BUS 419 Presentation
The Andersons, Viterra, and ADM
Outline
 Industry Analysis
 Economic
 Market
 The Andersons
 Company Overview
 Risk Management
 Financial Statement Analysis
 Viterra
 Company Overview
 Risk Management
 Financial Statements Analysis
 ADM
 Company Overview
 Risk Management
 Financial Statements Analysis
Industry overview
Agriculture industry
 Refers to the industrialized production of:
 Livestock
 Poultry
 Fish
 Crops
History
 Agricultural production across the world doubled four times
between 1820 and 1975 to feed a global population of one
billon human beings in 1800 and greater than 7 billion in
2012.
 The number of farms has decreased and their ownerships is
more concentrated.
Trends
 Agriculture Industry is always seeking to improve, by
adopting new technologies. The new technologies aim at
improving the efficiency of various Agricultural based
operations.
 Biotechnology has assisted in improving the quality of crops
manifold. But it depends on the choice of the consumers as
consumers opt for natural food.
 Transgenic rice is produced at a cheaper rate as compared to
conventional rice.
Population Growth
Forecasts
 World agricultural production is expected to grow nearly
1.5% yearly in the next few years, according to the
Organization for Economic Co-operation and Development
(OECD).
 Commodity prices are expected to decline from 2011 figures
but will average at 20% or less for cereals and 30% or less for
meats over the next decade.
 By 2050, there will be 3 billion more people to feed, by
which time meat production demand will grow almost 75%
and cereal production will have to increase by 1 billion tons.
U.S. farm sector output
Total food expenditures in U.S.
 Total food expenditures for all food consumed in the U.S.
were $1,240.4 billion in 2010, a 3.4-percent increase from
$1,199.8 billion in 2009.
Food expenditures
Year
Total4
2005
1,053,403
2006
1,102,003
2007
1,159,903
2008
1,204,779
2009
1,199,839
2010
1,240,438
Challenges
 Adoption of manufacturing processes in production as well as




processing
A system or food supply chain approach to production and
distribution
Negotiated coordination replacing market coordination of
the system
A more important role for information, knowledge and
other soft assets in reducing cost
Increasing consolidation at all levels raising issues of market
power and control
Risks
 Is classified into such categories:
 Production
 Marketing
 Financial
 Legal
 Human
Risks
Financing and financial structure
 Liquidity
 Company must have the ability to hold accounts receivable on
its asset and pay off short-term bonds
 Solvency
 Company may have the risk of having not enough income to
payoff the bonds maturity in short term
Market prices and terms of trade
 Product price volatility
 The price of agricultural products may decrease a lot. As a
result, company can suffer great loss when its input price is
fixed by the long-term contract
 Input price volatility
 Similar to product price volatility, input price may increase a
lot.
Financial markets and instruments
 Foreign exchange
 For companies with foreign businesses, FX rates have great
effect on company’s profit
 Interest rate
 Paying for the bonds and borrowing money with great interest
cost
Operations and business practices
 natural hazards
 Natural hazards can easily disrupt the continuous operation of
the company
 internal processes and controls
 Operating the facilities in wrong way or negligence can result in
broking down the machines
Corn
Soybean
Wheat
Company Overview
 Listed on NYSE
 Focuses mainly on grain related services e.g., risk
management, marketing, crop insurance and grain
transportation
 A diversified company with interests in the grain, ethanol and
plant nutrient sectors of U.S. agruiculture, as well as in
railcar leasing and repair, turf products production and
general merchandise retailing
Primary Market Segments
 Grain and Ethanol
 Grain trading (through Lansing Trade Group 52% stake)
 Rail
 Plant Nutrient
 Cob
 Retail Stores
Grain Group
 Operates grain terminals
 Earns income by:
 Buying and selling (mostly using forwards)
 Conditioning for resale
 Space income(“appreciation or depreciation in the basis value of
grain held”)
Ethanol Group
 Part ownership of 3 LLC’s, each of which owns an ethanol
plant operated by The Andersons
 Grain group has exclusive rights to provide all corn to each
plant
 The company buys from 50-100% of the ethanol from each
plant for resale
 Ethanol group provides operations and administration of each
plant on a cost-plus contract
Plant Nutrient Group
 Manufactures and distributes agricultural plant nutrients
 Operates 27 manufacturing/distribution locations
Wholesale Nutrients(Plant Nutrient
Group Cont’d)
 Manufactures, stores, distributes agricultural nutrients, lime
and gypsum pellets
 Also manufactures and distributes industrial products (deicers for plane runways, water treatment products)
Farm Centers (Plant Nutrient Group
Cont’d)
 Provides nutrients, crop protection chemicals, seeds,
agronomic advice to small farmers
 Recently purchased Eezy Gro inc., and Immokalee Farmers
Supply inc.
