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Derivative Instruments and Hedging Activities | 3 Months Ended
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Sep. 30, 2012
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments and Hedging Activities Disclosure | Note 3. Derivative Instruments and Hedging Activities The Company recognizes all of its derivative instruments as either assets or liabilities at fair value in its consolidated balance sheet. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. The majority of the Company’s derivatives have not been designated as hedging instruments. For those derivative instruments that are designated and qualify as hedging instruments, a reporting entity must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, a cash flow hedge, or a hedge of a net investment in a foreign operation. As of September 30, 2012 and June 30, 2012, the Company has certain derivatives designated as cash flow hedges. Within the Note 3 tables, zeros represent minimal amounts. Derivatives Not Designated as Hedging Instruments The Company generally follows a policy of using 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. Exchange-traded futures and exchange-traded and OTC options contracts, and forward cash purchase and sales contracts of certain merchandisable agricultural commodities accounted fo r as derivatives are stated at fair value. Unrealized gains and unrealized losses on forward cash purchase contracts, forward foreign currency exchange (FX) contracts, forward cash sales contracts, and exchange-traded and OTC options contracts represent the fair value of such instruments and are classified on the Company’s consolidated balance sheets as other current assets and accrued expenses and other payables, respectively. As of September 30, 2012, the Company held an economic interest in 4.7% of GrainCorp Limited (“GrainCorp”) shares through two transactions with investment bank counterparties. The purpose of these transactions was to facilitate the Company’s planned acquisition of GrainCorp (see Note 14 for more information). One of the transactions is accounted for as an unfunded derivative instrument. The other transaction is a hybrid financial instrument, as defined by applicable accounting standards, whereby the accounting rules require the Company to account for a funded host instrument and a separate embedded derivative instrument. The funded amount on these transactions at September 30, 2012 is reported on the consolidated balance sheet in other current assets. The company is required to measure these derivatives at fair value, which was based on GrainCorp’s stock price as traded on the Australia Stock Exchange. These derivatives are reported as “Other Contracts” in the tables below. The following table sets forth the fair value of derivatives not designated a s hedging instruments as of September 30, 2012 and June 30, 2012.
|  | September 30, 2012 |  | June 30, 2012
|  | Assets |  | Liabilities |  | Assets |  | Liabilities
|  | (In millions) |  | (In millions)
FX Contracts |  | $ | 222 |  | $ | 244 |  | $ | 219 |  | $ | 291
Interest Contracts |  |  | 1 |  |  | - |  |  | - |  |  | -
Commodity Contracts |  |  | 3,370 |  |  | 2,901 |  |  | 2,843 |  |  | 2,704
Other Contracts |  |  | - |  |  | 3 |  |  | 1 |  |  | -
Total |  | $ | 3,593 |  | $ | 3,148 |  | $ | 3,063 |  | $ | 2,995
The following table sets forth the pre-tax gains (losses) on derivatives not designated as hedging instruments that have been included in the consolidated stat ements of earnings for the three months ended September 30, 2012 and 2011.
| Three months ended September 30,
| 2012 | 2011
| (In millions)
Interest Contracts |  |  |  |
Interest expense | $ | 0 | $ | 0
FX Contracts |  |  |  |
Net sales and other operating income | $ | 51 | $ | 16
Cost of products sold |  | 4 |  | (134)
Other income (expense) - net |  | (76) |  | (6)
Commodity Contracts |  |  |  |
Cost of products sold | $ | (436) | $ | 620
Other Contracts |  |  |  |
Other income (expense) - net | $ | (4) | $ | -
Total gain (loss) recognized in earnings | $ | (461) | $ | 496
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 is not included in the table s above. 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 Hedging Strategies For derivative instruments that are designated and qualify as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI and reclassified into earnings in the same line item affected by the hedged transaction and in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument that is in excess of the cumulative change in the cash flows of the hedged item, if any (i.e., the ineffective portion), hedge components excluded from the assessment of effectiveness, and gains and losses related to discontinued hedges are recognized in the consolidated statement of earnings during the current period. For each of the commodity hedge programs described below, the derivatives are designated as cash flow hedges. 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 net sales and other operating income, cost of products sold, interest expense or other income (expense) – net, as applicable. As of September 30, 2012, the Company has $58 million of after-tax gains in AOCI related to gains and losses from commodity cash flow hedge transactions. The Company expects to recognize $57 million of these after-tax gains in its consolidated statement of earnings during the next 12 months. The Company, from time to time, 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 1% and 100% of its mon thly anticipated grind. At September 30, 2012, the Company has designated hedges representing between 1% to 20% of its anticipated monthly grind of corn for the next 17 months. The Company, from time to time, also 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 19% and 30% of the quantity of its anticipated monthly natural gas purchases. At September 30, 2012, the Company has designated hedges representing between 8% to 49% of its anticipated monthly natural gas purchases for the next 15 months. The Company, from time to time, also 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 9 million to 21 million gallons of ethanol per month unde r this program. At September 30, 2012, the Company has designated hedges representing between 0.4 million to 11 million gallons of contracted ethanol sales per month over the next 4 months. To protect against fluctuations in cash flows due to foreign currency exchange rates, the Company from time to time will use forward foreign exchange contracts as cash flow hedges. Certain production facilities have 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 forecasted foreign currency expenditures. During the past 12 months, the Company hedged between $24 million to $30 million of forecasted foreign cu rrency expenditures. As of September 30, 2012, the Company has designated hedges of $25 million of its forecasted foreign currency expenditures. At September 30, 2012, the Company has $2 million of after-tax losses in AOCI related to foreign exchange contracts designated as cash flow hedging instruments. The Company will recognize all of these after-tax losses in its consolidated statement of earnings over the life of the hedged transactions. The Company, f rom time to time, uses treasury-lock agreements and interest rate swaps in order to lock in the Company’s interest rate prior to the issuance or remarketing of its long-term debt. 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 de bt was actually issued. At September 30, 2012, AOCI included $22 million of after-tax gains related to treasury-lock agreements and interest rate swaps. The Company will recognize $1 million of these after-tax gains in its co nsolidated statement of earnings during the next 12 months. The following tables set forth the fair value of derivatives designated a s hedging instruments as of September 30, 2012 and June 30, 2012.
|  | September 30, 2012 |  | June 30, 2012
|  | Assets |  | Liabilities |  | Assets |  | Liabilities
|  | (In millions) |  | (In millions)
Commodity Contracts |  | $ | 2 |  | $ | 1 |  | $ | - |  | $ | -
Total |  | $ | 2 |  | $ | 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 f or the three months ended September 30, 2012 and 2011.
|  |  |  | Three months ended
|  | Consolidated Statement of |  | September 30,
|  | Earnings Locations |  | 2012 | 2011
|  |  |  | (In millions)
Effective amounts recognized in earnings |  |  |  |  |  |  |
FX Contracts |  | Other income/expense – net |  |  | $ (1) | $ | 0
Interest Contracts |  | Interest expense |  |  | 0 |  | 0
Commodity Contracts |  | Cost of products sold |  |  | 89 |  | 0
|  | Net sales and other operating income |  |  | 0 |  | 2
Ineffective amount recognized in earnings |  | Cost of products sold |  |  | (18) |  | (1)
Total amount recognized in earnings |  |  |  |  | $ 70 | $ | 1
The following tables set forth the changes in AOCI related to derivatives gains (losses) for the three months ended September 30, 2012 and 2011.
|  | Three months ended
|  | September 30, 2012
|  | (In millions)
Balance at June 30, 2012 |  | $ | 50
Unrealized gains |  |  | 142
Gains reclassified to earnings |  |  | (88)
Tax effect |  |  | (18)
Balance at September 30, 2012 |  | $ | 86
|  | Three months ended
|  | September 30, 2011
|  | (In millions)
Balance at June 30, 2011 |  | $ | 29
Unrealized gains |  |  | 6
Gains reclassified to earnings |  |  | (3)
Tax effect |  |  | (2)
Balance at September 30, 2011 |  | $ | 30

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7668309&loc=d3e80784-113994 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624171-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624181-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5708775-113959 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5579245-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41641-113959 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5579240-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41638-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41635-113959 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. 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