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Derivative Financial Instruments and Hedging Activities | 12 Months Ended
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Aug. 31, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments and Hedging Activities | Derivative Financial Instruments and Hedging Activities Our derivative instruments primarily consist of commodity and forward contracts and, to a minor degree, may include foreign currency and interest rate swap contracts. These contracts are economic hedges of price risk, but we do not apply hedge accounting under ASC Topic 815, Derivatives and Hedging, except with respect to certain interest rate swap contracts which are accounted for as cash flow hedges or fair value hedges as described below. Derivative instruments are recorded on our Consolidated Balance Sheets at fair value as described in Note 14, Fair Value Measurements. The following tables present the gross fair values of derivative assets, derivative liabilities, and margin deposits (cash collateral) recorded on our Consolidated Balance Sheets along with the related amounts permitted to be offset in accordance with U.S. GAAP. We have elected not to offset derivative assets and liabilities when we have the right of offset under ASC Topic 210-20, Balance Sheet - Offsetting; or when the instruments are subject to master netting arrangements under ASC Topic 815-10-45, Derivatives and Hedging - Overall.
| August 31, 2018
|  |  | Amounts Not Offset on the Consolidated Balance Sheet but Eligible for Offsetting |  |
| Gross Amounts Recognized |  | Cash Collateral |  | Derivative Instruments |  | Net Amounts
| (Dollars in thousands)
Derivative Assets: |  |  |  |  |  |  |
Commodity derivatives | $ | 313,033 |  |  | $ | — |  |  | $ | 26,781 |  |  | $ | 286,252 |
Foreign exchange derivatives | 15,401 |  |  | — |  |  | 8,703 |  |  | 6,698 |
Embedded derivative asset | 23,595 |  |  | — |  |  | — |  |  | 23,595 |
Total | $ | 352,029 |  |  | $ | — |  |  | $ | 35,484 |  |  | $ | 316,545 |
Derivative Liabilities: |  |  |  |  |  |  |
Commodity derivatives | $ | 421,054 |  |  | $ | 12,983 |  |  | $ | 26,781 |  |  | $ | 381,290 |
Foreign exchange derivatives | 24,701 |  |  | — |  |  | 8,703 |  |  | 15,998 |
Total | $ | 445,755 |  |  | $ | 12,983 |  |  | $ | 35,484 |  |  | $ | 397,288 |
| August 31, 2017 (As Restated)
|  |  | Amounts Not Offset on the Consolidated Balance Sheet but Eligible for Offsetting |  |
| Gross Amounts Recognized |  | Cash Collateral |  | Derivative Instruments |  | Net Amounts
| (Dollars in thousands)
Derivative Assets: |  |  |  |  |  |  |
Commodity derivatives | $ | 215,349 |  |  | $ | — |  |  | $ | 34,912 |  |  | $ | 180,437 |
Foreign exchange derivatives | 8,779 |  |  | — |  |  | 3,636 |  |  | 5,143 |
Embedded derivative asset | 25,533 |  |  | — |  |  | — |  |  | 25,533 |
Total | $ | 249,661 |  |  | $ | — |  |  | $ | 38,548 |  |  | $ | 211,113 |
Derivative Liabilities: |  |  |  |  |  |  |
Commodity derivatives | $ | 293,330 |  |  | $ | 3,898 |  |  | $ | 34,912 |  |  | $ | 254,520 |
Foreign exchange derivatives | 19,931 |  |  | — |  |  | 3,636 |  |  | 16,295 |
Total | $ | 313,261 |  |  | $ | 3,898 |  |  | $ | 38,548 |  |  | $ | 270,815 |
Derivative assets and liabilities with maturities of less than 12 months are recorded in derivative assets and derivative liabilities, respectively, on the Consolidated Balance Sheets. Derivative assets and liabilities with maturities greater than 12 months are recorded in other assets and other liabilities, respectively, on the Consolidated Balance Sheets. The amount of long-term derivative assets, excluding derivatives accounted for as fair value hedges, recorded on the Consolidated Balance Sheet at August 31, 2018, and 2017, was $23.1 million and $30.9 million, respectively. The amount of long-term derivative liabilities, excluding derivatives accounted for as fair value hedges, recorded on the Consolidated Balance Sheet at August 31, 2018, and 2017, was $7.9 million and $12.3 million, respectively. Derivatives Not Designated as Hedging Instruments The majority of our derivative instruments have not been designated as hedging instruments. The following table sets forth the pretax gains (losses) on derivatives not accounted for as hedging instruments that have been included in our Consolidated Statements of Operations for the years ended August 31, 2018, 2017, and 2016.
