Fair Value Measurements
Accounting Standards Codification Topic (ASC) 820, Fair Value Measures and Disclosures (ASC 820) defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in a principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
We determine fair market values of readily marketable inventories, derivative contracts and certain other assets, based on the fair value hierarchy established in ASC 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. ASC 820 describes three levels within its hierarchy that may be used to measure fair value, which are as follows:
Level 1: Values are based on unadjusted quoted prices in active markets for identical assets or liabilities. These assets and liabilities include exchange traded derivative contracts, Rabbi Trust investments, deferred compensation investments and available-for-sale investments.
Level 2: Values are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. These assets and liabilities include marketable inventories, interest rate swaps, forward commodity and freight purchase and sales contracts, flat price or basis fixed derivative contracts and other OTC derivatives whose value is determined with inputs that are based on exchange traded prices, adjusted for location specific inputs that are primarily observable in the market or can be derived principally from, or corroborated by, observable market data.
Level 3: Values are generated from 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. These unobservable inputs would reflect our own estimates of assumptions that market participants would use in pricing related assets or liabilities. Valuation techniques might include the use of pricing models, discounted cash flow models or similar techniques.
The following table presents assets and liabilities, included on our Consolidated Balance Sheets, that are recognized at fair value on a recurring basis, and indicates the fair value hierarchy utilized to determine such fair value. Assets and liabilities are classified, in their entirety, based on the lowest level of input that is a significant component of the fair value measurement. The lowest level of input is considered Level 3. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the classification of fair value assets and liabilities within the fair value hierarchy levels.
Fair value measurements at August 31, 2013 and 2012 are as follows:
|
| | | | | | | | | | | | | | | |
| 2013 |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| (Dollars in thousands) |
Assets: | |
| | |
| | | | |
|
Readily marketable inventories |
|
| | $ | 1,203,383 |
| |
| | $ | 1,203,383 |
|
Commodity and freight derivatives | $ | 58,441 |
| | 410,233 |
| |
| | 468,674 |
|
Interest rate swap derivatives | | | 24,139 |
| | | | 24,139 |
|
Foreign currency derivatives | 6,894 |
| | 185 |
| |
| | 7,079 |
|
Other assets | 114,084 |
| |
|
| |
| | 114,084 |
|
| $ | 179,419 |
| | $ | 1,637,940 |
| |
| | $ | 1,817,359 |
|
Liabilities: | |
| | |
| | | | |
|
Commodity and freight derivatives | $ | 59,184 |
| | $ | 399,710 |
| |
| | $ | 458,894 |
|
Interest rate swap derivatives |
|
| | 248 |
| |
| | 248 |
|
Foreign currency derivatives | 5,925 |
| |
|
| |
| | 5,925 |
|
Accrued liability for contingent crack spread payments
related to purchase of noncontrolling interests |
|
| |
|
| | $ | 134,134 |
| | 134,134 |
|
| $ | 65,109 |
| | $ | 399,958 |
| | $ | 134,134 |
| | $ | 599,201 |
|
|
| | | | | | | | | | | | | | | |
| 2012 |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| (Dollars in thousands) |
Assets: | |
| | |
| | | | |
|
Readily marketable inventories |
|
| | $ | 1,702,757 |
| |
| | $ | 1,702,757 |
|
Commodity and freight derivatives | $ | 122,013 |
| | 948,787 |
| |
| | 1,070,800 |
|
Foreign currency derivatives | 978 |
| |
|
| |
| | 978 |
|
Other assets | 75,000 |
| |
|
| |
| | 75,000 |
|
| $ | 197,991 |
| | $ | 2,651,544 |
| |
| | $ | 2,849,535 |
|
Liabilities: | |
| | |
| | | | |
|
Commodity and freight derivatives | $ | 201,475 |
| | $ | 645,452 |
| |
| | $ | 846,927 |
|
Interest rate swap derivatives | | | 544 |
| | | | 544 |
|
Foreign currency derivatives | 2,388 |
| | | | | | 2,388 |
|
Accrued liability for contingent crack spread payments
related to purchase of noncontrolling interests |
|
| |
|
| | $ | 127,516 |
| | 127,516 |
|
| $ | 203,863 |
| | $ | 645,996 |
| | $ | 127,516 |
| | $ | 977,375 |
|
Readily marketable inventories — Our readily marketable inventories primarily include grain, oilseed, and minimally processed soy-based inventories that are stated at fair values. These commodities are readily marketable, have quoted market prices and may be sold without significant additional processing. We estimate the fair market values of these inventories included in Level 2 primarily based on exchange quoted prices, adjusted for differences in local markets. Changes in the fair market values of these inventories are recognized in our Consolidated Statements of Operations as a component of cost of goods sold.
