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Archer-Daniels-Midland 10-Q 2011
adm10qfy11q3.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.  20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011
OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number 1-44
ADM Logo
ARCHER-DANIELS-MIDLAND COMPANY
(Exact name of registrant as specified in its charter)
Delaware
41-0129150
(State or other jurisdiction of
incorporation or organization)
(I. R. S. Employer
Identification No.)
   
4666 Faries Parkway   Box 1470
Decatur, Illinois
(Address of principal executive offices)
 
62525
(Zip Code)
   
(217) 424-5200
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         Yes  x  No  ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x  No  ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  x                                                      Accelerated Filer  o
Non-accelerated Filer     o                                                      Smaller reporting Company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o  No  x.

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock, no par value – 637,880,202 shares
(April 29, 2011)
 
 

 

PART I - FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

Archer-Daniels-Midland Company

Consolidated Statements of Earnings
(Unaudited)


   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
   
(In millions, except
 
   
per share amounts)
 
             
Net sales and other operating income
  $ 20,077     $ 15,145  
Cost of products sold
    18,917       14,254  
Gross Profit
    1,160       891  
                 
Selling, general and administrative expenses
    395       355  
Other (income) expense – net
    (26 )     2  
Earnings Before Income Taxes
    791       534  
                 
Income taxes
    223       118  
Net Earnings Including Noncontrolling Interests
    568       416  
                 
Less: Net earnings (losses) attributable to noncontrolling interests
    (10 )     (5 )
                 
Net Earnings Attributable to Controlling Interests
  $ 578     $ 421  
                 
 
Average number of shares outstanding – basic
    638       643  
                 
Average number of shares outstanding – diluted
    684       645  
                 
Basic earnings per common share
  $ 0.91     $ 0.65  
                 
Diluted earnings per common share
  $ 0.86     $ 0.65  
                 
Dividends per common share
  $ 0.16     $ 0.15  


See notes to consolidated financial statements.


 
 

 

Archer-Daniels-Midland Company

Consolidated Statements of Earnings
(Unaudited)


   
Nine Months Ended
 
   
March 31,
 
   
2011
   
2010
 
   
(In millions, except
 
   
per share amounts)
 
             
Net sales and other operating income
  $ 57,806     $ 45,979  
Cost of products sold
    54,604       43,062  
Gross Profit
    3,202       2,917  
                 
Selling, general and administrative expenses
    1,188       1,067  
Other (income) expense – net
    (237 )     (185 )
Earnings Before Income Taxes
    2,251       2,035  
                 
Income taxes
    612       561  
Net Earnings Including Noncontrolling Interests
    1,639       1,474  
                 
Less: Net earnings (losses) attributable to noncontrolling interests
    (16 )     (10 )
                 
Net Earnings Attributable to Controlling Interests
  $ 1,655     $ 1,484  
                 
 
Average number of shares outstanding – basic
    639       643  
                 
Average number of shares outstanding – diluted
    655       644  
                 
Basic earnings per common share
  $ 2.59     $ 2.31  
                 
Diluted earnings per common share
  $ 2.55     $ 2.30  
                 
Dividends per common share
  $ 0.46     $ 0.43  


See notes to consolidated financial statements.


 
 

 
Archer-Daniels-Midland Company

Consolidated Balance Sheets


   
(Unaudited)
   
   
March 31,
June 30,
 
   
2011
2010
 
   
(In millions)
 
Assets
           
Current Assets
           
Cash and cash equivalents
  $ 858     $ 1,046  
Short-term marketable securities
    765       394  
Segregated cash and investments
    3,051       2,337  
Receivables
    10,428       6,122  
Inventories
    13,409       7,611  
Other assets
    741       624  
Total Current Assets
    29,252       18,134  
                 
Investments and Other Assets
               
Investments in and advances to affiliates
    3,062       2,799  
Long-term marketable securities
    847       678  
Goodwill
    594       523  
Other assets
    693       702  
Total Investments and Other Assets
    5,196       4,702  
                 
Property, Plant, and Equipment
               
Land
    302       277  
Buildings
    4,371       4,008  
Machinery and equipment
    16,046       15,107  
Construction in progress
    630       612  
      21,349       20,004  
Accumulated depreciation
    (12,034 )     (11,292 )
Net Property, Plant, and Equipment
    9,315       8,712  
Total Assets
  $ 43,763     $ 31,548  
                 
Liabilities and Shareholders’ Equity
               
Current Liabilities
               
Short-term debt
  $ 5,732     $ 374  
Accounts payable
    7,703       5,538  
Accrued expenses
    3,252       2,317  
Current maturities of long-term debt
    176       344  
Total Current Liabilities
    16,863       8,573  
                 
Long-Term Liabilities
               
Long-term debt
    8,350       6,830  
Deferred income taxes
    517       439  
Other
    1,353       1,075  
Total Long-Term Liabilities
    10,220       8,344  
                 
Shareholders’ Equity
               
Common stock
    5,086       5,151  
Reinvested earnings
    11,718       10,357  
Accumulated other comprehensive income (loss)
    (152 )     (899 )
Noncontrolling interests
    28       22  
Total Shareholders’ Equity
    16,680       14,631  
Total Liabilities and Shareholders’ Equity
  $ 43,763     $ 31,548  

See notes to consolidated financial statements.
 
