Archer Daniels Midland 2007 Annual Report Download - page 43

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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. Thus, unrealized gains and losses related to
the change in fair value of these investments are recorded in the limited partnerships’ statements of earnings. The
valuation of these investments, as determined by the general partner, can be subjective, and the values may vary
significantly. Some of the factors causing the subjectivity and volatility of these valuations include the illiquidity
and minority positions of these investments, currency exchange rate fluctuations, less-regulated securities
exchanges, and the inherent business risks and limitations present in the emerging market countries. The Company
records the results of these limited partnerships based on the information provided to the Company by the general
partner. Due to the subjectivity and volatility in valuing these investments, the fair value of these investments, and
thus the Company’s results, could vary significantly over future periods.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Company’s market risk sensitive instruments and positions is the potential loss
arising from adverse changes in commodities futures prices, marketable equity security prices, market prices of
limited partnerships’ investments, foreign currency exchange rates, and interest rates as described below.
Commodities
The availability and price of agricultural commodities are subject to wide fluctuations due to unpredictable factors
such as weather, plantings, government (domestic and foreign) farm programs and policies, changes in global
demand resulting from population growth and changes in standards of living, and global production of similar and
competitive crops. 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. In addition, the Company from time-to-time enters
into derivative contracts which are designated as hedges of specific volumes of commodities that will be purchased
and processed, or sold, in a future month. The changes in the market value of such futures contracts have
historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of
the hedged item. Gains and losses arising from open and closed hedging transactions are deferred in other
comprehensive income, net of applicable taxes, and recognized as a component of cost of products sold in the
statement of earnings when the hedged item is recognized.