Derivatives

Commodity Contracts

The Company’s operating results are affected by changes to commodity prices. The Grain and Ethanol businesses have established “unhedged” position limits (the amount of a commodity, either owned or contracted for, that does not have an offsetting derivative contract to lock in the price). To reduce the exposure to market price risk on commodities owned and forward grain and ethanol purchase and sale contracts, the Company enters into exchange traded commodity futures and options contracts and over the counter forward and option contracts with various counterparties. The exchange traded contracts are primarily via the regulated Chicago Mercantile Exchange. The Company’s forward purchase and sales contracts are for physical delivery of the commodity in a future period. Contracts to purchase commodities from producers generally relate to the current or future crop years for delivery periods quoted by regulated commodity exchanges. Contracts for the sale of commodities to processors or other commercial consumers generally do not extend beyond one year.

All of these contracts meet the definition of derivatives. While the Company considers its commodity contracts to be effective economic hedges, the Company does not designate or account for its commodity contracts as hedges as defined under current accounting standards. The Company accounts for its commodity derivatives at estimated fair value, the same method it uses to value its grain inventory. The estimated fair value of the commodity derivative contracts that require the receipt or posting of cash collateral is recorded on a net basis (offset against cash collateral posted or received, also known as margin deposits) within commodity derivative assets or liabilities. Management determines fair value based on exchange-quoted prices and in the case of its forward purchase and sale contracts, estimated fair value is adjusted for differences in local markets and non-performance risk. For contracts for which physical delivery occurs, balance sheet classification is based on estimated delivery date. For futures, options and over-the-counter contracts in which physical delivery is not expected to occur but, rather, the contract is expected to be net settled, the Company classifies these contracts as current or noncurrent assets or liabilities, as appropriate, based on the Company’s expectations as to when such contracts will be settled.

Realized and unrealized gains and losses in the value of commodity contracts (whether due to changes in commodity prices, changes in performance or credit risk, or due to sale, maturity or extinguishment of the commodity contract) and grain inventories are included in sales and merchandising revenues.

Generally accepted accounting principles permit a party to a master netting arrangement to offset fair value amounts recognized for derivative instruments against the right to reclaim cash collateral or obligation to return cash collateral under the same master netting arrangement. The Company has master netting arrangements for its exchange traded futures and options contracts and certain over-the-counter contracts. When the Company enters into a futures, options or an over-the-counter contract, an initial margin deposit may be required by the counterparty. The amount of the margin deposit varies by commodity. If the market price of a future, option or an over-the-counter contract moves in a direction that is adverse to the Company’s position, an additional margin deposit, called a maintenance margin, is required. The Company nets, by counterparty, its futures and over-the-counter positions against the cash collateral provided or received. The margin deposit assets and liabilities are included in short-term commodity derivative assets or liabilities, as appropriate, in the Consolidated Balance Sheets.

The following table presents at December 31, 2012 and December 31, 2011, a summary of the estimated fair value of the Company’s commodity derivative instruments that require cash collateral and the associated cash paid/received as collateral. The net asset or liability positions of these derivatives (net of their cash collateral) are determined on a counterparty-by-counterparty basis and are included within short-term commodity derivative assets (or liabilities) on the Consolidated Balance Sheets:



	December 31, 2012					December 31, 2011
(in thousands)	Net derivative asset position			Net derivative liability position		Net derivative asset position			Net derivative liability position
Collateral paid (received)	$	(13,772	)	$	—	$	66,870		$	—
Fair value of derivatives	61,247			—		(20,480		)	—
Balance at end of period	$	47,475		$	—	$	46,390		$	—

Grain inventory posted as collateral on our derivative contracts are recorded in Inventories on the Consolidated Balance Sheets and the fair value of such inventory was $7.7 million and $1.0 million as of December 31, 2012 and 2011, respectively.

The following table presents the fair value of the Company's commodity derivatives as of December 31, 2012 and 2011, and the balance sheet line item in which they are located:



	December 31,
(in thousands)	2012			2011
Forward commodity contracts included in Commodity derivative assets -current	55,630			37,560
Forward commodity contracts included in Commodity derivative assets - noncurrent	1,906			2,289
Forward commodity contracts included in Commodity derivative liabilities -current	(33,277		)	(15,874		)
Forward commodity contracts included in Commodity derivative liabilities - noncurrent	(1,134		)	(1,519		)
Regulated futures and options contracts included in Commodity derivatives (a)	60,738			(23,367		)
Over-the-counter contracts included in Commodity derivatives (a)	509			2,887
Total estimated fair value of commodity derivatives	$	84,372		$	1,976

(a) The fair value of futures, options and over-the-counter contracts are offset by cash collateral posted or received and included as a net amount in the Consolidated Balance Sheets.

