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Fair Value Measurements
6 Months Ended
Feb. 28, 2015
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements

The following tables present assets and liabilities, included on our Consolidated Balance Sheets, that are recognized at fair value on a recurring basis, and indicate the fair value hierarchy utilized to determine such fair values. Assets and liabilities are classified, in their entirety, based on the lowest level of input that is a significant component of the fair value measurement. The lowest level of input is considered Level 3. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of fair value assets and liabilities within the fair value hierarchy levels.

Recurring fair value measurements at February 28, 2015 and August 31, 2014 are as follows:
 
February 28, 2015
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(Dollars in thousands)
Assets:
 

 
 

 
 

 
 

Readily marketable inventories
$

 
$
1,246,484

 
$

 
$
1,246,484

Commodity and freight derivatives
126,415

 
469,579

 

 
595,994

Foreign currency derivatives
5,620

 

 

 
5,620

Interest rate swap derivatives

 
12,390

 

 
12,390

Deferred compensation assets
84,479

 

 

 
84,479

Other assets
11,013

 

 

 
11,013

Total
$
227,527

 
$
1,728,453

 
$

 
$
1,955,980

Liabilities:
 

 
 

 
 
 
 

Commodity and freight derivatives
$
157,780

 
$
307,205

 
$

 
$
464,985

Interest rate swap derivatives

 
4,390

 

 
4,390

Foreign currency derivatives
13,215

 

 

 
13,215

Accrued liability for contingent crack spread payments related to purchase of noncontrolling interests

 

 
121,070

 
121,070

Total
$
170,995

 
$
311,595

 
$
121,070

 
$
603,660


 
August 31, 2014
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
Readily marketable inventories
$

 
$
921,554

 
$

 
$
921,554

Commodity and freight derivatives
78,590

 
518,620

 

 
597,210

Interest rate swap derivatives

 
4,200

 

 
4,200

Foreign currency derivatives
2,523

 

 

 
2,523

Deferred compensation assets
83,217

 

 

 
83,217

Other assets
8,778

 

 

 
8,778

Total
$
173,108

 
$
1,444,374

 
$

 
$
1,617,482

Liabilities:
 
 
 
 
 
 
 
Commodity and freight derivatives
$
117,690

 
$
479,922

 
$

 
$
597,612

Interest rate swap derivatives

 
130

 

 
130

Foreign currency derivatives
2,248

 

 

 
2,248

Accrued liability for contingent crack spread payments related to purchase of noncontrolling interests

 

 
114,917

 
114,917

Total
$
119,938

 
$
480,052

 
$
114,917

 
$
714,907


Readily marketable inventories — Our readily marketable inventories primarily include grain, oilseed, and minimally processed soy-based inventories that are stated at fair values. These commodities are readily marketable, have quoted market prices and may be sold without significant additional processing. We estimate the fair market values of these inventories included in Level 2 primarily based on exchange quoted prices, adjusted for differences in local markets. Changes in the fair market values of these inventories are recognized in our Consolidated Statements of Operations as a component of cost of goods sold.

Commodity, freight and foreign currency derivatives — Exchange traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified within Level 1. Our forward commodity purchase and sales contracts, flat price or basis fixed derivative contracts, ocean freight contracts and other OTC derivatives are determined using inputs that are generally based on exchange traded prices and/or recent market bids and offers, adjusted for location specific inputs, and are classified within Level 2. The location specific inputs are generally broker or dealer quotations, or market transactions in either the listed or OTC markets. Changes in the fair values of these contracts are recognized in our Consolidated Statements of Operations as a component of cost of goods sold.

Interest rate swap derivatives — Fair values of our interest rate swap liabilities are determined utilizing valuation models that are widely accepted in the market to value such OTC derivative contracts. The specific terms of the contracts, as well as market observable inputs, such as interest rates and credit risk assumptions, are factored into the models. As all significant inputs are market observable, all interest rate swaps are classified within Level 2. Changes in the fair values of contracts not designated as hedging instruments for accounting purposes are recognized in our Consolidated Statements of Operations as a component of interest, net. See Note 11, Derivative Financial Instruments and Hedging Activities for additional information about interest rate swaps designated as fair value and cash flow hedges.
        