| Location of Gain (Loss) |  | 2018 |  | (As Restated) 2017 |  | (As Restated) 2016
|  |  | (Dollars in thousands)
Commodity derivatives | Cost of goods sold |  | $ | 162,321 |  |  | $ | 168,569 |  |  | $ | (67,014 | )
Foreign exchange derivatives | Cost of goods sold |  | (26,010 | ) |  | (13,140 | ) |  | (10,904 | )
Foreign exchange derivatives | Marketing, general and administrative |  | 596 |  |  | (1,604 | ) |  | (97 | )
Interest rate derivatives | Interest expense |  | (1 | ) |  | 8 |  |  | (6,292 | )
Embedded derivative | Other income (loss) |  | 3,061 |  |  | 30,533 |  |  | — |
Total |  |  | $ | 139,967 |  |  | $ | 184,366 |  |  | $ | (84,307 | )
Commodity Contracts: When we enter a commodity purchase or sales commitment, we are exposed to risks related to price changes and performance including delivery, quality, quantity and shipment period. If market prices decrease, we are exposed to risk of loss in the market value of inventory and purchase contracts with a fixed or partially fixed price. Conversely, we are exposed to risk of loss on our fixed or partially fixed price sales contracts if market prices increase. Our use of hedging reduces the exposure to price volatility by protecting against adverse short-term price movements, but it also limits the benefits of favorable short-term price movements. To reduce the price risk associated with fixed price commitments, we generally enter into commodity derivative contracts, to the extent practical, to achieve a net commodity position within the formal position limits we have established and deemed prudent for each commodity. These contracts are primarily transacted on regulated commodity futures exchanges but may also include over-the-counter derivative instruments when deemed appropriate. For commodities where there is no liquid derivative contract, risk is managed using forward sales contracts, other pricing arrangements and, to some extent, futures contracts in highly correlated commodities. These contracts are economic hedges of price risk, but are not designated as hedging instruments for accounting purposes. The contracts are recorded on our Consolidated Balance Sheets at fair values based on quotes listed on regulated commodity exchanges or the market prices of the underlying products listed on the exchanges, except that fertilizer and certain propane contracts are accounted for as normal purchase and normal sales transactions. Unrealized gains and losses on these contracts are recognized in cost of goods sold in our Consolidated Statements of Operations. When a futures position is established, initial margin must be deposited with the applicable exchange or broker. The amount of margin required varies by commodity and is set by the applicable exchange at its sole discretion. If the market price relative to a short futures position increases, an additional margin deposit would be required. Similarly, a margin deposit would be required if the market price relative to a long futures position decreases. Conversely, if the market price increases relative to a long futures position or decreases relative to a short futures position, margin deposits may be returned by the applicable exchange or broker. Our policy is to manage our commodity price risk exposure according to internal polices and in alignment with our tolerance for risk. Our profitability from operations is primarily derived from margins on products sold and grain merchandised, not from hedging transactions. At any one time, inventory and purchase contracts for delivery to us may be substantial. We have risk management policies that include established net position limits. These limits are defined for each commodity and business unit, and may include both trader and management limits as appropriate. The limits policy is managed within each individual business unit to ensure any limits overage is explained and exposures reduced, or a temporary limit increase is established if needed. The position limits are reviewed, at least annually, with senior leadership and the Board of Directors. We monitor current market conditions and may expand or reduce our net position limits in response to changes in those conditions. In addition, all purchase and sales contracts are subject to credit approvals and appropriate terms and conditions. The use of hedging instruments does not protect against nonperformance by counterparties to cash contracts. We evaluate counterparty exposure by reviewing contracts and adjusting the values to reflect potential nonperformance. Risk of nonperformance by counterparties includes the inability to perform because of a counterparty’s financial condition and the risk that the counterparty will refuse to perform on a contract during periods of price fluctuations where contract prices are significantly different than the current market prices. We manage these risks by entering into fixed price purchase and sales contracts with preapproved producers and by establishing appropriate limits for individual suppliers. Fixed price contracts are entered into with customers of acceptable creditworthiness, as internally evaluated. Regarding our use of derivatives, we primarily transact in exchange traded instruments or enter into over-the-counter derivatives that clear through a designated clearing organization, which limits our counterparty exposure relative to hedging activities. Historically, we have not experienced significant events of nonperformance on open contracts. Accordingly, we only adjust the estimated fair values of specifically identified contracts for nonperformance. Although we have established policies and procedures, we make no assurances that historical nonperformance experience will carry forward to future periods. As of August 31, 2018, and 2017, we had outstanding commodity futures and options contracts that were used as economic hedges, as well as fixed-price forward contracts related to physical purchases and sales of commodities. The table below presents the notional volumes for all outstanding commodity contracts accounted for as derivative instruments.
