Note 14 - Derivative Instruments and Fair Value Measurements

12 Months Ended

Dec. 31, 2012

Derivative Instruments And Fair Value Measurements [Text Block]

NOTE 14:                    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 used 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 were 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.  Between Effective July 2011 and February 2012, management elected to restart hedge accounting for qualifying derivative contracts entered into on and after July 1, 2011.  No ethanol futures or option contracts had been designated as hedges as of December 31, 2012.

During 2012, the Company entered into a grain supply contract for its distillery in Indiana Atchison facility that permits the Company to purchase corn for delivery up to 12 months in the future, at negotiated prices.  The pricing for these contracts is based on a formula using several factors.  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 consolidated financial statements until the actual contracts are physically settled.  Accordingly, given these 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 at that time.  As of December 31, 2012, the Company has no future 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 corn and flour.  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 financial statements until the actual contracts are physically settled.  See Note 7. Commitments for discussion on the Company’s corn, flour and 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 Consolidated Statements of Operations.

	Classified	Year Ended December 31, 2012		Six Months Ended December 31, 2011			Year Ended June 30, 2011
Commodity derivatives	Cost of sales	$	2,173	$	(634	)	$	11,299

The Company used 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 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 December 31, 2012, the Company had no ethanol derivative contracts outstanding.

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 1,750,000 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.  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 at December 31, 2012.

	Amounts of Gains (Losses) Recognized in OCI on Derivatives									Amount of Gains (Losses) Reclassified from AOCI into Earnings
Derivatives in Cash Flow Hedging Relationship	Year Ended December 31, 2012			Six Months Ended December 31, 2011			Year Ended June 30, 2011		Location of Losses Reclassified  from AOCI  into Income	Year Ended December 31, 2012			Six Months Ended December 31, 2011			Year Ended  June 30, 2011
Commodity derivatives	$	(286	)	$	(1,252	)		n/a	Cost of sales	$	(413	)	$	(539	)		n/a

During the year ended December 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.

As of December 31, 2011, the Company recorded $1,252 of net losses in AOCI related to gains and losses from changes in fair value of commodity cash flow hedge transactions and reclassified $586 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.  As of December 31, 2011, the Company had deferred net losses of $127 in AOCI.

Fair Value Measurements.

The Company did not have any outstanding derivatives (designated or non-designated) at December 31, 2012.  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 Consolidated Balance Sheets and the level, within the fair value hierarchy, at December 31, 2011.
 

					Fair Value Measurements
	Classified	Total			Level 1			Level 2		Level 3
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	)	$	-	$	-

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 $12 and $7,605 at December 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 $0 and $4,680 at December 31, 2012 and December 31, 2011, respectively.