Rail Group
 Repairs, sells, leases locomotives, railcars, containers
 Fleet management services offered to private railcar owners
 Invested in Iowa Northern Railway Company
Turf & Specialty Group
 Turf Products
 Golf courses, turf care markets
 Also sells fertilizer
 Cob Products
 Processes corncob based products for animal litter, among other
things
Retail Group
Retail stores “The Andersons”
Specialty foods
Home improvement products
Financial Statements
Risk Management
The closest thing to a hedging
philosophy available
 “In the case of our off-balance sheet railcars and locomotives,
the risk management philosophy of the Company is to matchfund the lease commitments where possible. Match-funding
(in relation to rail lease transactions) means matching the
terms of the financial intermediary funding arrangement
with the lease terms of the customer where the Company is
both lessee and sublessor.”
So, they really don’t state what
their hedging philosophy is, if they
have one.
Risk Management
 “The market risk inherent in the Company's market risk-
sensitive instruments and positions is the potential loss
arising from adverse changes in commodity prices and
interest rates”
Risk Management
 Commodity Prices:
 Uses Futures, Options, and OTC contracts
 Interest Rate
 Short-term:
 Interest Cap
 Long-term
 Interest Swap and Cap
 FX rate
 Collar contracts
 The company is exposed to commodity price risk
 They have unhedged position limits
 Above these limits, they use commodity futures, options, and
forwards
 Forwards are for delivery, and rarely extend beyond one year
Commodity
 In 2010, The Andersons Inc. increased the use of forward
commodity contracts substantially
 However, in 2011 is was reduced substantially
“we are unable to offset 100% of the price risk of each transaction
due to timing, availability of futures and options contracts and third
party credit risk.
Furthermore, there is a risk that the derivatives we employ will not
be effective in offsetting all of the risks we are trying to manage.
Our grain derivatives, for example, do not perfectly correlate with
the basis component of our grain inventory and contracts.”
Commodity
 In 2010, the profit margin increase to 1.91% from 1.27%
Commodity
 Observing the outflow of cash in inventories and commodity
derivatives and margin deposits, the increased use of derivatives
might be caused by larger inventory
Why the focus on corn?
 “Any event that tends to negatively affect the supply of corn,
such as adverse weather or crop disease, could increase corn
prices and potentially harm our share of the ethanol LLCs
results.…High costs or shortages could require us to suspend
ethanol operations until corn is available on economical
terms, which would have a material adverse effect on
operating results.”
 “Our futures, options and over-the-counter contracts are
subject to margin calls. If there is a significant movement in
the commodities market, we could be required to post
significant levels of margin, which would impact our
liquidity.”
 “There is no assurance that the efforts we have taken to
mitigate the impact of the volatility of the prices of
commodities upon which we rely will be successful and any
sudden change in the price of these commodities could have
an adverse affect on our business and results of operations.”
Sensitivity Analysis (commodity)
“The fair value of the position is a summation of the fair values
calculated for each commodity by valuing each net position at
quoted futures market prices. Market risk is estimated as the
potential loss in fair value resulting from a hypothetical 10%
adverse change in such prices.”
