Accounting for Hedging Transactions

©2013 CliftonLarsonAllen LLP • • • • Bio Neiffer Paul Paul Paul can be reached at: summer summer to help operate the combine wheat in harvest Paul grew up on a wheat farm Southeastern in Washin Standards Council. attorneys, bankers and others each year. curr Paul Paul gives numerous talks on various tax, accountin ( CPA” and the is primary writer and editor for the n Yakima, Washington offices. writes Paul a monthly an Paul is Agribusiness CPA and with Principal Clif www.farmcpatoday.com – – – – – 509-961-9739 cellphone 509-961-9739 linedirect 509-823-2920 Twitter @farmcpa Twitter Blog [email protected] www.farmcpatoday.com ). tonLarsonAllen tonLarsonAllen LLP located the in Kennewick and ationally ationally recognized farm blog “Farm CPA Today” ently ently serves as the treasurer for the Farm Financia g and succession planning topics to farmers, CPAs, column column for Top Producer magazine called the “Farm gton gton State enjoys and still going home each . This idea his is of a vacation. l l

©2013 CliftonLarsonAllen LLP 3 ©2013 CliftonLarsonAllen LLP 4 ©2013 CliftonLarsonAllen LLP • • • • Agenda Detailed ExamplesDetailed Accounting for Hedging for Accounting Hedgingis What FFSCtheon Background – – Tax Tax Treatment Financial Treatment

©2013 CliftonLarsonAllen LLP • • (FFSC) StandardsCouncilFinancial theFarmAbout Two sets of guidelines of sets Two academicians consultants, accountants, managers, farm credit), farm and (banks lenders ag producers, of Comprised – – Management Accounting Management Guidelines Financial Guidelines

©2013 CliftonLarsonAllen LLP uniformity and integrity in both financial reportin financial both in integrity and uniformity To provide education and a national forum to facili to forum national a and education provide To development, review, communication and promotion of promotion and communication review, development, measurement of the financial position and the finan the and position financial the of measurement FFSC Mission FFSC analytical techniques useful for effective and real and effective for useful techniques analytical performance of agricultural producers.agricultural of performance g and the and g tate the tate istic istic cial

©2013 CliftonLarsonAllen LLP FFSC Vision FFSC To be recognized as the definitive resource of fina of resource definitivethe as berecognized To guidelines to benefit agricultural producers.agricultural benefit to guidelines ncial

©2013 CliftonLarsonAllen LLP • • • Goals FFSC methods of calculating those measures; andmeasures; those calculating of methods standardized establish and agriculture of sectors alland country the of areas all to common ratios) (usually measures financial certain identify To producers; agricultural of reports financial of content and format for standards recommended establish To rewritten to address benchmarking.address to rewritten being of process the In database. financial agricultural an of development the encourageTo

©2013 CliftonLarsonAllen LLP • the of FFSC History Report Producers” Agriculture for Guidelines“Financial – – – – – – – – – Revised 2014report issued Jan Revised (accounting for hedg report issued AprilRevised 2011 2008report issued January Revised December 1997glossary, report Expandedby Notes” andwith“Disclosure report issued in1995 Revised July to accrual Cash appendixin November issued 1993 OriginalMay 1991report issued May 1990 released Exposure draft 22, Initial1989Januarymeeting es)

©2013 CliftonLarsonAllen LLP • cont. the of FFSC, History Agriculture Producers” ReportProducers” Agriculture for Guidelines Accounting “Management – – – – – Final 2008report January issued Final report December 2006approved issued December 2005Exposure draft formal inBegan effortsummer 2000 accounting guidelines develop of uniform chart of and accounts management November 1997, FFSC recommendation a endorsed to

©2013 CliftonLarsonAllen LLP • • • • from DeparturesGAAP Recommendations:Key Capital Leases—Estimation Approach Acceptable Approach Leases—Estimation Capital Acceptable Method Value Livestock—Base Breeding Raised Livestock Market for Acceptable Values Valuation—Market Inventory Primary Format Primary Be Can Either Required, Market and Cost Both – Valuation/Personal Asset Equity Asset Valuation/Personal an Retained Capital least at Delineate Section Must Format, Primary as Equit WithOwnerValue Market B/S d y y

©2013 CliftonLarsonAllen LLP • • • • • • • Practice Lender Common from Departures Recommendations:Key Depreciation—Book, Not % of Market or Taxor Market of % Not Depreciation—Book, LeasesCapital and Taxes Deferred of Incorporation Statement Income and SCF theon Income Non-Farm and Withdrawals of Treatment Liabilitiesand Assets Personal of Separation Format Statement Income Category Format—Two Sheet Balance AssetsCapital of Market and Cost

©2013 CliftonLarsonAllen LLP 1. GAAP ComplianceGAAP 1. Recommendations theFFSCAbout MisconceptionsCommon Two 2. Credit AnalysisCredit 2. – – – – to to be qualified. on based FFSC andRecommendations are will continue w/GAAP.and largely are consistent Accountant opin Framework on Conceptual …basedFact: the documents, GAAP for or replacement substitutea of as …meant Myth: FFSC FFSC Recommendations. of numerous evaluation scope of beyond thefactors creditof process re Development Fact: an effective creditrecommendations as analysis …are meant Myth: quires the ions ions

©2013 CliftonLarsonAllen LLP • • • Hedging? Whatis It is not an attempt to make money. make to attempt an not is It commodity). physical underlyingan from value its derives generally (which instrument derivative a against goodor commodity of purchases plannedor good, or commodity a of production planned assets, owned of movements price offset to Attempts protection. pric provides that strategy management risk a is It e

©2013 CliftonLarsonAllen LLP • • Not Whatis Hedging? Forward contracts Forward Speculation – – – contracts, installment sale contracts, etc. contracts, sale installment contracts, Fixed or delayed price price, b deferred contracts, as exists (or (or on willexists as farm or exist) the ranch. or position Taking in theoptions futures same the m owned or produced. Taking or a options futuresposition in commodity a asis asis not arket arket

©2013 CliftonLarsonAllen LLP • • Types and Treatment Hedging Three types of hedges of types Three Financial Statement treatment Statement Financial – – – – – Net investment hedge/Foreign currency currency hedge/Foreign transactions investment Net flowCash Fair value the two two methods.the betwe No difference in presentation -- Sheet Balance income. be included in income or net be excluded may from n on dependshedging theMa type. -- Income Statement en et y y

©2013 CliftonLarsonAllen LLP • • Hedges Value Fair value). market determinable readily a at valued crops harvested (e.g., value market at sheet balance on listed inventory stored to refers Generally asset.an of changes value market to exposure the protect to Used

©2013 CliftonLarsonAllen LLP • • Hedges Flow Cash being raised or will be raised, or feed to purchase to feedor raised, be will or raised being that livestock crops, future crops, growing (e.g., purchased or produced, be to yetor unfinished, raised, being growing, items to refers Generally transactions. forecasted of fluctuations price of risk the reduce to Used is ).

©2013 CliftonLarsonAllen LLP • • • • • • • • Terminology Accumulated other comprehensive income (AOCI) income comprehensive other Accumulated (OCI) income comprehensive Other effectivenessHedging lossesor gains Unrealized lossesor gains Recognized lossesor gains Realized Derivative Mark(ed)-to-market

©2013 CliftonLarsonAllen LLP • • Recommendations FFSC Alternative GAAP – – – – include all hedgingin gains andearnings. losses and and Ignore unearned earned distinctionbetween Simplified method may be used “Statement of Comprehensive Income”). of Comprehensive “Statement or end Income on of the separate a Statement and(at unearned body theIncome of the Statement) earned (i between andgains hedging losses Separate Recommended approach n the

©2013 CliftonLarsonAllen LLP • • ApproachHedge Value Fair losses. on I/S the income gainsreported or and hedgingas withstatementfinancialrecognized respect are to or of gainsMarked-to-marketas losses datethe of market) value. atsale sheet is its or onfair balancethe valued availableis hedgedfor beingasset underlying When – – section of theI/S. of section expensein is shownthe G/L reportedbusinessthenthe thecourse in purchased is normally itemhedged the If th of section revenue thein is shown G/L reportedthe b of thecourse insold is normally itemhedged the If ◊ and therefore will be included in net income. in net included will be therefore and wi included be should loss or gain hedging unrealized at market, valued is feed, instance for items, purchased if but flow hedges, cash are purchases hedged Generally th expenses th expenses then the the then the the usiness, (or (or e I/S.e of net