Commodity, freight and foreign currency derivatives — Exchange traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified within Level 1. Our forward commodity purchase and sales contracts, flat price or basis fixed derivative contracts, ocean freight contracts and other OTC derivatives are determined using inputs that are generally based on exchange traded prices and/or recent market bids and offers, adjusted for location specific inputs, and are classified within Level 2. The location specific inputs are generally broker or dealer quotations, or market transactions in either the listed or OTC markets. Changes in the fair values of these contracts are recognized in our Consolidated Statements of Operations as a component of cost of goods sold.
Other assets — Our available-for-sale investments in common stock of other companies, deferred compensation investments and Rabbi Trust assets are valued based on unadjusted quoted prices on active exchanges and are classified within Level 1. Changes in the fair values of these other assets are primarily recognized in our Consolidated Statements of Operations as a component of marketing, general and administrative expenses.
Interest rate swap derivatives — Fair values of our interest rate swap derivatives are determined utilizing valuation models that are widely accepted in the market to value such OTC derivative contracts. The specific terms of the contracts, as well as market observable inputs, such as interest rates and credit risk assumptions, are factored into the models. As all significant inputs are market observable, all interest rate swaps are classified within Level 2. Changes in the fair values of contracts not designated as hedging instruments for accounting purposes are recognized in our Consolidated Statements of Operations as a component of interest, net. Changes in the fair values of contracts designated as hedging instruments are deferred to accumulated other comprehensive loss in the equity section of our Consolidated Balance Sheets and are amortized into earnings within interest, net over the term of the agreements.
Accrued liability for contingent crack spread payments related to purchase of noncontrolling interests — The fair value of the accrued liability was calculated utilizing an average price option model, an adjusted Black-Scholes pricing model commonly used in the energy industry to value options. The model uses market observable inputs and unobservable inputs. Due to significant unobservable inputs used in the pricing model, the liability is classified within Level 3.
|
| | | | | | |
Quantitative Information about Level 3 Fair Value Measurements |
| Fair Value | Valuation | | Range |
Item | August 31, 2013 | Technique | Unobservable Input | (Weighted Average) |
Accrued liability for contingent crack spread payments related to purchase of noncontrolling interests | $ | 134,134 |
| Adjusted Black Scholes option pricing model | Forward crack spread margin on August 31 (a) | $20.46-$22.07 ($20.97) |
| | | Contractual target crack spread margin (b) | $17.50 |
| | | Expected volatility (c) | 80.31% |
| | | Risk-free interest rate (d) | 1.80-2.60% (2.23%) |
| | | Expected life - years (e) | 1.00-4.00 (2.64) |
(a) Represents forward crack spread margin quotes and management estimates based on future settlement dates
(b) Represents the minimum contractual threshold that would require settlement with the counterparties
(c) Represents quarterly adjusted volatility estimates derived from daily historical market data
(d) Represents yield curves for U.S. Treasury securities
(e) Represents the range in the number of years remaining related to each contingent payment
Valuation processes for Level 3 measurements — Management is responsible for determining the fair value of our Level 3 financial instruments. Option pricing methods are utilized, as indicated above. Inputs used in the option pricing models are based on quotes obtained from third party vendors as well as management estimates for periods in which quotes cannot be obtained. Each reporting period, management reviews the unobservable inputs provided by third-party vendors for reasonableness utilizing relevant information available to us. Management also takes into consideration current and expected market trends and compares the liability’s fair value to hypothetical payments using known historical market data to assess reasonableness of the resulting fair value.
Sensitivity analysis of Level 3 measurements — The significant unobservable inputs that are susceptible to periodic fluctuations used in the fair value measurement of the accrued liability for contingent crack spread payments related to the purchase of noncontrolling interests are the adjusted forward crack spread margin and the expected volatility. Significant increases (decreases) in either of these inputs in isolation would result in a significantly higher (lower) fair value measurement. Although changes in the expected volatility are driven by fluctuations in the underlying crack spread margin, changes in expected volatility are not necessarily accompanied by a directionally similar change in the forward crack spread margin. Directional changes in the expected volatility can be affected by a multitude of factors including the magnitude of daily fluctuations in the underlying market data, market trends, timing of fluctuations, and other factors.
The following table represents a reconciliation of liabilities measured at fair value using significant unobservable inputs (Level 3) for the years ended August 31, 2013 and 2012:
|
| | | | | | | | |
| | Level 3 Liabilities |
| | Accrued Liability for Contingent Crack Spread Payments Related to Purchase of Noncontrolling Interests |
| | 2013 | | 2012 |
| | (Dollars in thousands) |
Balance - beginning of year | | $ | 127,516 |
| | |
Purchases | |
|
| | $ | 105,188 |
|
Amounts currently payable | | (16,491 | ) | | |
Total losses included in cost of goods sold | | 23,109 |
| | 22,328 |
|
| | | | |
Balance - end of year | | $ | 134,134 |
| | $ | 127,516 |
|