 
 

 
Archer-Daniels-Midland Company

Consolidated Statements of Cash Flows
(Unaudited)


   
Nine Months Ended
 
   
March 31,
 
   
2011
   
2010
 
   
(In millions)
 
Operating Activities
           
Net earnings including noncontrolling interests
  $ 1,639     $ 1,474  
Adjustments to reconcile net earnings to net cash provided by
               
(used in) operating activities
               
Depreciation and amortization
    665       673  
Deferred income taxes
    185       90  
Equity in (earnings) losses of affiliates, net of dividends
    (222 )     (232 )
Gain on Golden Peanut revaluation
    (71 )      
Stock compensation expense
    41       41  
Pension and postretirement accruals (contributions), net
    69       (133 )
Charges on early extinguishment of debt
          75  
Deferred cash flow hedges
    (13 )     17  
Other – net
    (72 )     13  
Changes in operating assets and liabilities
               
Segregated cash and investments
    (691 )     (88 )
Receivables
    (3,590 )     1,228  
Inventories
    (5,121 )     (551 )
Other assets
    (200 )     (190 )
Accounts payable and accrued expenses
    2,632       358  
Total Operating Activities
    (4,749 )     2,775  
                 
Investing Activities
               
Purchases of property, plant, and equipment
    (913 )     (1,230 )
Proceeds from sales of property, plant, and equipment
    52       25  
Net assets of businesses acquired
    (206 )     (59 )
Purchases of marketable securities
    (1,874 )     (1,012 )
Proceeds from sales of marketable securities
    1,370       1,086  
Other – net
    (16 )     (23 )
Total Investing Activities
    (1,587 )     (1,213 )
                 
Financing Activities
               
Long-term debt borrowings
    1,563       14  
Long-term debt payments
    (306 )     (546 )
Debt purchase premium and costs
          (71 )
Net borrowings (payments) under lines of credit agreements
    5,259       (89 )
Purchases of treasury stock
    (94 )      
Cash dividends
    (293 )     (276 )
Other – net
    19       10  
Total Financing Activities
    6,148       (958 )
                 
Increase (decrease) in cash and cash equivalents
    (188 )     604  
Cash and cash equivalents beginning of period
    1,046       1,055  
                 
Cash and cash equivalents end of period
  $ 858     $ 1,659  
                 
See notes to consolidated financial statements.
 
 

 

Archer-Daniels-Midland-Company

Consolidated Statement of Shareholders’ Equity
(Unaudited)


               
Accumulated
             
               
Other
         
Total
 
   
Common Stock
   
Reinvested
   
Comprehensive
   
Noncontrolling
 
Shareholders’
 
   
Shares
   
Amount
   
Earnings
   
Income (Loss)
   
       Interests
   
Equity
 
                     
(In millions)
             
                                     
Balance June 30, 2010
    639     $ 5,151     $ 10,357     $ (899 )   $ 22     $ 14,631  
                                                 
Comprehensive income
                                               
Net earnings
                    1,655               (16 )        
Other comprehensive
  income
                            747                  
Total comprehensive
  income
                                            2,386  
Cash dividends paid-$.46
  per share
                    (293 )                     (293 )
Treasury stock purchases
    (3 )     (94 )                             (94 )
Stock compensation
  expense
            41                               41  
Other
    2       (12 )     (1 )             22       9  
Balance March 31, 2011
    638     $ 5,086     $ 11,718     $ (152 )   $ 28     $ 16,680  
                                                 

See notes to consolidated financial statements.




 
 

 

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements
(Unaudited)


Note 1.
Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and nine months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending June 30, 2011.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 2010.

Principles of Consolidation

Effective in the second quarter of fiscal year 2011, one of the Company’s majority-owned subsidiaries changed its accounting period to align with the Company’s reporting period resulting in the elimination of a one-month lag in the reporting of the consolidated subsidiary’s financial results.  The effect of this change on after-tax earnings for the nine months ended March 31, 2011 was immaterial.

