Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Derivatives Not Designated as Hedging Instruments

The majority of the Company’s derivative instruments have not been designated as hedging instruments. The Company uses exchange-traded futures and exchange-traded and OTC options contracts to manage its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts to reduce price risk caused by market fluctuations in agricultural commodities and foreign currencies.  The Company also uses exchange-traded futures and exchange-traded and OTC options contracts as components of merchandising strategies designed to enhance margins. The results of these strategies can be significantly impacted by factors such as the correlation between the value of exchange-traded commodities futures contracts and the value of the underlying commodities, counterparty contract defaults, and volatility of freight markets. Derivatives, including exchange-traded contracts and physical purchase or sale contracts, are stated at market value and inventories of certain merchandisable agricultural commodities, which include amounts acquired under deferred pricing contracts, are stated at market value.  Inventory is not a derivative and therefore fair values of and changes in fair values of inventories are not included in the tables below.

The following table sets forth the fair value of derivatives not designated as hedging instruments as of September 30, 2017 and December 31, 2016.

	September 30, 2017				December 31, 2016
	Assets		Liabilities		Assets		Liabilities
	(In millions)
Foreign Currency Contracts	$	81	$	119	$	102	$	90
Commodity Contracts	360		445		511		561
Total	$	441	$	564	$	613	$	651

The following table sets forth the pre-tax gains (losses) on derivatives not designated as hedging instruments that have been included in the consolidated statements of earnings for the three and nine months ended September 30, 2017 and 2016.

	Three months ended September 30,
	2017			2016
	(In millions)
Foreign Currency Contracts
Revenues	$	(8	)	$	(19	)
Cost of products sold	52			1
Other income (expense) – net	52			(3		)
Commodity Contracts
Cost of products sold	34			369
Total gain (loss) recognized in earnings	$	130		$	348

	Nine months ended September 30,
	2017			2016
	(In millions)
Foreign Currency Contracts
Revenues	$	(16	)	$	(32	)
Cost of products sold	82			263
Other income (expense) – net	186			(108		)
Commodity Contracts
Cost of products sold	$	294		$	(266	)
Total gain (loss) recognized in earnings	$	546		$	(143	)

Inventories of certain merchandisable agricultural commodities, which include amounts acquired under deferred pricing contracts, are stated at market value. Changes in the market value of inventories of certain merchandisable agricultural commodities, forward cash purchase and sales contracts, exchange-traded futures and exchange-traded and OTC options contracts are recognized in earnings immediately.

Derivatives Designated as Cash Flow or Fair Value Hedging Strategies

As of September 30, 2017 and December 31, 2016, the Company has certain derivatives designated as cash flow and fair value hedges.

The Company uses interest rate swaps designated as fair value hedges to protect the fair value of fixed-rate debt due to changes in interest rates. The changes in the fair value of the interest rate swaps and the underlying fixed-rate debt are recorded in other (income) expense - net. The terms of the interest rate swaps match the terms of the underlying debt resulting in no ineffectiveness. At September 30, 2017, the Company has $2 million in other current assets representing the fair value of the interest rate swaps and a corresponding increase in the underlying debt for the same amount with no net impact to earnings.

For each of the commodity hedge programs described below, the derivatives are designated as cash flow hedges.  Assuming normal market conditions, the changes in the market value of such derivative contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of the hedged item.  Once the hedged item is recognized in earnings, the gains/losses arising from the hedge are reclassified from AOCI to either revenues or cost of products sold, as applicable. As of September 30, 2017, the Company has $12 million of after-tax losses in AOCI related to gains and losses from commodity cash flow hedge transactions.  The Company expects to recognize $12 million of these after-tax losses in its consolidated statement of earnings during the next 12 months.

The Company uses futures or options contracts to fix the purchase price of anticipated volumes of corn to be purchased and processed in a future month.  The objective of this hedging program is to reduce the variability of cash flows associated with the Company’s forecasted purchases of corn.  The Company’s corn processing plants currently grind approximately 72 million bushels of corn per month.  During the past 12 months, the Company hedged between 19% and 62% of its monthly anticipated grind.  At September 30, 2017, the Company has designated hedges representing between 6% and 41% of its anticipated monthly grind of corn for the next 12 months.

The Company, from time to time, also uses futures, options, and swaps to fix the sales price of certain ethanol sales contracts.  The Company has established hedging programs for ethanol sales contracts that are indexed to unleaded gasoline prices and to various exchange-traded ethanol contracts. The objective of these hedging programs is to reduce the variability of cash flows associated with the Company’s sales of ethanol.  During the past 12 months, the Company hedged between 1 million and 66 million gallons of ethanol sales per month under these programs.  At September 30, 2017, the Company has designated hedges representing between 0 and 1 million gallons of ethanol sales per month over the next 12 months.

The following table sets forth the fair value of derivatives designated as hedging instruments as of September 30, 2017 and December 31, 2016.

	September 30, 2017				December 31, 2016
	Assets		Liabilities		Assets		Liabilities
	(In millions)
Interest Rate Contracts	$	2	$	—	$	11	$	—
Total	$	2	$	—	$	11	$	—

The following table sets forth the pre-tax gains (losses) on derivatives designated as hedging instruments that have been included in the consolidated statements of earnings for the three and nine months ended September 30, 2017 and 2016.

		Three months ended
	Consolidated Statement of Earnings Locations	September 30,
		2017			2016
		(In millions)
Effective amounts recognized in earnings
Foreign Currency Contracts	Other income/expense – net	$	—		$	(3	)
Interest Contracts	Interest expense	—			(2		)
Commodity Contracts	Revenues	—			(9		)
	Cost of products sold	(15		)	(37		)
Ineffective amount recognized in earnings
Commodity Contracts	Revenues	—			(1		)
	Cost of products sold	(4		)	1
Total amount recognized in earnings		$	(19	)	$	(51	)

		Nine months ended
	Consolidated Statement of Earnings Locations	September 30,
		2017			2016
		(In millions)
Effective amounts recognized in earnings
Foreign Currency Contracts	Other income/expense – net	$	(2	)	$	(25	)
Interest Contracts	Interest expense	—			(2		)
Commodity Contracts	Revenues	—			(14		)
	Cost of products sold	(20		)	(61		)
Ineffective amount recognized in earnings
Commodity Contracts	Revenues	4			—
	Cost of products sold	5			5
Total amount recognized in earnings		$	(13	)	$	(97	)

Hedge ineffectiveness for commodity contracts results when the change in the price of the underlying commodity in a specific cash market differs from the change in the price of the derivative financial instrument used to establish the hedging relationship.  As an example, if the change in the price of a corn futures contract is strongly correlated to the change in cash price paid for corn, the gain or loss on the derivative instrument is deferred and recognized at the time the corn grind occurs.  If the change in price of the derivative does not strongly correlate to the change in the cash price of corn, in the same example, some portion or all of the derivative gains or losses may be required to be recognized in earnings prior to when the corn grind occurs.

Net Investment Hedging Strategies

On June 24, 2015, the Company issued €500 million aggregate principal amount of Floating Rate Notes and €600 million aggregate principal amount of 1.75% Notes (collectively, the “Notes”). The Company has designated €1.1 billion of the Notes as a hedge of its net investment in a foreign subsidiary. As of September 30, 2017, the Company has $47 million of after-tax losses in AOCI related to gains and losses from the net investment hedge transaction. The amount is deferred in AOCI until the underlying investment is divested.