Quarterly report pursuant to Section 13 or 15(d)

4. Derivatives

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4. Derivatives
3 Months Ended
Mar. 31, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives

The business and activities of the Company expose it to a variety of market risks, including risks related to changes in commodity prices. 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 RiskCash 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 months ended March 31, 2017 and 2016, 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 exchange-traded 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 $216,000 and $582,000 as the changes in the fair values of these contracts for the three months ended March 31, 2017 and 2016, respectively.

 

Non Designated Derivative Instruments – The classification and amounts of the Company’s derivatives not designated as hedging instruments are as follows (in thousands):

 

  As of March 31, 2017  
  Assets     Liabilities  
Type of Instrument   Balance Sheet Location   Fair
Value
    Balance Sheet Location   Fair
Value
 
Commodity contracts   Derivative instruments   $ 594     Derivative instruments   $ 1,171  

 

 

  As of December 31, 2016  
  Assets     Liabilities  
Type of Instrument   Balance Sheet Location   Fair
Value
    Balance Sheet Location   Fair
Value
 
Commodity contracts   Derivative instruments   $ 978     Derivative instruments   $ 4,115  

 

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

 

    Realized Gains (Losses)  
      Three Months Ended March 31,  
Type of Instrument   Statements of Operations Location   2017     2016  
Commodity contracts   Cost of goods sold   $ (2,344 )   $ 908  

 

 

      Unrealized Gains (Losses)  
        Three Months Ended March 31,  
Type of Instrument   Statements of Operations Location   2017

    2016  
Commodity contracts   Cost of goods sold   $ 2,560     $ (326 )