10-Q 1 adm-2013930x10q.htm 10-Q ADM-2013.9.30-10Q


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.  20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-44
ARCHER-DANIELS-MIDLAND COMPANY
(Exact name of registrant as specified in its charter)
Delaware
41-0129150
(State or other jurisdiction of
incorporation or organization)
(I. R. S. Employer
Identification No.)
 
 
4666 Faries Parkway   Box 1470
Decatur, Illinois
(Address of principal executive offices)
 
62525
(Zip Code)
 
 
(217) 424-5200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         Yes  x  No ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x  No  ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer  x
Accelerated Filer  o
Non-accelerated Filer     o 
Smaller reporting Company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o  No  x.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common Stock, no par value – 657,970,080 shares
(October 31, 2013)





PART I - FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Archer-Daniels-Midland Company

Consolidated Statements of Earnings
(Unaudited)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
 
(In millions, except per share amounts)
 
 
 
 
 
 
 
 
Net sales and other operating income
$
21,393

 
$
21,808

 
$
65,661

 
$
65,638

Cost of products sold
20,237

 
21,002

 
62,942

 
63,011

Gross Profit
1,156

 
806

 
2,719

 
2,627

 
 
 
 
 
 
 
 
Selling, general, and administrative expenses
429

 
390

 
1,317

 
1,186

Asset impairment, exit, and restructuring costs
23

 
146

 
23

 
231

Interest expense
105

 
106

 
318

 
338

Equity in earnings of unconsolidated affiliates
(63
)
 
(113
)
 
(262
)
 
(334
)
Interest income
(12
)
 
(30
)
 
(68
)
 
(80
)
Other (income) expense – net
(35
)
 
12

 
(10
)
 
7

Earnings Before Income Taxes
709

 
295

 
1,401

 
1,279

 
 
 
 
 
 
 
 
Income taxes
228

 
111

 
424

 
397

Net Earnings Including Noncontrolling Interests
481

 
184

 
977

 
882

 
 
 
 
 
 
 
 
Less: Net earnings (losses) attributable to noncontrolling interests
5

 
2

 
9

 
17

 
 
 
 
 
 
 
 
Net Earnings Attributable to Controlling Interests
$
476

 
$
182

 
$
968

 
$
865

 
 
 
 
 
 
 
 
Average number of shares outstanding – basic
661

 
660

 
661

 
660

 
 
 
 
 
 
 
 
Average number of shares outstanding – diluted
664

 
661

 
663

 
662

 
 
 
 
 
 
 
 
Basic and diluted earnings per common share
$
0.72

 
$
0.28

 
$
1.46

 
$
1.31

 
 
 
 
 
 
 
 
Dividends per common share
$
0.190

 
$
0.175

 
$
0.570

 
$
0.525


See notes to consolidated financial statements.




2



Archer-Daniels-Midland Company

Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
 
(In millions)
 
 
 
 
 
 
 
 
Net earnings including noncontrolling interests
$
481

 
$
184

 
$
977

 
$
882

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
225

 
145

 
(1
)
 
101

Tax effect

 
(7
)
 
2

 
53

Net of tax amount
225

 
138

 
1

 
154

 
 
 
 
 
 
 
 
Pension and other postretirement benefit liabilities adjustment
10

 
16

 
45

 
(560
)
Tax effect
(4
)
 
(7
)
 
(16
)
 
198

Net of tax amount
6

 
9

 
29

 
(362
)
 
 
 
 
 
 
 
 
Deferred gain (loss) on hedging activities
16

 
54

 
18

 
87

Tax effect
(7
)
 
(18
)
 
(7
)
 
(31
)
Net of tax effect
9

 
36

 
11

 
56

 
 
 
 
 
 
 
 
Unrealized gain (loss) on investments
3

 
(11
)
 
2

 
(36
)
Tax effect
(3
)
 
3

 

 
13

Net of tax effect

 
(8
)
 
2

 
(23
)
Other comprehensive income (loss)
240

 
175

 
43

 
(175
)
Comprehensive income including noncontrolling interests
721

 
359

 
1,020

 
707

 
 
 
 
 
 
 
 
Less: Comprehensive income attributable to noncontrolling interests
5

 
4

 

 
13

 
 
 
 
 
 
 
 
Comprehensive income attributable to controlling interests
$
716

 
$
355

 
$
1,020

 
$
694


See notes to consolidated financial statements.





