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Financial Instruments, Derivatives and Hedging Activities | 3 Months Ended
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Mar. 31, 2019
Financial Instruments, Derivatives and Hedging Activities |
Financial Instruments, Derivatives and Hedging Activities | 6. Financial Instruments, Derivatives and Hedging Activities The Company is exposed to market risk stemming from changes in commodity prices (primarily corn and natural gas), foreign currency exchange rates and interest rates. In the normal course of business, the Company actively manages its exposure to these market risks by entering into various hedging transactions, authorized under established policies that place clear controls on these activities. These transactions utilize exchange-traded derivatives or over-the-counter derivatives with investment-grade counterparties. Derivative financial instruments currently used by the Company consist of commodity-related futures, options and swap contracts, foreign currency-related forward contracts and interest rate swaps. Commodity price hedging: The Company’s principal use of derivative financial instruments is to manage commodity price risk relating to anticipated purchases of corn and natural gas to be used in the manufacturing process, generally over the next 12 to 24 months. The Company maintains a commodity-price risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by commodity-price volatility. For example, the manufacturing of the Company’s products requires a significant volume of corn and natural gas. Price fluctuations in corn and natural gas cause the actual purchase price of corn and natural gas to differ from anticipated prices. To manage price risk related to corn purchases, the Company uses corn futures and options contracts that trade on regulated commodity exchanges to lock-in its corn costs associated with fixed-priced customer sales contracts. The Company uses over-the-counter natural gas swaps to hedge a portion of its natural gas usage. These derivative financial instruments limit the impact that volatility resulting from fluctuations in market prices will have on corn and natural gas purchases. A majority of corn derivatives have been designated as cash flow hedging instruments. The Company also enters into futures contracts to hedge price risk associated with fluctuations in the market price of ethanol and soybean oil. The Company’s natural gas, ethanol and soybean oil derivatives have been designated as cash flow hedging instruments. The Company enters into certain corn derivative instruments that are not designated as hedging instruments as defined by ASC 815, Derivatives and Hedging. Therefore, the realized and unrealized gains and losses from these instruments are recognized in cost of sales during each accounting period. These derivative instruments also mitigate commodity price risk related to anticipated purchases of corn. For commodity hedges designated as cash flow hedges, unrealized gains and losses associated with marking the commodity hedging contracts to market (fair value) are recorded as a component of other comprehensive income (“OCI”) and included in the equity section of the Condensed Consolidated Balance Sheets as part of accumulated other comprehensive income/loss (“AOCI”). These amounts are subsequently 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, or in the month a hedge is determined to be ineffective. The Company assesses the effectiveness of a commodity hedge contract based on changes in the contract’s fair value. The changes in the market value of such contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in the price of the hedged items. Gains and losses from cash flow hedging instruments reclassified from AOCI to earnings are reported as Cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows. As of March 31, 2019, AOCI included $11 million of losses (net of income taxes of $5 million), pertaining to commodities-related derivative instruments designated as cash flow hedges. As of December 31, 2018, AOCI included $2 million of losses (net of tax of $2 million), pertaining to commodities-related derivative instruments designated as cash flow hedges. Interest rate hedging: The Company assesses its exposure to variability in interest rates by identifying and monitoring changes in interest rates that may adversely impact future cash flows and the fair value of existing debt instruments, and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate risk attributable to both the Company’s outstanding and forecasted debt obligations as well as the Company’s offsetting hedge positions. The risk management control systems involve the use of analytical techniques, including sensitivity analysis, to estimate the expected impact of changes in interest rates on future cash flows and the fair value of