2,064		11		-		2,075
Deferred consideration		-		894		-		894
Total Assets	$	3,457	$	8,478	$	2,037	$	13,972

Liabilities:
Unrealized derivative losses:
Commodity contracts	$	1,769	$	917	$	216	$	2,902
Foreign exchange contracts		-		243		1		244
Other contracts		-		3		-		3
Inventory-related payables		-		539		40		579
Total Liabilities	$	1,769	$	1,702	$	257	$	3,728



	Fair Value Measurements at June 30, 2012
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
			(In millions)

Assets:
Inventories carried at market	$	-	$	5,297	$	1,462	$	6,759
Unrealized derivative gains:
Commodity contracts		1,275		1,397		171		2,843
Foreign exchange contracts		-		219		-		219
Other Contracts		-		1		-		1
Marketable securities		1,666		26		-		1,692
Deferred consideration		-		629		-		629
Total Assets	$	2,941	$	7,569	$	1,633	$	12,143

Liabilities:
Unrealized derivative losses:
Commodity contracts	$	1,487	$	1,038	$	179	$	2,704
Foreign exchange contracts		2		289		-		291
Inventory-related payables		-		307		38		345
Total Liabilities	$	1,489	$	1,634	$	217	$	3,340

The Company determines fair value based on 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. Three levels are established within the fair value hierarchy that may be used to report 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 September 30, 2012, the Company had no transfers between Levels 1 and 2. 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 permitting reclassification to Level 2.

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. Market valuations for the Company’s inventories are adjusted for location and quality because the exchange-quoted prices represent contracts that have standardized terms for commodity, quantity, future delivery period, delivery location, and commodity quality or grade. Generally, the valuations are based on price information that is observable by market participants, or rely only on insignificant unobservable information. 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. For these inventories, the availability of sufficient third-party information is limited. In such cases, the inventory is classified as 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 are measured at fair value and 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 the fair value tables. 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) (AOCI) 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 AOCI unless a decline in value is deemed to be other-than-temporary at which point the decline is recorded in earnings.

The Company has deferred consideration under its accounts receivable securitization program (the “Program”) which represents a note receivable from the purchasers under the Program. This amount is reflected in other current assets on the consolidated balance sheet (see Note 11). The Company carries the deferred consideration at fair value determined by calculating the expected amount of cash to be received. The fair value is principally based on observable inputs (a Level 2 measurement) consisting mainly of the face amount of the receivables adjusted for anticipated credit losses and discounted at the appropriate market rate. Payment of deferred consideration is not subject to significant risks other than delinquencies and credit losses on accounts receivable transferred under the program which have historically been insignificant.

The following tables present a rollforward of the activity of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended September 30, 2012 and 2011.



	Level 3 Fair Value Assets Measurements at
	September 30, 2012
			Commodity
	Inventories		Derivative
	Carried at		Contracts		Total
	Market		Gains		Assets
	(In millions)

Balance, June 30, 2012	$	1,462	$	171	$	1,633
Total increase (decrease) in unrealized
gains included in cost of products sold		164		109		273
Purchases		2,390		-		2,390
Sales		(2,225)		-		(2,225)
Settlements		-		(95)		(95)
Transfers into Level 3		157		128		285
Transfers out of Level 3		(193)		(31)		(224)
Ending balance, September 30, 2012	$	1,755	$	282	$	2,037



	Level 3 Fair Value Liability Measurements at
	September 30, 2012
			Commodity
	Inventory-		Derivative
	related		Contracts		Total
	Payables		Losses		Liabilities
	(In millions)

Balance, June 30, 2012	$	38	$	179	$	217
Total increase (decrease) in unrealized
losses included in cost of products sold		-		86		86
Purchases		2		-		2
Sales		-		-		-
Settlements		-		(105)		(105)
Transfers into Level 3		-		73		73
Transfers out of Level 3		-		(16)		(16)
Ending balance, September 30, 2012	$	40	$	217	$	257


	Level 3 Fair Value Asset Measurements at
	September 30, 2011
			Commodity
	Inventories		Derivative
	carried at		Contracts		Total
	Market		Gains		Assets
	(In millions)

Balance, June 30, 2011	$	762	$	112	$	874
Total increase (decrease) in unrealized gains
included in cost of products sold		(46)		197		151
Purchases		136		4		140
Sales		(261)		-		(261)
Settlements		-		(59)		(59)
Transfers into Level 3		767		50		817
Transfers out of Level 3		(10)		(34)		(44)
Ending balance, September 30, 2011	$	1,348	$	270	$	1,618


	Level 3 Fair Value Liability Measurements at
	September 30, 2011
			Commodity
	Inventory-		Derivative
	related		Contracts		Total
	Payables		Losses		Liabilities
	(In millions)

Balance, June 30, 2011	$	45	$	44	$	89
Total increase (decrease) in unrealized losses
included in cost of products sold		-		170		170
Purchases		(6)		1		(5)
Sales		2		-		2
Settlements		-		19		19
Transfers into Level 3		93		15		108
Transfers out of Level 3		-		(5)		(5)
Ending balance, September 30, 2011	$	134	$	244	$	378

Fair values for inventories and commodity purchase and sale contracts are generally estimated based on observable, exchange-quoted futures prices adjusted as needed to arrive at prices in local markets. Exchange-quoted futures prices represent quotes for contracts that have standardized terms for commodity, quantity, future delivery period, delivery location, and commodity quality or grade. In some cases, the price components that result in differences between the exchange-traded prices and the local prices are observable based upon available quotations for these pricing components, and in some cases, the differences are unobservable. These price components primarily include transportation costs and other adjustments required due to location, quality, or other contract terms. In the table below, these other adjustments will be referred to as Basis.

The changes in unobservable price components are determined by specific local supply and demand characteristics at each facility and the overall market. Factors such as substitute products, weather, fuel costs, contract terms, and futures prices will also impact the movement of these unobservable price components.

The following table sets forth the weighted average percentage of the unobservable price components included in the Company’s Level 3 valuations as of September 30, 2012 and June 30, 2012. The Company’s Level 3 measurements may include Basis only, transportation cost only, or both price components. As an example, for Level 3 inventories with Basis as of September 30, 2012, the unobservable component is a weighted average 14.8% of the total price for assets and 4.0% for liabilities.



	Weighted Average
	% of Total Price
	September 30, 2012				June 30, 2012
Component Type	Assets		Liabilities		Assets		Liabilities

Inventories
Basis	14.8	%	4.0	%	8.8	%	2.3	%
Transportation cost	10.7	%	7.4	%	8.5	%	7.9	%

Commodity Derivative Contracts
Basis	18.4	%	19.0	%	12.6	%	11.8	%
Transportation cost	8.6	%	14.9	%	12.6	%	14.0	%

In certain of the Company’s principal markets, the Company relies on price quotes from third parties to value its inventories and physical commodity purchase and sale contracts. These price quotes are generally not further adjusted by the Company in determining the applicable market price. In some cases, availability of third-party quotes is limited to only one or two independent sources. In these situations, the Company considers these price quotes as 100 percent unobservable and, therefore, the fair value of these items is reported in Level 3.