3



Archer-Daniels-Midland Company

Consolidated Balance Sheets
 
(Unaudited)
 
 
 
September 30,
 
December 31,
 
2013
 
2012
 
(In millions)
 
 
 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
3,252

 
$
1,714

Short-term marketable securities
242

 
576

Segregated cash and investments
3,992

 
3,638

Trade receivables
3,447

 
3,450

Inventories
9,278

 
13,836

Other current assets
5,879

 
6,548

Total Current Assets
26,090

 
29,762

 
 
 
 
Investments and Other Assets
 

 
 

Investments in and advances to affiliates
3,183

 
3,170

Long-term marketable securities
685

 
717

Goodwill
552

 
551

Other assets
813

 
813

Total Investments and Other Assets
5,233

 
5,251

 
 
 
 
Property, Plant, and Equipment
 

 
 

Land
406

 
378

Buildings
4,797

 
4,807

Machinery and equipment
17,464

 
16,984

Construction in progress
770

 
1,004

 
23,437

 
23,173

Accumulated depreciation
(13,312
)
 
(13,050
)
Net Property, Plant, and Equipment
10,125

 
10,123

 
 
 
 
Total Assets
$
41,448

 
$
45,136

 
 
 
 
Liabilities and Shareholders’ Equity
 

 
 

Current Liabilities
 

 
 

Short-term debt
$
364

 
$
2,816

Trade payables
2,942

 
4,787

Accrued expenses and other payables
9,291

 
9,122

Current maturities of long-term debt
1,156

 
268

Total Current Liabilities
13,753

 
16,993

 
 
 
 
Long-Term Liabilities
 

 
 

Long-term debt
5,364

 
6,456

Deferred income taxes
1,282

 
1,267

Other
1,483

 
1,289

Total Long-Term Liabilities
8,129

 
9,012

 
 
 
 
Shareholders’ Equity
 

 
 

Common stock
6,108

 
6,134

Reinvested earnings
13,828

 
13,236

Accumulated other comprehensive income (loss)
(398
)
 
(450
)
Noncontrolling interests
28

 
211

Total Shareholders’ Equity
19,566

 
19,131

Total Liabilities and Shareholders’ Equity
$
41,448

 
$
45,136

 
 
 
 
See notes to consolidated financial statements.

4



Archer-Daniels-Midland Company

Consolidated Statements of Cash Flows
(Unaudited)

 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
(In millions)
 
 
 
 
Operating Activities
 
 
 
Net earnings including noncontrolling interests
$
977

 
$
882

Adjustments to reconcile net earnings to net cash provided by operating activities
 

 
 

Depreciation and amortization
681

 
651

Asset impairment charges
23

 
176

Deferred income taxes
4

 
119

Equity in earnings of affiliates, net of dividends
(152
)
 
(221
)
Stock compensation expense
30

 
36

Pension and postretirement accruals (contributions), net
7

 
(19
)
Deferred cash flow hedges
18

 
80

Other – net
(142
)
 
99

Changes in operating assets and liabilities, net of businesses acquired
 

 
 

Segregated cash and investments
(360
)
 
(317
)
Trade receivables
92

 
2,187

Inventories
4,788

 
(1,207
)
Other current assets
615

 
(3,157
)
Trade payables
(2,154
)
 
(465
)
Accrued expenses and other payables
442

 
1,493

Total Operating Activities
4,869

 
337

 
 
 
 
Investing Activities
 

 
 

Purchases of property, plant, and equipment
(659
)
 
(877
)
Proceeds from sales of property, plant, and equipment
36

 
32

Net assets of businesses acquired
(35
)
 
(56
)
Purchases of marketable securities
(530
)
 
(874
)
Proceeds from sales of marketable securities
826

 
1,008

Distributions from affiliates
150

 
22

Other – net
38

 
(5
)
Total Investing Activities
(174
)
 
(750
)
 
 
 
 
Financing Activities
 

 
 

Long-term debt borrowings
23

 
9

Long-term debt payments
(265
)
 
(1,597
)
Net borrowings (payments) under lines of credit agreements
(2,489
)
 
2,820

Debt exchange premiums

 
(12
)
Purchases of treasury stock
(95
)
 
(100
)
Cash dividends
(376
)
 
(346
)
Other – net
45

 
10

Total Financing Activities
(3,157
)
 
784

 
 
 
 
Increase in cash and cash equivalents
1,538

 
371

Cash and cash equivalents beginning of period
1,714

 
864

 
 
 
 
Cash and cash equivalents end of period
$
3,252

 
$
1,235

 
 
 
 
See notes to consolidated financial statements.

5



Archer-Daniels-Midland-Company

Consolidated Statement of Shareholders’ Equity
(Unaudited)
 
Common Stock
 
Reinvested
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
Total
Shareholders’
Equity
 
Shares
 
Amount
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2012
659

 
$
6,134

 
$
13,236

 
$
(450
)
 
$
211

 
$
19,131

Comprehensive income
 

 
 

 
 

 
 

 
 

 
 

Net earnings
 

 
 

 
968

 
 

 
9

 
 

   Other comprehensive
     income
 

 
 

 
 

 
52

 
(9
)
 
 

      Total comprehensive
       income
 

 
 

 
 

 
 

 
 

 
1,020

Cash dividends paid- $0.57 per share
 

 
 

 
(376
)
 
 

 
 

 
(376
)
Treasury stock purchases
(3)

 
(95
)
 
 
 
 
 
 
 
(95
)
Stock compensation expense
 

 
30

 
 

 
 

 
 

 
30

Noncontrolling interests associated with mandatorily redeemable instruments
 

 
 

 


 
 

 
(180
)
 
(180
)
Other
2

 
39

 


 
 

 
(3
)
 
36

Balance September 30, 2013
658

 
$
6,108

 
$
13,828

 
$
(398
)
 
$
28

 
$
19,566


See notes to consolidated financial statements.

