Archer Daniels Midland 2006 Annual Report Download - page 47

2006 Annual Report 45
Of the $34 million in unrealized losses at June 30, 2006, $4 million
of unrealized losses arose within the last 12 months, $25 million of
unrealized losses arose within the last 24 months, and the remaining
$5 million of unrealized losses arose within the last 36 months. The
market value of United States government obligations and other debt
securities with unrealized losses as of June 30, 2006 is $527 million.
The $15 million of unrealized losses associated with United States
government obligations and other debt securities are not considered
to be other-than-temporary because their unrealized losses are related
to changes in interest rates and do not affect the expected cash flows
to be received upon maturity of these investments or the credit quality
of the issuer. The market value of available-for-sale equity securities
with unrealized losses as of June 30, 2006 is $78 million. The
$19 million of unrealized losses associated with available-for-sale
equity securities are principally related to long-term strategic
investments. The Company has the intent and ability to hold its debt
and equity securities for a period of time sufficient to recover all
unrealized losses. The Company has not recognized any other-than-
temporary impairments for its debt and equity securities.
Note 3-Inventories and Derivatives
To reduce price risk caused by market fluctuations, the Company
generally follows a policy of using exchange-traded futures and
options contracts to minimize its net position of merchandisable
agricultural commodity inventories and forward cash purchase and
sales contracts. The Company will also use exchange-traded futures
and options contracts as components of merchandising strategies
designed to enhance margins. The results of these strategies can
be significantly impacted by factors such as the volatility of the
relationship between the value of exchange-traded commodities
futures contracts and the cash prices of the underlying commodities,
counterparty contracts defaults, and volatility of freight markets.
Inventories of certain merchandisable agricultural commodities,
which include amounts acquired under deferred pricing contracts,
are stated at market value. Exchange-traded futures and options
contracts, forward cash purchase contracts, and forward cash sales
contracts of merchandisable agricultural commodities, which have
not been designated as fair value hedges, are valued at market
price. Changes in the market value of inventories of merchandisable
agricultural commodities, forward cash purchase and sales contracts,
and exchange-traded futures contracts are recognized in earnings
immediately, resulting in cost of goods sold approximating first-in,
first-out (FIFO) cost. Unrealized gains on forward cash purchase
contracts, forward cash sales contracts, and exchange-traded
futures contracts represent the fair value of such instruments
and are classified on the Company’s balance sheet as receivables.
Unrealized losses on forward cash purchase contracts, forward cash
sales contracts, and exchange-traded futures contracts represent the
fair value of such instruments and are classified on the Company’s
balance sheet as accounts payable.
The Company also values certain inventories using the lower of cost,
determined by either the LIFO or FIFO method, or market.
2006 2005
(In thousands)
LIFO inventories
FIFO value .................................... $ 437,942 $ 339,964
LIFO valuation reserve . . . . . . . . . . . . . . . . . . . . . . . . . . (8,740) (20,732)
LIFO inventories carrying value . . . . . . . . . . . . . . . . . . . . . . 429,202 319,232
FIFO inventories .................................. 1,427,597 1,292,822
Market inventories ................................ 2,820,709 2,294,644
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,677,508 $3,906,698
The Company, from time to time, uses futures contracts to fix
the purchase price of anticipated volumes of commodities to be
purchased and processed in a future month. The Company also uses
futures, options, and swaps to fix the purchase price of the Company’s
anticipated natural gas requirements for certain production facilities.
In addition, certain of the Company’s ethanol sales contracts are
indexed to unleaded gasoline prices. The Company uses futures and
options to fix the sales price of anticipated volumes of these ethanol
sales in future months. These derivatives are designated as cash flow
hedges. The changes in the market value of such derivative contracts
have historically been, and are expected to continue to be, highly
effective at offsetting changes in price movements of the hedged
item. The amounts representing the ineffectiveness of these cash
flow hedges are immaterial. Gains and losses arising from open and
closed hedging transactions are deferred in other comprehensive
income (loss), net of applicable income taxes, and recognized as a
component of cost of products sold in the statement of earnings when
the hedged item is recognized. As of June 30, 2006, the Company
has recorded $37 million of after-tax losses in other comprehensive
income (loss) related to gains and losses from cash flow hedge
transactions. The Company expects to recognize $33 million of
these after-tax losses in the statement of earnings during fiscal 2007,
and the remaining $4 million of after-tax losses are expected to be
recognized in the statement of earnings during the first two quarters
of fiscal 2008.
At June 30, 2006, other comprehensive income (loss) included a
$7 million after-tax gain related to a treasury-lock agreement
entered into and settled during 2006. This treasury-lock agreement
was designated as a cash flow hedge of the anticipated proceeds
from the Company’s issuance of $600 million of debentures in