4. DERIVATIVES. |
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| Derivative Instruments and Hedging Activities Disclosure [Text Block] |
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):
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