Interest Rate
 The Company has other interest rate contracts that are not
designated as hedges. While the Company considers all of its
interest rate derivative positions to be effective economic
hedges of specified risks, these interest rate contracts are
recorded on the balance sheet in prepaid expenses and other
assets or current and long-term liabilities and changes in fair
value are recognized currently in income as interest expense.
Interest Rate Cont’d
 The company is exposed to interest rate risk through their
borrowing and financing
 To mitigate this, they use long term interest rate swaps
Interest Rate
Sensitivity Analysis (Interest Rate)
The fair value of these contracts is estimated based on quoted
market termination values. Market risk, which is estimated as
the potential increase in fair value resulting from a hypothetical
one-half percent decrease in interest rates, is summarized
below:
Foreign Currency Risk
 Railcar repair, leasing etc. in Canada exposes the company to
fluctuations in the C$/US$ exchange rate
 They use a costless collar that establishes
a floor of $0.9875/US$
a ceiling of $1.069/US$
Swaptions
“In 2011, the Company entered into two $10 million
swaptions for Rail purchase options on sale leaseback
transactions to manage the risk of higher interest rates in the
future.”
 “The option to enter into an interest rate swap. In exchange
for an option premium, the buyer gains the right but not the
obligation to enter into a specified swap agreement with the
issuer on a specified future date.
http://www.investopedia.com/terms/s/swaption.asp#ixzz
1oUbcpwCd
From the notes:
 “While the Company considers its commodity contracts to
be effective economic hedges, the Company does not
designate or account for its commodity contracts as hedges.”
 “The Company has a long-term interest rate swap recorded
in other long-term liabilities and a foreign currency collar
recorded in other assets and has designated them as cash flow
hedges; accordingly, changes in the fair value of these
instruments are recognized in other comprehensive income.”
Marking to market
 “The Company marks to market all grain inventory, forward
purchase and sale contracts for grain and ethanol, over-thecounter grain and ethanol contracts, and exchange-traded
futures and options contracts.”
 “Management estimates fair value based on exchange-quoted
prices, adjusted for differences in local markets, as well as
counter-party non-performance risk in the case of forward
and over-the-counter contracts.”
Accounting
 “Realized and unrealized gains and losses in the value of
commodity contracts (whether due to changes in commodity
prices, changes in performance or credit risk, or due to sale,
maturity or extinguishment of the commodity contract) and
grain inventories are included in sales and merchandising
revenues.”
Company Overview
 Production: Food ingredients, animal feeds, feed ingredient,
and ingredients for wholesome food
 Conducts business in over 75 countries
 Significant Investments in joint ventures
Primary Business Segment
 Oilseeds Processing
 Corn Processing
 Agricultural Services
 Other
 Food processing
 Financial activities
Oilseeds Processing
 Operates in North America, Europe, and South America
 100% ownership in Golden Peanut
 Major supplier of peanuts and peanut-derived ingredients to
both the U.S. and export markets and operator of one peanut
shelling facility in Argentina
 Partial Ownerships in Wilmar (Singapore), Edible Oils
Limited (UK), Stratas Foods LLC (U.S.), several other joint
ventures
Corn Processing
 50% interest in Almidones Mexicanos S.A., operates wet
corn milling plant in Mexico
 50% in Eaststarch C.V. (Netherlands)
 50% interest in Telles, LLC
 40% interest in Red Star Yeast Company, LLC which sells in
the U.S. and Canada
Agricultural Services
 Agricultural Services’ transportation network capabilities
include truck, rail, barge, port, and ocean-going vessel
handling and freight services
 The Agricultural Services segment also includes the activities
related to the processing and distributing of formula feeds
and animal health and nutrition products, and the procuring,
processing, and distributing of edible beans.
