Archer Daniels Midland 2006 Annual Report Download - page 37

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2006 Annual Report 35
2006 2005
Fair Market Fair Market
Value Risk Value Risk
(In millions)
Highest long position . . . . . . . . . . . . . . . . . . . $ 510 $ 51 $ 226 $23
Highest short position . . . . . . . . . . . . . . . . . . . 574 57 944 94
Average position long (short) . . . . . . . . . . . . . (203) (20) (300) (30)
The change in fair value of the average position for 2006 compared
to 2005 was principally a result of a decrease in the daily net
commodity position, partially offset by increased commodity prices.
Marketable Equity Securities
Marketable equity securities, which are recorded at fair value, have
exposure to price risk. The fair value of marketable equity securities
is based on quoted market prices. Risk is estimated as the potential
loss in fair value resulting from a hypothetical 10% adverse change
in quoted market prices. Actual results may differ.
2006 2005
(In millions)
Fair value ................................................... $640 $664
Market risk .................................................. 64 66
The decrease in fair value for 2006 compared to 2005 resulted
primarily from disposals of securities and decreased fair market value
of the securities.
Limited Partnerships
The Company is a limited partner in various private equity funds
which invest primarily in emerging markets. The Company accounts
for these limited partnerships using the equity method of accounting.
Therefore, the Company is recording in the consolidated statement
of earnings its proportional share of the limited partnerships’ net
income or loss. The limited partnerships value their investments
at fair value. Risk is estimated as the potential loss in fair value
resulting from a hypothetical 10% adverse change in market prices of
the limited partnerships’ investments. Actual results may differ.
2006 2005
(In millions)
Fair value of partnerships’ investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . $210 $290
Market risk .................................................. 21 29
The decrease in fair value for 2006 compared to 2005 resulted
primarily from returns of capital.
Currencies
In order to reduce the risk of foreign currency exchange rate
fluctuations, except for amounts permanently invested as described
below, the Company follows a policy of hedging substantially all
transactions denominated in a currency other than the functional
currencies applicable to each of its various entities. The instruments
used for hedging are readily marketable exchange-traded futures
contracts and forward contracts with banks. The changes in market
value of such contracts have a high correlation to the price changes
in the currency of the related hedged transactions. The potential
loss in fair value for such net currency position resulting from a
hypothetical 10% adverse change in foreign currency exchange rates
is not material.
The amount the Company considers permanently invested in foreign
subsidiaries and affiliates and translated into dollars using the
year-end exchange rates is $4.5 billion at June 30, 2006 and
$4.0 billion at June 30, 2005. This increase is principally due to
an increase in retained earnings of the foreign subsidiaries and
affiliates. The potential loss in fair value resulting from a hypothetical
10% adverse change in quoted foreign currency exchange rates is
$454 million and $397 million for 2006 and 2005, respectively. Actual
results may differ.
Interest
The fair value of the Company’s long-term debt is estimated using
quoted market prices, where available, and discounted future cash
flows based on the Company’s current incremental borrowing
rates for similar types of borrowing arrangements. Such fair value
exceeded the long-term debt carrying value. Market risk is estimated
as the potential increase in fair value resulting from a hypothetical
.5 % decrease in interest rates. Actual results may differ.
2006 2005
(In millions)
Fair value of long-term debt ................................. $4,387 $4,532
Excess of fair value over carrying value . . . . . . . . . . . . . . . . . . . . . . . . . 257 779
Market risk ............................................... 218 229
The decrease in fair value for the current year resulted principally
from increased interest rates.