| 2018 |  | (As Restated) 2017
| Long |  | Short |  | Long |  | Short
| (Units in thousands)
Grain and oilseed - bushels | 715,866 |  |  | 929,873 |  |  | 569,243 |  |  | 767,110 |
Energy products - barrels | 17,011 |  |  | 8,329 |  |  | 15,072 |  |  | 18,252 |
Processed grain and oilseed - tons | 1,064 |  |  | 2,875 |  |  | 299 |  |  | 2,347 |
Crop nutrients - tons | 11 |  |  | 76 |  |  | 9 |  |  | 15 |
Ocean freight - metric tons | 227 |  |  | 45 |  |  | 160 |  |  | 198 |
Natural gas - MMBtu | 610 |  |  | — |  |  | 500 |  |  | — |
Foreign Exchange Contracts We conduct a substantial portion of our business in U.S. dollars, but we are exposed to risks relating to foreign currency fluctuations primarily due to grain marketing transactions in South America, the Asia Pacific region, and Europe, and purchases of products from Canada. We use foreign currency derivative instruments to mitigate the impact of exchange rate fluctuations. Although CHS has some risk exposure relating to foreign currency transactions, a larger impact with exchange rate fluctuations is the ability of foreign buyers to purchase U.S. agricultural products and the competitiveness of U.S. agricultural products compared to the same products offered by alternative sources of world supply. The notional amounts of our foreign exchange derivative contracts were $988.8 million and $776.7 million as of August 31, 2018, and August 31, 2017, respectively. Embedded Derivative Asset Under the terms of our strategic investment in CF Nitrogen, if CF Industries' credit rating is reduced below certain levels by two of three specified credit ratings agencies, we are entitled to receive a non-refundable annual payment of $5.0 million from CF Industries. These payments will continue on an annual basis until the date that CF Industries' credit rating is upgraded to or above certain levels by two of the three specified credit ratings agencies or February 1, 2026, whichever is earlier. During the first quarter of fiscal 2017, CF Industries' credit rating was reduced below the specified levels and we recorded a gain of $29.1 million in other income (loss) in our Consolidated Statement of Operations and received a $5.0 million payment from CF Industries. A total gain of $30.5 million was recognized in relation to the embedded credit derivative during fiscal 2017. During fiscal 2018, we received a second $5.0 million payment from CF Industries. The fair value of the embedded derivative asset recorded on our Consolidated Balance Sheet as of August 31, 2018, was equal to $23.6 million. The current and long-term portions of the embedded derivative asset are included in derivative assets and other assets on our Consolidated Balance Sheet, respectively. See Note 14, Fair Value Measurements for additional information regarding the valuation of the embedded derivative asset. Derivatives Designated as Cash Flow or Fair Value Hedging Strategies Fair Value Hedges As of August 31, 2018, and 2017, we had outstanding interest rate swaps with an aggregate notional amount of $495.0 million designated as fair value hedges of portions of our fixed-rate debt that is due between fiscal 2019 and fiscal 2025. Our objective in entering into these transactions is to offset changes in the fair value of the debt associated with the risk of variability in the three-month U.S. dollar LIBOR interest rate ("LIBOR"), in essence converting the fixed-rate debt to variable-rate debt. Under these interest rate swaps, we receive fixed-rate interest payments and make interest payments based on the three-month LIBOR. Offsetting changes in the fair values of both the swap instruments and the hedged debt are recorded contemporaneously each period and only create an impact to earnings to the extent that the hedge is ineffective. The following table presents the fair value of our derivative interest rate swap instruments designated as fair value hedges and the line items on our Consolidated Balance Sheets in which they are recorded as of August 31, 2018, and 2017.