Adoption of New Accounting Standards

Effective July 1, 2010, the Company adopted the amended guidance in Accounting Standards Codification (ASC) Topic 810, Consolidations, which changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting or similar rights (known as variable interest entities or VIEs) should be consolidated.  The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance and the other entity’s purpose and design.  The VIEs in which the Company holds variable interests are not individually considered material to the Company’s consolidated results. As a result of the adoption of this guidance, the Company deconsolidated one VIE with no material effect on the Company’s consolidated financial statements.

Effective October 1, 2010, the Company adopted the amended guidance in ASC Topic 310, Receivables, which requires more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables (excluding trade receivables), and its allowances for credit losses.  The new disclosures require additional information for nonaccrual and past due accounts, the allowance for credit losses, impaired loans, credit quality, and account notifications.  A financing receivable is defined as a contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the entity’s statement of financial position.

The Company has seasonal financing arrangements with farmers in certain countries around the world.  Typically, advances occur during the planting season and are repaid at harvest.  As of March 31, 2011, $319 million of receivables under these financing arrangements were outstanding, the majority of which was secured by various forms of collateral.  Receivables are placed on non-accrual status when the accounts are in legal dispute.  Interest income and losses on these inventory financing arrangements are not material.


 
 

 

 
 
Archer-Daniels-Midland Company>

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 1.
Basis of Presentation (Continued)

The Company also has loans receivable through its wholly-owned subsidiary, Hickory Point Bank and Trust.  As of March 31, 2011, $274 million of loans were outstanding.  The accrual of interest on loans is discontinued when the loan is 90 days past due unless the credit is well-secured and in the process of collection.  Interest income and losses on bank loans are not material.

Other than as discussed above, the Company’s financing receivables as of March 31, 2011 were immaterial.

Change in Estimate

During the second quarter of fiscal year 2011, the Company updated its estimates for service lives of certain of its machinery and equipment assets in order to better match the Company’s depreciation expense with the periods these assets are expected to generate revenue based on planned and historical service periods.  The new estimated service lives were established based on manufacturing engineering data, external benchmark data and on new information obtained as a result of the Company’s recent major construction projects.  These new estimated service lives are also supported by biofuels legislation and mandates in many countries that are driving requirements over time for greater future usage and higher blend rates of biofuels.

The Company accounted for this service life update as a change in accounting estimate as of October 1, 2010 in accordance with the guidance of ASC Topic 250, Accounting Changes and Error Corrections, thereby impacting the quarter in which the change occurred and future quarters.  The effect of this change on after-tax earnings and diluted earnings per share was an increase of $31 million and $0.05, respectively for the quarter ended March 31, 2011 and $55 million and $0.08, respectively for the nine months ended March 31, 2011.

Reclassifications

Certain items in prior years’ consolidated statements of cash flows have been reclassified to conform to the current year’s presentation with no impact to total cash provided by (used in) operating, investing, or financing activities.

Last-in, First-out (LIFO) Inventories

Interim period LIFO calculations are based on interim period costs and management’s estimates of year-end inventory levels.  Because the availability and price of agricultural commodity-based LIFO inventories are unpredictable due to factors such as weather, government farm programs and policies, and changes in global demand, quantities of LIFO-based inventories at interim periods may vary significantly from management’s estimates of year-end inventory levels.

Note 2.
New Accounting Standards

Effective July 1, 2011, the Company will be required to adopt the second phase of the amended guidance in ASC Topic 820, Fair Value Measurements and Disclosures, which requires the Company to disclose information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances, and settlements on a gross basis, separately for assets and liabilities.  The adoption of this amended guidance will require expanded disclosures in the notes to the Company’s consolidated financial statements but will not impact financial results.


 
 

 


Archer-Daniels-Midland Company>

Notes to Consolidated Financial Statements (Continued)
(Unaudited)


Note 3.
Acquisitions

During the nine months ended March 31, 2011, the Company made three acquisitions for a total cost of $206 million and recorded a preliminary allocation of the purchase price related to these acquisitions.  The acquisition of Alimenta (USA), Inc., the Company’s former 50 percent partner in Golden Peanut Company LLC (“Golden Peanut”), was the only significant acquisition during the nine months ended March 31, 2011.  This transaction resulted in the Company obtaining the control of the remaining outstanding shares of Golden Peanut, the largest U.S. handler, processor and exporter of peanuts.  This business fits well with the Company’s existing U.S. oilseed and export operations in its global oilseed business.  A pre-tax gain of $71 million was recognized in the second quarter as a result of revaluing the Company’s previously held investment in Golden Peanut in conjunction with the acquisition of the remaining 50 percent interest based on the guidance of ASC Topic 805, Business Combinations.

