DERIVATIVES AND OTHER HEDGING INSTRUMENTS
Objectives and Strategies for Holding Derivative Instruments
In the ordinary course of business, the company enters into contractual arrangements (derivatives) to reduce its exposure to foreign currency, interest rate and commodity price risks. The company has established a variety of derivative programs to be utilized for financial risk management. These programs reflect varying levels of exposure coverage and time horizons based on an assessment of risk.
Derivative programs have procedures and controls and are approved by the Corporate Financial Risk Management Committee, consistent with the company's financial risk management policies and guidelines. Derivative instruments used are forwards, options, futures and swaps. The company has not designated any nonderivatives as hedging instruments.
The company's financial risk management procedures also address counterparty credit approval, limits and routine exposure monitoring and reporting. The counterparties to these contractual arrangements are major financial institutions and major commodity exchanges. The company is exposed to credit loss in the event of nonperformance by these counterparties. The company utilizes collateral support annex agreements with certain counterparties to limit its exposure to credit losses. The company's derivative assets and liabilities are reported on a gross basis in the Consolidated Balance Sheets. The company anticipates performance by counterparties to these contracts and therefore no material loss is expected. Market and counterparty credit risks associated with these instruments are regularly reported to management.
The notional amounts of the company's derivative instruments were as follows:
|
| | | | | | |
December 31, | 2013 | 2012 |
Derivatives designated as hedging instruments: | | |
Interest rate swaps | $ | 1,000 |
| $ | 1,000 |
|
Foreign currency contracts | 1,107 |
| 1,083 |
|
Commodity contracts | 606 |
| 753 |
|
Derivatives not designated as hedging instruments: | |
|
Foreign currency contracts | 9,553 |
| 6,733 |
|
Commodity contracts | 281 |
| 242 |
|
Foreign Currency Risk
The company's objective in managing exposure to foreign currency fluctuations is to reduce earnings and cash flow volatility associated with foreign currency rate changes. Accordingly, the company enters into various contracts that change in value as foreign exchange rates change to protect the value of its existing foreign currency-denominated assets, liabilities, commitments and cash flows.
The company routinely uses forward exchange contracts to offset its net exposures, by currency, related to the foreign currency-denominated monetary assets and liabilities of its operations. The primary business objective of this hedging program is to maintain an approximately balanced position in foreign currencies so that exchange gains and losses resulting from exchange rate changes, net of related tax effects, are minimized. The company also uses foreign currency exchange contracts to offset a portion of the company's exposure to certain foreign currency-denominated revenues so that gains and losses on these contracts offset changes in the USD value of the related foreign currency-denominated revenues. The objective of the hedge program is to reduce earnings and cash flow volatility related to changes in foreign currency exchange rates.
Interest Rate Risk
The company uses interest rate swaps to manage the interest rate mix of the total debt portfolio and related overall cost of borrowing.
Interest rate swaps involve the exchange of fixed for floating rate interest payments to effectively convert fixed rate debt into floating rate debt based on USD LIBOR. Interest rate swaps allow the company to achieve a target range of floating rate debt.
Commodity Price Risk
Commodity price risk management programs serve to reduce exposure to price fluctuations on purchases of inventory such as copper, corn, soybeans and soybean meal. The company enters into over-the-counter and exchange-traded derivative commodity instruments to hedge the commodity price risk associated with energy feedstock and agricultural commodity exposures.
Fair Value Hedges
Interest Rate Swaps
At December 31, 2013, the company maintained a number of interest rate swaps, which were implemented at the time debt instruments were issued. All interest rate swaps qualify for the shortcut method of hedge accounting, thus there is no ineffectiveness related to these hedges.
Cash Flow Hedges
Foreign Currency Contracts
The company uses foreign currency exchange instruments such as forwards and options to offset a portion of the company's exposure to certain foreign currency-denominated revenues so that gains and losses on these contracts offset changes in the USD value of the related foreign currency-denominated revenues.
Commodity Contracts
The company enters into over-the-counter and exchange-traded derivative commodity instruments, including options, futures and swaps, to hedge the commodity price risk associated with energy feedstock and agriculture commodity exposures.
While each risk management program has a different time maturity period, most programs currently do not extend beyond the next two-year period. Cash flow hedge results are reclassified into earnings during the same period in which the related exposure impacts earnings. Reclassifications are made sooner if it appears that a forecasted transaction will not materialize. The following table summarizes the after-tax effect of cash flow hedges on accumulated other comprehensive income (loss) for the years ended December 31, 2013 and 2012:
|
| | | | | | |
December 31, | 2013 | 2012 |
Beginning balance | $ | 3 |
| $ | 41 |
|
Additions and revaluations of derivatives designated as cash flow hedges | (36 | ) | (1 | ) |
Clearance of hedge results to earnings | (15 | ) | (37 | ) |
Ending balance | $ | (48 | ) | $ | 3 |
|
During the next 12 months, the after-tax amount expected to be reclassified from accumulated other comprehensive income (loss) into earnings is $(36).