Agricultural Services
 80% in Toepfer, 36 sales offices worldwide
 45% interest in Kalama Export Company, grain export
elevator in Washington
Other
 activities related to processing agricultural commodities into
food ingredient products such as wheat into wheat flour, and
cocoa into chocolate and cocoa products. Other also includes
financial activities related to banking, captive insurance,
futures commission merchant activities, and private equity
fund investments.
Other
 23.2% interest in Gruma, operates in U.S. Central America,
South America, and Europe
 Wholly owned Bank and Trust Copmany
 Wholly owned Captive insurance (crop insurance for farmers
in the U.S. and South America
 Wholly owned ADM Investor Services, Inc., commodities
exchange and broker services
Financial Statements
Risk Management
Major Risks
 Competition
 Commodity
 Currency
Hedging Philosophy
ADM:
“The Company enters into derivative and non-derivative
contracts with the primary objective of managing the Company’s
exposure to adverse price movements in the agricultural
commodities used for, and produced in, our business
operations.”
Hedging Philosophy
 “The Company will also use exchange-traded futures and
exchange-traded and over-the-counter option contracts as
components of merchandising strategies designed to enhance
margins.”
Risk Management (Competition)
 operates based principally on price, quality, and alternative
products
 Given the commodity-based nature of its businesses, the
Company focuses on managing unit costs and improving
efficiency through technology improvements, productivity
enhancements, and regular evaluation of the Company’s asset
portfolio
Risk Management (Competition)
 Secured demand from subsidiaries and affiliates
 Major supplier of agricultural commodity raw materials to
Wilmar, Edible Oils Limited, and Stratas Foods LLC
Risk Management (Commodity)
 The Company’s commodity position consists
 merchandisable agricultural commodity inventories
 purchase and sales contracts
 energy and freight contracts
 exchange-traded futures and exchange-traded and over-the-
counter option contracts including contracts used to hedge
portions of production requirements, net of sales
VaR 10% adverse price change
Risk Management (Currencies)
 Currency exchange contracts
 Euro, British Pound, Canadian Dollar, and Brazilian Real
 Contracts Used
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


forward contracts
swaps with banks
exchange-traded futures contracts
and over-the-counter options
Risk Management (Interest)
 The Company does not use any derivative instruments to
hedge against interest rate risks
 Market risk is estimated as the potential increase in fair value
resulting from a hypothetical 50 basis points decreases in
interest rates
Fair Value Measurements
 The Company determines the fair value of certain of its
inventories of agricultural commodities, derivative contracts,
and marketable securities based on the fair value definition
and hierarchy levels
Fair Value Measurement (Cont’d)
 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 2: Observable inputs, including Level 1 prices that have been
adjusted
 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
Level 1 assets and liabilities include exchange-traded derivative
contracts, U.S. treasury securities and certain publicly traded
equity securities.
Level 2 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 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.