the Company’s outstanding and forecasted debt instruments. Derivative financial instruments that have been used by the Company to manage its interest rate risk consist of interest rate swaps and T-Locks. The Company has an interest rate swap agreement that effectively converts the interest rates on $200 million of its $400 million of 4.625 percent senior notes due November 1, 2020, to variable rates. This swap agreement calls for the Company to receive interest at the fixed coupon rate of the respective notes and to pay interest at a variable rate based on the six-month U.S. LIBOR plus a spread. The Company has designated this interest rate swap agreement as a hedge of the changes in fair value of the underlying debt obligations attributable to changes in interest rates and accounts for it as a fair value hedging instrument. The change in fair value of an interest rate swap designated as a hedging instrument that effectively offsets the variability in the fair value of outstanding debt obligations is reported in earnings. This amount offsets the gain or loss (the change in fair value) of the hedged debt instrument that is attributable to changes in interest rates (the hedged risk), which is also recognized in earnings. The fair value of the interest rate swap agreement as of March 31, 2019 was less than a $1 million gain, and is reflected in the Condensed Consolidated Balance Sheets within Non-current liabilities, with an offsetting amount recorded in Long-term debt to adjust the carrying amount of the hedged debt obligations. As of December 31, 2018, the fair value of the interest rate swap agreement was a $1 million loss, and is reflected in the Condensed Consolidated Balance Sheets within Non-current liabilities, with an offsetting amount recorded in Long-term debt to adjust the carrying amount of hedged debt obligations. The Company periodically enters into T-Locks to hedge its exposure to interest rate changes. The T-Locks are designated as hedges of the variability in cash flows associated with future interest payments caused by market fluctuations in the benchmark interest rate until the fixed interest rate is established, and are accounted for as cash flow hedges. Accordingly, changes in the fair value of the T-Locks are recorded to AOCI until the consummation of the underlying debt offering, at which time any realized gain (loss) is amortized to earnings over the life of the debt. The Company did not have any T-Locks outstanding as of March 31, 2019 or December 31, 2018. As of March 31, 2019, AOCI included $2 million of losses (net of income taxes of $1 million) related to settled T-Locks. As of December 31, 2018, AOCI included $2 million of losses (net of income taxes of $1 million) related to settled T-Locks. These deferred losses are being amortized to Financing costs, net over the terms of the senior notes with which they are associated. Foreign currency hedging: Due to the Company’s global operations, including operations in many emerging markets, it is exposed to fluctuations in foreign currency exchange rates. As a result, the Company has exposure to translational foreign exchange risk when the results of its foreign operations are translated to U.S. dollars and to transactional foreign exchange risk when transactions not denominated in the functional currency are revalued. The Company primarily uses derivative financial instruments such as foreign currency forward contracts, swaps and options to manage its transactional foreign exchange risk. The Company enters into foreign currency derivative instruments that are designated as both cash flow hedging instruments as well as instruments not designated as hedging instruments as defined by ASC 815, Derivatives and Hedging. The Company enters into both of these hedge types in order to mitigate transactional foreign exchange risk. Gains and losses from derivative financial instruments not designated as hedging instruments are marked to market in earnings during each accounting period. The notional volume of the Company’s foreign currency derivatives not designated as hedging instruments included forward sales contracts of $866 million and $621 million as well as forward purchase contracts worth $406 million and $165 million as of March 31, 2019 and December 31, 2018, respectively. The Company’s foreign currency derivatives designated as cash flow hedging instruments include a $1 million gain (net of income taxes of $1 million) in AOCI as of March 31, 2019. The amount included in AOCI related to these hedges at December 31, 2018 was not significant. The notional volume of the Company’s foreign currency cash flow hedging instruments included forward sales contracts of $274 million and $345 million as well as forward purchase contracts of $227 million and $275 million as of March 31, 2019 and December 31, 2018, respectively. The fair value and balance sheet location of the Company’s derivative instruments, presented gross in the Condensed Consolidated Balance Sheets, are reflected below:
