Archer Daniels Midland 2010 Annual Report Download - page 39

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35
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Valuation of Marketable Securities and Investments in Affiliates
The Company classifies the majority of its marketable securities as available-for-sale and carries these securities at
fair value. The Company applies the equity method for investments in investees over which the Company has the
ability to exercise significant influence. These investments in affiliates are carried at cost plus equity in
undistributed earnings and are adjusted, where appropriate, for amortizable basis differences between the
investment balance and the underlying net assets of the investee. For publicly traded securities, the fair value of the
Company‘s investments is readily available based on quoted market prices. For non-publicly traded securities,
management‘s assessment of fair value is based on valuation methodologies including discounted cash flows and
estimates of sales proceeds. In the event of a decline in fair value of an investment below carrying value,
management is required to determine if the decline in fair value is other than temporary. In evaluating the nature of
a decline in the fair value of an investment, management considers the market conditions, trends of earnings,
discounted cash flows, trading volumes, and other key measures of the investment as well as the Company‘s ability
and intent to hold the investment. When such a decline in value is deemed to be other than temporary, an
impairment loss is recognized in the current period operating results to the extent of the decline. See Notes 5 and 6
in Item 8 for information regarding the Company‘s marketable securities and investments in affiliates. If
management used different estimates and assumptions in its evaluation of these marketable securities, then the
Company could recognize different amounts of expense 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: commodity market prices as they relate to the Company‘s net commodity position,
foreign currency exchange rates, and interest rates as described below.
Commodities
The availability and prices of agricultural commodities are subject to wide fluctuations due to factors such as
changes in weather conditions, disease, plantings, government programs and policies, competition, 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 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.