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Derivative Instruments and Hedging Activities
 9 Months Ended
Sep. 30, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities
Derivative Instruments and 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 September 30, 2019 and December 31, 2018.

 
September 30, 2019
 
December 31, 2018
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
(In millions)
 
 
 
 
 
 
 
 
Foreign Currency Contracts
$
132

 
$
128

 
$
175

 
$
152

Commodity Contracts
424

 
471

 
461

 
589

Total
$
556

 
$
599

 
$
636

 
$
741


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, 2019 and 2018.
 
 
 
 
 
Other expense (income) - net
 
 
 
 
 
Cost of products sold
 
 
 
(In millions)
Revenues
 
 
 
 
Three Months Ended September 30, 2019
 
 

 
 
 
 
Consolidated Statement of Earnings
$
16,726

 
$
15,648

 
$
(18
)
 
 
 
 
 
 
 
 
 
 
Pre-tax gains (losses) on:
 
 
 
 
 
 
 
Foreign Currency Contracts
$
17

 
$
(81
)
 
$
(6
)
 
 
Commodity Contracts
—

 
153

 
—

 
 
Total gain (loss) recognized in earnings
$
17

 
$
72

 
$
(6
)
 
$
83

 
 
 
 
 
 
 
 
Three Months Ended September 30, 2018
 
 
 
 
 
 
 
Consolidated Statement of Earnings
$
15,800

 
$
14,742

 
$
(25
)
 
 
 
 
 
 
 
 
 
 
Pre-tax gains (losses) on:
 
 
 
 
 
 
 
Foreign Currency Contracts
$
(4
)
 
$
12

 
$
(30
)
 
 
Commodity Contracts
—

 
84

 
—

 
 
Total gain (loss) recognized in earnings
$
(4
)
 
$
96

 
$
(30
)
 
$
62

 
 
 
 
 
Other expense (income) - net
 
 
 
 
 
Cost of products sold
 
 
 
(In millions)
Revenues
 
 
 
 
Nine Months Ended September 30, 2019
 
 
 
 
 
 
 
Consolidated Statement of Earnings
$
48,327

 
$
45,349

 
$
(39
)
 
 
 
 
 
 
 
 
 
 
Pre-tax gains (losses) on:
 
 
 
 
 
 
 
Foreign Currency Contracts
$
15

 
$
(30
)
 
$
(22
)
 
 
Commodity Contracts
—

 
142

 
—

 
 
Total gain (loss) recognized in earnings
$
15

 
$
112

 
$
(22
)
 
$
105

 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
Consolidated Statement of Earnings
$
48,394

 
$
45,266

 
$
(42
)
 
 
 
 
 
 
 
 
 
 
Pre-tax gains (losses) on:
 
 
 
 
 
 
 
Foreign Currency Contracts
$
21

 
$
(189
)
 
$
(91
)
 
 
Commodity Contracts
—

 
163

 
—

 
 
Total gain (loss) recognized in earnings
$
21

 
$
(26
)
 
$
(91
)
 
$
(96
)

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 as a component of cost of products sold.

Derivatives Designated as Cash Flow, Fair Value or Net Investment Hedging Strategies

As of September 30, 2019 and December 31, 2018, the Company had certain derivatives designated as cash flow and fair value hedges.

For derivative instruments that are designated and qualify as highly-effective cash flow hedges, the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income (loss) (“AOCI”) and as an operating activity in the statement of cash flows 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.  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.

The Company uses interest rate swaps designated as fair value hedges to protect the fair value of $496 million in 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. At September 30, 2019, the Company had $4 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 net impact to earnings.

The Company uses cross-currency swaps designated as net investment hedges to protect the Company’s investment in a foreign subsidiary against changes in foreign currency exchange rates. During the three months ended September 30, 2019, the Company executed USD-fixed to Euro-fixed cross-currency swaps maturing on various dates with an aggregate notional amount of $1.2 billion. As of September 30, 2019, the Company had after-tax gains of $30 million in AOCI related to foreign exchange gains and losses from the net investment hedge transactions. The amount is deferred in AOCI until the underlying investment is divested.

The Company uses interest rate swaps designated as cash flow hedges to hedge the forecasted interest payments on certain letters of credit from banks. The terms of the interest rate swaps match the terms of the forecasted interest payments. The deferred gains and losses are recognized in other (income) expense - net over the period in which the related interest payments are paid to the banks. At September 30, 2019, the Company had $43 million of losses in AOCI related to these interest rate swaps. The Company expects to recognize this amount in its consolidated statement of earnings during the life of the instruments.

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 or cost of products sold, as applicable. As of September 30, 2019, the Company had $7 million of after-tax losses in AOCI related to gains and losses from commodity cash flow hedge transactions.  The Company expects to recognize $7 million of these after-tax losses in its consolidated statement of earnings during the next 12 months.

The Company uses futures or options contracts to hedge 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 72 million bushels of corn per month.  During the past 12 months, the Company hedged between 19% and 95% of its monthly anticipated grind.  At September 30, 2019, the Company had designated hedges representing between 4% and 60% 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 hedge 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 0 million and 121 million gallons of ethanol sales per month under these programs.  At September 30, 2019, the Company had designated hedges representing between 0 and 91 million gallons of ethanol sales per month over the next 12 months.

The Company uses futures and options contracts to hedge the purchase price of anticipated volumes of soybeans to be purchased and processed in a future month for certain of its U.S. soybean crush facilities. The Company also uses futures or options contracts to hedge the sales prices of anticipated soybean meal and soybean oil sales proportionate to the soybean crushing process at these facilities. During the past 12 months, the Company hedged between 79% and 100% of the anticipated monthly soybean crush for soybean purchases and soybean meal and oil sales at the designated facilities. The Company has designated hedges representing between 0% and 100% of the anticipated monthly soybean crush for soybean purchases and soybean meal and oil sales at the designated facilities over the next 12 months.

The following table sets forth the fair value of derivatives designated as hedging instruments as of September 30, 2019 and December 31, 2018.

 
September 30, 2019
 
December 31, 2018
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
(In millions)
Foreign Currency Contracts
$
39

 
$
—

 
$
—

 
$
—

Interest Rate Contracts
4

 
43

 
—

 
20

Total
$
43

 
$
43

 
$
—

 
$
20









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, 2019 and 2018.
 
 
 
 
Cost of products sold
 
Interest expense
 
Other expense (income) - net
 
 
(In millions)
Revenues
 
 
 
 
 
Three Months Ended September 30, 2019
 
 
 
 
 
 

Consolidated Statement of Earnings
$
16,726

 
$
15,648

 
$
97

 
$
(18
)
 
 
 
 
 
 
 
 
 
 
 
 
Effective amounts recognized in earnings
 
 
 
 
 
 
 
 
 
Pre-tax gains (losses) on:
 
 
 
 
 
 
 
 
 
Commodity Contracts
$
3

 
$
1

 
$
—

 
$
—

 
 
Interest Contracts
—

 
—

 
—

 
(21
)
 
 
Total gain (loss) recognized in earnings
$
3

 
$
1

 
$
—

 
$
(21
)
 
$
(17
)
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
Consolidated Statement of Earnings
$
15,800

 
$
14,742

 
$
87

 
$
(25
)
 
 
 
 
 
 
 
 
 
 
 
 
Effective amounts recognized in earnings
 
 
 
 
 
 
 
 
 
Pre-tax gains (losses) on:
 
 
 
 
 
 
 
 
 
Commodity Contracts
$
15

 
$
(87
)
 
$
—

 
$
—

 
 
Total gain (loss) recognized in earnings
$
15

 
$
(87
)
 
$
—

 
$
—

 
$
(72
)
 
 
 
Cost of products sold
 
Interest expense
 
Other expense (income) - net
 
 
(In millions)
Revenues
 
 
 
 
 
Nine Months Ended September 30, 2019
 
 
 
 
 
 
 
Consolidated Statement of Earnings
$
48,327

 
$
45,349

 
$
307

 
$
(39
)
 
 

 
 
 
 
 
 
 
 
 
Effective amounts recognized in earnings

 
 
 
 
 
 
 
 
Pre-tax gains (losses) on:


 
 
 
 
 
 
 
 
Commodity Contracts
$
(5
)
 
$
7

 
$
—

 
$
—

 
 
Interest Contracts
—

 
—

 
—

 
(29
)
 
 
Total gain (loss) recognized in earnings
$
(5
)
 
$
7

 
$
—

 
$
(29
)
 
$
(27
)
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018


 
 
 
 
 
 
 
 
Consolidated Statement of Earnings
$
48,394

 
$
45,266

 
$
267

 
$
(42
)
 
 

 
 
 
 
 
 
 
 
 
Effective amounts recognized in earnings
 
 
 
 
 
 
 
 
 
Pre-tax gains (losses) on:
 
 
 
 
 
 
 
 
 
Commodity Contracts
$
16

 
$
(115
)
 
$
—

 
$
—

 
 
Interest Contracts
—

 
—

 
1

 
—

 
 
Total gain (loss) recognized in earnings
$
16

 
$
(115
)
 
$
1

 
$
—

 
$
(98
)






Other Net Investment Hedging Strategies

The Company has designated €2.2 billion of its outstanding long-term debt and commercial paper borrowings and €1.1 billion of its outstanding long-term debt at September 30, 2019 and December 31, 2018, respectively, as hedges of its net investment in a foreign subsidiary. As of September 30, 2019 and December 31, 2018, the Company had after-tax gains of $63 million and losses of $26 million, respectively, in AOCI related to foreign exchange gains and losses from the net investment hedge transactions. The amount is deferred in AOCI until the underlying investment is divested.