©2013 CliftonLarsonAllen LLP • • • ApproachHedge Flow Cash comprehensive income.comprehensive other accumulatedtitled in accountan sheet balance o sectionequityin the accumulated are andlossesGains Income.”Comprehensive of “Statement state separatein a or Statement Income the onbe May income.net after andreported comprehensiv included“Other but is in income, in net no is hedge withoftypethis associatedloss gain or The – – comprehensive income to retaining earnings. retaining to income comprehensive from sheet balance the of section equity the in loss of mo impact the has which income, in net reclassified comprehensive other from removed are losses or gains previo offset, are losses and gains unrealized these As income). net they (i.e., income net to respect with unrecognized c are losses and gains unrealized all these Accordingly, are not included in in included not are accumulated other other accumulated us accumulated accumulated us onsidered onsidered ving the gain gain or the ving income and are are and income

e income” income” e ment, t included t f the f

©2013 CliftonLarsonAllen LLP Assumes constantbasis, no commissions, no fees, an • • • • Example Futures – Hedge Value Fair offset to offset the fluctuating corn inventory valuation. resulting gain or loss in the futures market is rec At the end of each month, the futures position is m Result On On 5/2/13 As As of 1/3/13 – – – – – – – – The net price received by the farmer is $675,000. The gain in the futures market is $0.25/bu ($6.85 Producer receives cash $650,000 from elevator for c at $6.60/bu. Producer buys (or goes long) 100,000 (orbu 20 cont Producer sells 100,000 cornbu of inventory to loca at $6.85/bu. Producer sells (or goes short) 100,000 bu (or 20 co The forward price for May delivery is $6.75/bu. corninve Assume producer has 100,000 bu of unpriced d nod intereston futures margin account. $6.60) or $25,000.- ntracts) of Jul ‘13 cornfutures l elevatorl for $6.50/bu. racts) of Jul corn‘13 futures orn. ognized ognized an asin revenue ntory on hand. arked-to-market and

©2013 CliftonLarsonAllen LLP Assumes constantbasis, no commissions, no fees, an • • • • Example Options – Hedge Value Fair an offset an to offset the fluctuating corn inventory valuati resulting gain or loss in the options market is rec At the end of each month, the options position is m Result On On 5/2/13 As As of 1/3/13 – – – – – – – – The net price received by the farmer is $635,000. The loss from the options premium is $-0.11/bu ($0 Producer receives cash $650,000 from elevator for c option for $0.20/bu, $20,000.or Producer sells (or goes short) 100,000 bu (or 20 co Producer sells 100,000 cornbu of inventory to loca with an out-of-the-moneystrike price of $6.50/bu f Producer buys (or goes long) 100,000 (orbu 20 cont The forward price for May delivery is $6.80/bu. corninve Assume producer has 100,000 bu of unpriced d nod intereston futures margin account. ntracts) of the Jul ‘13 corn l elevatorl for $6.50/bu. or $0.35/bu, or $35,000. at)o u 1 cornoptions racts) of Jul ‘13 orn. 2 $0.35) or -$15,000. .20 - ognized ognized asin revenue on. ntory on hand. arked-to-market and

©2013 CliftonLarsonAllen LLP Assumes constantbasis, no commissions, no fees, an • • • • Example Futures – Hedge Flow Cash losses losses used areto offset to the fluctuating corn i inventory (at marketatvalue) which point the unre comprehensive income, until the crop is harvested a resulting gain or loss in the futures market is rec At the end of each month, the futures position is m Result On On 11/23/12 As As of 1/3/12 – – – – – – – – The net price received by the farmer is $590,000. The loss in the futures market is -$1.50/bu ($5.90 Producer receives cash $740,000 from elevator for c at $7.40/bu. Producer buys (or goes long) 100,000 (orbu 20 cont Producer sells 100,000 cornbu of local to elevator at $5.90/bu. Producer sells (or goes short) 100,000 bu (or 20 co The forward price for Dec delivery is $5.90/bu. Assume producer wants to protect 100,000 bu of unpl d nod intereston futures margin account. -$7.40) -$150,000.or - for $7.40/bu. ntracts) of Dec corn ‘12 futures racts) of Dec ‘12 cornfutures orn. ognized ognized in other nventory nventory valuation. anted corn. arked-to-market and alized gains and nd placed nd in

©2013 CliftonLarsonAllen LLP Assumes constantbasis, no commissions, no fees, an • • • • Example Options – Hedge Flow Cash losses losses used areto offset to the fluctuating corn i inventory (at marketatvalue) which point the unre comprehensive income until the crop is an harvested resulting gain or loss in the options market is rec At the end of each month, the options position is m Result On On 11/23/12 As As of 1/3/12 – – – – – – – – The net price received by the farmer is $670,000. The loss from the options premium is $-0.70/bu ($0 Producer receives cash $740,000 from elevator for c Producer allows the option to expire worthless. Producer sells 100,000 cornbu of inventory to loca with an at-the-moneystrike price of $6.00/bu for $ Producer buys (or goes long) 100,000 (orbu 20 cont The forward price for Dec delivery is $5.90/bu. Assume producer wants to protect 100,000 bu of unpl d nod intereston futures margin account. l elevatorl for $7.40/bu. 0.70/bu, 0.70/bu, $70,000.or racts) of Dec ‘12 cornoptions orn. 7 $0.00) or -$70,000. .70 - nventory nventory valuation. ognized ognized in other anted corn. alized gains and arked-to-market and d d placed in

©2013 CliftonLarsonAllen LLP • • Approach Alternative process production (cash flow) with this approach. this with flow) (cash production process in- or vs.planned value) (fair hand on commodities of hedges between distinctionno is There Statement. Income the on recognizedand marked-to-market lossesare and g hedging all thus value, fair as hedgesall treats hedges for accounting of method simplified The ains

©2013 CliftonLarsonAllen LLP • • Summary The recommended The recommended approach is to: important to be sure earnings are sure importantearnings are accurate to be measured infinancial the stateme and presentation treatment for an items significantagricultural producer. Pr Gain from may andbehedging losses transactions – – transactions, transactions, these and keeping amounts out net of comprehensive income the gain and losses from hedgi (has not This begun). treatment has the impact of atvalue cost (growingcrops or livestock) produ or Treat hedging transactions cash as flow when hedges losses from hedging transactions. treatment has the impact of showing in net income t valued at market(stored grainor livestock availab Treat hedging transactions fairas value whe hedges ction is planned le for sale). This le sale). for This showing showing in other n inventories n inventories are income. he he gain and inventories inventories are oper oper ng ng nts are are nts ly.

©2013 CliftonLarsonAllen LLP • • • Treatment Tax Income reported net gain or loss) 1.446-4(e)(1)(ii)] loss) or gainnet[Reg.reported 10 theupusuallypicka mark-to-market basis (i.e. loss electgains canandall they reportto hedging However, producerif the certainmeets requirements is losses closed.or hedgethewhen g normally reportsagriculturalAn producer hedging from different beGAAPMay – – – different from actual gains or losses.orgains actual from different mate are thatlosses gains or in reportedresult This may gain.unrealizedas year-end atvalue option outstanandanyloss realizeda asoption an of purchase sho will many brokers since used are if options companies brok from 1099B form in reviewing taken bemust Care 1099B.form statement Broker’s the from gains andlosses simply toreport producersallows method This simplified . es es on erage 99 99 ding rially rially the ains w a w , ,

©2013 CliftonLarsonAllen LLP • Example gain or loss should be shown for the year.the for shown lossshouldbe or gain hedgingno and incurred beenloss nohas $35,000, loss of realizeda shows 1099-B the Although zero. of profit net a with $35,000 of gain unrealized and $35,000 losso realized a is there that notices he company, brokerage the from 1099-B the receives he When $35,000. of cost a options at put hog 20xx June 15 hepurchases 20xx, 31, December On account. hedgingan opens pigsand grows Duroc Farmer f f

