Note 6 - Derivative Instruments and Fair Value Measurements.

3 Months Ended

Sep. 30, 2011

Derivative Instruments And Fair Value Measurements [Text Block]

Note 6.  Derivative Instruments and Fair Value Measurements.

Derivative Instruments.  See Note 1. Accounting Policies and Basis of Presentation – Derivative Instruments for discussion on the Company’s derivative instruments and the accounting thereof.

Certain commodities the Company uses in its production process are exposed to market price risk due to volatility in the prices for those commodities.  The Company uses financial derivative instruments to reduce exposure to market risk in commodity prices, primarily corn, through a combination of forward purchases, long-term contracts with suppliers and exchange traded commodity futures and option contracts.  Specifically, the Company will sell put options on commodity futures at exercise prices that are deemed attractive to the Company and use the premiums received to reduce the overall cost of inputs utilized in the production process.  During the current quarter, the Company began to buy and sell derivative instruments to manage market risk associated with ethanol purchases, including ethanol futures and option contracts.  These contracts were entered into to mitigate risks associated with our investment in ICP.  Effective July 1, 2011, management elected to restart hedge accounting for qualifying derivative contracts entered into on and after July 1, 2011.  As of September 30, 2011, the Company has certain exchange traded corn futures contracts designated as cash flow hedges.  No ethanol futures or option contracts have been designated as hedges as of September 30, 2011.

Derivatives Not Designated as Hedging Instruments

The Company’s production process involves the use of natural gas, which it purchases under contracts that require it to commit to the purchase of certain quantities on a monthly basis and allow the Company to lock in prices on such purchase quantities.  Because the quantities involved have always been for amounts to be consumed within the normal production process, the Company has determined that these contracts meet the normal purchases and sales exception as defined under ASC 815, Derivatives and Hedging, and have excluded the fair value of these commitments from recognition within its condensed financial statements until the actual contracts are physically settled.  See Note 5. Commitments and Contingencies for discussion on the Company’s natural gas purchase commitments.

The following table provides the gain or (loss) for the Company’s commodity derivatives not designated as hedging instruments and where it was recognized in the Condensed Consolidated Statements of Operations.

		Quarter Ended
	Classified	September 30, 2011			September 30, 2010
Commodity derivatives	Cost of sales	$	(1,016	)	$	3,023

The Company uses corn futures contracts for the purchase of corn and also uses call and put options in order to mitigate the impact of potential changes in market conditions.  Beginning July 1, 2011, the Company started entering into ethanol derivative contracts to fix the sales price of certain ethanol purchase contracts and mitigate the impact of potential changes in market conditions. At September 30, 2011, the Company had the follow open derivative contracts not designated as hedging instruments:

Corn futures	2,355,000 bushels, expiring no later than March, 2012
Corn call options	645,000 bushels, expiring no later than December, 2011
Corn put options	2,125,000 bushels, expiring no later than December, 2011
Ethanol futures	4,219,500 gallons, maturing through December, 2012
Ethanol call options	435,000 gallons, maturing through March, 2012

Derivatives Designated as Cash Flow Hedges

The Company, from time to time, uses futures or options contracts to fix the purchase price of anticipated volumes of corn to be purchased and processed in a future month.  The Company’s corn processing plants currently grind approximately 1,300,000 bushels of corn per month.  The Company typically enters into cash flow hedges to cover between 70 percent and 80 percent of its monthly anticipated grind.  Effective October 20, 2011, the Company’s amended Credit Agreement requires it to hedge the input costs of 100 percent of all contracted sales of inventory, and not less than 40 percent of the input costs of inventory to be sold on the spot market, as further described in Note 10. Subsequent Events.  At September 30, 2011, the Company had open exchange traded futures contracts to purchase 4,145,000 bushels of corn that qualified as cash-flow hedges, which have maturities that run through March, 2013.

