Note 7. Derivative Financial Instruments

The company is exposed to certain risks relating to its ongoing business operations. The company utilizes derivative instruments to mitigate commodity margin risk, occasionally to mitigate foreign currency exchange rate risk, and have in the past to mitigate interest rate fluctuation risk. The company routinely enters into forward exchange traded futures and option contracts to manage the price risk associated with nonferrous metals inventory as well as purchases and sales of nonferrous and ferrous metals (primarily aluminum and copper). The company offsets fair value amounts recognized for derivative instruments executed with the same counterparty under master netting agreements.

Note 7. Derivative Financial Instruments (Continued)

Commodity Futures Contracts. If the company is “long” on futures contracts, it means the company has more futures contracts purchased than futures contracts sold for the underlying commodity. If the company is “short” on a futures contract, it means the company has more futures contracts sold than futures contracts purchased for the underlying commodity. The following summarizes the company’s futures contract commitments as of March 31, 2019:



Commodity Futures	Long/Short	Metric Tons
Aluminum	Long	3,075
Aluminum	Short	5,925
Copper	Long	12,440
Copper	Short	22,759

The following summarizes the location and amounts of the fair values reported on the company’s consolidated balance sheets as of March 31, 2019, and December 31, 2018, and gains and losses related to derivatives included in the company’s statement of income for the three months ended March 31, 2019 and 2018 (in thousands):



		Asset Derivatives				Liability Derivatives
	Balance sheet	Fair Value				Fair Value
	location	March 31, 2019		December 31, 2018		March 31, 2019		December 31, 2018
Derivative instruments designated as hedges
Commodity futures	Other current assets	$	552	$	2,999	$	1,068	$	1,837

Derivative instruments not designated as hedges
Commodity futures	Other current assets		1,480		1,559		1,752		2,053
Total derivative instruments		$	2,032	$	4,558	$	2,820	$	3,890

The fair value of the above derivative instruments along with required margin deposit amounts with the same counterparty under master netting arrangements totaled $3.7 million at March 31, 2019, and $4.9 million at December 31, 2018, and are reflected in other current assets in the consolidated balance sheets.

Amount of gain (loss) recognized

Location of gain

Amount of gain (loss) recognized

Location of gain

in income on derivatives

(loss) recognized

in income on related hedged items

(loss) recognized

for the three months ended

Hedged items in

in income on

for the three months ended

in income on

March 31,

fair value hedge

related hedged

March 31,

derivatives

2019

2018

relationships

items

2019

2018

Derivatives in fair value

hedging relationships

Commodity futures

Costs of goods sold

(1,453)

8,516

Firm commitments

Costs of goods sold

(1,499)

(793)

Inventory

Costs of goods sold

721

(2,596)

Derivatives not designated

(778)

(3,389)

as hedging instruments

Commodity futures

Costs of goods sold

(4,077)

2,756

Derivatives accounted for as fair value hedges had ineffectiveness resulting in losses of $1.1 million and $101,000 during the three-month periods ended March 31, 2019, and 2018, respectively. Losses excluded from hedge effectiveness testing of $2.2 million increased cost of goods sold during the three-month period ended March 31, 2019. Gains excluded from hedge effectiveness testing of $5.0 million decreased cost of goods sold during the three-month period ended March 31, 2018.

Derivatives accounted for as cash flow hedges resulted in net gains of $58,000 recognized in other comprehensive income for the three-month period ended March 31, 2019. Net gains of $283,000 were reclassified from accumulated other comprehensive three-month period ended March 31, 2019. At March 31, 2019, the company expects to reclassify $170,000 of net gains on derivative instruments from accumulated other comprehensive income to earnings during the next 12 months due to the settlement of futures contracts.