v3.20.1
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 3 Months Ended
Mar. 31, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses derivative instruments to manage several market risks, such as interest rate, foreign currency, and commodity risk. Some of those hedges the Company enters into qualify for hedge accounting in the financial statements (Hedge Accounting Derivatives) and some, while intended as economic hedges, do not qualify or are not designated for hedge accounting (Economic Hedge Derivatives). As these derivatives impact the financial statements in different ways, they are discussed separately below.
Hedge Accounting Derivatives - The Company uses derivatives in qualifying hedge accounting relationships to manage certain of its interest rate, foreign currency, and commodity risks. In executing these hedge strategies, the Company primarily relies on the shortcut and critical terms match methods in designing its hedge accounting strategy, which results in little to no net earnings impact for these hedge relationships. The Company monitors these relationships on a quarterly basis and performs a quantitative analysis to validate the assertion that the hedges are highly effective if there are changes to the hedged item or hedging derivative.
Fair value hedges - These derivatives are used to hedge the effect of interest rate and currency exchange rate changes on certain long-term debt. Under fair value hedge accounting, the derivative is measured at fair value and the carrying value of hedged debt is adjusted for the change in value related to the exposure being hedged, with both adjustments offset to earnings. In other words, the earnings effect of an increase in the fair value of the derivative will be substantially offset by the earnings effect of the increase in the carrying value of the hedged debt. The net impact of fair value hedge accounting for interest rate swaps is recognized in Interest expense. For cross currency swaps the changes in currency risk on the derivative are recognized in Foreign exchange gains (losses), and the changes in interest rate risk are recognized in Interest expense. Changes in basis risk are held in Accumulated other comprehensive income (loss) until realized through the coupon.
Cash flow hedges of currency risk - The Company manages currency risk on certain forecasted purchases, sales, and selling, general and administrative expenses with currency forwards. The change in the value of the forward is held in Accumulated other comprehensive income (loss) until the transaction affects earnings, at which time the change in value of the currency forward is reclassified to Net sales, Cost of goods sold or Selling, general and administrative expenses. These hedges mature at various times through December 2020. Of the amount currently in Accumulated other comprehensive income (loss), $9 million of deferred losses is expected to be reclassified to earnings in the next twelve months.
Net investment hedges - The Company hedges the currency risk of certain of its foreign subsidiaries with currency forwards and intercompany loans for which the currency risk is remeasured through Accumulated other comprehensive income (loss). For currency forwards, the forward method is used. The change in the value of the forward is classified in Accumulated other comprehensive income (loss) until the transaction affects earnings.
The table below provides information about the balance sheet values of hedged items and the notional amount of derivatives used in hedging strategies. The notional amount of the derivative is the number of units of the underlying (for example, the notional principal amount of the debt in an interest rate swap). The notional amount is used to compute interest or
other payment streams to be made under the contract and is a measure of the Company’s level of activity. The Company discloses derivative notional amounts on a gross basis.
(US$ in millions)
March 31, 2020
December 31, 2019
Unit of
Measure
Hedging instrument type:
 
 
 
Fair value hedges of interest rate risk
 
 
 
 
Carrying value of hedged debt
$
2,322

$
2,279

$ Notional
 
Cumulative adjustment to long-term debt from application of hedge accounting
$
102

$
37

$ Notional
 
Interest rate swap - notional amount
$
2,226

$
2,249

$ Notional
 
 
 
 
 
Fair value hedges of currency risk
 
 
 
 
Carrying value of hedged debt
$
283

$
281

$ Notional
 
Cross currency swap - notional amount
$
283

$
281

$ Notional
 
 
 
 
 
Cash flow hedges of currency risk
 
 
 
 
Foreign currency forward - notional amount
$
—

$
99

$ Notional
 
Foreign currency option - notional amount
$
75

$
75

$ Notional
 
 
 
 
 
Net investment hedges
 
 
 