©2013 CliftonLarsonAllen LLP • Treatment Tax Hedging transactionsHedging – – – – Schedule income.”F Schedule “Other showing IRS all suggest andgains guidelines losses accounting perspective. amount of the recognized or gains from losses an always andtaxable income, different is almost this from are closed losses hedgingrecogni transactions only gain tax for payers, theGenerally, cash-basis a as hedge. transaction a to met qualify futures rules andmust Detailed documentation requirements schedule F. ordinary as income Treated or reported and expense s or s or in from from zed zed in on on be

©2013 CliftonLarsonAllen LLP • • and Recordkeeping Identification transaction hedge the into entering days of 35 within happenmust This manner. contemporaneous substantial a in hedgedbeing risk o item the identity must taxpayer the Additionally, of the day of the transactionthe of day the of clo the before transaction hedginga as it identify clearly must hedge, a into enters who Taxpayer – – purchase orders purchase orders or confirmations books and suchrecords, notations on tradingas ticke Making notations or marks other withinidentifyingth hedging account A separate is one method ts, ts, e e se r r

©2013 CliftonLarsonAllen LLP • Example purchased in November.in purchased the price against hedge a is contract meals futures iden musthe days 35within and hedge, a as records transaction futures theinto enteringof the day On will purchasehewhen actually in November contract with low price, the currentin lock to meal futures in entershe meal Accordingly, market. soybean the concer is he June,however, in Currently November. of purchase a anticipates large feeder, a hog Art, soybean meal to be used as hog feed in feed hog as meal beto used soybean the intent of removing the futuresthe removing intent the of risk of the soybean meal meal beto soybean the of risk in June, Art must identify this in his this identifymust Art June,in to a current long position in soybean soybean in position long current a to ned about a possible price increase in increase price possible a about ned tify in his records that the soybean soybean that the his records in tify the soybean meal. soybean the

©2013 CliftonLarsonAllen LLP • Proper byEntity Performed Be Must Hedging hedge a commodity for the other entity.the other for commodity a hedge ( identical ownership underif even entity, Another – – – Creek Farms, Ltd v. Comm. TC Memo 2001-176]. TC Memo Comm. v. Ltd Farms,Creek be not these activities could hogs, produce did who corpora other to soybeans and corn sold corporation pro hog in engaged it not was because transactions, losses on ordinary deduct not could corporation CA 199720003].[PLR hedging sale and purchases his own treating of purposes for at couldn’t business the dairy in engagedwas which s significant andemployee an was who individual An [ transactions fo account maintained one shareholdera thougheven separate and beto was ruled Taxpayer transaction. capita a was transaction The group. consolidated a withcom a corporations Cthree of was one Taxpayer Pine Creek Farms, Ltd v. Comm. TC Memo 2001-176]. TC Memo Comm. v. Ltd Farms,Creek Pine other than consolidated group) cannot cannot group) consolidated than other l loss and not a hedginga not l and loss imputed to the taxpayer [ theto taxpayer imputed s of grain contract (at a net a as loss) (at contract grain s of duction. Even though the though Even duction. distinct from its its shareholders from distinct tribute that business to himself to businessthattribute the sale of hog futures as hedgingas futures sale hog of the hareholder of an S corporation corporation S an of hareholder tions with common ownership with common tions mon shareholder, but not part of of part not but shareholder, mon r all three corporation’s hedging corporation’s all threer Pine Pine

©2013 CliftonLarsonAllen LLP • • • Criteria Additional 2(d)(3)]. or partany of the risk from ahedging previous tra farmerA can into enter additional hedging transact constitute constitute a hedge price position in farm commodities on hand to or be acqui The futures options or contract must opposite be th production purchased raisedor by the farmer, within and be th The futures options or contract must in be commodit – – – – going long futures will qualify as a hedge a as will qualify futures long going purchasto needsand livestock raises farmer theIf hedge a will as qualify purthe livestock, raises or crop a grows farmerIf board”the “buy and sell crop Can’tthe Raise a 100,000 bushels of corn, can’t hedge a mill a hedge can’t corn, of bushels Raise 100,000a chase of a put or going short futures short going or puta of chase ion ion bushels e grain, the purchase of a call call a or of purchasethe grain, e nsaction nsaction 1.1221- [Reg. ions ions to counteract all e range of e farmer’sphysical red, so as to ies which are

©2013 CliftonLarsonAllen LLP • • • ProvisionsOther actually or purchased sold. hedge A gain loss or should only reported which be which the taxpayerwished to 1.1221 [Reg.hedged be terminate positions that hedge that risk, depending risk associated with an asset liabilityor might fr transactions are in hedging status, noting that a t into and terminating positions is not relevantto w The regulations acknowledge that of a the frequency yet be planted yet planted be for multiple years1.1221-2(d) [Reg. period during which it is to exposed the inclu risk farmerA may all hedge or portion any of afor risk – $25,000 loss until January 12, 20XX+1.12, January loss until $25,000 20XX12, January on sells soybeans He the $25,000. Decem on out the hedge closes He 20XX.1, November 10,000 of hedge a into entersBean Farmer – Example +1. He should not recognize the recognize not should He +1. bushels of soybeans on on soybeans of bushels equently establish establish equently and ber 28, 20XX for a loss of of loss a for 20XX28, ber axpayer hedging axpayer hedging the ding ding crops that may not all anyor part of the hether hether these (7)(i)] the the hedge crop is on the extent to taxpayer’s entering -2(d)(7)(ii)].

©2013 CliftonLarsonAllen LLP • Transactions Speculative Tax TreatmentTax – – Reporting of speculative transactions Reporting of speculative 1256(e)(1)]. will[Reg. be considered speculative 1.1221-2(g)(2) Any hefuturesor as not treatedoption transaction ◊ ◊ from from Section 1256 Contracts and Straddles Speculative Speculative contracts are reported on form 6781, tax1256(a)(1)]. [Sec. year approach, which treats the contract sold as on the Speculative contracts are reported under a“marked- loss loss is treated, by statute, as 40% short-term and . . The capital gain or 60% 60% long-term. Gains or Losses last last day of the to-market” ; Sec. Sec. ; dging

©2013 CliftonLarsonAllen LLP • • Continued- Transactions Speculative through entity.through pass- a inor donepersonally are transactions speculative all that sure make to taken be mu care backs, losscarry 1256 Sec. of availability the ensureto and loss treatment or gains capital favorable have notdo corporations C Since estates.or trusts corporations, to available no is Thiselection 1212(c)(1)]. [Sec. years those in gains 1256 Sec. net any offset to years three bac carried be lossescan speculation 1256 Sec. Net t t st st k k

©2013 CliftonLarsonAllen LLP • • • • Pitfalls capital gains treatment), the gain is ordinary [Reg If the taxpayer purposely not does makean identifi if even it would otherwise [Reg.be ahedge 1.1221- If the transaction was not identified as ahedge, g speculative, gain or loss is capital 1.1221-2 [Reg. If the transaction was inadvertently identified as speculative, speculative, gain is ordinary and loss is capital [ If the transaction was originally identified as hed Reg. 1.1221-2(g)(1)(i)] Reg. (g)(1)(ii)] ge and geand is actually hedge and and is hedge actually ain or loss ain loss or is capital, . 1.1221-2(g)(iii)] . cation (i.e. wants 2(g)(d)]

©2013 CliftonLarsonAllen LLP Positions Closed Market Marked-To- PositionsOpen 2 distinction fair no thereis betweenpurposes value 1 Inventory)Goods (Finished HedgesFairValue Technicallly, fair value hedges arereflected in bo Unless elected bytaxpayer Unless elected recognize to gains and l Event Treatment elzdN/A Realized N/A Tax 1 Comprehensive th net income and incomeand netcomprehensive th income. cashhedges.and flow osses on a marked-to-marketa on osses Forbasis. tax noeNet Income Income Other N/A 2 2 Unrealized but Realized and Recognized Recognized

