Derivative Instruments & Hedging Activities
Within the Note 4 tables, zeros represent minimal amounts.
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, 2013 and 2012.
|
| | | | | | | | | | | | | | | |
| December 31, 2013 | | December 31, 2012 |
| Assets | | Liabilities | | Assets | | Liabilities |
| (In millions) |
| | | | | | | |
Foreign Currency Contracts | $ | 118 |
| | $ | 166 |
| | $ | 170 |
| | $ | 215 |
|
Interest Contracts | 1 |
| | — |
| | 1 |
| | — |
|
Commodity Contracts | 850 |
| | 649 |
| | 1,209 |
| | 839 |
|
Total | $ | 969 |
| | $ | 815 |
| | $ | 1,380 |
| | $ | 1,054 |
|
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, 2013 and 2012, the six months ended December 31, 2012 and 2011, and the years ended June 30, 2012 and 2011.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | Six Months Ended | | Year Ended |
(In millions) | December 31 | | December 31 | | June 30 |
| 2013 | | 2012 | | 2012 | | 2011 | | 2012 | | 2011 |
| | | (Unaudited) | | | | (Unaudited) | | | | |
| | | | | | | | | | | |
Interest Contracts | | | | | | | |
| | |
| | |
|
Interest expense | $ | 0 |
| | $ | — |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
Other income (expense) - net | 1 |
| | — |
| | — |
| | — |
| | — |
| | 30 |
|
Foreign Currency Contracts | | | | | |
| | |
| | |
| | |
|
Revenues | $ | 108 |
| | $ | 213 |
| | $ | 129 |
| | $ | 33 |
| | $ | 117 |
| | $ | (14 | ) |
Cost of products sold | (157 | ) | | (188 | ) | | (49 | ) | | (116 | ) | | (255 | ) | | 150 |
|
Other income (expense) - net | 61 |
| | 142 |
| | 94 |
| | (69 | ) | | (21 | ) | | 43 |
|
Commodity Contracts | | | | | |
| | |
| | |
| | |
|
Cost of products sold | $ | 301 |
| | $ | (387 | ) | | $ | 136 |
| | $ | (4 | ) | | $ | (527 | ) | | $ | (1,303 | ) |
Other Contracts | | | | | |
| | |
| | |
| | |
|
Other income (expense) - net | $ | — |
| | $ | 57 |
| | $ | 58 |
| | $ | — |
| | $ | (1 | ) | | $ | 0 |
|
Total gain(loss) recognized in earnings | $ | 314 |
| | $ | (163 | ) | | $ | 368 |
| | $ | (156 | ) | | $ | (687 | ) | | $ | (1,094 | ) |
The Company recognized in earnings $30 million of pre-tax gains from changes in fair value of interest rate swaps for the year ended June 30, 2011.
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 tables below. 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, 2013 and 2012, the Company has certain derivatives designated as cash flow hedges. As of December 31, 2013, the Company has certain derivatives designated as 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, 2013, the Company has $9 million in accrued expenses and other payables representing the fair value of the interest rate swaps and a corresponding decrease 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, 2013, the Company has $15 million of after-tax losses in AOCI related to gains and losses from commodity cash flow hedge transactions. The Company expects to recognize the $15 million of losses 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 15% and 25% of its monthly anticipated grind. At December 31, 2013, the Company has designated hedges representing between 2% to 23% of its anticipated monthly grind of corn for the next 12 months.
The Company 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 13% and 66% of the quantity of its anticipated monthly natural gas purchases. At December 31, 2013, the Company has designated hedges representing between 17% to 21% of its anticipated monthly natural gas purchases for the next 3 months.
The Company 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 and 14 million gallons of ethanol per month under this program. At December 31, 2013, the Company has designated hedges representing between 1 million to 12 million gallons of contracted ethanol sales per month over the next 6 months.
