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F-9
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Cost of Goods Sold
Cost of goods sold includes costs for direct labor, materials and certain plant overhead costs. Direct labor includes all
compensation and related benefits of non-management personnel involved in the operation of the Company’s ethanol plants.
Grain purchasing and receiving costs, other than labor costs for grain buyers and scale operators, are also included in cost of
goods sold. Direct materials consist of the costs of corn feedstock, denaturant, and process chemicals. Corn feedstock costs
include unrealized gains and losses on related derivative financial instruments not designated as cash flow hedges, inbound
freight charges, inspection costs and transfer costs. Corn feedstock costs also include realized gains and losses on related
derivative financial instruments, ineffectiveness on cash flow hedges, and reclassifications of realized gains and losses on
effective cash flow hedges from accumulated other comprehensive income (loss). Plant overhead costs primarily consist of
plant utilities, plant depreciation and outbound freight charges. Shipping costs incurred directly by the Company, including
railcar lease costs, are also reflected in cost of goods sold.
The Company uses exchange-traded futures and options contracts to minimize the effects of changes in the prices of
agricultural commodities on its agribusiness segment’s grain inventories and forward purchase and sales contracts.
Exchange-traded futures and options contracts are valued at quoted market prices. Commodity inventories, forward purchase
contracts and forward sale contracts in the agribusiness segment are valued at market prices, where available, or other market
quotes adjusted for differences, primarily transportation, between the exchange-traded market and the local markets on which
the terms of the contracts are based. Changes in the market value of grain inventories, forward purchase and sale contracts,
and exchange-traded futures and options contracts in the agribusiness segment, are recognized in earnings as a component of
cost of goods sold. These contracts are predominantly settled in cash. The Company is exposed to loss in the event of non-
performance by the counter-party to forward purchase and forward sales contracts.
Derivative Financial Instruments
To minimize the risk and the effects of the volatility of commodity price changes primarily related to corn, ethanol and
natural gas, the Company uses various derivative financial instruments, including exchange-traded futures, and exchange-
traded and over-the-counter options contracts. The Company monitors and manages this exposure as part of its overall risk
management policy. As such, the Company seeks to reduce the potentially adverse effects that the volatility of these markets
may have on its operating results. The Company may take hedging positions in these commodities as one way to mitigate
risk. While the Company attempts to link its hedging activities to purchase and sales activities, there are situations where
these hedging activities can themselves result in losses.
By using derivatives to hedge exposures to changes in commodity prices, the Company has exposures on these
derivatives to credit and market risk. The Company is exposed to credit risk that the counterparty might fail to fulfill its
performance obligations under the terms of the derivative contract. The Company minimizes its credit risk by entering into
transactions with high quality counterparties, limiting the amount of financial exposure it has with each counterparty and
monitoring the financial condition of its counterparties. Market risk is the risk that the value of the financial instrument might
be adversely affected by a change in commodity prices or interest rates. The Company manages market risk by incorporating
monitoring parameters within its risk management strategy that limit the types of derivative instruments and derivative
strategies the Company uses, and the degree of market risk that may be undertaken by the use of derivative instruments.
The Company evaluates its contracts that involve physical delivery to determine whether they may qualify for the normal
purchases or normal sales exemption and are expected to be used or sold over a reasonable period in the normal course of
business. Any contracts that do not meet the normal purchase or sales criteria are recorded at fair value with the change in fair
value recorded in operating income unless the contracts qualify for, and the Company elects, hedge accounting treatment.
Certain qualifying derivatives within the ethanol production segment are designated as cash flow hedges. Prior to
entering into cash flow hedges the Company evaluates the derivative instrument to ascertain its effectiveness. 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, the Company would discontinue cash flow hedge
treatment, which would affect earnings. These derivative financial instruments are recognized in current assets or other
current liabilities at fair value.
Concentrations of Credit Risk
In the normal course of business, the Company is exposed to credit risk resulting from the possibility that a loss may
occur from the failure of another party to perform according to the terms of a contract. The Company transacts sales of