Quarterly report pursuant to Section 13 or 15(d)

Derivatives

v3.22.2.2
Derivatives
9 Months Ended
Sep. 30, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVES

5. 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 three and nine months ended September 30, 2022 and 2021, 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 forward 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 losses of $1,772,000 and $976,000 as the change in the fair value of these contracts for the three months ended September 30, 2022 and 2021, respectively. The Company recognized net gains of $20,164,000 and $18,435,000 as the change in the fair value of these contracts for the nine months ended September 30, 2022 and 2021, 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 September 30, 2022  
    Assets     Liabilities  
Type of Instrument   Balance Sheet Location   Fair Value     Balance Sheet Location   Fair Value  
Cash collateral balance   Restricted cash   $ 3,955    
 
   
 
 
Commodity contracts   Derivative assets   $ 7,384     Derivative liabilities   $ 1,106  

    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 assets   $ 15,839     Derivative liabilities   $ 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 its intent is to close out positions individually, therefore, they 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 Losses  
        For the Three Months
Ended September 30,
 
Type of Instrument   Statements of Operations Location   2022     2021  
Commodity contracts   Cost of goods sold   $ (13,332 )   $ (2,894 )
        $ (13,332 )   $ (2,894 )

 

        Realized Gains  
Type of Instrument   Statements of Operations Location   For the Nine Months Ended September 30,  
        2022     2021  
Commodity contracts   Cost of goods sold   $ 16,143     $ 21,449  
        $ 16,143     $ 21,449  

 

        Unrealized Gains  
        For the Three Months
Ended September 30,
 
Type of Instrument   Statements of Operations Location   2022     2021  
                 
Commodity contracts   Cost of goods sold   $ 11,560     $ 1,918  
        $ 11,560     $ 1,918  

 

        Unrealized Gains (Losses)  
        For the Nine Months
Ended September 30,
 
Type of Instrument   Statements of Operations Location   2022     2021  
                 
Commodity contracts   Cost of goods sold   $ 4,021     $ (3,014 )
        $ 4,021     $ (3,014 )