|  | 2018 |  | 2017 |  |  |  | 2018 |  | 2017
Balance Sheet Location |  | Derivative Assets |  | Balance Sheet Location |  | Derivative Liabilities
|  | (Dollars in thousands) |  |  |  | (Dollars in thousands)
Derivative assets |  | $ | — |  |  | $ | — |  |  | Derivative liabilities |  | $ | 771 |  |  | $ | — |
Other assets |  | — |  |  | 9,978 |  |  | Other liabilities |  | 8,681 |  |  | 707 |
Total |  | $ | — |  |  | $ | 9,978 |  |  | Total |  | $ | 9,452 |  |  | $ | 707 |
The following table sets forth the pretax gains (losses) on derivatives accounted for as hedging instruments that have been included in our Consolidated Statements of Operations for the years ended August 31, 2018, 2017, and 2016.
Gain (Loss) on Fair Value Hedging Relationships: |  | Location of Gain (Loss) |  | 2018 |  | 2017 |  | 2016
|  |  |  | (Dollars in thousands)
Interest rate swaps |  | Interest expense |  | $ | 18,723 |  |  | $ | 12,806 |  |  | $ | (9,842 | )
Hedged item |  | Interest expense |  | (18,723 | ) |  | (12,806 | ) |  | 9,842 |
Total |  | $ | — |  |  | $ | — |  |  | $ | — |
The following table provides the location and carrying amount of hedged liabilities in our Consolidated Balance Sheets as of August 31, 2018, and 2017.
|  | August 31, 2018 |  | August 31, 2017
Balance Sheet Location |  | Carrying Amount of Hedged Liabilities |  | Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of Hedged Liabilities |  | Carrying Amount of Hedged Liabilities |  | Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of Hedged Liabilities
|  | (Dollars in thousands)
Long-term debt |  | $ | 485,548 |  |  | $ | 9,452 |  |  | $ | 504,271 |  |  | $ | (9,271 | )
Cash Flow Hedges In the fourth quarter of fiscal 2018, our Energy segment entered into pay-fixed, receive-variable, cash-settled swaps designated as cash flow hedges of future crude oil purchases. We also entered into pay-variable, receive-fixed, cash-settled swaps designated as cash flow hedges of future refined product sales. These hedging instruments and the related hedged items are exposed to significant market price risk and potential volatility. As part of our risk management strategy, we look to hedge a portion of our expected future crude oil needs and the resulting refined product output based on prevailing futures prices, management's expectations about future commodity price changes and our risk appetite. As of August 31, 2018, the notional amount, the fair value and the amounts recorded in other comprehensive income relating to these cash flow hedges were immaterial. There were no outstanding cash flow hedges as of August 31, 2017. In fiscal 2015, we entered into forward-starting interest rate swaps with an aggregate notional amount of $300.0 million designated as cash flow hedges of the expected variability of future interest payments on our anticipated issuance of fixed-rate debt. During the first quarter of fiscal 2016, we determined that certain of the anticipated debt issuances would be delayed; and we consequently recorded an immaterial amount of losses on the ineffective portion of the related swaps in earnings. Additionally, we paid $6.4 million in cash to settle two of the interest rate swaps upon their scheduled termination dates. During the second quarter of fiscal 2016, we settled an additional two interest rate swaps, paying $5.3 million in cash upon their scheduled termination. In January 2016, we issued the fixed-rate debt associated with these swaps and will amortize the amounts which were previously deferred to other comprehensive income into earnings over the life of the debt. The amounts to be included in earnings are not expected to be material during any 12-month period. During the third quarter of fiscal 2016, we settled the remaining two interest rate swaps, paying $5.1 million in cash upon their scheduled termination. We did not issue additional fixed-rate debt as previously planned, and we reclassified all amounts previously recorded to other comprehensive income into earnings. The following table presents the pretax gains (losses) recorded in other comprehensive income relating to cash flow hedges for the years ended August 31, 2018, 2017, and 2016:
|  | 2018 |  | 2017 |  | 2016
|  | (Dollars in thousands)
Interest rate derivatives |  | $ | 178 |  |  | $ | — |  |  | $ | (10,070 | )
The following table presents the pretax gains (losses) relating to cash flow hedges that were reclassified from accumulated other comprehensive loss into income for the years ended August 31, 2018, 2017, and 2016:
| Location of Gain (Loss) |  | 2018 |  | 2017 |  | 2016
|  |  | (Dollars in thousands)
Interest rate derivatives | Interest expense |  | $ | (1,704 | ) |  | $ | (1,742 | ) |  | $ | (5,071 | )

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