Archer Daniels Midland 2009 Annual Report Download - page 39

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Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
To reduce price risk caused by market fluctuations, the Company generally follows a policy of using exchange-
traded futures and exchange-traded and over-the-counter 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 exchange-traded and over-the-counter 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 or net sales and other operating income in the statement of
earnings when the hedged item is recognized.
A sensitivity analysis has been prepared to estimate the Company’s exposure to market risk of its daily net
commodity position. The Company’s daily net commodity position consists of merchandisable agricultural
commodity inventories, related purchase and sale contracts, and exchange-traded futures and exchange-traded and
over-the-counter option contracts, including those contracts used to hedge portions of production requirements. The
fair value of such daily net commodity position is a summation of the fair values calculated for each commodity by
valuing each net position at quoted futures prices. Market risk is estimated as the potential loss in fair value
resulting from a hypothetical 10% adverse change in such prices. Actual results may differ.
2009
2008
Long/(Short)
Fair Value
Market Risk
Fair Value
Market Risk
(In millions)
Highest position
$ 845
$ 85
$ 1,260
$ 126
Lowest position
(1,342)
(134)
(915)
(92)
Average position
(392)
(39)
251
25
The change in fair value of the average position for 2009 compared to 2008 was principally a result of decreases in
quantities underlying the daily net commodity position.
Currencies
The Company conducts its business in many countries. For the majority of the Company’s subsidiaries located
outside the United States, the local currency is the functional currency. In order to reduce the risks associated with
foreign currency exchange rate fluctuations, except for amounts permanently invested as described below, the
Company follows a policy of entering into currency exchange contracts to mitigate its foreign currency risk related
to transactions denominated in a currency other than the functional currencies applicable to each of its various
entities, primarily the Euro, British Pound, and Canadian Dollar. The instruments used are forward contracts,
swaps with banks, exchange-traded futures contracts, and over-the-counter options. The changes in market value
of such contracts have a high correlation to the price changes in the currency of the related 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.