6



Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements
(Unaudited)
Note 1.
Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's transition report on Form 10-KT for the six months ended December 31, 2012.

During 2013, the noncontrolling interest of certain of the Company's less than wholly-owned subsidiaries was subject to a mandatorily redeemable put option. As a result, the Company reclassified $180 million of noncontrolling interest in shareholders' equity to long-term liabilities.

Adoption of New Accounting Standards

Effective January 1, 2013, the Company adopted the amended guidance of Accounting Standards Codification (ASC) Topic 220, Comprehensive Income, which requires the Company to present, either on the face of the consolidated statement of earnings or in the notes, the effect on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income. The adoption of this amended guidance requires expanded disclosures in the Company's consolidated financial statements but does not impact results (see Note 11).

Effective July 17, 2013, the Company adopted the amended guidance of ASC Topic 815, Derivatives and Hedging (Topic 815), which permits the Company to use the Overnight Index Swap as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the U.S. treasury interest rates and the London Interbank Offered Rate. The amended guidance also removes the restriction on using different benchmark rates for similar hedges. The adoption of this amended guidance did not have an impact on current period results and is not expected to have any material impact on the Company's financial results.
 
Last-in, First-out (LIFO) Inventories

Interim period LIFO calculations are based on interim period costs and management’s estimates of year-end inventory levels.  Because the availability and price of agricultural commodity-based LIFO inventories are unpredictable due to factors such as weather, government farm programs and policies, and changes in global demand, quantities of LIFO-based inventories at interim periods may vary significantly from management’s estimates of year-end inventory levels.

Note 2.
Pending Accounting Standards

Effective January 1, 2014, the Company will be required to adopt the amended guidance of ASC Topic 740, Income Taxes, which requires the Company to present an unrecognized tax benefit in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or if the Company does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liability in the financial statements and should not be combined with deferred tax assets. The Company does not expect any material impact on its financial results as a result of the adoption of this amended guidance.

Effective January 1, 2014, the Company will be required to adopt the amended guidance of ASC Topic 830, Foreign Currency Matters (Topic 830), which requires the Company to transfer currency translation adjustments from other comprehensive income into net income in certain circumstances. The amended guidance aims to resolve diversity in practice as to whether ASC Topic 810, Consolidation or Topic 830 applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity, or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business. The Company will be required to apply the amended guidance prospectively. If the Company disposes all or part of a qualifying foreign entity, it will be required to release the portion of cumulative translation adjustment applicable to the disposed entity.

7

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 2.
Pending Accounting Standards (Continued)

Effective January 1, 2014, the Company will be required to adopt the amended guidance of ASC Topic 405, Liabilities, which addresses the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements, for which the total amount under the arrangement is fixed at the reporting date. The amended guidance aims to resolve diversity in practice among companies that are subject to joint and several liabilities. The Company will be required to apply the amended guidance retrospectively to all prior periods presented. The Company does not expect any material impact on its financial results as a result of the adoption of this amended guidance.

Note 3.
Acquisitions

During the nine months ended September 30, 2013, the Company acquired two businesses for a total cost of $35 million and recorded a preliminary allocation of the purchase price related to these acquisitions.
 
The net cash purchase price for the acquisitions of $35 million was preliminarily allocated to working capital, property, plant, and equipment, and other long-term assets for $10 million, $10 million, and $15 million, respectively.

Note 4.
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, 2013 and December 31, 2012.
 
 
Fair Value Measurements at September 30, 2013
 

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
$

 
$
3,654

 
$
1,272

 
$
4,926

Unrealized derivative gains:
 
 
 
 
 
 
 
Commodity contracts
1,364

 
748

 
262

 
2,374

Foreign exchange contracts

 
233

 

 
233

Interest rate contracts

 
1

 

 
1

Marketable securities
2,557

 
17

 

 
2,574

Deferred receivables consideration

 
487

 

 
487

Total Assets
$
3,921

 
$
5,140

 
$
1,534

 
$
10,595

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Unrealized derivative losses:
 
 
 
 
 
 
 
Commodity contracts
$
1,667

 
$
708

 
$
186

 
$
2,561

Foreign exchange contracts

 
201

 

 
201

Inventory-related payables

 
299

 
9

 
308

Total Liabilities
$
1,667

 
$
1,208

 
$
195

 
$
3,070




8

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 4.
Fair Value Measurements (Continued)

 
Fair Value Measurements at December 31, 2012
 
 
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
$

 
$
5,291

 
$
1,745

 
$
7,036

Unrealized derivative gains:
 
 
 
 
 
 
 
Commodity contracts
1,426

 
936

 
143

 
2,505

Foreign exchange contracts

 
170

 

 
170

Interest rate contracts

 
1

 

 
1

Marketable securities
2,451

 
16

 

 
2,467

Deferred receivables consideration

 
900

 

 
900

Total Assets
$
3,877

 
$
7,314

 
$
1,888

 
$
13,079

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Unrealized derivative losses:
 
 
 
 
 
 
 
Commodity contracts
$
1,600

 
$
638

 
$
138

 
$
2,376

Foreign exchange contracts

 
215

 

 
215

Inventory-related payables

 
903

 
33

 
936

Total Liabilities
$
1,600

 
$
1,756

 
$
171

 
$
3,527


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 in less active markets for similar assets or liabilities. Level 2 assets and liabilities include 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, such as basis and freight components.

