Archer Daniels Midland 2010 Annual Report Download - page 55

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51
Archer Daniels Midland Company
Notes to Consolidated Financial Statements (Continued)
Note 3.
Fair Value Measurements (Continued)
The Company uses the market approach valuation technique to measure the majority of its assets and liabilities
carried at fair value. Estimated fair values for inventories carried at market are based on exchange-quoted prices,
adjusted for differences in local markets, broker or dealer quotations, or market transactions in either listed or over-
the-counter (OTC) markets. In such cases, the inventory is classified in Level 2. Certain inventories may require
management judgment or estimation for a significant component of the fair value amount. In such cases, the
inventory is classified in Level 3. Changes in the fair value of inventories are recognized in the consolidated
statements of earnings as a component of cost of products sold.
The Company‘s derivative contracts that are measured at fair value include forward commodity purchase and sale
contracts, exchange-traded commodity futures and option contracts, and OTC instruments related primarily to
agricultural commodities, ocean freight, energy, interest rates, and foreign currencies. Exchange-traded futures and
options contracts are valued based on unadjusted quoted prices in active markets and are classified in Level 1. The
majority of the Company‘s exchange-traded futures and options contracts are cash settled on a daily basis and,
therefore, are not included in this table. Fair value for forward commodity purchase and sale contracts is estimated
based on exchange-quoted prices adjusted for differences in local markets. These differences are generally
determined using inputs from broker or dealer quotations or market transactions in either the listed or OTC
markets. When observable inputs are available for substantially the full term of a contract, it is classified in Level
2. When unobservable inputs have a significant impact on the measurement of fair value, the contract is classified
in Level 3. Based on historical experience with the Company‘s suppliers and customers, the Company‘s own credit
risk and knowledge of current market conditions, the Company does not view nonperformance risk to be a
significant input to fair value for the majority of its forward commodity purchase and sale contracts. However, in
certain cases, if the Company believes the nonperformance risk to be a significant input, the Company records
estimated fair value adjustments, and classifies the contract in Level 3. Except for certain derivatives designated as
cash flow hedges, changes in the fair value of commodity-related derivatives are recognized in the consolidated
statements of earnings as a component of cost of products sold. Changes in the fair value of foreign currency-
related derivatives are recognized in the consolidated statements of earnings as a component of net sales and other
operating income, cost of products sold, and other (income) expense–net. The effective portions of changes in the
fair value of derivatives designated as cash flow hedges are recognized in the consolidated balance sheets as a
component of accumulated other comprehensive income until the hedged items are recorded in earnings or the
hedged transaction is no longer probable to occur.
The Company‘s marketable securities are comprised of U.S. Treasury securities, obligations of U.S. government
agencies, corporate and municipal debt securities, and equity investments. U.S. Treasury securities and certain
publicly traded equity investments are valued using quoted market prices and are classified in Level 1. U.S.
government agency obligations, corporate and municipal debt securities and certain equity investments are valued
using third-party pricing services and substantially all are classified in Level 2. Security values that are determined
using pricing models are classified in Level 3. Unrealized changes in the fair value of available-for-sale marketable
securities are recognized in the consolidated balance sheets as a component of accumulated other comprehensive
income (loss) unless a decline in value is deemed to be other-than-temporary at which point the decline is recorded
in earnings.