The net cash purchase price for these three acquisitions of $206 million plus the acquisition-date fair value of the equity interest the Company previously held in Golden Peanut was preliminarily allocated to working capital, property, plant and equipment, goodwill, other long-term assets, and liabilities for $109 million, $189 million, $60 million, $46 million, and $30 million, respectively.

Note 4.
Fair Value Measurements

The Company determines the fair market value of certain of its inventories of agricultural commodities, derivative contracts, and marketable securities based on the fair value definition and hierarchy levels established in the guidance of ASC Topic 820, Fair Value Measurements and Disclosures.  Three levels are established within the hierarchy that may be used to measure fair value:

Level 1:  Quoted prices (unadjusted) in active markets for identical assets or liabilities.  Level 1 assets and liabilities include exchange-traded derivative contracts, U.S. treasury securities, and certain publicly traded equity securities.

Level 2:  Observable inputs, including Level 1 prices that have been adjusted; quoted prices for similar assets or liabilities; quoted prices in markets that are less active than traded exchanges; and other inputs that are observable or can be substantially corroborated by observable market data.

Level 3:  Unobservable inputs that are supported by little or no market activity and that are a significant component of the fair value of the assets or liabilities.  In evaluating the significance of fair value inputs, the Company generally classifies assets or liabilities as Level 3 when their fair value is determined using unobservable inputs that individually or when aggregated with other unobservable inputs, represent more than 10% of the fair value of the assets or liabilities.  Judgment is required in evaluating both quantitative and qualitative factors in the determination of significance for purposes of fair value level classification.  Level 3 amounts can include assets and liabilities whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as assets and liabilities for which the determination of fair value requires significant management judgment or estimation.

In many cases, a valuation technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy. The lowest level of input that is a significant component of the fair value measurement determines the placement of the entire fair value measurement in the hierarchy.  The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the classification of fair value assets and liabilities within the fair value hierarchy levels.


 
 

 


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)


Note 4.  Fair Value Measurements (Continued)

The Company’s policy regarding the timing of transfers between levels, including both transfers into and transfers out of Level 3, is to measure and record the transfers at the end of the reporting period. For the quarter and nine months ended March 31, 2011, the Company had no transfers between Levels 1 and 2.


The following tables set forth, by level, the Company’s assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2011 and June 30, 2010.
 
   
Fair Value Measurements at March 31, 2011
 
   
Quoted Prices in
 Active Markets
 for Identical
 Assets
 (Level 1)
   
Significant
 Other
 Observable
 Inputs
 (Level 2)
   
 
Significant 
Unobservable
 Inputs
 (Level 3)
   
 
 
 
 Total
 
   
(In millions)
 
                         
Assets:
                       
Inventories carried at market
  $     $ 6,336     $ 735     $ 7,071  
Unrealized derivative gains:
                               
  Commodity contracts
    1,140       2,072       115       3,327  
  Foreign exchange contracts
          277             277  
  Interest rate contracts
          13             13  
Marketable securities
    1,640       576             2,216  
Total Assets
  $ 2,780     $ 9,274     $ 850     $ 12,904  
Liabilities:
                               
Unrealized derivative losses:
                               
  Commodity contracts
  $ 1,338     $ 1,330     $ 20     $ 2,688  
  Foreign exchange contracts
          179             179  
  Interest rate contracts
          11             11  
Inventory-related payables
          482       97       579  
Total Liabilities
  $ 1,338     $ 2,002     $ 117     $ 3,457  



 
 

 


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)


Note 4.
Fair Value Measurements (Continued)

   
Fair Value Measurements at June 30, 2010
 
   
Quoted Prices in
 Active Markets
 for Identical
 Assets
 (Level 1)
   
Significant
 Other
 Observable
 Inputs
 (Level 2)
   
 
Significant 
Unobservable
 Inputs
 (Level 3)
   
 
 
 
 Total
 
   
(In millions)
 
                         
Assets:
                       
Inventories carried at market
  $     $ 3,774     $ 458     $ 4,232  
Unrealized derivative gains:
                               
  Commodity contracts
    777       1,883       69       2,729  
  Foreign exchange contracts
    162       38             200  
Marketable securities
    1,067       543             1,610  
Total Assets
  $ 2,006     $ 6,238     $ 527     $ 8,771  
Liabilities:
                               
Unrealized derivative losses:
                               
  Commodity contracts
  $ 937     $ 2,161     $ 56     $ 3,154  
  Foreign exchange contracts
    184       82             266  
  Interest rate contracts
          26             26  
Inventory-related payables
          207       31       238  
Total Liabilities
  $ 1,121     $ 2,476     $ 87     $ 3,684  


The Company uses the market approach valuation technique to measure the majority of its assets and liabilities carried at fair value.  Estimated fair market values for inventories carried at market are based on exchange-quoted prices, adjusted for differences in local markets, broker or dealer quotations or market transactions in either listed or over-the-counter (OTC) markets.  In such cases, the inventory is classified in Level 2.  Certain inventories may require management judgment or estimation for a significant component of the fair value amount.  In such cases, the inventory is classified as Level 3. Changes in the fair market value of inventories are recognized in the consolidated statements of earnings as a component of cost of products sold.


