Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments & Hedging Activities

Derivative Instruments & Hedging Activities

Derivatives Not Designated as Hedging Instruments

The majority of the Company's derivative instruments have not been designated as hedging instruments. The Company 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.  Derivatives, including exchange traded contracts and physical purchase or sale contracts, and 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 fair values of and changes in fair values of inventories are not included in the tables below. 

The following table sets forth the fair value of derivatives not designated as hedging instruments as of December 31, 2014 and 2013.

	December 31, 2014				December 31, 2013
	Assets		Liabilities		Assets		Liabilities
	(In millions)
Foreign Currency Contracts	$	186	$	150	$	118	$	166
Interest Contracts	—		—		1		—
Commodity Contracts	690		776		850		649
Total	$	876	$	926	$	969	$	815

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 years ended December 31, 2014 and 2013, the six months ended December 31, 2012 and 2011, and the year ended June 30, 2012.

	Year Ended						Six Months Ended						Year Ended
(In millions)	December 31						December 31						June 30
	2014			2013			2012			2011			2012
										(Unaudited)
Interest Contracts
Other income (expense) - net	$	—		$	1		$	—		$	—		$	—
Foreign Currency Contracts
Revenues	$	(1	)	$	108		$	129		$	33		$	117
Cost of products sold	131			(157		)	(49		)	(116		)	(255		)
Other income (expense) - net	(171		)	61			94			(69		)	(21		)
Commodity Contracts
Cost of products sold	$	(263	)	$	301		$	136		$	(4	)	$	(527	)
Other Contracts
Other income (expense) - net	$	—		$	—		$	58		$	—		$	(1	)
Total gain(loss) recognized in earnings	$	(304	)	$	314		$	368		$	(156	)	$	(687	)

During the quarter ended September 30, 2014, the Company recognized $102 million of pre-tax foreign exchange hedging losses on Euro foreign currency derivative contracts entered into to economically hedge the Wild Flavors acquisition.

During December 2012, the Company entered into two transactions with investment bank counterparties resulting in an economic interest in GrainCorp shares. The purpose of these transactions was to facilitate the Company’s planned acquisition of GrainCorp, which was rejected by the Australian Federal Treasurer in November 2013.  One of the transactions was accounted for as an unfunded derivative instrument.  The other transaction was a hybrid financial instrument, as defined by applicable accounting standards, whereby the accounting rules required the Company to account for a funded host instrument and a separate embedded derivative instrument.  In December 2012, the Company settled the derivative instruments known as “Total Return Swaps”, and recognized pre-tax gains reported as “Other Contracts” in the table above.  After the settlement of these transactions, the interest in GrainCorp is recorded as a long-term marketable security.

Inventories of certain merchandisable agricultural commodities, which include amounts acquired under deferred pricing contracts, are stated at market value.  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

As of December 31, 2014 and 2013, the Company has certain derivatives designated as cash flow hedges and fair value hedges.

The Company uses interest rate swaps designated as fair value hedges to protect the fair value of fixed-rate debt due to changes in interest rates. The changes in the fair value of the interest rate swaps and the underlying fixed-rate debt are recorded in other (income) expense - net. The terms of the interest rate swaps match the terms of the underlying debt resulting in no ineffectiveness. At December 31, 2014, the Company has $21 million in other current assets representing the fair value of the interest rate swaps and a corresponding increase in the underlying debt for the same amount with no impact to earnings.

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 are reclassified from AOCI to either revenues, cost of products sold, interest expense or other (income) expense – net, as applicable.  As of December 31, 2014, the Company has $30 million of after-tax gains in AOCI related to gains and losses from commodity cash flow hedge transactions.  The Company expects to recognize the $30 million of gains in its consolidated statement of earnings during the next 12 months.

The Company 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 24% and 71% of its monthly anticipated grind.  At December 31, 2014, the Company has designated hedges representing between 0.3% to 23% of its anticipated monthly grind of corn for the next 12 months.

The Company, from time to time, also uses futures, options, and swaps to fix the sales price of certain ethanol sales contracts.  The Company has established hedging programs for ethanol sales contracts that are indexed to unleaded gasoline prices and to various exchange-traded ethanol contracts. The objective of these hedging programs is to reduce the variability of cash flows associated with the Company’s sales of ethanol. During the past 12 months, the Company hedged between 9 million and 121 million gallons of ethanol sales per month under these programs.  At December 31, 2014, the Company has designated hedges representing between 1 million to 30 million gallons of ethanol sales per month over the next 6 months.

The following tables set forth the fair value of derivatives designated as hedging instruments as of December 31, 2014 and 2013.

	December 31, 2014				December 31, 2013
	Assets		Liabilities		Assets		Liabilities
	(In millions)
Interest Contracts	$	21	$	—	$	—	$	9
Total	$	21	$	—	$	—	$	9

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 years ended December 31, 2014 and 2013, the six months ended December 31, 2012 and 2011, and the year ended June 30, 2012.

		Year Ended						Six Months Ended						Year Ended
	Consolidated Statement of	December 31						December 31						June 30
(In millions)	Earnings Locations	2014			2013			2012			2011			2012
											(Unaudited)
Effective amounts recognized in earnings
FX Contracts	Other income/expense -net	$	5		$	(1	)	$	(1	)	$	(1	)	$	(1	)
Interest Contracts	Interest expense	1			1			—			—			1
Commodity Contracts	Cost of products sold	(124		)	(41		)	158			11			5
	Revenues	(69		)	4			2			8			3
Ineffective amount recognized in earnings
Interest contracts	Interest expense	—			—			—			—			—
Commodity contracts	Cost of products sold	(4		)	(120		)	(30		)	39			49
	Revenues	(34		)	—			—			—			—
Total amount recognized in earnings		$	(225	)	$	(157	)	$	129		$	57		$	57

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 the 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.