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. Significant components of Level 3 assets and liabilities can include basis and freight if they do not have sufficient market data.



9

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 4.
Fair Value Measurements (Continued)

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 that 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 all periods presented, 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.  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 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, 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, based on the intended purpose of the instrument.  Changes in the fair value of interest rate derivatives designated as fair value hedges are recognized in the consolidated statements of earnings as a component of 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 and corporate and municipal debt securities 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.

10

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 4.
Fair Value Measurements (Continued)

The Company has deferred consideration under its accounts receivable securitization program (the “Program”) which represents a note receivable from the purchasers under the Program (see Note 15 for more information about the Program). This amount is reflected in other current assets on the consolidated balance sheet (see Note 7). 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 table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended September 30, 2013.

 
Level 3 Fair Value Asset Measurements at
 
September 30, 2013
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, June 30, 2013
$
1,926

 
$
267

 
$
2,193

Total increase in unrealized gains included in cost of products sold*
162

 
143

 
305

Purchases
2,896

 

 
2,896

Sales
(3,264
)
 

 
(3,264
)
Settlements

 
(153
)
 
(153
)
Transfers into Level 3
35

 
69

 
104

Transfers out of Level 3
(483
)
 
(64
)
 
(547
)
Ending balance, September 30, 2013
$
1,272

 
$
262

 
$
1,534


* Includes gains of $289 million that are attributable to the change in unrealized gains relating to Level 3 assets still held at September 30, 2013.

11

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 4.
Fair Value Measurements (Continued)

The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended September 30, 2013.

 
Level 3 Fair Value Liability Measurements at
 
September 30, 2013
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, June 30, 2013
$
63

 
$
233

 
$
296

Total increase in unrealized losses included in cost of products sold*

 
127

 
127

Purchases
4

 

 
4

Sales
(17
)
 

 
(17
)
Settlements

 
(186
)
 
(186
)
Transfers into Level 3

 
30

 
30

Transfers out of Level 3
(41
)
 
(18
)
 
(59
)
Ending balance, September 30, 2013
$
9

 
$
186

 
$
195


* Includes losses of $127 million that are attributable to the change in unrealized losses relating to Level 3 liabilities still held at September 30, 2013.

The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended September 30, 2012.

 
Level 3 Fair Value Asset Measurements at
 
September 30, 2012
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
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



12

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 4.
Fair Value Measurements (Continued)

The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended September 30, 2012.

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


The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2013.

 
Level 3 Fair Value Asset Measurements at
 
September 30, 2013
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2012
$
1,745

 
$
143

 
$
1,888

Total increase (decrease) in unrealized gains included in cost of products sold*
(677
)
 
372

 
(305
)
Purchases
11,795

 

 
11,795

Sales
(11,576
)
 

 
(11,576
)
Settlements

 
(381
)
 
(381
)
Transfers into Level 3
35

 
209

 
244

Transfers out of Level 3
(50
)
 
(81
)
 
(131
)
Ending balance, September 30, 2013
$
1,272

 
$
262

 
$
1,534


* Includes gains of $553 million that are attributable to the change in unrealized gains relating to Level 3 assets still held at September 30, 2013.

13

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 4.
Fair Value Measurements (Continued)

The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2013.

 
Level 3 Fair Value Liability Measurements at
 
September 30, 2013
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2012
$
33

 
$
138

 
$
171

Total increase (decrease) in unrealized losses included in cost of products sold*
(191
)
 
382

 
191

Purchases
190

 

 
190

Sales
(23
)
 

 
(23
)
Settlements

 
(397
)
 
(397
)
Transfers into Level 3

 
104

 
104

Transfers out of Level 3

 
(41
)
 
(41
)
Ending balance, September 30, 2013
$
9

 
$
186

 
$
195


* Includes losses of $237 million that are attributable to the change in unrealized losses relating to Level 3 liabilities still held at September 30, 2013.

The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2012.

 
Level 3 Fair Value Asset Measurements at
 
September 30, 2012
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2011
$
1,624

 
$
198

 
$
1,822

Total increase (decrease) in unrealized gains included in cost of products sold
240

 
366

 
606

Purchases
4,516

 
(2
)
 
4,514

Sales
(3,616
)
 

 
(3,616
)
Settlements

 
(341
)
 
(341
)
Transfers into Level 3
317

 
152

 
469

Transfers out of Level 3
(1,326
)
 
(91
)
 
(1,417
)
Ending balance, September 30, 2012
$
1,755

 
$
282

 
$
2,037



14

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 4.
Fair Value Measurements (Continued)

The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2012.

