Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2013

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

Note 5.     Derivative Instruments and Hedging Activities

The Company recognizes all of its derivative instruments as either assets or liabilities at fair value in its consolidated balance sheets.  The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship.  The majority of the Company’s derivatives have not been designated as hedging instruments.  For those derivative instruments that are designated and qualify as hedging instruments, a reporting entity must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, a cash flow hedge, or a hedge of a net investment in a foreign operation.  As of March 31, 2013 and December 31, 2012, the Company has certain derivatives designated as cash flow hedges.  Within the Note 5 tables, zeros represent minimal amounts.

Derivatives Not Designated as Hedging Instruments

The Company generally uses exchange-traded futures and exchange-traded and OTC options contracts to manage its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts to reduce price risk caused by market fluctuations in agricultural commodities and foreign currencies.  The Company also uses exchange-traded futures and exchange-traded and OTC options contracts as components of merchandising strategies designed to enhance margins.  The results of these strategies can be significantly impacted by factors such as the correlation between the value of exchange-traded commodities futures contracts and the value of the underlying commodities, counterparty contract defaults, and volatility of freight markets.  Exchange-traded futures and exchange-traded and OTC options contracts, and forward cash purchase and sales contracts of certain merchandisable agricultural commodities accounted for as derivatives by the Company are stated at fair value.  Inventories of certain merchandisable agricultural commodities, which include amounts acquired under deferred pricing contracts, are stated at market value.  Inventory is not a derivative and therefore is not included in the tables below.  Changes in the market value of inventories of certain merchandisable agricultural commodities, forward cash purchase and sales contracts, exchange-traded futures and exchange-traded and OTC options contracts are recognized in earnings immediately.  Unrealized gains and unrealized losses on forward cash purchase contracts, forward foreign currency exchange (FX) contracts, forward cash sales contracts, and exchange-traded and OTC options contracts represent the fair value of such instruments and are classified on the Company’s consolidated balance sheets as other current assets and accrued expenses and other payables, respectively.

The following table sets forth the fair value of derivatives not designated as hedging instruments as of March 31, 2013 and December 31,  2012.

	March 31, 2013				December 31, 2012
	Assets		Liabilities		Assets		Liabilities
	(In millions)				(In millions)
FX Contracts	$	181	$	126	$	170	$	215
Interest Contracts		1		-		1		-
Commodity Contracts		2,209		2,250		2,504		2,376
Total	$	2,391	$	2,376	$	2,675	$	2,591

The following table sets forth the pre-tax gains (losses) on derivatives not designated as hedging instruments that have been included in the consolidated statements of earnings for the six months ended March 31, 2013 and 2012.

	Three Months Ended
	March 31,
	2013		2012
	(In millions)
Interest Contracts
Interest expense	$	0	$	0
Other income (expense) - net		0		-
FX Contracts
Net sales and other operating income	$	73	$	9
Cost of products sold		(1)		30
Other income (expense) - net		(45)		141
Commodity Contracts
Cost of products sold	$	68	$	(232)
Total gain (loss) recognized in earnings	$	95	$	(52)

Derivatives Designated as Cash Flow Hedging Strategies

For derivative instruments that are designated and qualify as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income (AOCI) and reclassified into earnings in the same line item affected by the hedged transaction and in the same period or periods during which the hedged transaction affects earnings.  The remaining gain or loss on the derivative instrument that is in excess of the cumulative change in the cash flows of the hedged item, if any (i.e., the ineffective portion), hedge components excluded from the assessment of effectiveness, and gains and losses related to discontinued hedges are recognized in the consolidated statement of earnings during the current period.

For each of the commodity hedge programs described below, the derivatives are designated as cash flow hedges.  The changes in the market value of such derivative contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of the hedged item.  Once the hedged item is recognized in earnings, the gains/losses arising from the hedge are reclassified from AOCI to either net sales and other operating income, cost of products sold, interest expense or other income(expense) – net, as applicable.  As of March 31, 2013, the Company has $8 million of after-tax losses in AOCI related to gains and losses from commodity cash flow hedge transactions.  The Company expects to recognize  $8 million of these after-tax losses in its consolidated statement of earnings during the next 12 months. 

The Company, from time to time, uses futures or options contracts to fix the purchase price of anticipated volumes of corn to be purchased and processed in a future month.  The objective of this hedging program is to reduce the variability of cash flows associated with the Company’s forecasted purchases of corn.  The Company’s corn processing plants currently grind approximately 76 million bushels of corn per month.  During the past 12 months, the Company hedged between 15% and 26% of its monthly anticipated grind.  At March 31, 2013, the Company has designated hedges representing between 0.1%  to 19% of its anticipated monthly grind of corn for the next 15 months. 