Derivatives not Designated in Hedging Relationships
Foreign Currency Contracts
The company routinely uses forward exchange contracts to reduce its net exposure, by currency, related to foreign currency-denominated monetary assets and liabilities of its operations so that exchange gains and losses resulting from exchange rate changes are minimized. The netting of such exposures precludes the use of hedge accounting; however, the required revaluation of the forward contracts and the associated foreign currency-denominated monetary assets and liabilities intends to achieve a minimal earnings impact, after taxes. Additionally, the company utilized cross-currency swaps to hedge foreign currency fluctuations on long-term intercompany loans. These swaps matured during 2013.
In 2012, the company initiated a program to utilize forward exchange contracts to reduce the net exposure related to foreign currency-denominated monetary assets and liabilities of its discontinued operations.
Commodity Contracts
The company utilizes options, futures and swaps that are not designated as hedging instruments to reduce exposure to commodity price fluctuations on purchases of inventory such as corn, soybeans and soybean meal.
Fair Values of Derivative Instruments
The table below presents the fair values of the company's derivative assets and liabilities within the fair value hierarchy, as described in Note 1, as of December 31, 2013 and 2012.
|
| | | | | | | |
| | Fair Value at December 31 Using Level 2 Inputs |
| Balance Sheet Location | 2013 | 2012 |
Asset derivatives: | | | |
Derivatives designated as hedging instruments: | | | |
Interest rate swaps1 | Other assets | $ | 29 |
| $ | 55 |
|
Foreign currency contracts | Accounts and notes receivable, net | 6 |
| 7 |
|
| | 35 |
| 62 |
|
Derivatives not designated as hedging instruments: | | | |
Foreign currency contracts2 | Accounts and notes receivable, net | 86 |
| 88 |
|
| | | |
Total asset derivatives3 | | $ | 121 |
| $ | 150 |
|
Cash collateral1,2 | Other accrued liabilities | $ | 30 |
| $ | 44 |
|
| | | |
Liability derivatives: | | | |
Derivatives designated as hedging instruments: | | | |
Foreign currency contracts | Other accrued liabilities | $ | 4 |
| $ | 10 |
|
| | | |
Derivatives not designated as hedging instruments: | | | |
Foreign currency contracts | Other accrued liabilities | 70 |
| 76 |
|
Commodity contracts | Other accrued liabilities | 1 |
| 1 |
|
| | 71 |
| 77 |
|
Total liability derivatives3 | | $ | 75 |
| $ | 87 |
|
| |
1. | Cash collateral held as of December 31, 2013 and 2012 represents $17 and $13, respectively, related to interest rate swap derivatives designated as hedging instruments. |
| |
2 | Cash collateral held as of December 31, 2013 and 2012 represents $13 and $31, respectively, related to foreign currency derivatives not designated as hedging instruments. |
| |
3 | The company's derivative assets and liabilities subject to enforceable master netting arrangements totaled $54 at December 31, 2013 and $40 at December 31, 2012. |
Effect of Derivative Instruments
|
| | | | | | | | | | | | | | | | | | | |
| Amount of Gain (Loss) Recognized in OCI1 (Effective Portion) | Amount of Gain (Loss) Recognized in Income2 | |
| 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | Income Statement Classification |
Derivatives designated as hedging instruments: | | | | | | | |
Fair value hedges: | | | | | | | |
Interest rate swaps | $ | — |
| $ | — |
| $ | — |
| $ | (26 | ) | $ | (11 | ) | $ | 26 |
| Interest expense3 |
Cash flow hedges: |
|
| |
| |
| | |
| |
| |
Foreign currency contracts | 9 |
| (2 | ) | (6 | ) | 1 |
| 21 |
| (15 | ) | Net sales |
Commodity contracts | (67 | ) | 7 |
| 23 |
| 24 |
| 44 |
| (81 | ) | Cost of goods sold |
| (58 | ) | 5 |
| 17 |
| (1 | ) | 54 |
| (70 | ) | |
Derivatives not designated as hedging instruments: | | |
| |
| | |
| |
| |
Foreign currency contracts | — |
| — |
| — |
| 35 |
| (157 | ) | (133 | ) | Other income, net4 |
Commodity contracts | — |
| — |
| — |
| (10 | ) | (22 | ) | 3 |
| Cost of goods sold |
Interest rate swaps | — |
| — |
| — |
| — |
| — |
| (1 | ) | Interest expense |
| — |
| — |
| — |
| 25 |
| (179 | ) | (131 | ) | |
Total derivatives | $ | (58 | ) | $ | 5 |
| $ | 17 |
| $ | 24 |
| $ | (125 | ) | $ | (201 | ) | |
| |
1. | OCI is defined as other comprehensive income (loss). |
| |
2. | For cash flow hedges, this represents the effective portion of the gain (loss) reclassified from accumulated OCI into income during the period. For the years ended December 31, 2013, 2012 and 2011, there was no material ineffectiveness with regard to the company's cash flow hedges. |
| |
3. | Gain (loss) recognized in income of derivative is offset to $0 by gain (loss) recognized in income of the hedged item. |
| |
4. | Gain (loss) recognized in other income, net, was partially offset by the related gain (loss) on the foreign currency-denominated monetary assets and liabilities of the company's operations, which were $(163), $(58) and $(13) for 2013, 2012 and 2011, respectively. |