Deferred compensation and other assets — Our deferred compensation investments, Rabbi Trust assets and available-for-sale investments in common stock of other companies are valued based on unadjusted quoted prices on active exchanges and are classified within Level 1. Changes in the fair values of these other assets are primarily recognized in our Consolidated Statements of Operations as a component of marketing, general and administrative expenses.
 
Accrued liability for contingent crack spread payment related to purchase of noncontrolling interests — The fair value of the accrued contingent consideration liability was calculated utilizing an average price option model, an adjusted Black-Scholes pricing model commonly used in the energy industry to value options. The model uses market observable inputs and unobservable inputs. Due to significant unobservable inputs used in the pricing model, the liability is classified within Level 3.
Quantitative Information about Level 3 Fair Value Measurements
 
 
Fair Value
 
 
 
 
 
Range
Item
 
February 28, 2015
(Dollars in thousands)
 
Valuation Technique
 
Unobservable Input
 
(Weighted Average)
Accrued liability for contingent crack spread payments related to purchase of noncontrolling interests
 
$121,070
 
Adjusted Black-Scholes option pricing model
 
Forward crack spread margin on February 28, 2015 (a)
 
$20.78-$21.79 ($21.55)
 
Contractual target crack spread margin (b)
 
$17.50
 
Expected volatility (c)
 
165.25%
 
Risk-free interest rate (d)
 
0.09%-0.94% (0.53%)
 
Expected life - years (e)
 
0.50-2.50 (1.57)

(a) Represents forward crack spread margin quotes and management estimates based on future settlement dates
(b) Represents the minimum contractual threshold that would require settlement with the counterparties
(c) Represents quarterly adjusted volatility estimates derived from daily historical market data
(d) Represents yield curves for U.S. Treasury securities
(e) Represents the range in the number of years remaining related to each contingent payment

Valuation processes for Level 3 measurements — Management is responsible for determining the fair value of our Level 3 financial instruments. Option pricing methods are utilized, as indicated above. Inputs used in the option pricing models are based on quotes obtained from third party vendors as well as management estimates for periods in which quotes cannot be obtained. Each reporting period, management reviews the unobservable inputs provided by third-party vendors for reasonableness utilizing relevant information available to us. Management also takes into consideration current and expected market trends and compares the liability’s fair value to hypothetical payments using known historical market data to assess reasonableness of the resulting fair value.

Sensitivity analysis of Level 3 measurements — The significant unobservable inputs that are susceptible to periodic fluctuations used in the fair value measurement of the accrued liability for contingent crack spread payments related to the purchase of noncontrolling interests are the adjusted forward crack spread margin and the expected volatility. Significant increases (decreases) in either of these inputs in isolation would result in a significantly higher (lower) fair value measurement. Although changes in the expected volatility are driven by fluctuations in the underlying crack spread margin, changes in expected volatility are not necessarily accompanied by a directionally similar change in the forward crack spread margin. Directional changes in the expected volatility can be affected by a multitude of factors including the magnitude of daily fluctuations in the underlying market data, market trends, timing of fluctuations, and other factors.

The following table represents a reconciliation of liabilities measured at fair value using significant unobservable inputs (Level 3) for the three months ended February 28, 2015 and 2014, respectively:
 
 
Level 3 Liabilities
 
 
Accrued liability for contingent crack spread payments related to purchase of noncontrolling interests
 
 
2015
 
2014
 
 
(Dollars in thousands)
Balances, November 30, 2014 and 2013, respectively
 
$
86,520

 
$
150,991

Total (gains) losses included in cost of goods sold
 
34,550

 
(10,360
)
Balances, February 28, 2015 and 2014, respectively
 
$
121,070

 
$
140,631



The following table represents a reconciliation of liabilities measured at fair value using significant unobservable inputs (Level 3) for the six months ended February 28, 2015 and 2014, respectively:
 
 
Level 3 Liabilities
 
 
Accrued liability for contingent crack spread payments related to purchase of noncontrolling interests
 
 
2015
 
2014
 
 
(Dollars in thousands)
Balances, August 31, 2014 and 2013, respectively
 
$
114,917

 
$
134,134

Total (gains) losses included in cost of goods sold
 
6,153

 
6,497

Balances, February 28, 2015 and 2014, respectively
 
$
121,070

 
$
140,631



There were no material transfers between Level 1, Level 2 and Level 3 assets and liabilities.