Note 3. Fair Value Measurement
Note 3. (continued)
• Except for derivatives designated as cash flow hedges, changes in fair value of commodityrelated derivatives are recognized in the consolidated statements of earnings as a component
of cost of products sold
• Changes of fair value of Foreign currency-related derivatives are recognized in the earnings as
a component of net sales and other operating income, cost of products sold, and other
(income) expense net
• Changes in the fair value of derivatives designated as cash flow hedges are recognized as a
component of accumulated other comprehensive income
Fair Value Measurement (not hedge)
 The following is the fair values of derivatives not designated
as hedging instruments
Impact on Financials
Impact on Financials
Impact on Financials
Viterra
Company Overview
 Vertically integrated global agri-business
 Founded in 1924, headquartered in Canada
 Extensive operations across Western Canada and Australia
 Has offices in Canada, the U.S., Australia, New Zealand,
Japan, Singapore, China, Vietnam, Switzerland, Italy,
Ukraine, Germany and India
 Shares traded on TSX and ASX
Viterra: International
International Operations
 Viterra operate its business in more than 50 countries
Understanding the Business
 Act as a mediator in the agri-food value chain
 Generate revenue at each stage of the value chain by
providing crop inputs, handling grain, marketing grain and
processing
 Relationship with producers in crucial to the business
 Markets grain through its commodity merchandisers,
international trading offices or through the Canadian Wheat
Board
Seasonal Trends
 North America
 More than 75% of the annual sales from agri-products
operation are generated between mid-April and the end of
June
 Earnings from grain handling and markting operation are
generated through the harvest period, between August and
the end of October
Seasonal Trends
 Australia
 Income generated from the grain handling and marketing
operations are earned between October and the end of
January
Seasonal Trends
 Select Quarterly Financial Information
Sale Volumes
 North America
 Primary elevator shipments of western Canadian grains totaled
15.3 million tones in 2011
 Port terminal receipts were 10.8 million tones

South Australia
 Received 8.6 million tones of grains in its South Australia
system
Primary Market Segments
 Grain Handling and Marketing
 Agri-products
 Food Processing
Segment Operations
 Grain Handling and Marketing
 Mainly handles wheat, durum, barley, canola and pulses
 Derives its revenue from accumulating, storing, blending,
transporting and marketing these grains from the producer’s
farm to end-use markets
Segment Operations
 Sensitivity analysis of grain handling and marketing operation
in North America:
 For operation in Australia:
Segment Operations
 EBITDA
Segment Operations
 Agri-products
 Viterra sell seed, crop protection product, fertilizer, bulk fuel
and small agricultural equipment through a network of retail
locations
 The company has 258 retail locations in Western Canada,
represents about 35% of the market
Segment Operations
 Sensitivity analysis of sell of agri-products in North America:
Segment Operations
 EBITDA
Segment Operations
 Processing
 Viterra has 5 oat and specialty grain milling facilities, 2 pasta
processing facilities and a canola processing facility in North
America
 The company is one of the world’s largest industrial oat millers
Segment Operations
 EBITDA
Segment Operations
 Consolidated segment revenues
Other Segments
 Oats and Specialty Grain Milling
“Viterra is one of the world’s largest industrial oat millers and
operates
approximately 39% of the total North American oat milling capacity
and approximately 46% of the industrial ingredient supply market.
It processes raw oats into food ingredients and has a total milling
capacity of 540,000 tonnes of oats per year. The Company’s
customers are primarily North American food manufacturers who
are consistent brand leaders in breakfast cereals, whole grain and
healthy food choices.”
Other Segments
 Pasta
“Viterra’s pasta operations are located in the U.S., where Processing
operates a vertically integrated durum wheat milling and pasta
production facility, as well as a second pasta production facility. The
primary raw material input for pasta products is durum wheat, which
is processed through its milling facility into semolina and wheat flours
that are then used by Viterra to produce dry pasta products. The
milling facility has a durum grind capacity of 340,000 tonnes per year.
The two production plants have a combined capacity of 254,000
tonnes of pasta per year.”
Other Segments
 Canola Processing
“In Western Canada, Viterra operates a canola processing plant with an annual
processing capacity of 340,000 tonnes. Canola oil and meal from this plant are
produced using a double expeller-press process, which does not use solvents, as
opposed to the North American standard whereby hexane (a solvent) is used to
maximize oil yields.
The Company’s joint venture canola processing facility in southern China began
operating during the fourth quarter of fiscal 2011,
providing oil and meal to end-use customers located in the region.
This facility utilizes the hexane oil extraction method to process about
680,000 tonnes of canola annually. The majority of the canola seed
requirements for this facility are sourced from Viterra’s grain handling
and marketing operation.”
