Note 6 - Derivative Instruments and Fair Value Measurements.

3 Months Ended

Mar. 31, 2012

Derivative Instruments And Fair Value Measurements [Text Block]

Note 6.  Derivative Instruments and Fair Value Measurements.

Derivative Instruments.  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 and ethanol, 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.  Beginning July 1, 2011, 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 the Company’s 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.  No ethanol futures or option contracts have been designated as hedges as of March 31, 2012.  Effective January 27, 2012, the Company entered into a grain supply contract for its distillery in Indiana that permits the Company to purchase corn for delivery up to 12 months in the future, at fixed prices.  Subsequent to March 31, 2012, the Company extended this grain supply arrangement used for its distillery in Indiana to its Atchison facility.  For the Atchison facility, the Company had made corn purchase commitments for future delivery prior to the agreement being finalized.  The pricing for these contracts is based on a formula with several factors, including corn futures prices and the timing of the Company’s pricing decisions.  The Company has determined that the firm commitments to purchase corn under the terms of these new contracts meet the normal purchases and sales exception as defined under ASC 815, Derivatives and Hedging, and has excluded the fair value of these commitments from recognition within its condensed consolidated financial statements until the actual contracts are physically settled.  Accordingly, given these new purchase agreements, in February 2012, the Company made the decision to close out of the corn futures contracts designated as cash flow hedges prior to their scheduled delivery and simultaneously de-designated 100 percent of these cash flow hedges.  As of March 31, 2012, the Company has no exchange traded corn futures contracts designated as cash flow hedges.

Derivatives Not Designated as Hedging Instruments

The Company’s production process involves the use of natural gas and raw materials including flour and corn.  The contracts for raw materials and natural gas range from monthly contracts to multi-year supply arrangements; however, 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 consolidated financial statements until the actual contracts are physically settled.  See Note 5. Commitments and Contingencies for discussion on the Company’s natural gas and raw materials 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 Comprehensive Income.

		Quarter Ended
	Classified	March 31, 2012			March 31, 2011
Commodity derivatives	Cost of sales	$	(827	)	$	5,145

The Company uses corn futures contracts for the purchase of corn and has also used call and put options in order to mitigate the impact of potential changes in market conditions.  Beginning July 2011, the Company began to buy and sell derivative instruments to manage market risk associated with ethanol purchases, including ethanol futures and option contracts, in order to mitigate risks associated with the Company’s investment in ICP.  At March 31, 2012, the Company had the following open derivative contracts not designated as hedging instruments:

Corn put options	1,250,000 bushels, expiring no later than June 2012
Ethanol futures	12,876,000 gallons, maturing through December 2012

Derivatives Designated as Cash Flow Hedges

The Company, from time to time, has used 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 1,750,000 bushels of corn per month.  From July 1, 2011 until January 27, 2012, when the grain supply contracts became operative, the Company typically entered into cash flow hedges to cover between 70 percent and 80 percent of its monthly anticipated grind.  As previously discussed, in connection with the Company’s new grain supply agreements, the Company de-designated its cash flow hedges and had no corn futures contracts at March 31, 2012.

	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 March 31, 2012	Quarter Ended March 31, 2011	Location of Losses Reclassified from AOCI into Income	Quarter Ended March  31, 2012	Quarter Ended March 31, 2011
Commodity derivatives	$(286)	n/a	Cost of sales	$(413)	n/a

During the quarter ended March 31, 2012, the Company de-designated 100 percent of its cash flow hedges, which resulted in a reclassification of a $27 loss from AOCI into current period earnings.  The Company also reclassified $200 of net losses deferred in AOCI, prior to the de-designation, to cost of sales as a result of cash flow hedge ineffectiveness.  

Fair Value Measurements.In accordance with ASC 820, Fair Value Measurements and Disclosures, the fair value of an asset is considered to be 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 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 March 31, 2012 and December 31, 2011.

					Fair Value Measurements
	Classified	Total			Level 1			Level 2		Level 3
March 31, 2012
Liabilities
Corn Derivatives	Derivative Liabilities	$	(160	)	$	(160	)	$	-	$	-
Ethanol Derivatives	Derivative Liabilities	$	(3,005	)	$	(3,005	)	$	-	$	-
December 31, 2011
Assets
Corn Derivatives	Derivative Assets	$	1,091		$	1,091		$	-	$	-
Ethanol Derivatives	Derivative Assets	$	213		$	213		$	-	$	-
Liabilities
Corn Derivatives	Derivative Liabilities	$	(974	)	$	( 974	)	$	-	$	-
Ethanol Derivatives	Derivative Liabilities	$	(2,491	)	$	(2,491	)	$	-	$	-

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 $8,241 and $8,647 at March 31, 2012 and December 31, 2011, respectively. The financial statement carrying value was $8,109 and $8,522 at March 31, 2012 and December 31, 2011, respectively.  These fair values are considered Level 2 under the fair value hierarchy.

Counterparty credit risk.  The Company enters into commodity derivatives through a broker with a diversified group of counterparties.  Under the terms of the Company’s account with its broker, it is required to maintain a cash margin account as collateral to cover any shortfall in the market value of derivatives.

The Company classifies certain interest bearing cash accounts on deposit with and maintained with the Company’s broker for exchange-traded commodity instruments, which totaled $6,151 and $7,605 at March 31, 2012 and December 31, 2011, respectively, as restricted cash to reflect the fair value of open contract positions relative to respective contract prices.  The Company is also required to provide required margin, serving as collateral, in accordance with commodity exchange requirements which totaled $1,960 and $4,680 at March 31, 2012 and December 31, 2011, respectively.