	Amount of Gains (Losses) Recognized in OCI on Derivatives						Amount of Gains (Losses) Reclassified from AOCI into Earnings
Derivatives in Cash Flow Hedging Relationship	Quarter Ended September 30, 2011			Quarter Ended September 30, 2010		Location of Losses Reclassified from AOCI into Income	Quarter Ended September 30, 2011		Quarter Ended September 30, 2010
Commodity derivatives	$	(3,613	)		n/a	Cost of sales	$	120		n/a

As of September 30, 2011, the Company recorded $3,493 of net losses in AOCI related to gains and losses from changes in fair value of commodity cash flow hedge transactions and reclassified a deminimus amount of net losses deferred in AOCI to cost of goods sold as a result of cash flow hedge ineffectiveness.   The Company expects any  losses ultimately realized to largely be offset by changes in the underlying cost of corn purchased.  The actual amount of any losses realized for open derivative positions will be dependent on future prices.

Fair Value Measurements.In accordance with ASC 820, Fair Value Measurements and Disclosures, the fair value of an asset is considered the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Statement also establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The fair value hierarchy gives the highest priority to quoted market prices (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of inputs used to measure fair value are as follows:

• Level 1—quoted prices in active markets for identical assets or liabilities accessible by the reporting entity.

• Level 2—observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

• Level 3—unobservable inputs for an asset or liability. Unobservable inputs should only be used to the extent observable inputs are not available.

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were measured at fair value on a recurring basis as of September 30, 2011 and June 30, 2011, respectively.  At September 30, 2011, $169 of corn derivative assets and $5,513 of corn derivative liabilities, both related to futures contracts, were included in Level 2 and at June 30, 2011, $298 of corn derivative assets and $2,125 of corn derivative liabilities, both related to futures contracts, were included in Level 2, as further described following the table below.  Given that the fair value of the futures contracts held at September 30, 2011 and June 30, 2011 were based upon an observable proxy, the Company has classified these contracts as level 2 within the fair value hierarchy.  Management believes that under specific circumstances the opening value on the next day the market was open, October 3, 2011 and July 1, 2011, represented better estimates of fair value.

The following table shows the fair value of the Company’s derivatives (both designated and non-designated hedging instruments), where the derivatives are classified on the Condensed Consolidated Balance Sheets and the level, within the fair value hierarchy at both September 30, 2011 and June 30, 2011.

					Fair Value Measurements
	Classified	Total			Level 1			Level 2			Level 3
September 30, 2011
Assets
Corn Derivatives (a)	Derivative Assets	$	385		$	216		$	169		$	-
Liabilities
Corn Derivatives (a)	Derivative Liabilities	$	(7,175	)	$	(1,662	)	$	(5,513	)	$	-
Ethanol Derivatives	Derivative Liabilities	$	(1,519	)	$	(1,519	)	$	-		$	-
June 30, 2011
Assets
Corn Derivatives (b)	Derivative Assets	$	598		$	300		$	298		$	-
Liabilities
Corn Derivatives (b)	Derivative Liabilities	$	(2,852	)	$	(727	)	$	(2,125	)	$	-

(a)   On September 30, 2011, the futures contracts market experienced significant volatility and had reached the maximum daily price allowed by the Chicago Board of Trade (“CBOT”) and was closed prior to the normal closing of the market.    Accordingly, the closing price was not considered to be indicative of the fair value of these futures contracts on September 30, 2011, and the Company used the CBOT’s prices on the next business day for these futures contracts as the best indicator of fair value at September 30, 2011.

(b)   On June 30, 2011, the futures contracts market experienced significant volatility and had reached the maximum daily price allowed by the CBOT and was closed prior to the normal closing of the market.    Accordingly, the closing price was not considered to be indicative of the fair value of these futures contracts on June 30, 2011, and the Company used the CBOT’s prices on the next business day for these futures contracts as the best indicator of fair value at June 30, 2011.

FASB ASC 825, Financial Instruments, requires the disclosure of the estimated fair value of financial instruments. The Company’s short term financial instruments include cash and cash equivalents, accounts receivable, accounts payable and a revolving credit facility.  The carrying value of the short term financial instruments approximates the fair value due to their short term nature. These financial instruments have no stated maturities or the financial instruments have short term maturities that approximate market.

            The fair value of the Company’s debt is estimated based on current market interest rates for debt with similar maturities and credit quality. The fair value of the Company’s debt was $9,057 and $9,550 at September 30, 2011 and June 30, 2011, respectively. The financial statement carrying value was $8,933 and $9,407 at September 30, 2011 and June 30, 2011, respectively.