CHS 2014 Annual Report Download - page 58

accounted for as normal purchase and normal sales trans- than current market prices. We manage risks by
actions. We expect all normal purchase and normal sales entering into fixed price purchase and sales contracts
transactions to result in physical settlement. with preapproved producers and by establishing appro-
priate limits for individual suppliers. Fixed price con-
When a futures contract is entered into, an initial margin tracts are entered into with customers of acceptable
deposit must be sent to the applicable exchange or creditworthiness, as internally evaluated. Historically, we
broker. The amount of the deposit is set by the exchange have not experienced significant events of nonperform-
and varies by commodity. If the market price of a short ance on open contracts. Accordingly, we only adjust the
futures contract increases, then an additional mainte- estimated fair values of specifically identified contracts
nance margin deposit would be required. Similarly, if the for nonperformance. Although we have established pol-
price of a long futures contract decreases, a mainte- icies and procedures, we make no assurances that his-
nance margin deposit would be required and sent to the torical nonperformance experience will carry forward to
applicable exchange. Subsequent price changes could future periods.
require additional maintenance margins or could result
in the return of maintenance margins. As of August 31, 2014 and 2013, we had the following
outstanding purchase and sale contracts:
Our policy is to primarily maintain hedged positions in 2014 2013
grain and oilseed. Our profitability from operations is PURCHASE SALE PURCHASE SALE
primarily derived from margins on products sold and (UNITS IN THOUSANDS) CONTRACTS CONTRACTS CONTRACTS CONTRACTS
grain merchandised, not from hedging transactions. At Grain and oilseed—
any one time, inventory and purchase contracts for bushels 665,690 938,140 521,979 806,295
delivery to us may be substantial. Our risk management Energy products—
policies and procedures include net position limits. barrels 27,754 50,450 12,626 21,312
These limits are defined for each commodity and Soy products—tons 37 1,212 24 847
include both trader and management limits. The policy Crop nutrients—tons 1,613 1,607 968 1,050
and procedures in our grain marketing operations Ocean and barge
require a review by operations management when any freight—metric tons 5,423 4,005 1,225 151
trader is outside of position limits and also a review by Rail freight—rail cars 321 186 220 43
senior management if operating areas are outside of
Livestock—pounds — 46,280 — 17,280
position limits. A similar process is used in energy and
wholesale crop nutrients operations. Position limits are
Foreign Exchange Contracts:
reviewed, at least annually, with management and the
We conduct essentially all of our business in U.S. dollars,
Board of Directors. We monitor current market condi-
except for some grain marketing transactions primarily
tions and may expand or reduce our net position limits
in South America and Europe, and purchases of prod-
or procedures in response to changes in conditions. In
ucts from Canada. We had minimal risk regarding foreign
addition, all purchase and sales contracts are subject to
currency fluctuations during fiscal 2014 and in prior
credit approvals and appropriate terms and conditions.
years, as substantially all international sales were
denominated in U.S. dollars. From time to time, we enter
Hedging arrangements do not protect against nonper-
into foreign currency futures contracts to mitigate cur-
formance by counterparties to contracts. We primarily
rency fluctuations. Foreign currency fluctuations do,
use exchange traded instruments which minimize expo-
however, impact the ability of foreign buyers to purchase
sure to counterparties’ nonperformance. We evaluate
U.S. agricultural products and the competitiveness of
exposure by reviewing contracts and adjusting the
U.S. agricultural products compared to the same prod-
values to reflect potential nonperformance. Risk of non-
ucts offered by alternative sources of world supply. As of
performance by counterparties includes the inability to
August 31, 2014, we had $2.5 million included in deriva-
perform because of the counterparty’s financial condi-
tive assets and $2.2 million included in derivative liabili-
tion and also the risk that the counterparty will refuse to
ties associated with foreign currency contracts.
perform on a contract during periods of price fluctua-
tions where contract prices are significantly different
56 CHS 2014
TWELVE: Derivative Financial Instruments and Hedging Activities, continued