Derivatives

9 Months Ended

Sep. 30, 2021

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 Risk – Cash 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, 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 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 $976,000 and gains of $1,582,000 as the change in the fair value of these contracts for the three months ended September 30, 2021 and 2020, respectively. The Company recognized net gains of $18,435,000 and $1,582,000 as the change in the fair value of these contracts for the nine months ended September 30, 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 September 30, 2021
	Assets			Liabilities
Type of Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Cash collateral balance	Other current assets	$	757
Commodity contracts	Derivative assets	$	12,977	Derivative liabilities	$	2,735

	As of December 31, 2020
	Assets			Liabilities
Type of Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Cash collateral balance	Other current assets	$	520
Commodity contracts	Derivative assets	$	17,149	Derivative liabilities	$	—

The classification and amounts of the Company’s recognized gains for its derivatives not designated as hedging instruments are as follows (in thousands):

		Realized Losses
		Three Months Ended September 30,
Type of Instrument	Statements of Operations Location	2021			2020
Commodity contracts	Cost of goods sold	$	(2,894	)	$	(531	)

		Unrealized Gains
		Three Months Ended September 30,
Type of Instrument	Statements of Operations Location	2021		2020
Commodity contracts	Cost of goods sold	$	1,918	$	2,113

		Realized Gains
		Nine Months Ended September 30,
Type of Instrument	Statements of Operations Location	2021		2020
Commodity contracts	Cost of goods sold	$	21,449	$	47

		Unrealized Gains (Losses)
		Nine Months Ended September 30,
Type of Instrument	Statements of Operations Location	2021			2020
Commodity contracts	Cost of goods sold	$	(3,014	)	$	1,535