Page 69 - New8814 GP 2011_AR-fnl

Basic HTML Version

49
49
We attempt to reduce the market risk associated with fluctuations in the price of corn, natural gas, ethanol, distillers
grains and corn oil by employing a variety of risk management and economic hedging strategies. Strategies include the use of
forward fixed-price physical contracts and derivative financial instruments, such as futures and options executed on the
Chicago Board of Trade and the New York Mercantile Exchange.
We focus on locking in operating margins based on a model that continually monitors market prices of corn, natural gas
and other input costs against prices for ethanol and distillers grains at each of our production facilities. We create offsetting
positions by using a combination of forward fixed-price physical purchases and sales contracts and derivative financial
instruments. As a result of this approach, we frequently have gains on derivative financial instruments that are conversely
offset by losses on forward fixed-price physical contracts or inventories and vice versa. In our ethanol production segment,
gains and losses on derivative financial instruments are recognized each period in operating results while corresponding gains
and losses on physical contracts are generally designated as normal purchases or normal sales contracts and are not
recognized until quantities are delivered or utilized in production. For cash flow hedges, any ineffectiveness is recognized in
current period results, while other unrealized gains and losses are reflected in accumulated other comprehensive income until
gains and losses from the underlying hedged transaction are realized. In the event that it becomes probable that a forecasted
transaction will not occur, we would discontinue cash flow hedge treatment, which would affect earnings. During the year
ended December 31, 2011, revenues and cost of goods sold included net losses from derivative financial instruments of $45.3
million and $39.5 million respectively. To the extent the net gains or losses from settled derivative instruments are related to
hedging current period production, they are generally offset by physical commodity purchases or sales resulting in the
realization of the intended operating margins. However, our results of operations are impacted when there is a mismatch of
gains or losses associated with the change in fair value of derivative instruments at the reporting period when the physical
commodity purchase or sales has not yet occurred since they are designated as a normal purchase or normal sale.
In our agribusiness segment, inventory positions, physical purchase and sale contracts, and financial derivatives are
marked to market with gains and losses included in results of operations. The market value of derivative financial instruments
such as exchange-traded futures and options has a high, but not perfect, correlation to the underlying market value of grain
inventories and related purchase and sale contracts.
Ethanol Production Segment
A sensitivity analysis has been prepared to estimate our ethanol production segment exposure to ethanol, corn, distillers
grains and natural gas price risk. Market risk related to these factors is estimated as the potential change in net income
resulting from hypothetical 10% changes in prices of our expected corn and natural gas requirements, and ethanol and
distillers grains output for a one-year period from December 31, 2011. This analysis excludes the impact of risk management
activities that result from our use of fixed-price purchase and sale contracts and derivatives. The results of this analysis,
which may differ from actual results, are as follows (in thousands):
Commodity
EstimatedTotal
Volume
Requirements for
the Next 12 Months
Unit of
Measure
Ethanol
740,000
Gallons
$
102,154
Corn
265,000
Bushels
$
102,445
Distillers grains
2,100
Tons
(1)
$
17,396
Natural gas
20,300
MMBTU
(2)
$
3,638
(1) Dist illers grains quant it ies are stated on an equivalent dried ton basis.
(2) Millions of Brit ish Thermal Units
Net Income Effect
of Approximate
10% Change
in Price
Corn Oil Production Segment
A sensitivity analysis has been prepared to estimate our corn oil production segment exposure to corn oil price risk.
Market risk related to these factors is estimated as the potential change in net income resulting from hypothetical 10%
changes in prices of our expected corn oil output for a one-year period from December 31, 2011. This analysis includes the
impact of risk management activities that result from our use of fixed-price sale contracts. Market risk at December 31, 2011,
based on the estimated net income effect resulting from a hypothetical 10% change in such prices, was approximately $0.4
million.