 
 

 



Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)


Note 4.
Fair Value Measurements (Continued)

The Company’s derivative contracts that are measured at fair value include forward commodity purchase and sale contracts, exchange-traded commodity futures and option contracts, and OTC instruments related primarily to agricultural commodities, ocean freight, energy, interest rates, and foreign currencies.  Exchange-traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified in Level 1.  The majority of the Company’s exchange-traded futures and options contracts are cash- settled on a daily basis and, therefore, are not included in this table.  Fair value for forward commodity purchase and sale contracts is estimated based on exchange-quoted prices adjusted for differences in local markets.  These differences are generally determined using inputs from broker or dealer quotations or market transactions in either the listed or OTC markets.  When observable inputs are available for substantially the full term of the contract, it is classified in Level 2.  When unobservable inputs have a significant impact on the measurement of fair value, the contract is classified in Level 3. Based on historical experience with the Company’s suppliers and customers, the Company’s own credit risk and knowledge of current market conditions, the Company does not view nonperformance risk to be a significant input to fair value for the majority of its forward commodity purchase and sale contracts.  However, in certain cases, if the Company believes the nonperformance risk to be a significant input, the Company records estimated fair value adjustments, and classifies the contract in Level 3. Except for certain derivatives designated as cash flow hedges, changes in the fair market value of commodity-related derivatives are recognized in the consolidated statements of earnings as a component of cost of products sold.  Changes in the fair market value of foreign currency-related derivatives are recognized in the consolidated statements of earnings as a component of net sales and other operating income, cost of products sold, and other (income) expense – net.  The effective portions of changes in the fair market value of derivatives designated as cash flow hedges are recognized in the consolidated balance sheets as a component of accumulated other comprehensive income (loss) until the hedged items are recorded in earnings or it is probable the hedged transaction will no longer occur.

The Company’s marketable securities are comprised of U.S. Treasury securities, obligations of U.S. government agencies, corporate and municipal debt securities, and equity investments.  U.S. Treasury securities and certain publicly traded equity investments are valued using quoted market prices and are classified in Level 1.  U.S. government agency obligations, corporate and municipal debt securities and certain equity investments are valued using third-party pricing services and substantially all are classified in Level 2.  Security values that are determined using pricing models are classified in Level 3.  Unrealized changes in the fair market value of available-for-sale marketable securities are recognized in the consolidated balance sheets as a component of accumulated other comprehensive income (loss) unless a decline in value is deemed to be other-than-temporary at which point the decline is recorded in earnings.

 
 

 
 
 
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)


Note 4.
Fair Value Measurements (Continued)

The following tables present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2011 and 2010.
 
   
Level 3 Fair Value Measurements at
March 31, 2011
 
   
Inventories
 Carried at
 Market, Net
   
Derivative
Contracts,
Net
   
 
 Total
 
   
(In millions)
 
                   
Balance, December 31, 2010
  $ 306     $ 92     $ 398  
   Total gains (losses), realized or
      unrealized, included in earnings
      before income taxes*
    236       4       240  
   Purchases, issuances and settlements
    (46 )     (4 )     (50 )
   Transfers into Level 3
    142       13       155  
   Transfers out of Level 3
          (10 )     (10 )
Ending balance, March 31, 2011
  $ 638     $ 95     $ 733  


* Includes gains of $79 million that are attributable to the change in unrealized gains or losses relating to Level 3 assets and liabilities still held at March 31, 2011.

   
Level 3 Fair Value Measurements at
March 31, 2010
 
   
Inventories
 Carried at
 Market, Net
   
Derivative
Contracts,
Net
   
 
 Total
 
   
(In millions)
 
                   
Balance, December 31, 2009
  $ 600     $ 77     $ 677  
   Total gains (losses), realized or
      unrealized, included in earnings
      before income taxes*
    72       (62 )     10  
   Purchases, issuances and settlements
    (99 )     (6 )     (105 )
   Transfers into Level 3
          (5 )     (5 )
   Transfers out of Level 3
    (168 )     (35 )     (203 )
Ending balance, March 31, 2010
  $ 405     $ (31 )   $ 374  

*Includes losses of $99 million that are attributable to the change in unrealized gains or losses relating to Level 3 assets and liabilities still held at March 31, 2010.

