Annual report pursuant to Section 13 and 15(d)

Derivatives

v3.22.4
Derivatives
12 Months Ended
Dec. 31, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVES

8. 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 alcohol sales and purchase commitments where the prices are set at a future date and/or if the contracts specify a floating or index-based price. In addition, the Company hedges anticipated sales of alcohol 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 years ended December 31, 2022, 2021 and 2020, 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 alcohols by entering into exchange-traded futures contracts or options for those commodities. These derivatives are not designated for 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 net gains of $19,263,000, $21,619,000 and $14,780,000 as the change in the fair value of these contracts for the years ended December 31, 2022, 2021 and 2020, respectively.

 

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

 

    As of December 31, 2022
    Assets   Liabilities
Type of Instrument   Balance Sheet Location   Fair Value     Balance Sheet Location   Fair Value  
                     
Cash collateral balance   Restricted cash   $ 13,069    
 
   
 
 
Commodity contracts   Derivative instruments   $ 4,973     Derivative instruments   $ 6,732  

 

    As of December 31, 2021  
    Assets         Liabilities      
Type of Instrument   Balance Sheet Location   Fair Value     Balance Sheet Location   Fair Value  
                     
Cash collateral balance   Restricted cash   $ 11,513    
 
   
 
 
Commodity contracts   Derivative instruments   $ 15,839     Derivative instruments   $ 13,582  

 

The above amounts represent the gross balances of the contracts; however, the Company does have a right of offset with each of its derivative brokers, but the Company’s intent is to close out positions individually, therefore the positions are reported at gross.

 

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  
        For the Years Ended December 31,  
Type of Instrument   Statements of Operations Location   2022     2021     2020  
                       
Commodity contracts   Cost of goods sold   $ 23,280     $ 32,618     $ 2,102  
        $ 23,280     $ 32,618     $ 2,102  

 

        Unrealized Gains (Losses)  
        For the Years Ended December 31,  
Type of Instrument   Statements of Operations Location   2022     2021     2020  
                       
Commodity contracts   Cost of goods sold   $ (4,017 )   $ (10,999 )   $ 12,678  
        $ (4,017 )   $ (10,999 )   $ 12,678