The Company, from time to time, also uses futures, options, and swaps to fix the purchase price of the Company’s anticipated natural gas requirements for certain production facilities.  The objective of this hedging program is to reduce the variability of cash flows associated with the Company’s forecasted purchases of natural gas.  These production facilities use approximately 3.8 million MMbtus of natural gas per month.  During the past 12 months, the Company hedged between 11% and 66% of the quantity of its anticipated monthly natural gas purchases.  At March 31, 2013, the Company has designated hedges representing between 13% to 49% of its anticipated monthly natural gas purchases for the next 9 months. 

The Company, from time to time, also uses futures, options, and swaps to fix the sales price of certain ethanol sales contracts.  The objective of this hedging program is to reduce the variability of cash flows associated with the Company’s sales of ethanol under sales contractsthat are indexed to unleaded gasoline prices.  During the past 12 months, the Company hedged between 1 million and21 million gallons of ethanol per month under this program.  At March 31, 2013, the Company has designated hedges representing between 2 million to 12 million gallons of contracted ethanol sales per monthover the next9 months.

The Company started a new hedge program this quarter using soybean meal futures to fix the sales price of certain corn gluten meal sales contracts.  The objective of this hedging program is to reduce the variability of cash flows associated with the Company’s sales of corn gluten meal under sales contracts, entered into for deliveries over the next 12 months, that are indexed to soybean meal prices.  At March 31, 2013, the Company has designated hedges of up to 23,000 tons of contracted corn gluten meal sales per month.

To protect against fluctuations in cash flows due to foreign currency exchange rates, the Company from time to time will use forward foreign exchange contracts as cash flow hedges.  Certain production facilities have manufacturing expenses and equipment purchases denominated in non-functional currencies.  To reduce the risk of fluctuations in cash flows due to changes in the exchange rate between functional versus non-functional currencies, the Company will hedge some portion of the forecasted foreign currency expenditures.  During the past 12 months, the Company hedged between $13 million and  $25 million of forecasted foreign currency expenditures.  As of March 31, 2013, the Company has designated hedges of $13 million of its forecasted foreign currency expenditures.  At March 31, 2013, the Company has $1 million of after-tax losses in AOCI related to foreign exchange contracts designated as cash flow hedging instruments.  The Company will recognize the $1 million of losses in its consolidated statement of earnings over the life of the hedged transactions. 

The Company, from time to time, uses treasury lock agreements and interest rate swaps in order to lock in the Company’s interest rate prior to the issuance or remarketing of its long-term debt.  Both the treasury-lock agreements and interest rate swaps were designated as cash flow hedges of the risk of changes in the future interest payments attributable to changes in the benchmark interest rate.  The objective of the treasury-lock agreements and interest rate swaps was to protect the Company from changes in the benchmark rate from the date of hedge designation to the date when the debt was actually issued.  At March 31, 2013, AOCI included $21 million of after-tax gains related to treasury-lock agreements and interest rate swaps, The Company will recognize the $21 million of gains in its consolidated statement of earnings over the terms of the hedged items, which range from 10 to 30 years.  

The following tables set forth the fair value of derivatives designated as hedging instruments as of March 31, 2013 and December 31, 2012.

	March 31, 2013				December 31, 2012
	Assets		Liabilities		Assets		Liabilities
	(In millions)				(In millions)
Commodity Contracts	$	1	$	0	$	1	$	0
Total	$	1	$	0	$	1	$	0

The following table sets forth the pre-tax gains (losses) on derivatives designated as hedging instruments that have been included in the consolidated statement of earnings for the three months ended March 31, 2013 and 2012.

		Three Months Ended
	Consolidated Statement of	March 31,
	Earnings Locations	2013		2012
		(In millions)
Effective amounts recognized in earnings
FX Contracts	Other income/expense – net	$	0	$	0
Interest Contracts	Interest expense		0		0
Commodity Contracts	Cost of products sold		(2)		(3)
	Net sales and other operating income		(1)		(10)
Ineffective amount recognized in earnings
Interest contracts	Interest expense		-		-
Commodity contracts	Cost of products sold		(42)		(27)
Total amount recognized in earnings		$	(45)	$	(40)

Hedge ineffectiveness results when the change in the price of the underlying commodity in a specific cash market differs from the change in the price of the derivative financial instrument used to establish the hedging relationship.  As an example, if the change in the price of a corn futures contract is strongly correlated to the change in cash price paid for corn, the gain or loss on the derivative instrument is deferred and recognized at the time the corn grind occurs.  If the change in price of the derivative does not strongly correlate to the change in the cash price of corn, in the same example, some portion or all of the derivative gains or losses may be required to be recognized in earnings prior to the corn grind occurring.

The following tables set forth the changes in AOCI related to derivatives gains (losses) for the three months ended March 31, 2013 and 2012.

	Three months ended
	March 31,
	2013		2012
	(In millions)
Balance at December 31, 2012 and 2011	$	4	$	30
Unrealized gains (losses)		9		(54)
Losses (gains) reclassified to earnings		3		13
Tax effect		(5)		15
Balance at March 31, 2013 and 2012	$	11	$	4