©2013 CliftonLarsonAllen LLP Positions Closed Market Marked-To- PositionsOpen and Planned Production)andPlanned Inventory Process in(Work FlowHedges Cash income. entity income respectunless net electetohas with 3 2 distinction fair no thereis betweenpurposes value 1 Ineffective reportedin hedge be should of portion Effectivehedge may of comp portion remain in other bytaxpayer Unless elected recognize to gains and l Event Treatment Realized N/A Tax 1 Comprehensive Unrealized but Realized and cashhedges.and flow Recognized Recognized d to recognize d hedging gains net in and losses osses on a marked-to-marketa on osses Forbasis. tax net income, the effectivethe income,net unrecognizedis portion rehensive income.rehensive noeNet Income Income Other 2 2 Unrealized and Unrecognized Unrecognized Realized but 3 3

©2013 CliftonLarsonAllen LLP Alternative Approach Alternative Closed PositionsClosed Marked-To-Market PositionsOpen 2 alternative approach. however,comprehensi otherconcept of that note the 1 Unless elected bytaxpayer Unless elected recognize to gains and l alternative the income with net impact The on appro vn a ramn Net Income Tax Treatment Event Realized N/A 1 1 All Hedges All 2 osses on a marked-to-marketa on osses basis. ach is the same as the fair the as same the is ach value approach, ve income does not exist not income does using the ve Unrealized but Realized and Recognized Recognized

©2013 CliftonLarsonAllen LLP ©2013 CliftonLarsonAllen LLP CLAconnect.com Hedging Examples Hedging • • and options market to hedge the price of hogs price the lean hedge market to options and p weaned buys (and hogs produces lean Hogoperation m futures the produces uses corn and Crop operation and purchased corn. of purchased price and arket to hedge the price price the corn. arket of to hedge igs and feed) and uses the futures futures the uses and feed) and igs

©2013 CliftonLarsonAllen LLP Q1 Hedge Statement, 3/31/X2Statement, HedgeQ1 //2Wr eep Mri al 45,000.00 100,000 (Margin call) receipt Wire 1/1/X2 1/1/X2 //2100,000 1/1/X2 //2Wr eep Mri al 10,000.00 (Margin call) receipt Wire 2/1/X2 /5X iercit(agncl)10,000.00 (Margin call) receipt Wire 2/15/X2 //2Wr eep Mri al 10,000.00 (Margin call) receipt Wire 3/1/X2 /2X iercit(agncl)10,000.00 (Margin call) receipt Wire 3/12/X2 Date Date Long bushels Long bushels u X BTcr 5.80 'X2 Jul CBOT corn u X BTcr 5.80 'X2 Jul CBOT corn Short Short bushels Short bushels nigBlne33/285,000.00 3/31/X2 Balance Ending uue pntaeeut (20,000.00) trade equity open Futures con au tMre /1X 65,000.00 3/31/X2 at Account Market value einn aac 23/1- 12/31/X1 balance Beginning hsprosatvt 85,000.00 activity periods This ls 6.00 Close Contract Description Contract Description Positions in your account:in Positions Your activity this period:Yourthis activity Period Period Recap 20,000.00 $ $ 45,000.00 $ Price Price $ $ $ (20,000.00) $ $ $

Debit Debit 45,000.00 $ 55,000.00 $ 65,000.00 $ 75,000.00 $ 85,000.00 $ Credit Credit $ $ $ $ $ $ $ Amount Amount

©2013 CliftonLarsonAllen LLP Q1 Balance Sheet, as as 3/31/X2 of Balance Sheet,Q1 Total current assets Current liabilities: Total current liabilities Total equity Current assets: Total liabilities equity& Total liabilities Total liabilities Total assets Long-term debt Fixed assetsFixed Short-term debtShort-term Accounts Accounts payable ri netr 200,000 85,000 Grain inventory 1 Note account, Hedge see Cash Investment in growing crops growing in Investment Liabilities & Equity& Liabilities 5.80 (20,000) Assets Quantity, buQuantity, Cash 1,160,000 65,000 $ adjustment Price, $/buPrice, Market $

$ $

1,265,000

3,525,000 4,265,000 4,265,000 3,000,000 200, 000 240, 000

740, 000 500, 000 40, 000 40, 000

©2013 CliftonLarsonAllen LLP Q1 Income Statement,3/31/X2 IncomeQ1 Other income (loss):*comprehensive Total expenses Income: Total income (loss)comprehensive Net income (loss) Expenses: nelzdcs lwhdegi ls)- (loss) gain hedge cash flow Unrealized Total income from grain Total income eea n diitaie(&)5,000 (G&A) and administrative General Income from grain:Income Depreciation elzdfi au eg os(an - (gain) loss hedge value fair Realized Interest Input costInput cra dutet ivsmn ngoigcos - crops) growing in (investment Accrual adjustments Hedge gain (loss)gain Hedge eg an(os,seNt (20,000) 2 Note see (loss), gain Hedge Ending inventoryEnding oa te opeesv noe(os - (loss) income Total comprehensive other Beginning inventoryBeginning Cash sale of grain of Cash sale

5,000 - 1,160,000 - (1,120,000) - - $ 15,000 -

- 5,000 -

Quarter ended (1,120,000) 1,160,000 (20,000) 20,000 15, 000 15, 000 15,000 20, 000 5 ,0 0 0 ------

$ Year-to-date

©2013 CliftonLarsonAllen LLP Q2 Hedge Statement, 6/30/X2Statement, HedgeQ2 //2Wr eep Mri al 5,000.00 (Margin call) receipt Wire 4/1/X2 /0X iercit(agncl)5,000.00 (Margin call) receipt Wire 4/30/X2 /5X iercit(agncl)5,000.00 (Margin call) receipt Wire 5/15/X2 /5X iedsusmn 30,000.00 disbursement Wire 6/15/X2 /1X iercit(agncl)15,000.00 (Margin call) receipt Wire 5/31/X2 /0X 100,000 6/10/X2 Date Date u X BTcr 6.20 'X2 Jul CBOT corn Long bushels Long bushels Short Short bushels Short bushels uue pntaeeut - 45,000.00 6/30/X2 trade equity open Futures Balance Ending hsprosatvt (40,000.00) 85,000.00 3/31/X2 activity periods This balance Beginning con au tMre /0X 45,000.00 6/30/X2 at Account Market value Contract Description Contract Description Positions in your account:in Positions Your activity this period:Yourthis activity Period Period Recap 40,000.00 $ Price Price $ $ $ $ $ 75,000.00 $ 45,000.00 $

Debit Debit

90,000.00 $ 95,000.00 $ 100,000.00 $ 115,000.00 $ Credit Credit $ $ $ $ $ $ $ Amount Amount -

©2013 CliftonLarsonAllen LLP Q2 Balance Sheet, as as 6/30/X2 of Balance Sheet,Q2 Long-term debt Total current liabilities assetsFixed Total current assets Total liabilities equity& Total liabilities Total equity Total liabilities Current liabilities: Total assets Current assets: Short-term debtShort-term - Accounts payable 45,000 crops growing in Investment 2 Note see Grain inventory, 1 Note account, Hedge see Cash Liabilities & Equity& Liabilities - - Assets Quantity, buQuantity, Cash - 45,000 $ adjustment Price, $/buPrice, Market

$ $ $ $

3,000,000 1,300,000

4,300,000 3,560,000 4,300,000

500, 000 240, 000 200, 000 300, 000 955, 000 740, 000 40, 000

©2013 CliftonLarsonAllen LLP Q2 Income Statement,6/30/X2 IncomeQ2 Total income (loss)comprehensive Net income (loss) Income: Other income (loss):comprehensive Expenses: Total expenses Unrealized cash flow hedge gain (loss)gain hedge cash flow Unrealized from grain:Income Interest Input costInput Hedge gain (loss)gain Hedge elzdfi au eg os(an - (gain) loss hedge value fair Realized Depreciation cra dutet ivsmn ngoigcos (3 crops) growing in (investment Accrual adjustments eea n diitaie(&)5,000 (G&A) and administrative General Total income from from grain Total income eg an(os,seNt (20,000) 3 Note see (loss), gain Hedge Ending inventoryEnding Beginning inventoryBeginning Cash sale of grain of Cash sale oa te opeesv noe(os - (loss) income Total comprehensive other

- (1,120,000) $ 70,000 1,240,000 $

300,000 10,000 - - - - 10,000 -

Quarter ended (1,160,000) 1,240,000 (300,000) 300, 000 (40,000) 80,000 55, 000 55, 000 70,000 00,000) 60, 000 5 ,0 0 0 ------