 
 

 


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)


Note 4.
Fair Value Measurements (Continued)
 
 
The following tables present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended March 31, 2011 and 2010.
 
 
   
Level 3 Fair Value Measurements at
March 31, 2011
 
   
Inventories
 Carried at
 Market, Net
   
Derivative
Contracts,
Net
   
 
 Total
 
   
(In millions)
 
                   
Balance, June 30, 2010
  $ 427     $ 13     $ 440  
   Total gains (losses), realized or
      unrealized, included in earnings
      before income taxes*
    240       102       342  
   Purchases, issuances and settlements
    68       (1 )     67  
   Transfers into Level 3
    150       13       163  
   Transfers out of Level 3
    (247 )     (32 )     (279 )
Ending balance, March 31, 2011
  $ 638     $ 95     $ 733  


* Includes gains of $248 million that are attributable to the change in unrealized gains or losses relating to Level 3 assets and liabilities still held at March 31, 2011.


   
Level 3 Fair Value Measurements at
March 31, 2010
 
   
Inventories
 Carried at
 Market, Net
   
Derivative
Contracts,
Net
   
 
 Total
 
   
(In millions)
 
                   
Balance, June 30, 2009
  $ 468     $ (2 )   $ 466  
   Total gains (losses), realized or
      unrealized, included in earnings
      before income taxes*
    30       (18 )     12  
   Purchases, issuances and settlements
    (127 )     (23 )     (150 )
   Transfers in and/or out of Level 3
    34       12       46  
Ending balance, March 31, 2010
  $ 405     $ (31 )   $ 374  

*Includes losses of $4 million that are attributable to the change in unrealized gains or losses relating to Level 3 assets and liabilities still held at March 31, 2010.

Transfers into Level 3 of assets and liabilities previously classified in Level 2 were due to the relative value of unobservable inputs to the total fair value measurement of certain products and derivative contracts rising above the 10% threshold.   Transfers out of Level 3 were primarily due to the relative value of unobservable inputs to the total fair value measurement of certain products and derivative contracts falling below the 10% threshold and thus permitting reclassification to Level 2.

 
 

 

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)


Note 5.
Derivative Instruments and Hedging Activities

The Company recognizes all of its derivative instruments as either assets or liabilities at fair value in its consolidated balance sheets.  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.  The majority of the Company’s derivatives have not been designated as hedging instruments.  For those derivative instruments that are designated and qualify as hedging instruments, a reporting entity 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.  As of March 31, 2011, the Company has certain derivatives designated as cash flow hedges.  Within the Note 5 tables, zeros represent minimal amounts.

Derivatives Not Designated as Hedging Instruments

The Company generally follows a policy of using exchange-traded futures and exchange-traded and OTC options contracts to minimize its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts to reduce price risk caused by market fluctuations in agricultural commodities and foreign currencies.  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, exchange-traded and OTC options contracts, and forward cash purchase and sales contracts of certain merchandisable agricultural commodities accounted for as derivatives are stated 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 certain merchandisable agricultural commodities, forward cash purchase and sales contracts, exchange-traded futures, and exchange-traded and OTC options contracts are recognized in earnings immediately.  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 sheets as receivables and accrued expenses, respectively.

At March 31, 2010, the Company de-designated and discontinued hedge accounting treatment for certain interest rate swaps.  At the date of de-designation of these hedges, $21 million of after-tax gains was deferred in accumulated other comprehensive income (AOCI).  These gains will remain in AOCI and will be amortized over the life of the hedged transaction.  The Company recognized in earnings $6 million and $30 million of pre-tax gains from these interest rate swaps during the quarter and nine months ended March 31, 2011, respectively.

The following table sets forth the fair value of derivatives not designated as hedging instruments as of March 31, 2011 and June 30, 2010.

   
March 31, 2011
   
June 30, 2010
 
   
Assets
   
Liabilities
   
Assets
   
Liabilities
 
   
(In millions)
   
(In millions)
 
                         
FX Contracts
  $ 277     $ 179     $ 200     $ 266  
Interest Contracts
    10       3             26  
Commodity Contracts
    3,326       2,687       2,727       3,152  
Total
  $ 3,613     $ 2,869     $ 2,927     $ 3,444  


 
 

 

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)


Note 5.
Derivative Instruments and Hedging Activities (Continued)

The following tables set forth the pre-tax gains (losses) on derivatives not designated as hedging instruments that have been included in the consolidated statements of earnings for the quarter and nine months ended March 31, 2011 and 2010.