 
Level 3 Fair Value Liability Measurements at
 
September 30, 2012
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2011
$
196

 
$
192

 
$
388

Total increase (decrease) in unrealized losses included in cost of products sold

 
335

 
335

Purchases
2

 
(1
)
 
1

Sales
(4
)
 

 
(4
)
Settlements

 
(350
)
 
(350
)
Transfers into Level 3
2

 
126

 
128

Transfers out of Level 3
(156
)
 
(85
)
 
(241
)
Ending balance, September 30, 2012
$
40

 
$
217

 
$
257


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 are 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 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, 2013 and December 31, 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, the unobservable component as of September 30, 2013 is a weighted average 27.5% of the total price for assets and 13.8% for liabilities.

 
Weighted Average % of Total Price
 
September 30, 2013
 
December 31, 2012
Component Type
Assets
 
Liabilities
 
Assets
 
Liabilities
Inventories and Related Payables
 
 
 
 
 
 
 
Basis
27.5
%
 
13.8
%
 
13.5
%
 
26.2
%
Transportation cost
15.9
%
 
%
 
8.4
%
 
9.1
%
 
 
 
 
 
 
 
 
Commodity Derivative Contracts
 
 
 
 
 
 
 
Basis
22.4
%
 
16.9
%
 
45.7
%
 
17.0
%
Transportation cost
16.6
%
 
9.9
%
 
16.2
%
 
7.7
%

15

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 4.
Fair Value Measurements (Continued)

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.

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 September 30, 2013 and December 31, 2012, the Company has certain derivatives designated as cash flow and fair value hedges.  Within the Note 5 tables, zeros represent minimal amounts.

Derivatives Not Designated as Hedging Instruments

The Company generally uses exchange-traded futures, exchange-traded and OTC options contracts, and forward 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. 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 economically hedge some portion of its forecasted foreign currency expenditures. For example, certain production facilities have manufacturing expenses and equipment purchases denominated in non-functional currencies. 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, forward foreign currency exchange contracts, 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 September 30, 2013 and December 31, 2012.

 
September 30, 2013
 
December 31, 2012
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
(In millions)
 
(In millions)
 
 
 
 
 
 
 
 
FX Contracts
$
233

 
$
201

 
$
170

 
$
215

Interest Contracts
1

 

 
1

 

Commodity Contracts
2,374

 
2,561

 
2,504

 
2,376

Total
$
2,608

 
$
2,762

 
$
2,675

 
$
2,591



16

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Derivative Instruments and Hedging Activities (Continued)

The following tables set 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 three and nine months ended September 30, 2013 and 2012.

 
Three months ended September 30,
 
2013
 
2012
 
(In millions)
 
 
 
 
Interest Contracts
 
 
 
Interest expense
$
0

 
$
0

Other income (expense) – net
1

 

 
 
 
 
FX Contracts
 

 
 

Net sales and other operating income
$
(3
)
 
$
51

Cost of products sold
29

 
4

Other income (expense) – net
85

 
(76
)
 
 
 
 
Commodity Contracts
 

 
 

Cost of products sold
$
(3
)
 
$
(436
)
 
 
 
 
Other Contracts
 
 
 
Other income (expense) - net
$

 
$
(4
)
Total gain (loss) recognized in earnings
$
109

 
$
(461
)

 
Nine months ended September 30,
 
2013
 
2012
 
(In millions)
 
 
 
 
Interest Contracts
 
 
 
Interest expense
$
0

 
$
0

Other income (expense) – net
1

 

 
 
 
 
FX Contracts
 

 
 

Net sales and other operating income
$
106

 
$
135

Cost of products sold
(58
)
 
(135
)
Other income (expense) – net
30

 
(28
)
 
 
 
 
Commodity Contracts
 

 
 

Cost of products sold
$
204

 
$
(959
)
 
 
 
 
Other Contracts
 
 
 
Other income (expense) - net
$

 
$
(5
)
Total gain (loss) recognized in earnings
$
283

 
$
(992
)



17

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Derivative Instruments and Hedging Activities (Continued)

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 table above. 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.

Derivatives Designated as Cash Flow or Fair Value 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.  Assuming normal market conditions, 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 will be 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 September 30, 2013, the Company has $5 million of after-tax losses in AOCI related to gains and losses from commodity cash flow hedge transactions.  The Company expects to recognize all 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 25% of its monthly anticipated grind.  At September 30, 2013, the Company has designated hedges representing between 0.1% and 16% 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 September 30, 2013, the Company has designated hedges representing between 4% and 20% of its anticipated monthly natural gas purchases for the next 6 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 contracts that are indexed to unleaded gasoline prices.  During the past 12 months, the Company hedged between 1 million to 13 million gallons of ethanol per month under this program.  At September 30, 2013, the Company has designated hedges representing between 1 million to 14 million gallons of contracted ethanol sales per month over the next 9 months.

