Derivative Financial Instruments and Hedging Activities

6 Months Ended

Feb. 28, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments and Hedging Activities Disclosure

Derivative Financial Instruments and Hedging Activities

Our derivative instruments primarily consist of commodity and freight futures and forward contracts and, to a minor degree, may include foreign currency and interest rate swap contracts. These contracts are economic hedges of price risk, but we do not apply hedge accounting under ASC Topic 815, Derivatives and Hedging, except with respect to certain interest rate swap contracts which are accounted for as cash flow or fair value hedges. Derivative instruments are recorded on our Consolidated Balance Sheets at fair value as described in Note 11, Fair Value Measurements.

The following tables present the gross fair values of derivative assets, derivative liabilities, and margin deposits (cash collateral) recorded on our Consolidated Balance Sheets along with the related amounts permitted to be offset in accordance with GAAP. We have elected not to offset derivative assets and liabilities when we have the right of offset under ASC Topic 210-20, Balance Sheet - Offsetting; or when the instruments are subject to master netting arrangements under ASC Topic 815-10-45, Derivatives and Hedging - Overall.

	February 28, 2017
			Amounts Not Offset on the Consolidated Balance Sheet but Eligible for Offsetting
	Gross Amounts Recognized		Cash Collateral		Derivative Instruments		Net Amounts
	(Dollars in thousands)
Derivative Assets:
Commodity and freight derivatives	$	348,144	$	—	$	19,843	$	328,301
Foreign exchange derivatives	27,548		—		10,317		17,231
Interest rate derivatives - hedge	6,892		—		—		6,892
Embedded derivative asset - current	4,029		—		—		4,029
Total current derivatives	$	386,613	$	—	$	30,160	$	356,453
Embedded derivative asset - long term	20,540		—		—		20,540
Total	$	407,153	$	—	$	30,160	$	376,993
Derivative Liabilities:
Commodity and freight derivatives	$	254,618	$	80	$	19,843	$	234,695
Foreign exchange derivatives	18,537		—		10,317		8,220
Interest rate derivatives - hedge	2,327		—		—		2,327
Interest rate derivatives - non-hedge	2		—		—		2
Total	$	275,484	$	80	$	30,160	$	245,244

	August 31, 2016
			Amounts Not Offset on the Consolidated Balance Sheet but Eligible for Offsetting
	Gross Amounts Recognized		Cash Collateral		Derivative Instruments		Net Amounts
	(Dollars in thousands)
Derivative Assets:
Commodity and freight derivatives	$	500,192	$	—	$	23,689	$	476,503
Foreign exchange derivatives	21,551		—		9,187		12,364
Interest rate derivatives - hedge	22,078		—		—		22,078
Total	$	543,821	$	—	$	32,876	$	510,945
Derivative Liabilities:
Commodity and freight derivatives	$	491,302	$	811	$	23,689	$	466,802
Foreign exchange derivatives	22,289		—		9,187		13,102
Interest rate derivatives - non-hedge	8		—		—		8
Total	$	513,599	$	811	$	32,876	$	479,912

Derivatives Not Designated as Hedging Instruments

The majority of our derivative instruments have not been designated as hedging instruments for accounting purposes. The following table sets forth the pretax gains (losses) on derivatives not accounted for as hedging instruments that have been included in our Consolidated Statements of Operations for the three and six months endedFebruary 28, 2017, and February 29, 2016.

		For the Three Months Ended						For the Six Months Ended
	Location of Gain (Loss)	February 28, 2017			February 29, 2016			February 28, 2017			February 29, 2016
		(Dollars in thousands)
Commodity and freight derivatives	Cost of goods sold	$	56,896		$	54,971		$	75,305		$	90,017
Foreign exchange derivatives	Cost of goods sold	(3,429		)	(10,481		)	2,595			(9,798		)
Foreign exchange derivatives	Marketing, general and administrative	(951		)	7,605			(806		)	15,128
Interest rate derivatives	Interest expense	1			(500		)	4			(1,203		)
Embedded derivative	Other Income	468			—			29,574			—
Total		$	52,985		$	51,595		$	106,672		$	94,144

Commodity and Freight Contracts:

As of February 28, 2017, and August 31, 2016, we had outstanding commodity futures, options and freight contracts that were used as economic hedges, as well as fixed-price forward contracts related to physical purchases and sales of commodities. The table below presents the notional volumes for all outstanding commodity and freight contracts accounted for as derivative instruments.

