9. Fair Value Measurements

Generally accepted accounting principles defines fair value as an exit price and also establishes a framework for measuring fair value. An exit price represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy is used, which prioritizes the inputs used in measuring fair value as follows:

•

Level 1 inputs: Quoted prices (unadjusted) for identical assets or liabilities in active markets;

•

Level 2 inputs: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly; and

•

Level 3 inputs: Unobservable inputs (e.g., a reporting entity's own data).

In many cases, a valuation technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.

The following table presents the Company's assets and liabilities that are measured at fair value on a recurring basis at December 31, 2011 and 2010.

(in thousands)

December 31, 2011

Assets (liabilities)

Level 1

Level 2

Level 3

Total

Cash equivalents

183

—

183

Commodity derivatives, net

43,503

22,876

2,467

68,846

Convertible preferred securities (b)

—

20,360

Other assets and liabilities (a)

24,875

—

(2,178

)

22,697

Total

68,561

22,876

20,649

112,086


(in thousands)	December 31, 2010
Assets (liabilities)	Level 1		Level 2		Level 3			Total
Cash equivalents	$	213	$	—	$	—		$	213
Commodity derivatives, net		61,559		129,723		12,406			203,688
Convertible preferred securities (b)		—		—		15,790			15,790
Other assets and liabilities (a)		17,983		—		(2,156	)		15,827

Total	$	79,755	$	129,723	$	26,040		$	235,518

(a)	Included in other assets and liabilities is restricted cash, interest rate and foreign currency derivatives, swaptions and deferred compensation assets.

(b)	Recorded in "Other noncurrent assets" on the Company's Consolidated Balance Sheets

Level 1 commodity derivatives reflect the fair value of the futures and options contracts that the Company holds, net of the cash collateral that the Company has in its margin account.

A reconciliation of beginning and ending balances for the Company's fair value measurements using Level 3 inputs is as follows:


	2011								2010
(in thousands)	Interest rate derivatives and swaptions			Convertible preferred securities		Commodity derivatives, net			Interest rate derivatives			Convertible preferred securities		Commodity derivatives, net
Asset (liability) at December 31,	$	(2,156	)	$	15,790	$	12,406		$	(1,763	)	$	—	$	1,948
Investment in debt securities		—			—		—			—			13,100		—
Gains (losses) included in earnings		(560	)		—		(9,109	)		(132	)		—		(1,519	)
Unrealized gains (losses) included in other comprehensive income		(62	)		—		—			(297	)		—		—
Increase in estimated fair value of investment in debt securities included in other comprehensive income		—			4,570		—			—			2,690		—
New contracts entered into		600			—		—			36			—		—
Transfers to level 2		—			—		(1,234	)		—			—		—
Transfers from level 2		—			—		404			—			—		11,977

Asset (liability) at December 31,	$	(2,178	)	$	20,360	$	2,467		$	(2,156	)	$	15,790	$	12,406

The majority of the Company's assets and liabilities measured at fair value are based on the market approach valuation technique. With the market approach, fair value is derived using prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

The Company's convertible preferred securities are measured at fair value using a combination of the income and market approaches. Specifically, the income approach incorporates the use of the Discounted Cash Flow method, whereas the Market Approach incorporates the use of the Guideline Public Company method. Application of the Discounted Cash Flow method requires estimating the annual cash flows that the business enterprise is expected to generate in the future. The assumptions input into this method are estimated annual cash flows for a specified estimation period, the discount rate, and the terminal value at the end of the estimation period. In the Guideline Public Company method, valuation multiples, including total invested capital, are calculated based on financial statements and stock price data from selected guideline publicly traded companies. A comparative analysis is then performed for factors including, but not limited to size, profitability and growth to determine fair value.

The Company's net commodity derivatives primarily consist of futures or options contracts via regulated exchanges and contracts with producers or customers under which the future settlement date and bushels (or gallons in the case of ethanol contracts) of commodities to be delivered (primarily wheat, corn, soybeans and ethanol) are fixed and under which the price may or may not be fixed. Depending on the specifics of the individual contracts, the fair value is derived from the futures or options prices on the CME or the New York Mercantile Exchange for similar commodities and delivery dates as well as observable quotes for local basis adjustments (the difference, which is attributable to local market conditions, between the quoted futures price and the local cash price). Although nonperformance risk, both of the Company and the counterparty, is present in each of these commodity contracts and is a component of the estimated fair values, based on the Company's historical experience with its producers and customers and the Company's knowledge of their businesses, the Company does not view nonperformance risk to be a significant input to fair value for the majority of these commodity contracts. However, in situations where the Company believes that nonperformance risk exists, based on past or present experience with a customer or knowledge of the customer's operations or financial condition, the Company classifies these commodity contracts as Level 3 in the fair value hierarchy and, accordingly, records estimated fair value adjustments based on internal projections and views of these contracts.

Fair Values of Financial Instruments

Certain long-term notes payable and the Company's debenture bonds bear fixed rates of interest and terms of up to 10 years. Based upon the Company's credit standing and current interest rates offered by the Company on similar bonds and rates currently available to the Company for long-term borrowings with similar terms and remaining maturities, the Company estimates the fair values of its long-term debt instruments outstanding at December 31, 2011 and 2010, as follows:


(in thousands)	Carrying Amount		Fair Value
2011:
Fixed rate long-term notes payable	$	179,160	$	186,918
Long-term notes payable, non-recourse		954		966
Debenture bonds		29,483		30,666

	$	209,597	$	218,550


2010:
Fixed rate long-term notes payable	$	196,242	$	199,292
Long-term notes payable, non-recourse		15,991		16,157
Debenture bonds		36,887		39,991

	$	249,120	$	255,440

The fair values of the Company's cash equivalents, accounts receivable, and accounts payable approximate their carrying values as they are close to maturity.