   
Three months ended March 31,
 
   
2011
   
2010
 
   
(In Millions)
 
             
Interest Contracts
           
    Other income/expense – net
  $ 6     $ 0  
                 
FX Contracts
               
    Net sales and other operating income
  $ (11 )   $ 19  
    Cost of products sold
    41       21  
    Other income/expense – net
    35       (9 )
                 
Commodity Contracts
               
    Cost of products sold
  $ (104 )   $ 553  
        Total gain (loss) recognized in earnings
  $ (33 )   $ 584  

   
Nine months ended March 31,
 
   
2011
   
2010
 
   
(In Millions)
 
             
Interest Contracts
           
    Other income/expense – net
  $ 30     $ 2  
                 
FX Contracts
               
    Net sales and other operating income
  $ (18 )   $ (1 )
    Cost of products sold
    105       46  
    Other income/expense – net
    67       19  
                 
Commodity Contracts
               
    Cost of products sold
  $ (1,911 )   $ 144  
        Total gain (loss) recognized in earnings
  $ (1,727 )   $ 210  

Derivatives Designated as Cash Flow Hedging Strategies

For derivative instruments that are designated and qualify as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI and reclassified into earnings in the same line item affected by the hedged transaction and in the same period or periods during which the hedged transaction affects earnings.  The remaining gain or loss of the derivative instrument that is in excess of the cumulative change in the cash flows of the hedged item, if any (i.e., the ineffective portion), hedge components excluded from the assessment of effectiveness, and gains and losses related to discontinued hedges are recognized in the consolidated statement of earnings during the current period.

 
 

 


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)


Note 5.
Derivative Instruments and Hedging Activities (Continued)

For each of the commodity hedge programs described below, the derivatives are designated as cash flow hedges.  The changes in the market value of such derivative contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of the hedged item.  Once the hedged item is recognized in earnings, the gains/losses arising from the hedge will be reclassified from AOCI to either net sales and other operating income, or cost of products sold.  As of March 31, 2011, the Company has $3 million of after-tax losses in AOCI related to gains and losses from commodity cash flow hedge transactions.  The Company expects to recognize all of these after-tax losses in the statement of earnings during the next 12 months.

The Company, from time to time, uses futures or options contracts to fix the purchase price of anticipated volumes of corn to be purchased and processed in a future month.  The objective of this hedging program is to reduce the variability of cash flows associated with the Company’s forecasted purchases of corn.  The Company’s corn processing plants currently grind approximately 75 million bushels of corn per month.  During the past 12 months, the Company hedged between 14% and 100% of its monthly anticipated grind.  At March 31, 2011, the Company has hedged between 1% and 100% of its anticipated monthly grind of corn over the next 9 months.

The Company, from time to time, also uses futures, options, and swaps to fix the purchase price of the Company’s anticipated natural gas requirements for certain production facilities.  The objective of this hedging program is to reduce the variability of cash flows associated with the Company’s forecasted purchases of natural gas.  These production facilities use approximately 3.7 million MMbtus of natural gas per month.  During the past 12 months, the Company hedged between 47% and 58% of the quantity of its anticipated monthly natural gas purchases.  At March 31, 2011, the Company has hedged portions of its anticipated monthly purchases of natural gas over the next 15 months, ranging from 5% to 48% of its anticipated monthly natural gas purchases.

The Company, from time to time, also uses futures, options, and swaps to fix the sales price of certain ethanol sales contracts.  The objective of this hedging program is to reduce the variability of cash flows associated with the Company’s sales of ethanol under sales contracts that are indexed to unleaded gasoline prices.  During the past 12 months, the Company hedged between 7 million to 16 million gallons of ethanol per month under this program.  At March 31, 2011, the Company has hedged between 3 million to 16 million gallons of contracted ethanol sales per month over the next 9 months.

To protect against fluctuations in cash flows due to foreign currency exchange rates, the Company from time to time uses forward foreign exchange contracts as cash flow hedges.  Certain production facilities have manufacturing expenses and some sales contracts denominated in non-functional currency.  To reduce the risk of fluctuations in cash flows due to changes in the exchange rate between functional versus non-functional currency, the Company will hedge some portion of the forecasted foreign currency expenditures and/or receipts.  At March 31, 2011, the amount in AOCI related to foreign exchange contracts designated as cash flow hedging instruments was immaterial.



