CHS 2011 Annual Report Download - page 34

2011 CHS 33
implemented for the period ended February 28, 2009,
and as a result, comparative year-to-date information is
not presented for fiscal 2009.
(DOLLARS IN THOUSANDS) LOCATION OF GAIN (LOSS) 2 0 1 1 2 0 1 0
Commodity and
freight derivatives Cost of goods sold $186,265 $95,876
Foreign exchange
derivatives Cost of goods sold 3,363 (675)
Interest rate
derivatives Interest, net 522 (430)
$190,150 $94,771
During the year ended August 31, 2011, we recorded a
$3.9 million loss in cost of goods sold in the Consoli-
dated Statement of Operations for derivatives previ-
ously designated as cash flow hedging instruments. As
of August 31, 2011, there were no unrealized gains or
losses deferred to accumulated other comprehensive
loss. No gains or losses were recorded in the Consol-
idated Statement of Operations for derivatives desig-
nated as cash flow hedging instruments during the year
ended August 31, 2010, since there were no settlements.
Commodity and Freight Contracts: When the Company
enters into a commodity or freight purchase or sales
commitment, it incurs risks related to price change and
performance (including delivery, quality, quantity and
shipment period). The Company is exposed to risk of
loss in the market value of positions held, consisting of
inventory and purchase contracts at a fixed or partially
fixed price in the event market prices decrease. The
Company is also exposed to risk of loss on fixed or
partially fixed price sales contracts in the event market
prices increase.
The Company’s commodity contracts primarily relate to
grain, oilseed, energy and fertilizer commodities. The
Company’s freight contracts primarily relate to rail,
barge and ocean freight transactions. The Company’s
use of commodity and freight contracts reduces the
effects of price volatility, thereby protecting against
adverse short-term price movements, while limiting
the benefits of short-term price movements. To reduce
the price change risks associated with holding fixed
price commitments, the Company generally takes oppo-
site and offsetting positions by entering into commodity
futures contracts or options, to the extent practical, in
order to arrive at a net commodity position within the
formal position limits it has established and deemed
prudent for each commodity. These contracts are pur-
chased and sold through regulated commodity futures
exchanges for grain, and regulated mercantile
exchanges for refined products and crude oil. The Com-
pany also uses OTC instruments to hedge its exposure
on flat price fluctuations. The price risk the Company
encounters for crude oil and most of the grain and
oilseed volumes it handles can be hedged. Price risk
associated with fertilizer and certain grains cannot be
hedged because there are no futures for these commod-
ities and, as a result, risk is managed through the use of
forward sales contracts and other pricing arrangements
and, to some extent, cross-commodity futures hedging.
Fertilizer and propane contracts are accounted for as
normal purchase and normal sales transactions. The
Company expects all normal purchase and normal sales
transactions to result in physical settlement.
When a futures contract is entered into, an initial mar-
gin deposit must be sent to the applicable exchange or
broker. The amount of the deposit is set by the exchange
and varies by commodity. If the market price of a short
futures contract increases, then an additional mainte-
nance margin deposit would be required. Similarly, if
the price of a long futures contract decreases, a main-
tenance margin deposit would be required and sent to
the applicable exchange. Subsequent price changes
could require additional maintenance margins or could
result in the return of maintenance margins.
The Company’s policy is to primarily maintain hedged
positions in grain and oilseed. The Company’s profitabil-
ity from operations is primarily derived from margins on
products sold and grain merchandised, not from hedging
transactions. At any one time, inventory and purchase
contracts for delivery to the Company may be substan-
tial. The Company has risk management policies and
procedures that include net position limits. These limits
are defined for each commodity and include both trader
and management limits. This policy and computerized
procedures in the Company’s grain marketing operations
require a review by operations management when any
trader is outside of position limits and also a review by
the Company’s senior management if operating areas are
outside of position limits. A similar process is used in the
Company’s energy and wholesale crop nutrients opera-
tions. The position limits are reviewed, at least annually,
with the Company’s management and the Board of