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.  For example, 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 its forecasted foreign currency expenditures.  During the past 12 months, the Company hedged between $13 million and $19 million of forecasted foreign currency expenditures. As of September 30, 2013, the Company has designated hedges of $13 million of its forecasted foreign currency expenditures. At September 30, 2013, the Company has $0.3 million of after-tax gains in AOCI related to foreign exchange contracts designated as cash flow hedging instruments.  The Company will recognize the $0.3 million of gains in its consolidated statement of earnings over the life of the hedged transactions.




18

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Derivative Instruments and Hedging Activities (Continued)

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 September 30, 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.

During September 2013, the Company initiated a new fair value hedge program for certain interest rate swaps designated as fair value hedges for portions of its fixed rate debt. These fair value hedges were initiated with the objective of managing the Company's exposure to the benchmark interest rate on $1.7 billion of fixed rate debt. The change in fair value of the swaps and the corresponding debt was immaterial for the quarter ended September 30, 2013.


The following table sets forth the fair value of derivatives designated as hedging instruments as of September 30, 2013 and December 31, 2012.

 
September 30, 2013
 
December 31, 2012
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
(In millions)
 
(In millions)
Commodity Contracts
$

 
$

 
$
1

 
$
0

Interest Contracts
0

 
0

 

 

Total
$
0

 
$
0

 
$
1

 
$
0


The following tables set forth the pre-tax gains (losses) on derivatives designated as hedging instruments that have been included in the consolidated statements of earnings for the three and nine months ended September 30, 2013 and 2012.
 
 
 
 
Three months ended
 
Consolidated Statement of
Earnings Locations
 
September 30,
 
 
2013
 
2012
 
 
 
(In millions)
Effective amounts recognized in earnings
 
 
 
 
 
FX Contracts
Other income/expense – net
 
$
0

 
$
(1
)
Interest Contracts
Interest expense
 
1

 
0

Commodity Contracts
Cost of products sold
 
(2
)
 
89

 
Net sales and other operating income
 
(2
)
 

Ineffective amount recognized in earnings
 
 
 
 
 
Commodity Contracts
Cost of products sold
 
(73
)
 
(18
)
Total amount recognized in earnings
 
 
$
(76
)
 
$
70




19

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Derivative Instruments and Hedging Activities (Continued)

 
 
 
Nine months ended
 
Consolidated Statement of
Earnings Locations
 
September 30,
 
 
2013
 
2012
 
 
 
(In millions)
Effective amounts recognized in earnings
 
 
 
 
 
FX Contracts
Other income/expense – net
 
$
0

 
$
(1
)
Interest Contracts
Interest expense
 
1

 
1

Commodity Contracts
Cost of products sold
 
(7
)
 
83

 
Net sales and other operating income
 
3

 
(5
)
Ineffective amount recognized in earnings
 
 
 
 
 
Commodity Contracts
Cost of products sold
 
(128
)
 
(8
)
Total amount recognized in earnings
 
 
$
(131
)
 
$
70


Hedge ineffectiveness for commodity contracts 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 and nine months ended September 30, 2013 and 2012.

 
Three months ended
 
September 30,
 
2013
 
2012
 
(In millions)
 
 
 
 
Balance at June 30, 2013 and 2012
$
6

 
$
50

Unrealized gains (losses)
13

 
142

Losses (gains) reclassified to earnings
3

 
(88
)
Tax effect
(7
)
 
(18
)
Balance at September 30, 2013 and 2012
$
15

 
$
86


 
Nine months ended
 
September 30,
 
2013
 
2012
 
(In millions)
 
 
 
 
Balance at December 31, 2012 and 2011
$
4

 
$
30

Unrealized gains (losses)
15

 
164

Losses (gains) reclassified to earnings
3

 
(77
)
Tax effect
(7
)
 
(31
)
Balance at September 30, 2013 and 2012
$
15

 
$
86



20


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Marketable Securities and Cash Equivalents

 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(In millions)
 
 
 
 
 
 
 
 
September 30, 2013
 
 
 
 
 
 
 
United States government obligations
 
 
 
 
 
 
 
Maturity less than 1 year
$
465

 
$

 
$

 
$
465

Maturity 1 to 5 years
127

 

 

 
127

Government–sponsored enterprise obligations
 

 
 

 
 

 
 

Maturity 1 to 5 years
2

 

 

 
2

Corporate debt securities
 

 
 

 
 

 
 

Maturity 1 to 5 years
15

 

 

 
15

Other debt securities
 

 
 

 
 

 
 

Maturity less than 1 year
2,440

 

 

 
2,440

Maturity 1 to 5 years
3

 

 

 
3

Equity securities
 
 
 

 
 

 
 

Available-for-sale
538

 
2

 
(2
)
 
538

 
$
3,590

 
$
2

 
$
(2
)
 
$
3,590


 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(In millions)
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
United States government obligations
 
 
 
 
 
 
 
Maturity less than 1 year
$
583

 
$

 
$

 
$
583

Maturity 1 to 5 years
93

 

 

 
93

Government–sponsored enterprise obligations
 

 
 