|  | Fair value of hedging instruments as of March 31, 2019 |
|  | Designated Hedging Instruments (in millions) |  | Non-Designated Hedging Instruments (in millions) |
Balance Sheet Location |  |  | Commodity Contracts |  |  | Foreign Currency Contracts |  |  | Interest Rate Contracts |  | Total |  |  | Commodity Contracts |  |  | Foreign Currency Contracts |  |  | Interest Rate Contracts |  | Total |
Accounts receivable, net |  | $ | 2 |  | $ | 2 |  | $ | — |  | $ | 4 |  | $ | — |  | $ | 7 |  | $ | — |  | $ | 7 |
Other assets |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 1 |  |  | — |  |  | 1 |
Assets |  |  | 2 |  |  | 2 |  |  | — |  |  | 4 |  |  | — |  |  | 8 |  |  | — |  |  | 8 |
Accounts payable and accrued liabilities |  |  | 12 |  |  | — |  |  | — |  |  | 12 |  |  | 4 |  |  | 7 |  |  | — |  |  | 11 |
Non-current liabilities |  |  | 3 |  |  | — |  |  | — |  |  | 3 |  |  | — |  |  | 3 |  |  | — |  |  | 3 |
Liabilities |  |  | 15 |  |  | — |  |  | — |  |  | 15 |  |  | 4 |  |  | 10 |  |  | — |  |  | 14 |
Net Assets/(Liabilities) |  | $ | (13) |  | $ | 2 |  | $ | — |  | $ | (11) |  | $ | (4) |  | $ | (2) |  | $ | — |  | $ | (6) |
|  | Fair value of hedging instruments as of December 31, 2018 |
|  | Designated Hedging Instruments (in millions) |  | Non-Designated Hedging Instruments (in millions) |
Balance Sheet Location |  |  | Commodity Contracts |  |  | Foreign Currency Contracts |  |  | Interest Rate Contracts |  | Total |  |  | Commodity Contracts |  |  | Foreign Currency Contracts |  |  | Interest Rate Contracts |  | Total |
Accounts receivable, net |  | $ | 5 |  | $ | 1 |  | $ | — |  | $ | 6 |  | $ | — |  | $ | 16 |  | $ | — |  | $ | 16 |
Other assets |  |  | 1 |  |  | — |  |  | — |  |  | 1 |  |  | — |  |  | 1 |  |  | — |  |  | 1 |
Assets |  |  | 6 |  |  | 1 |  |  | — |  |  | 7 |  |  | — |  |  | 17 |  |  | — |  |  | 17 |
Accounts payable and accrued liabilities |  |  | 6 |  |  | — |  |  | — |  |  | 6 |  |  | 3 |  |  | 9 |  |  | — |  |  | 12 |
Non-current liabilities |  |  | 3 |  |  | — |  |  | 1 |  |  | 4 |  |  | — |  |  | 4 |  |  | — |  |  | 4 |
Liabilities |  |  | 9 |  |  | — |  |  | 1 |  |  | 10 |  |  | 3 |  |  | 13 |  |  | — |  |  | 16 |
Net Assets/(Liabilities) |  | $ | (3) |  | $ | 1 |  | $ | (1) |  | $ | (3) |  | $ | (3) |  | $ | 4 |  | $ | — |  | $ | 1 |
As of March 31, 2019, the Company had outstanding futures and option contracts that hedged the forecasted purchase of approximately 77 million bushels of corn. The Company is unable to directly hedge price risk related to coproduct sales; however, it occasionally enters into hedges of soybean oil (a competing product to corn oil) in order to mitigate the price risk of corn oil sales. As of March 31, 2019, the Company had outstanding futures or option contracts hedging approximately 22 million pounds of soybean oil. The Company also had outstanding swap and option contracts that hedged the forecasted purchase of approximately 31 million mmbtu’s of natural gas at March 31, 2019. Additionally, as of March 31, 2019, the Company had no outstanding ethanol futures contracts. Additional information pertaining to the Company’s fair value hedges is presented below:
Line item in the statement of financial position in which the hedged item is included (in millions) |  | Carrying Amount of the Hedged Assets/(Liabilities) |  | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of Hedged Assets/(Liabilities) |
Balance sheet date as of |  | March 31, 2019 |  | December 31, 2018 |  | March 31, 2019 |  | December 31, 2018 |
Interest Rate Contracts: |  |  |  |  |  |  |  |  |  |  |  |  |
Long-Term Debt |  | $ | (200) |  | $ | (199) |  | $ | — |  | $ | 1 |
Additional information relating to the Company’s derivative instruments is presented below:
|  |  |  |  |  |  |  | Location of Gains |  |  |  |  |  |  |
|  | Amount of Gains (Losses) |  | (Losses) |  | Amount of Gains (Losses) |
Derivatives in Cash-Flow |  | Recognized in OCI |  | Reclassified from |  | Reclassified from AOCI into Income |
Hedging Relationships |  | Three Months Ended March 31, |  | AOCI |  | Three Months Ended March 31, |
(in millions, pre-tax) |  | 2019 |  | 2018 |  | into Income |  | 2019 |  | 2018 |
Commodity contracts |  | $ | (10) |  | $ | 20 |  | Cost of sales |  | $ | 2 |  | $ | (5) |
Foreign currency contracts |  |  | (2) |  |  | 2 |  | Net sales/Cost of sales |  |  | (3) |  |  | 1 |
Interest rate contracts |  |  | — |  |  | — |  | Financing costs, net |  |  | (1) |  |  | — |
Total |  | $ | (12) |  | $ | 22 |  |  |  | $ | (2) |  | $ | (4) |
|  | For the three months ended March 31, 2019 |
Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships (in millions, pre-tax) |  | Net sales before shipping and handling costs |  |  | Cost of Sales |  |  | Financing costs, net |