The Company uses forward foreign exchange contracts as cash flow hedges to protect against fluctuations in cash flows due to changes in foreign currency exchange rates. The Company may have revenues associated with sales contracts, costs associated with commodity purchase contracts, manufacturing expenses, and equipment purchases denominated in non-functional currencies. To reduce the risk of fluctuations in cash flows due to changes in the exchange rate between functional versus non-functional currencies, the Company will hedge some portion of the qualifying forecasted non-functional currency expenditures. During the past 12 months, the Company hedged between $12 million and $18 million of forecasted foreign currency expenditures. As of December 31, 2013, the Company has designated hedges for $12 million of its forecasted foreign currency expenditures. At December 31, 2013, the Company has $0.3 million of after-tax losses in AOCI related to foreign exchange contracts designated as cash flow hedging instruments. The Company will recognize the $0.3 million of losses in its consolidated statement of earnings over the life of the hedged transactions.
The Company used treasury lock agreements and interest rate swaps in order to lock in the Company’s interest rate prior to the issuance or remarketing of a long-term debt instrument. 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 December 31, 2013, AOCI included $21 million of after-tax gains related to treasury-lock agreements and interest rate swaps. The Company will recognize $21 million of these after-tax gains in its consolidated statement of earnings over the terms of the hedged items, which range from 10 to 30 years.
The following tables set forth the fair value of derivatives designated as hedging instruments as of December 31, 2013 and 2012.
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| | | | | | | | | | | | | | | |
| December 31, 2013 | | December 31, 2012 |
| Assets | | Liabilities | | Assets | | Liabilities |
| (In millions) |
| | | | | | | |
Commodity Contracts | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 0 |
|
Interest Contracts | 0 |
| | 9 |
| | — |
| | — |
|
Total | $ | 0 |
| | $ | 9 |
| | $ | 1 |
| | $ | — |
|
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, 2013 and 2012, the six months ended December 31, 2012 and 2011, and the years ended June 30, 2012 and 2011.
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| | | | | | | | | | | | | | | | |
| | Year Ended | | Six Months Ended |
| Consolidated Statement of | December 31 | | December 31 |
(In millions) | Earnings Locations | 2013 | | 2012 | | 2012 | | 2011 |
| | | | (Unaudited) | | | | (Unaudited) |
Effective amounts recognized in earnings | | | | | | | |
FX Contracts | Other income/expense -net | $ | (1 | ) | | $ | (1 | ) | | $ | (1 | ) | | $ | (1 | ) |
Interest Contracts | Interest expense | 1 |
| | 1 |
| | 0 |
| | 0 |
|
Commodity Contracts | Cost of products sold | (41 | ) | | 152 |
| | 158 |
| | 11 |
|
| Revenues | 4 |
| | (3 | ) | | 2 |
| | 8 |
|
| | | | | | | | |
Ineffective amount recognized in earnings | | | | | |
| | |
|
Interest contracts | Interest expense | — |
| | — |
| | — |
| | — |
|
Commodity contracts | Cost of products sold | (120 | ) | | (20 | ) | | (30 | ) | | 39 |
|
Total amount recognized in earnings | $ | (157 | ) | | $ | 129 |
| | $ | 129 |
| | $ | 57 |
|
| | | | | | | | |
| Consolidated Statement of | | | | | Year Ended June 30 |
(In millions) | Earnings Locations | | | | | 2012 | | 2011 |
| | | | | | | | |
Effective amounts recognized in earnings | | | | | |
| | |
|
FX Contracts | Other income/expense – net | | | | | $ | (1 | ) | | $ | 0 |
|
Interest Contracts | Interest expense | | | | | 1 |
| | 0 |
|
Commodity Contracts | Cost of products sold | | | | | 5 |
| | 375 |
|
| Revenues | | | | | 3 |
| | (13 | ) |
| | | | | | | | |
Ineffective amount recognized in earnings | | | | | |
| | |
|
Interest contracts | Interest expense | | | | | — |
| | 1 |
|
Commodity contracts | Cost of products sold | | | | | 49 |
| | 46 |
|
Total amount recognized in earnings | | | | | $ | 57 |
| | $ | 409 |
|
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.