Other Segments
 Malt
“In Australia, Viterra is the largest malt processor with six processing
plants that account for 53% of Australia’s malt production
capacity.The Company’s Australian malt operation has an annual
production capacity of about 440,000 tonnes, of which 340,000
tonnes are destined for export markets and 100,000 tonnes are
consumed domestically. Viterra supplies malt to major domestic and
international brewers that supply key global markets predominantly
in the Asia-Pacific region. Viterra’s malt operations require
approximately 530,000 tonnes of malt barley per year, representing
25% of the Australian malt barley crop. The Company is currently
building a 110,000 tonne malt facility near Sydney, Australia, which
is expected to be completed in the first half of fiscal 2012.”
Other Segments
 Feed
“Feed includes the manufacture, sale and distribution of feed products and other
related products for commercial and acreage-based livestock producers. Specialty
feed formulations and feed product manufacturing is well diversified between
dairy cattle, beef cattle, poultry, swine and other specialty livestock feed varieties.
In Canada, feed is manufactured at six feed mills and one pre-mix manufacturing
facility. The Company owns an additional six feed mills and commodity blending
sites in the U.S. that manufacture complete feeds, supplements, pre-mixes and
commodity ingredients for ranchers and dairy farmers in those states and other
south central U.S. markets.
In New Zealand, the Company operates three storage facilities in close proximity
to the prime dairy regions and deepwater ports. It is involved in maize processing
and also operates a feed manufacturing and distribution business with three feed
mills representing production capacity of approximately 240,000 tonnes
annually.”
Strategic Direction
 optimizing core businesses through improved efficiencies
 growing shareholder value by maintaining and improving the
quality of earnings, managing risk, and keeping a strong
balance sheet,
 optimizing scale and influence in the grains the Company
sources and transports to export markets,
 building sustainable competitive advantages,
 and seeking balance between business segments to mitigate
risk through diversity.
Financial Statements
Financial Statements
Risk Management
Major Risk Factors
 Weather condition
 Commodity Price Fluctuation
 Grain volume and quality
 Foreign Exchange Rate
 Interest Rate
 Credit Risk
Risks and Risk Management
 Enterprise Risk Management (ERM)
 A framework that developed under the standards of the
Committee of Sponsoring Organizations of the Treadway
Commission
 Reflects the appropriate risk tolerances as set out by
management and board of directors
 Identify potential events that impact the company
 Provide assurance to achieve the company’s objective
Risks and Risk Management
 Weather risk
 Viterra’s most significant risk
 Effect on the production volumes and crop quality
 The company had grain volume insurance to protect the
revenues from a significant drop in grain volumes as a result of
weather-related events.
 For 2011, the company had $75 million of coverage in place for
Canadian and Australia exposure
Risks and Risk Management
 Commodity price and trading risk
 For all grains, oilseeds and special crops handled and marketed
by Viterra, the company is exposed to the risk of price
movement during the holding period
 Company uses exchange-traded futures and options contract as
well as OTC contracts to minimize the effects of changes in
prices on its agri-business inventories and forward cash
purchase and sales contracts
Risks and Risk Management
 Value at Risk (VaR)
 A methodology to standardize the commodity price risk
assessment globally
 VaR quantifies potential changes in the value of commodity
positions from all sources of risk
 Management use the daily VaR results to evaluate the impact of
different scenarios on the financial results
Risks and Risk Management
• VaR 10% adverse price change
Risks and Risk Management
 Foreign exchange risk
 Viterra is exposed to foreign exchange risk on commodity
contracts that are denominated in foreign currencies
 The company uses foreign currency forward contracts, crosscurrency swaps, futures contracts and options to limit
exposures to changes in foreign currency exchange rates (CAD
against USD, AUD)
Risks and Risk Management
 Sensitivity analysis
Risks and Risk Management
 Interest rate risk
 Viterra expose to interest rate risk relates primarily to the
company’s debt obligations
 The company manages this risk by using a combination of cash
instruments, forwards and a mixture of fixed and floating rates
 Interest rate swaps is also used in managing variable interest
rates associated with company’s debt portfolio
Risks and Risk Management
 Credit risk
 The Company is also exposed to credit risk in the event of non-
performance of its counterparties on its derivative contracts
 the Company only contracts with pre-authorized
counterparties where agreements are in place and the
Company monitors the credit ratings of its counterparties on an
ongoing basis
 Exchange-traded contracts are used to hedge future revenues in
the Company’s grain business
Risks and Risk Management
 Credit risk
Risks and Risk Management
 Liquidity risk
 Viterra has to generate enough cash for the requirements of
margin position, dividend, debt servicing, working capital, etc
Risks and Risk Management
 Company’s estimated value of remaining contractual
maturities for its financial liabilities
Fair Value Measurement
“Fair value amounts represent point-in-time estimates and
may not reflect fair value in the future. Fair value of
financial instruments, including derivative instruments,
takes into account the Company’s own credit risk and the
credit risk of the counterparties. The measurements are
subjective in nature, involve uncertainties, and are a matter
of significant judgment”
Fair Value Measurement
For those financial instruments where fair value is recognized in the
balance sheet, the methods and assumptions used to develop fair
value measurements have been prioritized into three levels as per the
fair value hierarchy included in GAAP:
 Level 1 includes quoted prices (unadjusted) in active markets for
identical assets or liabilities.
