Derivatives Instruments and Hedging Activities

6 Months Ended

Jun. 30, 2022

Derivatives Instruments and Hedging Activities

Derivatives Instruments and Hedging Activities

6. Derivative Instruments and Hedging Activities

Ingredion is exposed to market risk stemming from changes in commodity prices (primarily corn and natural gas), foreign currency exchange rates and interest rates. In the normal course of business, we actively manage our exposure to these market risks by entering various hedging transactions authorized under established policies that place controls on these activities. These transactions utilize exchange-traded derivatives or over-the-counter derivatives with investment grade counterparties. We have no collateral to counterparties under collateral funding arrangements as of June 30, 2022. Derivative financial instruments used by Ingredion consist primarily of commodity-related futures, options and swap contracts, foreign currency-related forward contracts, interest rate swaps and treasury locks (“T-Locks”).

Commodity price hedging: Ingredion’s principal use of derivative financial instruments is to manage commodity price risk relating to anticipated purchases of corn and natural gas to be used in the manufacturing process, generally over the next 12 to 24 months. We maintain a commodity-price risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by commodity-price volatility. To manage price risk related to corn purchases, primarily in North America, we use corn futures and option contracts that trade on regulated commodity exchanges to lock in corn costs associated with fixed-priced customer sales contracts. Ingredion also uses over-the-counter natural gas swaps in North America to hedge a portion of its natural gas usage. These derivative financial instruments limit the impact that volatility resulting from fluctuations in market prices will have on corn and natural gas purchases. Ingredion’s natural gas derivatives and the majority of its corn derivatives have been designated as cash flow hedging instruments for accounting purposes.

For certain corn derivative instruments that are not designated as cash flow hedging instruments for accounting purposes, all realized and unrealized gains and losses from these instruments are recognized in cost of sales during each accounting period. We enter these derivative instruments to further mitigate commodity and basis price risks related to anticipated purchases of corn. During the three and six months ended June 30, 2022, Ingredion recognized a $3 million loss and $1 million loss, respectively, on non-designated commodity contracts. During the three and six months ended June 30, 2021, Ingredion recognized an insignificant loss and $1 million loss, respectively, on non-designated commodity contracts.

For commodity hedges designated as cash flow hedges for accounting purposes, unrealized gains and losses associated with marking the commodity hedging contracts to market (fair value) are recorded as a component of Other comprehensive loss (“OCL”) and included in the equity section of the Condensed Consolidated Balance Sheets as part of Accumulated other comprehensive loss (“AOCL”). These amounts, as well as their related tax effects, are subsequently reclassified into earnings in the same line item affected by the hedged transaction and in the same period or periods during which the hedged transaction affects earnings, or in the period a hedge is determined to be ineffective. Ingredion assesses the effectiveness of a commodity hedge contract based on changes in the contract’s fair value. The changes in the market value of such contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in the price of the hedged items. Gains and losses from cash flow hedging instruments reclassified from AOCL to earnings are reported as Cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows.

Ingredion had outstanding futures and option contracts that hedged the forecasted purchase of approximately 77 million and 135 million bushels of corn as of June 30, 2022 and December 31. 2021, respectively. Ingredion also had outstanding swap contracts that hedged the forecasted purchase of approximately 38 million and 35 million mmbtus of natural gas as of June 30, 2022 and December 31, 2021, respectively.

Foreign currency hedging: Due to our global operations, including operations in many emerging markets, Ingredion is exposed to fluctuations in foreign currency exchange rates. As a result, Ingredion has exposure to translational foreign-exchange risk when the results of its foreign operations are translated to U.S. dollars and to transactional foreign-exchange risk when transactions not denominated in the functional currency are revalued. Ingredion’s foreign-exchange risk management strategy uses derivative financial instruments such as foreign currency forward contracts, swaps and options to manage its transactional foreign exchange risk. Ingredion enters into foreign currency derivative instruments that are designated as both cash flow hedging instruments as well as instruments not designated as hedging instruments for accounting purposes in order to mitigate transactional foreign-exchange risk. Gains and losses from derivative financial instruments not designated as hedging instruments for accounting purposes are marked to market in earnings during each accounting period.

Ingredion hedges certain assets using foreign currency derivatives not designated as hedging instruments for accounting purposes, which had a notional value of $414 million and $360 million as of June 30, 2022 and December 31, 2021, respectively. Ingredion also hedges certain liabilities using foreign currency derivatives not designated as hedging instruments, which had a notional value of $255 million and $205 million as of June 30, 2022 and December 31 2021, respectively.

Ingredion hedges certain assets using foreign currency derivative instruments that are designated as cash flow hedging instruments for accounting purposes, which had a notional value of $358 million and $505 million as of June 30, 2022 and December 31, 2021, respectively. Ingredion also hedges certain liability positions using foreign currency derivative instruments that are designated as cash flow hedging instruments for accounting purposes, which had a notional value of $518 million and $708 million as of June 30, 2022 and December 31, 2021, respectively.