	February 28, 2017		August 31, 2016
	Long	Short	Long	Short
	(Units in thousands)
Grain and oilseed - bushels	635,896	1,001,200	774,279	995,396
Energy products - barrels	10,493	6,732	14,740	6,470
Processed grain and oilseed - tons	365	2,344	541	2,060
Crop nutrients - tons	160	225	108	135
Ocean and barge freight - metric tons	5,365	727	4,406	877
Rail freight - rail cars	165	51	205	79
Natural gas - MMBtu	2,467	—	3,550	300

Foreign Exchange Contracts:

We are exposed to risk regarding foreign currency fluctuations even though a substantial amount of international sales are denominated in U.S. dollars. In addition to specific transactional exposure, foreign currency fluctuations can impact the ability of foreign buyers to purchase U.S. agricultural products and the competitiveness of U.S. agricultural products compared to the same products offered by alternative sources of world supply. From time to time, we enter into foreign currency hedge contracts to minimize the impact of currency fluctuations on our transactional exposures. The notional amounts of our foreign exchange derivative contracts were $903.4 million and $802.2 million as of February 28, 2017, and August 31, 2016, respectively.

Embedded Derivative Asset:

Under the terms of our strategic investment in CF Nitrogen, if CF Industries' credit rating is reduced below certain levels by two of three specified credit ratings agencies, we are entitled to receive a non-refundable annual payment of $5.0 million from CF Industries. The payment would continue on an annual basis until the date that CF Industries' credit rating is upgraded to or above certain levels by two of the three specified credit ratings agencies or February 1, 2026, whichever is earlier.

During the three months ended November 30, 2016, CF Industries' credit rating was reduced below the specified levels and we recorded a gain of $29.1 million in other income in our Consolidated Statement of Operations. During November 2016 we received a $5.0 million payment from CF Industries, which reduced the fair value of the associated embedded derivative asset to $24.1 million as of November 30, 2016. In addition, during the three months ended February 28, 2017, we recorded adjustments of $0.5 million in other income in our Consolidated Statement of Operations to reflect the $24.6 million fair value of the embedded derivative asset on our Consolidated Balance Sheet as of February 28, 2017. The current and long-term portions of the embedded derivative asset are included in derivative assets and other assets on our Consolidated Balance Sheet, respectively. See Note 11, Fair Value Measurements for more information on the valuation of the embedded derivative.

Derivatives Designated as Cash Flow or Fair Value Hedging Strategies

As of February 28, 2017, and August 31, 2016, we had certain derivatives designated as cash flow and fair value hedges.

Interest Rate Contracts:

We have outstanding interest rate swaps with an aggregate notional amount of $495.0 million designated as fair value hedges of portions of our fixed-rate debt. Our objective in entering into these transactions is to offset changes in the fair value of the debt associated with the risk of variability in the 3-month U.S. dollar LIBOR interest rate, in essence converting the fixed-rate debt to variable-rate debt. Offsetting changes in the fair values of both the swap instruments and the hedged debt are recorded contemporaneously each period and only create an impact to earnings to the extent that the hedge is ineffective. During the six months endedFebruary 28, 2017, and February 29, 2016, we recorded offsetting fair value adjustments of $17.5 million and $11.5 million, respectively, with no ineffectiveness recorded in earnings.

In fiscal 2015, we entered into forward-starting interest rate swaps with an aggregate notional amount of $300.0 million designated as cash flow hedges of the expected variability of future interest payments on our anticipated issuance of fixed-rate debt. During the first quarter of fiscal 2016, we determined that certain of the anticipated debt issuances would be delayed; and we consequently recorded the losses on the ineffective portion of the related swaps in earnings. Additionally, we paid $6.4 million in cash to settle two of the interest rate swaps upon their scheduled termination dates. During the second quarter of fiscal 2016, we settled an additional two interest rate swaps, paying $5.3 million in cash upon their scheduled termination. In January 2016, we issued the fixed-rate debt associated with these swaps and will amortize the amounts which were previously deferred to other comprehensive income into earnings over the life of the debt. The amounts to be included in earnings are not expected to be material during any 12-month period. During the third quarter of fiscal 2016, we settled the remaining two interest rate swaps, paying $5.1 million in cash upon their scheduled termination. We did not issue additional fixed-rate debt as previously planned, and we reclassified all amounts previously recorded to other comprehensive income into earnings. As of February 28, 2017, we had no outstanding cash flow hedges.

The following table presents the pretax gains (losses) recorded in other comprehensive income relating to cash flow hedges for the three and six months endedFebruary 28, 2017, and February 29, 2016.

	For the Three Months Ended					For the Six Months Ended
	February 28, 2017		February 29, 2016			February 28, 2017		February 29, 2016
	(Dollars in thousands)
Interest rate derivatives	$	—	$	(3,252	)	$	—	$	(10,070	)

The following table presents the pretax gains (losses) relating to cash flow hedges that were reclassified from accumulated other comprehensive loss into income for the three and six months endedFebruary 28, 2017, and February 29, 2016.

		For the Three Months Ended						For the Six Months Ended
	Location of Gain (Loss)	February 28, 2017			February 29, 2016			February 28, 2017			February 29, 2016
		(Dollars in thousands)
Interest rate derivatives	Interest expense	$	(436	)	$	(275	)	$	(877	)	$	(465	)