Year-to-date

©2013 CliftonLarsonAllen LLP Q3 Hedge Statement, 9/30/X2Statement, HedgeQ3 /1X iercit(agncl)25,000.00 30,000.00 80,000 (Margin call) receipt Wire (Margin call) receipt Wire 80,000 7/1/X2 8/31/X2 7/30/X2 7/1/X2 Date Date Long bushels Long bushels e X BTcr 6.00 Dec 'X2 CBOT corn 6.00 Dec 'X2 CBOT corn Short Short bushels Short bushels hsprosatvt 55,000.00 45,000.00 6/30/X2 activity periods This balance Beginning con au tMre /0X 52,000.00 9/30/X2 at Account Market value uue pntaeeut (48,000.00) 100,000.00 9/30/X2 trade equity open Futures Balance Ending ls 6.60 Close Contract Description Contract Description Positions in your account:in Positions Your activity this period:Yourthis activity Period Period Recap $ 45,000.00 48,000.00 $ $ Price Price $ $ $ (48,000.00) $ $ $

Debit Debit 100,000.00 75,000.00 Credit Credit $ $ $ $ Amount Amount

©2013 CliftonLarsonAllen LLP Q3 Balance Sheet, as as 9/30/X2 of Balance Sheet,Q3 Total equity Total current liabilities Total current assets Current liabilities: Fixed assetsFixed Current assets: Total liabilities equity& Total liabilities Total liabilities Total assets Long-term debt Short-term debtShort-term Accounts Accounts payable Cash eg con,seNt 100,000 crops growing in Investment Grain inventory 1 Note account, Hedge see Liabilities & Equity& Liabilities - (48,000) Assets Quantity, buQuantity, Cash - - $ 52,000 adjustment Price, $/buPrice, Market $

$ $ $

3,487,000 1,227,000

3,000,000 4,227,000 4,227,000 200, 000

240, 000

875, 000 300, 000 740, 000 500, 000 40, 000

©2013 CliftonLarsonAllen LLP Q3 Income Statement,9/30/X2 IncomeQ3 Total expenses Expenses: Income: Total income (loss)comprehensive Net income (loss) Other income (loss):comprehensive cra dutet ivsmn ngoigcos - crops) growing in (investment Accrual adjustments Hedge gain (loss)gain Hedge eea n diitaie(&)5,000 (G&A) and administrative General Depreciation Total income from grain Total income Interest Income from grain:Income Input costInput elzdfi au eg os(an - (gain) loss hedge value fair Realized nelzdcs lwhdegi ls) e oe3( 3 Note see (loss), gain hedge cash flow Unrealized Hedge gain (loss), see Note 2 Note see (loss), gain Hedge Ending inventoryEnding oa te opeesv noe(os (48,000) (loss) income Total comprehensive other Beginning inventoryBeginning Cash sale of grain of Cash sale

(48,000) - - 15,000 (1,120,000) - 15,000 $

300,000 65,000

(48,000) Quarter ended 17,000 (53,000) 48,000) (5,000) 5 ,0 0 0 (300,000) 80,000 (40,000) ------

Year-to-date 1,240,000

©2013 CliftonLarsonAllen LLP Q4 Hedge Statement, 12/31/X2Statement, HedgeQ4 21/2Wr eep Mri al 25,000.00 (Margin call) receipt Wire 60,000 12/15/X2 12/1/X2 11/250,000 60,000 12/1/X2 11/15/X2 03/2Wr eep Mri al 25,000.00 (Margin call) receipt Wire 10/31/X2 11/250,000 11/15/X2 20,000 10/31/X2 21X 60,000 12/1/X2 Date Date e X BTcr 6.40 Dec 'X2 CBOT corn e X BTcr 6.60 Dec 'X2 CBOT corn Long bushels Long bushels a X BTcr 6.75 Mar 'X3 CBOT corn e X BTcr 5.80 Dec 'X3 CBOT corn e X BTcr 5.80 Dec 'X3 CBOT corn a X BTcr 6.75 Mar 'X3 CBOT corn Short Short bushels Short bushels uue pntaeeut (56,000.00) 114,000.00 12/31/X2 trade equity open Futures Balance Ending con au tMre 23/258,000.00 12/31/X2 at Account Market value hsprosatvt 14,000.00 100,000.00 9/30/X2 activity periods This balance Beginning ls 6.80 Close ls 6.85 Close Contract Description Contract Description Positions in your account:in Positions Your activity this period:Yourthis activity Period Period Recap 24,000.00 $ 89,000.00 $ 113,000.00 $ 12,000.00 $ 50,000.00 $ $ 6,000.00 $ $ Price Price 89,000.00 $ 88,000.00 $ $ $ $ (50,000.00) $ (56,000.00) $ $ $

Debit Debit 114,000.00 113,000.00 Credit Credit $ $ $ $ $ $ $ $ Amount Amount

©2013 CliftonLarsonAllen LLP Q4 Balance Sheet, as as 12/31/X2 of Balance Sheet,Q4 Total current liabilities Total equity Current liabilities: Total current assets Current assets: Total liabilities equity& Total liabilities Total liabilities Total assets Long-term debt Fixed assetsFixed Accounts Accounts payable Short-term debtShort-term ri netr,seNt 180,000 114,000 2 Note see Grain inventory, 1 Note account, Hedge see Cash Investment in growing crops growing in Investment Liabilities & Equity& Liabilities 6.85 (56,000) Assets Quantity, buQuantity, Cash 1,233,000 58,000 $ adjustment Price, $/buPrice, Market

$ $

3,598,000

1,418,000 4,338,000 4,338,000 2,920,000 200, 000 240, 000

127, 000 740, 000 500, 000 40, 000

©2013 CliftonLarsonAllen LLP Q4 Income Statement,12/31/X2 IncomeQ4 Expenses: Total expenses Income: Total income (loss)comprehensive Net income (loss) Other income (loss):comprehensive cra dutet ivsmn ngoigcos 30 crops) growing in (investment Accrual adjustments Hedge gain (loss)gain Hedge eea n diitaie(&)780,000 (G&A) and administrative General Depreciation Interest Input costInput Total income from grain Total income Income from grain:Income elzdfi au eg os(an,seNt 48 5 Note see (gain), loss hedge value fair Realized nelzdcs lwhdegi ls) e oe4( 4 Note see (loss), gain hedge cash flow Unrealized oa te opeesv noe(os (2,000) (loss) income Total comprehensive other Cash sale of grain of Cash sale Ending inventoryEnding Beginning inventoryBeginning eg an(os,seNt (42,000) 3 Note see (loss), gain Hedge -

795,000 80,000 (50,000) 30,000

300,000 1,205,000

$ 198,000

(1,120,000) 1,372,000 $ 1,233,000 (98,000) Quarter ended 1,403,000 1,323,000 1,190,000 1,233,000 148,000 - (82,000) 131, 000 133, 000 132, 000 48,000 80, 000 30, 000 50,000) 0 ,0 0 0 ,0 0 0 - - -

Year-to-date

Year-to-Date Quarter Owner 12/31/X1equity, Owner 9/30/X2equity, Owner 12/31/X2equity, Owner 12/31/X2equity, oa opeesv noe(os (50,000) (loss) Income Total comprehensive we wtdaas - (withdrawals) Owner we wtdaas - (withdrawals) Owner oa opeesv noe(os (2,000) (loss) Income Total comprehensive As of 12/31/X2 of As 3,530,000 $ 198,000

3,535,000 $ $ $ 133,000 Comprehensive Comprehensive Accumulated Income Other 3,648,000 3,648,000 (48,000) (50,000) (50,000) - (80,000) (20,000) 3,530,000 $ 148,000 $ $ 131,000 3,487,000 $