 
Foreign currency forward - notional amount
$
938

$
928

$ Notional
 
Carrying value of non-derivative hedging instrument
$
873

$
895

$ Notional

Economic Hedge Derivatives - In addition to using derivatives in qualifying hedge relationships, the Company enters into derivatives to economically hedge its exposure to a variety of market risks it incurs in the normal course of operations.
Interest rate derivatives are used to hedge exposures to the Company's financial instrument portfolios and debt issuances. The impact of changes in fair value of these instruments is primarily presented in Interest expense.
Currency derivatives are used to hedge the balance sheet and commercial exposures that arise from the Company's global operations. The impact of changes in fair value of these instruments is presented in Cost of goods sold when hedging commercial exposures and Foreign exchange gains (losses) when hedging monetary exposures.
Agricultural commodity derivatives are used primarily to manage the Company's inventory and forward purchase and sales contracts. Contracts to purchase agricultural commodities generally relate to current or future crop years for delivery periods quoted by regulated commodity exchanges. Contracts for the sale of agricultural commodities generally do not extend beyond one future crop cycle. The impact of changes in fair value of these instruments is presented in Cost of goods sold.
The Company uses derivative instruments referred to as forward freight agreements ("FFA") and FFA options to hedge portions of its current and anticipated ocean freight costs. The impact of changes in fair value of these instruments is presented in Cost of goods sold.
The Company uses energy derivative instruments to manage its exposure to volatility in energy costs. Hedges may be entered into for natural gas, electricity, coal and fuel oil, including bunker fuel. The impact of changes in fair value of these instruments is presented in Cost of goods sold.
The Company may also enter into other derivatives, including credit default swaps and equity derivatives to manage exposure to credit risk and broader macroeconomic risks, respectively. The impact of changes in fair value of these instruments is presented in Cost of goods sold.
The table below summarizes the volume of economic derivatives as of March 31, 2020 and December 31, 2019. For those contracts traded bilaterally through the OTC markets (e.g., forwards, forward rate agreements ("FRA") and swaps), the gross position is provided. For exchange traded (e.g., futures, FFAs and options) and cleared positions (e.g., energy swaps), the net position is provided.
 
March 31,
December 31,
 
 
2020
2019
Unit of
Measure
 
Long
(Short)
Long
(Short)
Interest rate
 

 
 

 

 
   Swaps
$
3,286

$
(164
)
$
4,062

$
(39
)
$ Notional
   FRAs
$
169

$
(169
)
$
213

$
(418
)
$ Notional
Currency
 
 
 
 
 
   Forwards
$
10,187

$
(14,926
)
$
7,164

$
(9,983
)
$ Notional
   Swaps
$
299

$
(317
)
$
191

$
(170
)
$ Notional
   Futures
$
1

$
—

$
—

$
(16
)
$ Notional
   Options
$
124

$
(165
)
$
132

$
(157
)
Delta
Agricultural commodities
 
 
 
 
 
   Forwards
35,030,369

(32,400,559
)
27,914,141

(25,321,595
)
Metric Tons
   Swaps
193,287

(543,493
)
—

(1,114,704
)
Metric Tons
   Futures
—

(9,857,392
)
—

(1,960,051
)
Metric Tons
   Options
110,536

—

—

(115,232
)
Metric Tons
Ocean freight
 
 
 
 
 
   FFA
5,033

—

—

(133
)
Hire Days
   FFA options
397

—

42

—

Hire Days
Natural gas
 
 
 
 
 
   Swaps
811,374

—

215,640

—

MMBtus
   Futures
9,740,000

—

2,802,500

—

MMBtus
Energy - other
 
 
 
 
 
   Forwards
5,534,290

—

5,534,290

—

Metric Tons
   Swaps
370,979

—

239,836

—

Metric Tons
Other
 
 
 
 
 
Swaps and futures
$
10

$
—

$
50

$
(14
)
$ Notional

The Effect of Derivative Instruments and Hedge Accounting on the Condensed Consolidated Statements of Income
The tables below summarize the net effect of derivative instruments and hedge accounting on the condensed consolidated statements of income for the three months ended March 31, 2020 and 2019.
 
 
Gain (Loss) Recognized in
Income on Derivative Instruments
 
 
Three Months Ended March 31,
(US$ in millions)
 
2020
2019
Income statement classification
Type of derivative
 
 
Net sales
 
 
 
Hedge accounting
Foreign currency
$
—

$
1

 
 
 
 
Cost of goods sold
 
 
 
   Economic hedges
Foreign currency
(917
)
75

 
Commodities
721

138

 
Other (1)
(81
)
28

     Total Cost of goods sold
 
$
(277
)
$
241

 
 
 
 
Interest expense
 
 
 
   Hedge accounting
Interest rate
$
—

$
(3
)
   Economic hedges
Interest rate
—

(3
)
     Total Interest expense
 
$
—

$
(6
)
 
 
 
 
Foreign exchange gains (losses)
 
 
 
   Hedge accounting
Foreign currency
$
7

$
(1
)
   Economic hedges
Foreign currency
(184
)
38

     Total Foreign exchange gains (losses)
 
$
(177
)
$
37

 
 
 
 
Other comprehensive income (loss)
 
 
 
Gains and losses on derivatives used as fair value hedges of foreign currency risk included in other comprehensive income (loss) during the period
$
3

$
(2
)
Gains and losses on derivatives used as cash flow hedges of foreign currency risk included in other comprehensive income (loss) during the period
$
(14
)
$
—

Gains and losses on derivatives used as net investment hedges included in other comprehensive income (loss) during the period
$
46

$
(38
)
Foreign currency gains and losses on intercompany loans used as net investment hedges included in other comprehensive income (loss) during the period
$
22

$
17

 
 
 
Amounts released from accumulated other comprehensive income (loss) during the period
 
 
   Cash flow hedge of foreign currency risk
$
(6
)
$
1

(1)
Other includes the results from freight, energy and other derivatives.