Quarterly report pursuant to sections 13 or 15(d)

4. DERIVATIVES.

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4. DERIVATIVES.
9 Months Ended
Sep. 30, 2011
Derivative Instruments and Hedging Activities Disclosure [Text Block]
4.
DERIVATIVES.

The business and activities of the Company expose it to a variety of market risks, including risks related to changes in commodity prices and interest rates. The Company monitors and manages these financial exposures as an integral part of its risk management program. This program recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effects that market volatility could have on operating results.

Commodity Risk Cash Flow Hedges – The Company uses derivative instruments to protect cash flows from fluctuations caused by volatility in commodity prices for periods of up to twelve months in order to protect gross profit margins from potentially adverse effects of market and price volatility on ethanol sale and purchase commitments where the prices are set at a future date and/or if the contracts specify a floating or index-based price for ethanol. In addition, the Company hedges anticipated sales of ethanol to minimize its exposure to the potentially adverse effects of price volatility. These derivatives may be designated and documented as cash flow hedges and effectiveness is evaluated by assessing the probability of the anticipated transactions and regressing commodity futures prices against the Company’s purchase and sales prices. Ineffectiveness, which is defined as the degree to which the derivative does not offset the underlying exposure, is recognized immediately in cost of goods sold. For the three and nine months ended September 30, 2011 and 2010, the Company did not designate any of its derivatives as cash flow hedges.

Commodity Risk – Non-Designated Hedges – The Company uses derivative instruments to lock in prices for certain amounts of corn and ethanol by entering into forward contracts for those commodities. These derivatives are not designated for special hedge accounting treatment. The changes in fair value of these contracts are recorded on the balance sheet and recognized immediately in cost of goods sold. The Company recognized gains of $395,000 and $0 as the change in the fair value of these contracts for the three months ended September 30, 2011 and 2010, respectively. The Company recognized gains of $334,000 and $0 as the change in the fair value of these contracts for the nine months ended September 30, 2011 and 2010, respectively. The notional balances remaining on these contracts were $1,612,000 and $237,000 as of September 30, 2011 and December 31, 2010, respectively.

Interest Rate Risk – The Company, through the Plant Owners, used derivative instruments to minimize significant unanticipated income fluctuations that may arise from rising variable interest rate costs associated with existing and anticipated borrowings. To meet these objectives the Company purchased interest rate caps and swaps. On the Effective Date, all interest rate caps and swaps were removed from the Company’s consolidated statement of position. For the three and nine months ended September 30, 2010, the Company recognized gains from undesignated hedges of $0 and $1,227,000 in interest expense, net, respectively.

Non Designated Derivative Instruments – The Company classified its derivative instruments not designated as hedging instruments of $140,000 and $15,000 in accrued liabilities as of September 30, 2011 and December 31, 2010, respectively.

The classification and amounts of the Company’s recognized gains (losses) for its derivatives not designated as hedging instruments are as follow (in thousands):

       
Realized Gains
 
       
For the Three Months
Ended September 30,
 
Type of Instrument   Statement of Operations Location  
2011
   
2010
 
Commodity contracts   Cost of goods sold   $ 483     $  
        $ 483     $  
                     
       
Unrealized Losses
 
       
For the Three Months
Ended September 30,
 
Type of Instrument
 
Statement of Operations Location
    2011       2010  
Commodity contracts
 
Cost of goods sold
  $ (88 )   $  
        $ (88 )   $  
                     
       
Realized Gains
 
       
For the Nine Months
Ended September 30,
 
Type of Instrument
 
Statement of Operations Location
    2011       2010  
Commodity contracts
 
Cost of goods sold
  $ 460     $  
        $ 460     $  
                     
       
Unrealized Gains (Losses)
 
       
For the Nine Months
Ended September 30,
 
Type of Instrument
 
Statement of Operations Location
    2011       2010  
Commodity contracts
 
Cost of goods sold
  $ (126 )   $  
Interest rate contracts   Interest expense, net           1,227  
        $ (126 )   $ 1,227