Retained Capital 3,598,000 3,598,000 (80,000) (20,000) $ $ $ $ $ $ $ $ Total

©2013 CliftonLarsonAllen LLP Q4 Financial NotesStatement Financial Q4 FINANCIAL STATEMENT NOTES 5 4 3 2 1 because loss was converted to a realized fair value fair to a was converted realized loss because 'X2from $48,000loss crohedge value fair realized for Year: Note ($98,000) and unrealize unrecognized hedge). for Quarter: Note ($50,000) and unreal unrecognized loss ($6,000) from but roll, recognized unrealized ($12,000)'X2 Hedge, crop inventory, Fair Value in ($40,00of 'X1 loss Hedge, crop Fair Value realized $60,000 less from roll, loss but recognized realize for Year: Note ($12,000) ($24,000) loss, realized r 5 Notes and 6. See from roll. loss but recognized for Quarter: Note ($12,000) ($24,000 loss, realized 200,000Produced 'X2, bu in 20,000 sold spot market 'X3 bu planned crop.of on 20,000 hedge Lifted bu Decremaining 'X2, rolled ealized loss from roll, ($6,000) from roll, loss unrealized ealized d loss from old crop. from old d loss 0). from roll. ($24,000) on sale, loss loss realized realized ($6,000) from roll, loss unrealized realized ) p, previously a cash flow hedge. Reversed Reversed a hedge. cash flow p, previously loss, see Note 3. Note see loss, . 60,000 bu to Mar 'X3,50,000 and hedged d loss 'X3from d loss hedge).crop (cash flow ized loss from 'X3 loss cropized (cash flow

©2013 CliftonLarsonAllen LLP Summary Balance Sheets Balance Summary te opeesv noe- income Other comprehensive eandcptl3,525,000 capital Retained ogtr et500,000 debt Long-term / n / et240,000 and S/T A/P debt ie ses3,000,000 assets Fixed neteti rwn rp - crops growing in Investment netre 1,160,000 Inventories eg con 65,000 account Hedge umr aac hes33/263/293/212/31/X2 40,000 9/30/X2 6/30/X2 3/31/X2 Cash Summary Balance Sheets oa iblte n aia 4,265,000 and capital Total liabilities oa aia 3,525,000 Total capital oa iblte 740,000 Total liabilities oa ses4,265,000 Total assets 4,300,000 $ - 3,560,000 740,000 500,000 240,000 4,300,000 $ 3,000,000 300,000 - 45,000 955,000 3,560,000 4,227,000 $ (48,000) 3,535,000 740,000 500,000 240,000 4,227,000 $ 3,000,000 300,000 - 52,000 875,000 3,487,000 4,338,000 $ (50,000) 3,648,000 740,000 500,000 240,000 4,338,000 $ 2,920,000 - 1,233,000 58,000 127,000 3,598,000 $

©2013 CliftonLarsonAllen LLP these two losses become realized in net income. Innet theseinincome. two lossesbecomerealized a $12, inlosshedgeof weresold bushelsresulting AThe $20,000 lossrelates to f a hedgefairvalue Notes:Statement Financial Summary income statement,the income($42,000) lossrecogn hedging FThe $12,000 a from resultsreversalgainof the inco comprehensivelossotherreflectedwhich inis E The $(50,000) the loss from ‘X3 crop hedgingis $12,000the lossas was comprehensivincludedother ‘X2 has crop andnow harvestedinventoryisin been D the Of 80,000 cashplaced t bushelin flow hedge C Cash flow ‘X2 on growing crop marked-to-marke is cash production.the on pricehedged B The $20,000 lossrelates to a f hedgefairvalue a the reductionto section,increase essentially in umr noeSaeet s ure Year-to-Date 1st Quarter Summary Income Statements ae uhl - Bushels Sales oa op noeHdigGL15,000 Hedging G/L Total comp. income xessIptcss- Input costs Expenses e noe(os 15,000 Net income (loss) te op noeHdigGL- Hedging G/L Other comp. income Summary Income StatementsIncome Summary v rc e u- Avg price per bu ah- Cash netr dutet40,000 Inventory adjustment egn / (20,000) Hedging G/L noe20,000 Income neet- Interest ercain- Depreciation te 5,000 Other n.i rwn rpaj- Inv. in growing crop adj xess5,000 Expenses or the or ‘X1 crop that was quarter.theT duringsold hedgethoughthe even of inventory,valuethethe or or ‘X1 crop storage).Because (in fair ishedgethe ($48,000) ($48,000) thirdtheq lossfrom comprehensiveother a a cash nexrelatedplannedproduction flow hedgeto 000, 60,000 andremainingthe weref rolled bushels he third quarter,third he20,000 leavingweresold bushels me. order to $48,000 offsetthe perfrom priortheloss . The 20,000 . on weresold bushels 10/31/X2 incuand t as 30, t of Sep ‘X2 include lossis the andhedging - - 40,000

- 15,000 $ 20,000 - - - 5,000 - 5,000 15,000 - ized in revenue is the isof results ($48,000) revenuein ized plus ($ f quarterloss 3, in thisamountremoved so needs e A 6.20 1,240,000 (1,160,000) 200,000 (20,000) 55,000 $ 60,000 300,000 - - 5,000 (300,000) 5,000 55,000 - (20,000) 2nd Quarter 6.20 1,240,000 (1,120,000) 200,000

70,000 $ 80,000 300,000 - - 10,000 (300,000) 10,000 70,000 - value, the marked-to-market losstheis on recognizedvalue, marked-to-market hethe on recognizedinloss Statement is thIncome B is still open.stillis ert-ae3dQatrYa-oDt t ure Year- 4th Quarter Year-to-Date 3rd Quarter Year-to-Date d in other comprehensive income.otherincomprehensive d iod, a a realizedof changein$12,000 iod, gain/lossthe 6,000 6,000 $12,000.plus uarter. This was was futuresthetradeThisuarter.openin included a a 60,000 outstandingat whichedgeyear-end,bushel rom Dec ‘X2 to Mar ‘X3. The roll results in recognitinresults Theroll Dec rom ‘X2 to Mar‘X3. - - - - - (53,000) $ - - - - 5,000 - 5,000 (5,000) (48,000) t year. The 50,000 bushels hedged had a hedged$1/buprice year.The 50,000 t bushels rom other comprehensive income in quarter4in incomeand adde rom comprehensive other rred a a ($12,000)rred lossthe on recognizedwhich is qu (40,000) 6.20 1,240,000 (1,120,000) 200,000 (40,000) 17,000 $ 80,000 300,000 - - 15,000 (300,000) 15,000 65,000

C 6.60 132,000 1,233,000 20,000 (42,000) (2,000) 131,000 $ 1,323,000 - 30,000 80,000 780,000 300,000 1,190,000 133,000 (48,000) the Income Statementrevenue theIncome thein e revenue sectionoffset and increasedrevenue thee isfourthOnthe recognized. quarter ion of of a ion $24,000 lossand of sumthe equity as of 9/30/X2. equity 20,000 However, 6.24 1,372,000 113,000 220,000

148,000 $ 1,403,000 300,000 30,000 80,000 795,000 - 1,205,000 198,000 his now because hedgethefairvalue movement resulting in the in($50,000) resultingmovement arter 4 arter Statement. Income However, d as a loss.d hedging E-C C+D+F

(50,000) (82,000) to-Date

©2013 CliftonLarsonAllen LLP Corn Hedged Quantity, bu Quantity, Corn Hedged X3 Crop Short Hedge Price, $/bu Short Price, Hedge X3 Crop 1Co hr eg rc,$b 5.80 100,000 $/bu Short Price, Hedge X1 Crop bu Quantity, Corn Hedged Hedging, Brokerage and Inventory ri 1Bses200,000 X1 Bushels Grain rkrg einn aac - Balance Beginning Brokerage Corn Hedged Quantity, bu Quantity, Corn Hedged netr /u5.80 $/Bu Inventory X2 Crop Short Hedge Price, $/bu Short Price, Hedge X2 Crop con ahDpstd85,000 Cash Deposited Account Overall Summary Overall Hedge G/L,Hedge $/bu G/L,Hedge $/bu au,$1,160,000 $ Value, X2 Bushels nigBlne65,000 Balance Ending Hedge G/L,Hedge $ ahBlne85,000 Cash Balance Hedge G/L,Hedge $ Value, $Value, Realized Gain/(Loss) in Change T Ln)HdePie /u6.00 MTM $/bu Price, Hedge (Long) eg /,$(20,000) (0.20) G/L,Hedge $ G/L,Hedge $/bu T dutet(20,000) MTM Adjustment MTM $/bu Price, Hedge (Long) $ /Bu ahWtdan- Cash Withdrawn MTM $/bu Price, Hedge (Long) - 45,000

