Archer Daniels Midland 2009 Annual Report Download - page 55

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49
Archer Daniels Midland Company
Notes to Consolidated Financial Statements (Continued)
Note 4.
Inventories, Derivative Instruments & Hedging Activities (Continued)
SFAS No. 133, Accounting for Derivatives and Hedging Activities (SFAS 133) requires the Company to recognize
all of its derivative instruments as either assets or liabilities in its consolidated balance sheet at fair value. The
accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For
those derivative instruments that are designated and qualify as hedging instruments, a company must designate the
hedging instrument, based upon the exposure being hedged, as a fair value hedge, a cash flow hedge, or a hedge of
a net investment in a foreign operation. The Company does not currently have any derivatives designated as fair
value hedges or derivatives designated as hedges of net investment in foreign operations. The Company has certain
derivatives designated as cash flow hedges; however, the majority of the Company’s derivatives have not been
designated as hedging instruments.
Derivatives Not Designated as Hedging Instruments under SFAS 133
To reduce price risk caused by market fluctuations in agricultural commodities and foreign currencies, the
Company generally follows a policy of using exchange-traded futures and exchange-traded and over-the-counter
(OTC) options contracts to minimize its net position of merchandisable agricultural commodity inventories and
forward cash purchase and sales contracts and foreign exchange risk. The Company also uses exchange-traded
futures and exchange-traded and OTC 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 contract defaults, and volatility of freight markets. Exchange-traded futures
and exchange-traded and OTC options contracts, and forward cash purchase and sales contracts of certain
merchandisable agricultural commodities are valued at fair value. Inventories of certain merchandisable
agricultural commodities which include amounts acquired under deferred pricing contracts are stated at market
value. Inventory is not a derivative and therefore is not included in the tables below. Changes in the market value
of inventories of merchandisable agricultural commodities, forward cash purchase and sales contracts, and
exchange-traded futures and exchange-traded and OTC options contracts are recognized in earnings immediately,
resulting in cost of products sold approximating FIFO cost. Unrealized gains and unrealized losses on forward cash
purchase contracts, forward foreign currency exchange (FX) contracts, forward cash sales contracts, and exchange-
traded and OTC options contracts represent the fair value of such instruments and are classified on the Company’s
consolidated balance sheet as receivables and accrued expenses, respectively.
The following table sets forth the fair value of derivatives not designated as hedging instruments under SFAS 133
as of June 30, 2009.
Assets
Liabilities
(in millions)
FX Contracts
$ 46
$ 39
Commodity Contracts
1,781
2,139
Total
$ 1,827
$ 2,178