Income (expense) reported in earnings |  | $ | 1,536 |  | $ | (1,104) |  | $ | (22) |
Gains or (losses) on fair value hedging relationships: |  |  |  |  |  |  |  |  |  |
Interest Rate Contracts: |  |  |  |  |  |  |  |  |  |
Hedged Items |  | $ | — |  | $ | — |  | $ | — |
Derivatives designated as hedging instruments |  |  | — |  |  | — |  |  | — |
Gains or (losses) on cash flow hedging relationships: |  |  |  |  |  |  |  |  |  |
Commodity Contracts: |  |  |  |  |  |  |  |  |  |
Gain/(loss) reclassified from other comprehensive income into earnings |  | $ | — |  | $ | 2 |  | $ | — |
Foreign Exchange Contracts: |  |  |  |  |  |  |  |  |  |
Gain/(loss) reclassified from other comprehensive income into earnings |  |  | (3) |  |  | — |  |  | — |
Interest Rate Contracts: |  |  |  |  |  |  |  |  |  |
Gain/(loss) reclassified from other comprehensive income into earnings |  |  | — |  |  | — |  |  | (1) |
|  | For the three months ended March 31, 2018 |
Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships (in millions, pre-tax) |  | Net sales before shipping and handling costs |  |  | Cost of Sales |  |  | Financing costs, net |
Income (expense) reported in earnings |  | $ | 1,581 |  | $ | (1,115) |  | $ | (16) |
Gains or (losses) on fair value hedging relationships: |  |  |  |  |  |  |  |  |  |
Interest Rate Contracts: |  |  |  |  |  |  |  |  |  |
Hedged Items |  | $ | — |  | $ | — |  | $ | (2) |
Derivatives designated as hedging instruments |  |  | — |  |  | — |  |  | 2 |
Gains or (losses) on cash flow hedging relationships: |  |  |  |  |  |  |  |  |  |
Commodity Contracts: |  |  |  |  |  |  |  |  |  |
Gain/(loss) reclassified from other comprehensive income into earnings |  | $ | — |  | $ | (5) |  | $ | — |
Foreign Exchange Contracts: |  |  |  |  |  |  |  |  |  |
Gain/(loss) reclassified from other comprehensive income into earnings |  |  | 1 |  |  | — |  |  | — |
Interest Rate Contracts: |  |  |  |  |  |  |  |  |  |
Gain/(loss) reclassified from other comprehensive income into earnings |  |  | — |  |  | — |  |  | — |
As of March 31, 2019, AOCI included $10 million of losses (net of income taxes of $3 million) on commodities-related derivative instruments designated as cash flow hedges that are expected to be reclassified into earnings during the next 12 months. Transactions and events expected to occur over the next 12 months that will necessitate reclassifying these derivative losses to earnings include the sale of finished goods inventory, which includes previously hedged purchases of corn and natural gas. The Company expects the losses to be offset by changes in the underlying commodities costs. Additionally, as of March 31, 2019, AOCI included $1 million of losses (net of an insignificant amount of taxes) on settled T-Locks and $2 million of gains (net of an insignificant amount of taxes) related to foreign currency hedges which are expected to be reclassified into earnings during the next 12 months. Presented below are the fair values of the Company’s financial instruments and derivatives for the periods presented:
|  | As of March 31, 2019 |  | As of December 31, 2018 |
(in millions) |  | Total |  | Level 1 (a) |  | Level 2 (b) |  | Level 3 (c) |  | Total |  | Level 1 (a) |  | Level 2 (b) |  | Level 3 (c) |
Available for sale securities |  | $ | 10 |  | $ | 10 |  | $ | — |  | $ | — |  | $ | 11 |  | $ | 11 |  | $ | — |  | $ | — |
Derivative assets |  |  | 12 |  |  | 1 |  |  | 11 |  |  | — |  |  | 24 |  |  | 4 |  |  | 20 |  |  | — |
Derivative liabilities |  |  | 29 |  |  | 14 |  |  | 15 |  |  | — |  |  | 26 |  |  | 6 |  |  | 20 |  |  | — |
Long-term debt |  |  | 1,969 |  |  | — |  |  | 1,969 |  |  | — |  |  | 1,954 |  |  | — |  |  | 1,954 |  |  | — |
| (a) |  | Level 1 inputs consist of quoted prices (unadjusted) in active markets for identical assets or liabilities.
| (b) |  | Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs 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 inputs other than quoted prices that are observable for the asset or liability or can be derived principally from or corroborated by observable market data.
| (c) |  | Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
The carrying values of cash equivalents, short-term investments, accounts receivable, accounts payable and short-term borrowings approximate fair values. Commodity futures, options and swap contracts are recognized at fair value. Foreign currency forward contracts, swaps and options are also recognized at fair value. The fair value of the Company’s Long-term debt is estimated based on quotations of major securities dealers who are market makers in the securities. As of March 31, 2019, the carrying value and fair value of the Company’s Long-term debt was $2.0 billion.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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