45,000 $ $ $ -

65,000 $ 30,000 (70,000) 3/31/X2

6.40 (20,000) - A A 6/30/X2 - 52,000

100,000 - 45,000 55,000 -

6.60 - (48,000) B 9/30/X2

(0.10) $

$ 58,000

114,000 60,000

52,000 50,000 6.75 $ - $ (48,000)

80, 000 (0.60) 6.85 6 .0 0 6 .6 0 12,000 - C C

$ $ $

1,233,000 12/31/X2 180, 000

(56,000) (50,000)

50, 000 (6,000) (1.00)

5 .8 0 6 .8 0 6 .8 5 D D+E F E

©2013 CliftonLarsonAllen LLP egn con a X u X e X Dec 'X2 'X2 Sep - 'X2 Jun Mar 'X2 balance Beginning account Hedging nigblne65,000.00 balance Ending eois85,000.00 Deposits ihrwl - Withdrawals egn an(os (20,000.00) gain/(loss) Hedging Alternative Method Alternative o nig6mnedn o nig12 mon ending 9 mon ending 6 mon ending 3 mon ending - $ 45,000.00 $ 115,000.00 $ 30,000.00 $ (40,000.00) $ - $ 52,000.00 $ 170,000.00 $ 30,000.00 $ (88,000.00) $ - $ 58,000.00 $ 220,000.00 $ 30,000.00 $ (132,000.00) $ $ $ $ $ $

©2013 CliftonLarsonAllen LLP • • • Example Livestock Detailed the opposite of the corn example corn the of opposite the are operationhog the for positions hedgingCorn shown. statements hedginghogOnly Agriculture for Guidelines Financial FFSC’s the of Transactions) (Hedging H Appendixin Included

©2013 CliftonLarsonAllen LLP /7X 1,480,000 3/27/X2 /5X 1,000,000 3/25/X2 2/15/X2 /4X 800,000 1/24/X2 //21,000,000 1/1/X2 /4X 800,000 1/24/X2 /7X 1,480,000 3/27/X2 1/1/X2 Date Date Q1 Hedge Statement, 3/31/X2Statement, HedgeQ1 25 20 20 20 Long # Long # 800, 000 Pounds Pounds 37 25 37 Short Short # Short # p X M enHg 102.680 Apr 'X2 CME Lean Hogs u X M enHg 9 u 3.090 'X2 Jun CME Lean Hogs $94 Put u X M enHg 9 u 3.090 'X2 Jun CME Lean Hogs $94 Put Close Bought Bought Contracts Contracts Jl'2La os102.580 'X2 Jul Lean Hogs Ar'2CELa os82.550 Apr 'X2 CME Lean Hogs Jl'2La os102.580 'X2 Jul Lean Hogs Sold Sold con au tMre /1X 24,864.00 3/31/X2 at Account Market value nigBlne33/28,980.00 15,884.00 3/31/X2 trade equity open Futures Balance Ending einn aac 23/1- 12/31/X1 activity periods This balance Beginning Wire receipt (Margin call)receipt Wire Close Wire receipt (Margin call)receipt Wire Positions in your account:in Positions Contract Description Contract Description Your activity this period:Yourthis activity Period Period Recap $ 201,300.00 $ 24,720.00 $ $ $ 17,316.00 $ 24,720.00 $ 33,200.00 $ Price / cwtPrice Price 103.750 4 .1 5 0 8,980.00 $ 50,280.00 $ (17,316.00) $ $ $ $ $ $ $

Debit Debit

8,980.00 210,280.00 $ 75,000.00 $ 33,200.00 $ 160,000.00 75,000.00 Credit Credit $ $ $ $ $ $ $ Amount $ 75,000.00 8,980.00

©2013 CliftonLarsonAllen LLP Q1 Balance Sheet, as as 3/31/X2 of Balance Sheet,Q1 Current liabilities: Total liabilities equity& Total liabilities Total liabilities Total assets Current assets: Total current liabilities assetsFixed Total current assets Total equity Long-term debt Short-term debtShort-term Accounts Accounts payable Hedge accountHedge Cash Hogs inventory, see Note 2 Note see Hogs inventory, 1 Note see Grain inventory, accounts hedge Net onacut20,000 Corn account o con 8,980 Hog account Liabilities & Equity& Liabilities 40,000 15,884 Assets Cash 60,000 24,864 adjustment Market $

$ $

1,700,000

3,072,000 4,640,304 2,511,875 4,640,304 1,740,000 1,125,000 3,515,304 2,128,429 214, 690 143, 750 771, 875

40, 000 84, 864

©2013 CliftonLarsonAllen LLP Q1 Income Statement,3/31/X2 IncomeQ1 Total expenses Total income (loss)comprehensive Net income (loss) Income: Other income (loss):comprehensive Expenses: eea n diitaie(&)15,000 (G&A) and administrative General Depreciation Interest costs input Other costspig Weaned Income from hogs:Income Hedge gain (loss):gain Hedge Total income from hogs Total income Feed costsFeed Hedge (gain) loss on feed corn on feed loss (gain) Hedge cra dutet cag nganivnoy (116 grain inventory) in (change Accrual adjustments Net feed costs feed Net Hog Cash sale of hogsof Cash sale Corn oa te opeesv noe(os 31,164 (loss) income Total comprehensive other Beginning inventoryBeginning Ending inventoryEnding Hedge gain (loss)gain Hedge 25,000 31,400 100,000 385,000 40,000

31,164

$ 316,890

2,029,840 $ (2,850,000) 1,733,650

1,293,750 3,072,000 -

Quarter ended (2,850,000) 1,177,250 2,050,540 1,177,250 2,029,840 1,733,650 2,050,540 1,293,750 3,072,000 (116,500) (201,300) (201,300) 348,054 100, 000 385, 000 348, 054 316, 890 15,000 25, 000 31, 400 40, 000 (8,836) (8,836) ,500) -

Year to date

©2013 CliftonLarsonAllen LLP /0X 2,240,000 6/10/X2 4/1/X2 6/15/X2 4/30/X2 5/15/X2 /0X 1,480,000 6/10/X2 5/31/X2 /0X 2,240,000 6/10/X2 Date Date Q2 Hedge Statement, 6/30/X2Statement, HedgeQ2 37 Long # Long # Pounds Pounds 56 56 Short Short # Short # u X enHg 93.230 'X2 Jul Lean Hogs Bought Bought Contracts Contracts Ot'2La os85.800 Oct 'X2 Lean Hogs Ot'2La os85.800 Oct 'X2 Lean Hogs Sold Sold einn aac /1X 8,980.00 3/31/X2 activity periods This balance Beginning uue pntaeeut 41,440.00 52,360.00 6/30/X2 trade equity open Futures Balance Ending con au tMre /0X 93,800.00 6/30/X2 at Account Market value Close Wire receipt (Margin call)receipt Wire iedsusmn 125,000.00 disbursement Wire (Margin call)receipt Wire Wire receipt (Margin call)receipt Wire Wire receipt (Margin call)receipt Wire Positions in your account:in Positions Contract Description Contract Description Your activity this period:Yourthis activity Period Period Recap $ 41,440.00 $ $ 138,380.00 $ Price / cwtPrice Price 83. 950 $ $ 52,360.00 $ $ $ $ 43,380.00

Debit Debit 41,440.00 $ 13,980.00 $ 18,980.00 $ 23,980.00 $ 38,980.00 $ 177,360.00 $ 15,000.00 Credit Credit 5,000.00 5,000.00 5,000.00

$ $ $ $ $ $ $ Amount 177,360.00

©2013 CliftonLarsonAllen LLP Q2 Balance Sheet, as as 6/30/X2 of Balance Sheet,Q2 Total liabilities equity& Total liabilities Total liabilities Total assets Current assets: Current liabilities: Total equity Total current liabilities assetsFixed Total current assets Long-term debt Cash Hedge accountHedge Grain inventory, see Note 1 Note see Grain inventory, Accounts Accounts payable Short-term debtShort-term Net hedge accounts hedge Net Hogs inventory, see Note 2 Note see Hogs inventory, onacut25,000 Corn account o con 52,360 Hog account Liabilities & Equity& Liabilities - 41,440 Assets Cash 25,000 93,800 adjustment Market $ $ $