Interest rate hedging: Ingredion assesses its exposure to variability in interest rates by identifying and monitoring changes in interest rates that may adversely impact future cash flows and the fair value of existing debt instruments and by evaluating hedging opportunities. Ingredion’s risk management strategy is to monitor interest rate risk attributable to both Ingredion’s outstanding and forecasted debt obligations as well as Ingredion’s offsetting hedge positions. Derivative financial instruments that have been used by Ingredion to manage its interest rate risk consist of interest rate swaps and T-Locks.

Ingredion periodically enters into interest rate swaps to hedge its exposure to interest rate changes. The changes in fair value of interest rate swaps designated as hedging instruments that effectively offset the variability in the fair value of outstanding debt obligations are reported in earnings. These amounts offset the gains or losses (the changes in fair value) of the hedged debt instruments that are attributable to changes in interest rates (the hedged risk), which are also recognized in earnings. Ingredion did not have any outstanding interest rate swaps as of June 30, 2022 or December 31, 2021.

Ingredion periodically enters into T-Locks to hedge its exposure to interest rate changes. The T-Locks are designated as hedges of the variability in cash flows associated with future interest payments caused by market

fluctuations in the benchmark interest rate until the fixed interest rate is established and are accounted for as cash flow hedges. Accordingly, changes in the fair value of the T-Locks are recorded to AOCL until the consummation of the underlying debt offering, at which time any realized gain (loss) is amortized to earnings over the life of the debt. During 2020, Ingredion entered into and settled T-Locks associated with the issuance of senior notes due in 2030 and 2050. The realized loss upon settlement of the T-Locks was recorded in AOCL and is amortized into earnings over the term of the senior notes. Ingredion did not have outstanding T-Locks as of June 30, 2022 and December 31, 2021.

The derivative instruments designated as cash flow hedges included in AOCL as of June 30, 2022 and December 31, 2021 are reflected below:

	Amount of Gains
Derivatives in Cash Flow Hedging Relationships	(Losses) included in AOCL
(in millions)	June 30, 2022		December 31, 2021
Commodity contracts, net of income tax effect of $29 and $19, respectively	$	84	$	51
Foreign currency contracts, net of income tax effect of $3 and $ -, respectively		5		-
Interest rate contracts, net of income tax effect of $1		(3)		(3)
Total	$	86	$	48

The fair value and balance sheet location of the Ingredion’s derivative instruments, presented gross in the Condensed Consolidated Balance Sheets, are reflected below:

	Fair Value of Hedging Instruments as of June 30, 2022 (in millions)
	Designated Hedging Instruments						Non-Designated Hedging Instruments
Balance Sheet Location		Commodity Contracts		Foreign Currency Contracts	Total			Commodity Contracts		Foreign Currency Contracts	Total
Accounts receivable, net	$	86	$	10	$	96	$	2	$	12	$	14
Other assets		6		7		13		—		—		—
Assets		92		17		109		2		12		14
Accounts payable and accrued liabilities		26		12		38		3		5		8
Non-current liabilities		4		8		12		—		1		1
Liabilities		30		20		50		3		6		9
Net Assets/(Liabilities)	$	62	$	(3)	$	59	$	(1)	$	6	$	5

	Fair Value of Hedging Instruments as of December 31, 2021 (in millions)
	Designated Hedging Instruments						Non-Designated Hedging Instruments
Balance Sheet Location		Commodity Contracts		Foreign Currency Contracts	Total			Commodity Contracts		Foreign Currency Contracts	Total
Accounts receivable, net	$	45	$	9	$	54	$	4	$	3	$	7
Other assets		7		6		13		—		—		—
Assets		52		15		67		4		3		7
Accounts payable and accrued liabilities		5		12		17		2		4		6
Non-current liabilities		2		6		8		—		1		1
Liabilities		7		18		25		2		5		7
Net Assets/(Liabilities)	$	45	$	(3)	$	42	$	2	$	(2)	$	—

Additional information relating to the Ingredion’s derivative instruments is presented below:

Derivatives in Cash Flow	Gains (Losses) Recognized  in AOCL on Derivatives					Gains (Losses) Reclassified from AOCL into Income
Hedging Relationships	Three Months Ended June 30,				Income Statement	Three Months Ended June 30,
(in millions)	2022		2021		Location	2022		2021
Commodity contracts	$	(3)	$	149	Cost of sales	$	81	$	110
Foreign currency contracts		6		(2)	Net sales/Cost of sales		1		(1)
Interest rate contracts		—		—	Financing costs, net		—		—
Total	$	3	$	147		$	82	$	109

Derivatives in Cash-Flow	Gains Recognized  in AOCL on Derivatives					Gains Reclassified from AOCL into Income
Hedging Relationships	Six Months Ended June 30,				Income Statement	Six Months Ended June 30,
(in millions)	2022		2021		Location	2022		2021
Commodity contracts	$	168	$	176	Cost of sales	$	125	$	109
Foreign currency contracts		11		—	Net sales/Cost of sales		3		1
Interest rate contracts		—		—	Financing costs, net		—		—
Total	$	179	$	176		$	128	$	110

As of June 30, 2022, AOCL included $87 million of net gains (net of income taxes of $32 million) on commodities-related derivatives instruments, foreign currency hedges, and T-Locks designated as cash flow hedges that are expected to be reclassified into earnings during the next 12 months.