The following table sets forth the fair value of commodity derivatives as of December 31, 2012 on a gross basis by contract type:



(in thousands)	Total Assets		Total Liabilities
Purchase contracts	$	45,140	$	(44,734	)
Sales contracts	$	103,973	$	(19,165	)

The gains included in the Company’s Consolidated Statements of Income and the line items in which they are located for the years ended December 31, 2012 and 2011 are as follows:



	December 31,
(in thousands)	2012		2011
Gains (losses) on commodity derivatives included in sales and merchandising revenues	$	40,214	$	131,209

At December 31, 2012, the Company had the following volume of commodity derivative contracts outstanding (on a gross basis):



Commodity	Number of bushels (in thousands)	Number of gallons (in thousands)	Number of pounds (in thousands)	Number of tons (in thousands)
Non-exchange traded:
Corn	224,019	—	—	—
Soybeans	14,455	—	—	—
Wheat	19,407	—	—	—
Oats	8,113	—	—	—
Ethanol	—	76,099	—	—
Corn oil	—	—	11,082	—
Other	27	—	—	72
Subtotal	266,021	76,099	11,082	72
Exchange traded:
Corn	106,305	—	—	—
Soybeans	8,820	—	—	—
Wheat	41,125	—	—	—
Oats	4,345	—	—	—
Bean oil	—	—	48,000	—
Ethanol	—	3,795	—	—
Other	—	—	—	1
Subtotal	160,595	3,795	48,000	1
Total	426,616	79,894	59,082	73

Interest Rate Derivatives

The Company periodically enters into interest rate contracts to manage interest rate risk on borrowing or financing activities. One of the Company's long-term interest rate swaps is recorded in other long-term liabilities and is designated as a cash flow hedge; accordingly, changes in the fair value of this instrument are recognized in other comprehensive income. The terms of the swap match the terms of the underlying debt instrument. The deferred derivative gains and losses on the interest rate swap are reclassified into income over the term of the underlying hedged items. For the year ended December 31, 2012, the Company reclassified $0.3 million of accumulated other comprehensive income into earnings and for the years ended December 31, 2011 and 2010, the Company reclassified $0.1 million and $0.1 million of accumulated other comprehensive loss into earnings, respectively. The Company expects to reclassify less than $0.5 million of accumulated other comprehensive loss into earnings in the next twelve months.

The Company has other interest rate contracts that are not designated as hedges. While the Company considers all of its interest rate derivative positions to be effective economic hedges of specified risks, these interest rate contracts are recorded on the balance sheet in other current assets or liabilities (if short-term in nature) or in other assets or other long-term liabilities (if non-current in nature) and changes in fair value are recognized currently in income as interest expense.

The following table presents the open interest rate contracts at December 31, 2012:



Interest Rate Hedging Instrument	Year Entered	Year of Maturity	Initial Notional Amount (in millions)		Hedged Item	Interest Rate

Short-term
Caps	2012	2013	$	80.0	Interest rate component of debt - not accounted for as a hedge	0.6% to 1.7%

Long-term
Swap	2006	2016	$	4.0	Interest rate component of an operating lease - not accounted for as a hedge	5.2%
Swap	2006	2016	$	14.0	Interest rate component of debt - accounted for as cash flow hedge	6.0%
Swap	2012	2023	$	23.0	Interest rate component of debt - not accounted for as a hedge	4.4%
Caps	2012	2014	$	40.0	Interest rate component of debt - not accounted for as a hedge	0.8% to 1.4%
Cap	2012	2015	$	10.0	Interest rate component of debt - not accounted for as a hedge	0.9%
Cap	2012	2016	$	10.0	Interest rate component of debt - not accounted for as a hedge	1.5%

At December 31, 2012 and 2011, the Company had recorded the following amounts for the fair value of the Company's interest rate derivatives:



	December 31,
(in thousands)	2012			2011
Derivatives not designated as hedging instruments
Interest rate contracts included in other assets	23			31
Interest rate contracts included in other long term liabilities	(592		)	(372		)
Total fair value of interest rate derivatives not designated as hedging instruments	$	(569	)	$	(341	)
Derivatives designated as hedging instruments
Interest rate contract included in other long term liabilities	(1,540		)	(1,856		)
Total fair value of interest rate derivatives designated as hedging instruments	$	(1,540	)	$	(1,856	)

The losses included in the Company's Consolidated Statements of Income and the line item in which they are located for interest rate derivatives not designated as hedging instruments are as follows:



	Year ended December 31,
(in thousands)	2012			2011
Interest expense	$	(350	)	$	(232	)

The losses included in the Company's Consolidated Statements of Equity and the line item in which they are located for interest rate derivatives designated as hedging instruments are as follows:



	Year ended December 31,
(in thousands)	2012		2011
Accumulated other comprehensive loss	$	316	$	(88	)

Swaptions

The Company holds swaptions for Rail purchase options on sale leaseback transactions to manage the risk of higher interest rates in the future. The swaptions are recorded at fair value and are marked-to-market each reporting period, with the change recorded in income as interest expense. At December 31, 2012 and 2011, the Company had recorded the following amount for the fair value of the Company's swaptions:



	December 31,
(in thousands)	2012		2011
Swaptions included in other assets	$	—	$	19

The losses included in the Company's Consolidated Statements of Income and the line item in which they are located for swaptions are as follows:



	December 31,
(in thousands)	2012			2011
Interest expense	$	(19	)	$	(328	)