Derivatives

9 Months Ended

Sep. 30, 2023

Derivatives [Abstract]

DERIVATIVES

4. 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 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, 2023 and 2022, 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 futures contracts or options for those commodities. These derivatives are not designated for hedge accounting treatment. The changes in the 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 $2,711,000 and net gains of $1,772,000 as the change in the fair value of these contracts for the three months ended September 30, 2023 and 2022, respectively. The Company recognized net gains of $2,463,000 and $20,164,000 as the change in the fair value of these contracts for the nine months ended September 30, 2023 and 2022, 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, 2023
	Assets			Liabilities
Type of Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Cash collateral balance	Restricted cash	$	8,699
Commodity contracts	Derivative instruments	$	3,974	Derivative instruments	$	7,249

	As of December 31, 2022
	Assets			Liabilities
Type of Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Cash collateral balance	Restricted cash	$	13,069
Commodity contracts	Derivative instruments	$	4,973	Derivative instruments	$	6,732

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 the Company’s intent is to close out positions individually, therefore, the positions 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 Gains (Losses)
		For the Three Months Ended September 30,
Type of Instrument	Statements of Operations Location	2023		2022
Commodity contracts	Cost of goods sold	$	6,206	$	(13,332	)
		$	6,206	$	(13,332	)

		Realized Gains
		For the Nine Months Ended September 30,
Type of Instrument	Statements of Operations Location	2023		2022
Commodity contracts	Cost of goods sold	$	3,980	$	16,143
		$	3,980	$	16,143

		Unrealized Gains (Losses)
		For the Three Months Ended September 30,
Type of Instrument	Statements of Operations Location	2023			2022
Commodity contracts	Cost of goods sold	$	(8,917	)	$	11,560
		$	(8,917	)	$	11,560

		Unrealized Gains (Losses)
		For the Nine Months Ended September 30,
Type of Instrument	Statements of Operations Location	2023			2022
Commodity contracts	Cost of goods sold	$	(1,517	)	$	4,021
		$	(1,517	)	$	4,021