CHS 2011 Annual Report Download - page 35

34 2011 CHS
NOTE 1
Summary of Significant
Accounting Policies, continued
Directors. The Company monitors current market con-
ditions and may expand or reduce its net position limits
or procedures in response to changes in conditions. In
addition, all purchase and sales contracts are subject to
credit approvals and appropriate terms and conditions.
Hedging arrangements do not protect against nonper-
formance by counterparties to contracts. The Company
primarily uses exchange traded instruments which min-
imize its counterparty exposure. The Company evalu-
ates exposure by reviewing contracts and adjusting the
values to reflect potential nonperformance. Risk of non-
performance by counterparties includes the inability to
perform because of the counterparty’s financial condi-
tion and also the risk that the counterparty will refuse to
perform on a contract during periods of price fluctua-
tions where contract prices are significantly different
than current market prices. The Company manages its
risks by entering into fixed price purchase and sales
contracts with preapproved producers and by estab-
lishing appropriate limits for individual suppliers. Fixed
price contracts are entered into with customers of
acceptable creditworthiness, as internally evaluated.
Historically, the Company has not experienced signif-
icant events of nonperformance on open contracts.
Accordingly, the Company only adjusts the estimated
fair values of specifically identified contracts for non-
performance. Although the Company has established
policies and procedures, it makes no assurances that
historical nonperformance experience will carry for-
ward to future periods.
Interest Rate Contracts: Short-term debt used to finance
inventories and receivables is represented by notes pay-
able with maturities of 30 days or less, so that the
Company’s blended interest rate for all such notes
approximates current market rates. During the Compa-
ny’s year ended August 31, 2011, the Company entered
into interest rate swaps and treasury lock derivative
agreements to secure the interest rates related to a
portion of its private placement debt issued in June
2011. These derivative instruments were designated as
cash flow hedges for accounting purposes and, accord-
ingly, the net loss on settlements of $6.3 million was
recorded as a component of other comprehensive loss
and is being amortized into earnings within interest, net
over the term of the agreements. CHS Capital, LLC (CHS
Capital), the Company’s wholly-owned finance subsid-
iary, has interest rate swaps that lock the interest rates of
the underlying loans with a combined notional amount of
$18.9 million expiring at various times through fiscal
2018, with none of the notional amount expiring during
fiscal 2012. None of CHS Capital’s interest rate swaps
qualify for hedge accounting and as a result, changes in
fair value are recorded in earnings within interest, net in
the Consolidated Statements of Operations. Long-term
debt used to finance non-current assets carries various
fixed interest rates and is payable at various dates to
minimize the effects of market interest rate changes. The
weighted-average interest rate on fixed rate debt out-
standing on August 31, 2011, was approximately 5.3%.
Foreign Exchange Contracts: The Company conducts
essentially all of its business in U.S. dollars, except for
grain marketing operations primarily in South America
and Europe, and purchases of products from Canada.
The Company had minimal risk regarding foreign cur-
rency fluctuations during fiscal 2011 and in prior years,
as substantially all international sales were denomi-
nated in U.S. dollars. From time to time, the Company
enters into foreign currency futures contracts to miti-
gate currency fluctuations. Foreign currency fluctua-
tions do, however, impact the ability of foreign buyers to
purchase U.S. agricultural products and the competi-
tiveness of U.S. agricultural products compared to the
same products offered by alternative sources of world
supply. As of August 31, 2011, the Company had
$1.5 million included in derivative assets associated
with foreign currency contracts.
INVESTMENTS
Joint ventures and other investments, in which the Com-
pany has significant ownership and influence, but not
control, are accounted for in the consolidated financial
statements using the equity method of accounting.
Investments in other cooperatives are stated at cost, plus
patronage dividends received in the form of capital stock
and other equities. Patronage dividends are recorded as a
reduction to cost of goods sold at the time qualified
written notices of allocation are received. Investments
in other debt and equity securities are considered avail-
able for sale financial instruments and are stated at fair
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS