Archer Daniels Midland 2009 Annual Report Download - page 36

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30
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
At June 30, 2009, the Company estimates it will spend approximately $1.7 billion over the next five years to
complete currently approved capital projects and acquisitions which is not included in the table above. The
Company is a limited partner in various private equity funds which invest primarily in emerging markets. At June
30, 2009, the Company’s carrying value of these limited partnership investments was $83 million. The Company
has potential future capital commitments related to these partnerships of $114 million and expects the majority of
these additional capital commitments, if called for, to be funded by cash flows generated by the partnerships. The
Company also has outstanding letters of credit and surety bonds of $398 million at June 30, 2009.
In addition, the Company has entered into agreements, primarily debt guarantee agreements related to equity-
method investees, which could obligate the Company to make future payments. The Company’s liability under
these agreements arises only if the primary entity fails to perform its contractual obligation. The Company has
collateral for a portion of these contingent obligations. At June 30, 2009, these contingent obligations totaled
approximately $137 million. Amounts outstanding for the primary entity under these contingent obligations were
$82 million at June 30, 2009.
Critical Accounting Policies
The process of preparing financial statements requires management to make estimates and judgments that affect the
carrying values of the Company’s assets and liabilities as well as the recognition of revenues and expenses. These
estimates and judgments are based on the Company’s historical experience and management’s knowledge and
understanding of current facts and circumstances. Certain of the Company’s accounting policies are considered
critical, as these policies are important to the depiction of the Company’s financial statements and require
significant or complex judgment by management. Management has discussed with the Company’s Audit
Committee the development, selection, disclosure, and application of these critical accounting policies. Following
are the accounting policies management considers critical to the Company’s financial statements.
Inventories and Derivatives
Certain of the Company’s merchandisable agricultural commodity inventories, forward fixed-price purchase and
sale contracts, and exchange-traded futures and exchange-traded and over-the-counter options contracts are valued
at estimated market values. These merchandisable agricultural commodities are freely traded, have quoted market
prices, and may be sold without significant additional processing. Management estimates market value based on
exchange-quoted prices, adjusted for differences in local markets. Changes in the market values of these
inventories and contracts are recognized in the statement of earnings as a component of cost of products sold. If
management used different methods or factors to estimate market value, amounts reported as inventories and cost
of products sold could differ materially. Additionally, if market conditions change subsequent to year-end,
amounts reported in future periods as inventories and cost of products sold could differ materially.
The Company, from time to time, uses derivative contracts designated as cash flow hedges to fix the purchase price
of anticipated volumes of commodities to be purchased and processed in a future month, to fix the purchase price
of the Company’s anticipated natural gas requirements for certain production facilities, and to fix the sales price of
anticipated volumes of ethanol. The change in the market value of such derivative contracts has historically been,
and is 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 income taxes, and recognized as a component of cost of products sold and net sales and other
operating income in the statement of earnings when the hedged item is recognized. If it is determined that the
derivative instruments used are no longer effective at offsetting changes in the price of the hedged item, then the
changes in the market value of these exchange-traded futures and exchange-traded and over-the-counter option
contracts would be recorded in the statement of earnings as a component of cost of products sold.