 
 

 
 

Maturity 1 to 5 years
2

 

 

 
2

Corporate debt securities
 

 
 

 
 

 
 

Maturity 1 to 5 years
15

 

 

 
15

Other debt securities
 

 
 

 
 

 
 

Maturity less than 1 year
1,038

 

 

 
1,038

Maturity 1 to 5 years
3

 

 

 
3

Equity securities
 

 
 

 
 

 
 

Available-for-sale
606

 
3

 
(5
)
 
604

 
$
2,340

 
$
3

 
$
(5
)
 
$
2,338


All of the $2 million in unrealized losses at September 30, 2013 arose within the last 12 months and are related to the Company’s investment in one available-for-sale equity security with a fair value of $5 million.  The Company evaluated the near-term prospects of the issuer in relation to the severity and duration of the impairment.  Based on that evaluation and the Company’s ability and intent to hold this investment for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider this investment to be other-than-temporarily impaired at September 30, 2013.


21

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Marketable Securities and Cash Equivalents (Continued)

In September 2013, the Company recorded an other-than-temporary impairment charge of $11 million related to its available-for-sale investment in one equity security based on the Company's assessment of underlying market conditions. The impairment is recorded in asset impairment, exit, and restructuring costs in the consolidated statements of earnings.

Note 7.     Other Current Assets

The following table sets forth the items in other current assets:

 
September 30,
 
December 31,
 
2013
 
2012
 
(In millions)
 
 
 
 
Unrealized gains on derivative contracts
$
2,608

 
$
2,676

Deferred receivables consideration
487

 
900

Other current assets
2,784

 
2,972

 
$
5,879

 
$
6,548


Note 8.
Accrued Expenses and Other Payables

The following table sets forth the items in accrued expenses and other payables:

 
September 30,
 
December 31,
 
2013
 
2012
 
(In millions)
 
 
 
 
Unrealized losses on derivative contracts
$
2,762

 
$
2,591

Grain accounts and margin deposits
4,734

 
4,620

Accrued expenses and other payables
1,795

 
1,911

 
$
9,291

 
$
9,122


Note 9.
Debt and Financing Arrangements

The Company has outstanding $1.15 billion principal amount of convertible senior notes (the Notes) due in February 2014. As of September 30, 2013, none of the conditions permitting conversion of the Notes had been satisfied.  Therefore, no share amounts related to the conversion of the Notes or exercise of the warrants sold in connection with the issuance of the Notes were included in diluted average shares outstanding.  For further information on the Notes, refer to Note 10 “Debt and Financing Arrangements” in the consolidated financial statements included in the Company’s transition report on Form 10-KT for the six months ended December 31, 2012.

At September 30, 2013, the fair value of the Company’s long-term debt exceeded the carrying value by $0.9 billion, as estimated using quoted market prices (a Level 2 measurement under applicable accounting standards).

At September 30, 2013, the Company had lines of credit totaling $9.0 billion, of which $8.7 billion was unused.  Of the Company’s total lines of credit, $6.0 billion support a commercial paper borrowing facility, against which there was no commercial paper outstanding at September 30, 2013.


22

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 9.    Debt and Financing Arrangements (Continued)

The Company has an accounts receivable securitization program (the “Program”). The Program provides the Company with up to $1.1 billion in funding resulting from the sale of accounts receivable. As of September 30, 2013, the Company utilized all of its $1.1 billion facility under the Program (see Note 15 for more information on the Program).

Note 10.
Income Taxes

The Company’s effective tax rate for the quarter and nine months ended September 30, 2013 was 32.2% and 30.3%, respectively, compared to 37.6% and 31.0% for the quarter and nine months ended September 30, 2012, respectively. The effective tax rate for the quarter ended September 30, 2013 of 32.2% is higher than the 28.7% rate recorded in the second quarter ended June 30, 2013. This quarter the Company raised its estimated annual effective tax rate to 30% primarily due to changes in forecasted geographic mix of earnings. This quarter's effective tax rate includes the resultant year-to-date adjustment in tax expense and discrete items of $12 million, net. The effective tax rate of 37.6% for the quarter ended September 30, 2012 included $8 million of discrete tax expense, a valuation allowance for a portion of the tax benefit associated with the Gruma impairment charge (see Note 14), and income tax expense associated with foreign currency remeasurement of non-monetary assets in Brazil. Excluding these items, the prior quarter rate would have been 30%.

The Company is subject to income taxation in many jurisdictions around the world. The Company is subject to routine examination by domestic and foreign tax authorities and frequently faces challenges regarding the amount of taxes due.  These challenges include positions taken by the Company related to the timing, nature and amount of deductions and the allocation of income among various tax jurisdictions.  Resolution of the related tax positions, through negotiation with relevant tax authorities or through litigation, may take years to complete. Therefore, it is difficult to predict the timing for resolution of tax positions. In its routine evaluations of the exposure associated with various tax filing positions, the Company recognizes a liability, when necessary, for estimated potential additional tax owed by the Company in accordance with the applicable accounting standard.  However, the Company cannot predict or provide assurance as to the ultimate outcome of these ongoing or future examinations.

The Company's wholly-owned subsidiary, ADM do Brasil Ltda. (ADM do Brasil), received three separate tax assessments from the Brazilian Federal Revenue Service (BFRS) challenging the tax deductibility of commodity hedging losses and related expenses for the tax years 2004, 2006, and 2007 in the amounts of $449 million, $18 million, and $79 million, respectively (inclusive of interest and penalties and adjusted for variation in currency exchange rates). ADM do Brasil's tax return for 2005 was also audited and no assessment was received. The statute of limitations for 2005 has expired. If the BFRS were to challenge commodity hedging deductions in tax years after 2007, the Company estimates it could receive additional claims of approximately $97 million (as of September 30, 2013 and subject to variation in currency exchange rates).

ADM do Brasil enters into commodity hedging transactions that can result in gains, which are included in ADM do Brasil's calculations of taxable income in Brazil, and losses, which ADM do Brasil deducts from its taxable income in Brazil. The Company has evaluated its tax position regarding these hedging transactions and concluded, based upon advice from Brazilian legal counsel, that it was appropriate to recognize both gains and losses resulting from hedging transactions when determining its Brazilian income tax expense. Therefore, the Company has continued to recognize the tax benefit from hedging losses in its financial statements and has not recorded any tax liability for the amounts assessed by the BFRS.

ADM do Brasil filed an administrative appeal for each of the assessments. During the second quarter of fiscal 2011, a decision in favor of the BFRS on the 2004 assessment was received and a second level administrative appeal has been filed. In January of 2012, a decision in favor of the BFRS on the 2006 and 2007 assessments was received and a second level administrative appeal was filed and is still ongoing as of the date of this report. If ADM do Brasil continues to be unsuccessful in the administrative appellate process, further appeals are available in the Brazilian federal courts. While the Company believes its consolidated financial statements properly reflect the tax deductibility of these hedging losses, the ultimate resolution of this matter could result in the future recognition of additional payments of, and expense for, income tax and the associated interest and penalties. The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 2007.





23

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 10.     Income Taxes (Continued)

The Company's subsidiaries in Argentina have received tax assessments challenging transfer prices used to price grain exports totaling $48 million (inclusive of interest and adjusted for variation in currency exchange rates) for the tax years 2004 and 2005. The Argentine tax authorities have been conducting a review of income and other taxes paid by large exporters and processors of cereals and other agricultural commodities resulting in allegations of income tax evasion. While the Company believes that it has complied with all Argentine tax laws, it cannot rule out receiving additional assessments challenging transfer prices used to price grain exports for years subsequent to 2005, which could be material to the Company.  The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 2005. The Company believes that it has appropriately evaluated the transactions underlying these assessments, and has concluded, based on Argentine tax law, that its tax position would be sustained, and accordingly, the Company has not recorded a tax liability for these assessments.
  
In accordance with the accounting requirements for uncertain tax positions, the Company has concluded that it is more likely than not to prevail on the Brazil and Argentina matters based upon their technical merits. The Company has not recorded an uncertain tax liability for these assessments partly because the taxing jurisdictions' processes do not provide a mechanism for settling at less than the full amount of the assessment. The Company's consideration of these tax assessments requires judgments about the application of income tax regulations to specific facts and circumstances. The final outcome of these matters cannot reliably be predicted, may take many years to resolve, and could result in the payment and expense of up to the entire amount of these assessments.


24


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 11.     Accumulated Other Comprehensive Income (AOCI)

The following tables set forth the changes in AOCI by component and the reclassifications out of AOCI for the three and nine months ended September 30, 2013:
 
Three months ended September 30, 2013
 
Foreign Currency Translation Adjustment
 
Deferred Gain (Loss) on Hedging Activities
 
Pension Liability Adjustment
 
Unrealized Gain (Loss) on Investments
 
Total
 
(In millions)
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2013
$
(82
)
 
$
6

 
$
(564
)
 
$
2

 
$
(638
)
Other comprehensive income before reclassifications
225

 
13

 
(5
)
 
(6
)
 
227

Amounts reclassified from AOCI

 
3

 
15

 
9

 
27

Tax effect

 
(7
)
 
(4
)
 
(3
)
 
(14
)
Net current period other comprehensive income
225

 
9

 
6

 

 
240

Balance at September 30, 2013
$
143

 
$
15

 
$
(558
)
 
$
2

 
$
(398
)
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013
 
Foreign Currency Translation Adjustment
 
Deferred Gain (Loss) on Hedging Activities
 
Pension Liability Adjustment
 
Unrealized Gain (Loss) on Investments
 
Total
 
(In millions)
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
136

 
$
4

 
$
(590
)
 
$

 
$
(450
)
Other comprehensive income before reclassifications
5

 
15

 
3

 
(7
)
 
16

Amounts reclassified from AOCI

 
3

 
45

 
9

 
57

Tax effect
2

 
(7
)
 
(16
)
 

 
(21
)