 Level 2 includes inputs that are observable other than quoted
prices included in Level 1.
 Level 3 includes inputs that are not based on observable market
data.
Fair Value Measurement
 The following summarizes the methods and
assumptions used in estimating the fair value of the
Company’s financial instruments where
measurement is required:
 The fair value of short-term financial instruments approximates their
carrying amounts due to the relatively short period to maturity. These
include cash and cash equivalents, accounts receivable, and accounts payable
and accrued liabilities.
 Investments classified as available for sale with an active trading market are
recorded at their fair value based on closing market quotations and are
considered Level 1.
 The fair value of exchange-traded derivatives and securities is based on
closing market quotations and is considered Level 1.
Fair Value Measurement
 The fair value of commodity forward contracts is estimated based on
exchange-quoted prices adjusted for differences in local markets. The
adjustments are generally determined using inputs from broker or
dealer quotations or market transactions in either the listed or over the
counter (“OTC”) markets. Observable inputs are generally available for
the full term of the contract and are considered Level 2.
 The fair value of foreign exchange forward contracts (OTC), natural gas
swaps and cross-currency swaps is estimated using observable prices for
similar instruments in active markets and is considered Level 2.
 The fair value of bond forward contracts is estimated by discounting net
cash flows of the contracts using forward interest rates for Government
of Canada bonds of the same remaining maturity. The methods and
assumptions used are considered Level 2.
Fair Value Measurement
 The fair value of long-term debt with fixed interest rates is estimated by
discounting the expected future cash flows using the risk-free interest rate on
an instrument with similar terms adjusted for an appropriate risk premium for
the Company’s credit profile.
 When financial instruments lack an available trading market, fair value is
determined using management’s estimates and is calculated using market
factors for instruments with similar characteristics and risk profiles. The
methods and assumptions used in these limited cases would be assessed for
significance and may be disclosed as Level 3.
Hedge Accounting
 “The Company uses hedge accounting to match the cash flows of some
of its processed products to be sold in foreign funds with its foreign
currency hedging instruments. Under hedge accounting, the effective
portion of the change in the fair value of the hedging instrument is
recognized in other comprehensive income, while the ineffective
portion is recognized immediately in cost of goods sold. Upon maturity
of the derivative instrument, the effective gains and losses previously
recognized in other comprehensive income are recorded in net earnings
as a component of cost of goods sold in the same period the related
hedged sales are recorded in net earnings.”
 “The Company uses hedge accounting for the foreign exchange swaps,
cross-currency swaps and foreign denominated debt used to hedge
portions of net investments in self-sustaining foreign operations. The
effective portions of the hedges are recognized in other comprehensive
income while any ineffective portion is recognized immediately in
operating, general and administrative expenses.”
Hedge Accounting
Hedge Accounting
 Statement of comprehensive income