 
 

 


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)


Note 5.
Derivative Instruments and Hedging Activities (Continued)
 
 
The Company, from time to time, uses treasury-lock agreements and interest rate swaps in order to lock in the Company’s interest rate prior to the issuance or remarketing of its debentures.  Both the treasury-lock agreements and interest rate swaps were designated as cash flow hedges of the risk of changes in the future interest payments attributable to changes in the benchmark interest rate.  The objective of the treasury-lock agreements and interest rate swaps was to protect the Company from changes in the benchmark rate from the date the Company decided to issue the debt to the date when the debt will actually be issued.  At March 31, 2011, AOCI included $23 million of after-tax gains related to treasury-lock agreements and interest rate swaps, of which $21 million relates to the interest rate swaps that were de-designated at March 31, 2010 as discussed earlier in Note 5.  The Company will recognize the $23 million of gains in its consolidated statement of earnings over the terms of the hedged items which range from 10 to 30 years or when it is probable the hedged transactions will not occur.

The following table sets forth the fair value of derivatives designated as hedging instruments as of March 31, 2011 and June 30, 2010.
 
   
March 31, 2011
   
June 30, 2010
 
   
Assets
   
Liabilities
   
Assets
   
Liabilities
 
   
(In millions)
   
(In millions)
 
                         
Interest Contracts
  $ 3     $ 8     $     $  
Commodity Contracts
    1       1       2       2  
        Total
  $ 4     $ 9     $ 2     $ 2  

The following tables set forth the pre-tax gains (losses) on derivatives designated as hedging instruments that have been included in the consolidated statement of earnings for the quarter and nine months ended March 31, 2011 and 2010.

 
Consolidated
 
Three months ended
 
 
Statement of
 
March 31,
 
 
Earnings Location
 
2011
   
2010
 
     
(In millions)
 
Effective amounts recognized in earnings
             
FX Contracts
Other income/expense – net
  $ 0     $ 0  
   Interest Contracts
Other income expense – net
    0       0  
Commodity Contracts
Cost of products sold
    112       (18 )
 
Net sales and other operating income
    (12 )     0  
Ineffective amount recognized in earnings
                 
   Interest Contracts
Other income/expense – net
    1        
Commodity Contracts
Cost of products sold
    8       (82 )
Total amount recognized in earnings
    $ 109     $ (100 )


 
 

 


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)


Note 5.
Derivative Instruments and Hedging Activities (Continued)


 
Consolidated
 
Nine months ended
 
 
Statement of
 
March 31,
 
 
Earnings Location
 
2011
   
2010
 
     
(In millions)
 
Effective amounts recognized in earnings
             
FX Contracts
Other income/expense – net
  $ 0     $ (1 )
   Interest Contracts
Other income/expense – net
    0       0  
Commodity Contracts
Cost of products sold
    333       (68 )
 
Net sales and other operating income
    (8 )     0  
Ineffective amount recognized in earnings
                 
   Interest Contracts
Other income/expense – net
    1        
Commodity Contracts
Cost of products sold
    41       (60 )
Total amount recognized in earnings
    $ 367     $ (129 )

The following tables set forth the changes in AOCI related to derivatives gains (losses) for the quarter and nine months ended March 31, 2011 and 2010.

   
Three months ended
 
   
March 31,
 
   
2011
   
2010
 
   
(In millions)
 
             
Balance at December 31
  $ 43     $ 54  
Unrealized gains (losses)
    61       (94 )
Losses (gains) reclassified to earnings
    (101 )     19  
Tax effect
    16       28  
Balance at March 31
  $ 19     $ 7  

   
Nine months ended
 
   
March 31,
 
   
2011
   
2010
 
   
(In millions)
 
             
Balance at June 30
  $ 30     $ (13 )
Unrealized gains (losses)
    308       (36 )
Losses (gains) reclassified to earnings
    (326 )     70  
Tax effect
    7       (14 )
Balance at March 31
  $ 19     $ 7  

 
 

 

 
 
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)


Note 6.
Marketable Securities and Cash Equivalents

         
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(In millions)
 
March 31, 2011
                       
                         
  United States government obligations
                       
Maturity less than 1 year
  $ 714     $     $     $ 714  
Maturity 1 to 5 years
    71       1             72  
  Government–sponsored enterprise
    obligations
                               
Maturity 1 to 5 years
    130       2             132  
Maturity 5 to 10 years
    62       2             64  
Maturity greater than 10 years
    273       6       (1 )     278  
  Corporate debt securities
                               
Maturity 1 to 5 years
    35                   35  
  Other debt securities
                               
Maturity less than 1 year
    431                   431  
Maturity 1 to 5 years
    3                   3  
Maturity 5 to 10 years
    7                   7  
  Equity securities
                               
Available-for-sale
    159       83       (9 )     233  
Trading
    23                   23  
    $ 1,908     $ 94     $ (10 )   $ 1,992  

         
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(In millions)
 
June 30, 2010