4,864,140 2,569,375 4,864,140

1,775,000 2,294,765 1,815,000 1,100,000 3,764,140 3,128,250 412, 402 104, 688 118, 800 754, 375

40, 000

©2013 CliftonLarsonAllen LLP Q2 Income Statement,6/30/X2 IncomeQ2 Total income (loss)comprehensive Net income (loss) Income: Other income (loss):comprehensive Expenses: Total expenses Income from hogs:Income Hedge gain (loss):gain Hedge Total income from hogs Total income eg gi)ls nfe on(60,000) corn on feed loss (gain) Hedge costsFeed Weaned pig costspig Weaned Other input costs input Other cra dutet cag nganivnoy 39,0 grain inventory) in (change Accrual adjustments eea n diitaie(&)16,000 (G&A) and administrative General Depreciation Interest Net feed costs feed Net Beginning inventoryBeginning Cash sale of hogsof Cash sale Corn Hedge gain (loss)gain Hedge inventoryEnding Hog oa te opeesv noe(os 10,276 (loss) income Total comprehensive other 4,171,540 $ $ 492,950 3,128,250 (2,850,000)

2,856,250 3,869,200

799,000 (60,000) 41,440 205,000 50,000 65,388

Quarter ended (3,072,000) 2,718,812 4,362,150 2,141,700 3,128,250 2,311,610 1,562,500 2,135,550 1,541,562 534,390 186, 336 176, 060 113, 660 (87,640) 414, 000 105, 000 (40,000) 41,440 31,000 (77,438) 50, 276 25, 000 33, 988 62 $

$ Year to date

©2013 CliftonLarsonAllen LLP /0X 2,400,000 9/20/X2 /5X 2,240,000 9/15/X2 8/31/X2 /0X 2,400,000 9/20/X2 7/30/X2 Date Date Q3 Hedge Statement, 9/30/X2Statement, HedgeQ3 56 Long # Long # Pounds Pounds 60 60 Short Short # Short # c X enHg 84.400 Oct 'X2 Lean Hogs Bought Bought Contracts Contracts Dc'2La os87.300 Dec 'X2 Lean Hogs Dc'2La os87.300 Dec 'X2 Lean Hogs Sold Sold nigBlne93/2158,720.00 (102,720.00) 9/30/X2 trade equity open Futures Balance Ending con au tMre /0X 56,000.00 9/30/X2 at Account Market value hsprosatvt 106,360.00 52,360.00 6/30/X2 activity periods This balance Beginning Wire receipt (Margin call)receipt Wire Wire receipt (Margin call)receipt Wire Close Positions in your account:in Positions Contract Description Contract Description Your activity this period:Yourthis activity Period Period Recap - $ 31,360.00 $ 102,720.00 $ $ Price / cwtPrice Price 91. 580 $ $ $ (102,720.00) $ $ $

Debit Debit 158,720.00 158,720.00 $ 127,360.00 $ 77,360.00 $ 50,000.00 25,000.00 Credit Credit $ $ $

Amount $

©2013 CliftonLarsonAllen LLP Q3 Balance Sheet, as as 9/30/X2 of Balance Sheet,Q3 Long-term debt Total current liabilities assetsFixed Total current assets Total equity Current liabilities: Total liabilities equity& Total liabilities Total liabilities Total assets Current assets: Net hedge accounts hedge Net Accounts Accounts payable Cash Hedge accountHedge Hogs inventory, see Note 2 Note see Hogs inventory, Short-term debtShort-term Grain inventory, see Note 1 Note see Grain inventory, o con 158,720 25,000 Hog account Corn account Liabilities & Equity& Liabilities (102,720) 48,000 Assets Cash 56,000 73,000 adjustment Market

$ $

1,990,000 1,075,000 3,795,030 2,145,655 3,111,500

4,870,030 2,724,375 4,870,030 1,950,000 129, 000 443, 980 734, 375 110, 550

40, 000

©2013 CliftonLarsonAllen LLP Q3 Income Statement,9/30/X2 IncomeQ3 Expenses: Total income (loss)comprehensive Net income (loss) Income: Total expenses Other income (loss):comprehensive cra dutet cag nganivnoy (5,8 grain inventory) in (change Accrual adjustments Hedge (gain) loss on feed corn on feed loss (gain) Hedge Feed costsFeed Income from hogs:Income Weaned pig costspig Weaned Hedge gain (loss):gain Hedge Total income from hogs Total income Other input costs input Other Interest Depreciation eea n diitaie(&)17,000 (G&A) and administrative General Net feed costs feed Net Hedge gain (loss)gain Hedge oa te opeesv noe(os (96,160) (loss) income Total comprehensive other Ending inventoryEnding Hog Beginning inventoryBeginning Cash sale of hogsof Cash sale Corn (60,000)

4,493,750

$ 3,111,500 (54,720)

(2,850,000) 6,131,617 48,000 6,386,397 $ 460,000 1,243,000 315,000 100,167

75,000 Quarter ended (3,128,250) 4,350,450 6,591,617 1,637,500 3,111,500 2,229,467 1,631,638 2,262,417 2,214,857 (102,720) (144,160) (129,110) 405,280 444, 000 110, 000 (32,950) 48,000 (56,280) 31, 360 48, 000 34, 779 25, 000 (83,300) 6 2 ) -

Year to date

©2013 CliftonLarsonAllen LLP 12/15/X2 21/21,200,000 12/15/X2 21/21,800,000 12/15/X2 21/22,400,000 12/15/X2 03/21,600,000 10/30/X2 03/21,600,000 10/30/X2 03/21,600,000 10/30/X2 03/21,600,000 10/30/X2 03/21,600,000 10/30/X2 03/21,600,000 10/30/X2 21/21,200,000 12/15/X2 21/21,800,000 12/15/X2 10/30/X2 Date Date Q4 Hedge Statement, 12/31/X2Statement, HedgeQ4 60 40 40 40 1,600,000 Long # Long # Pounds Pounds 30 45 40 40 40 40 40 40 30 45 1,600,000 1,600,000 Short Short # Short # e X enHg 85.430 Dec 'X2 Lean Hogs Close u X M enHg 10Pt7.430 'X3 Jul CME Lean Hogs $100 Put u X M enHg 10Pt7.430 'X3 Jul CME Lean Hogs $100 Put Bought Bought Contracts Contracts Dc'3La os78.130 Dec 'X3 Lean Hogs Ar'3La os88.130 Apr 'X3 Lean Hogs Jl'3CELa os$0Pt3.350 'X3 Jul CME Lean Hogs $90 Put Jl'3CELa os$1 al2.180 'X3 Jul CME Lean Hogs $110 Call Jl'3CELa os$1 al2.180 'X3 Jul CME Lean Hogs $110 Call Close Close Jl'3CELa os$0Pt3.350 'X3 Jul CME Lean Hogs $90 Put Dc'3La os78.130 Dec 'X3 Lean Hogs Ar'3La os88.130 Apr 'X3 Lean Hogs Sold Sold einn aac /0X 158,720.00 9/30/X2 activity periods This balance Beginning uue pntaeeut 53,020.00 173,200.00 226,220.00 12/31/X2 12/31/X2 at Account Market value trade equity open Futures Balance Ending iedsusmn 25,000.00 disbursement Wire Close Wire receipt (Margin call)receipt Wire Close Positions in your in account:Positions Contract Description Contract Description Your activity this period: Yourthis activity Period Period Recap $ $ 44,880.00 $ 53,600.00 $ 34,880.00 $ 34,880.00 $ 53,600.00 $ 135,200.00 $ 118,880.00 $ 55,200.00 $ 16,480.00 $ $ 118,880.00 $ 18,240.00 $ 7,740.00 $ $ Price / cwtPrice Price 79. 650 87. 700 8 .4 5 0 3 .4 5 0 1 .0 3 0 173,200.00 $ $ $ $ $ 135,200.00 $ (55,200.00) $ (16,480.00) $ 64,840.00 (18,240.00) $ $ $ $

14,480.00

Debit Debit 198,200.00 153,320.00 118,440.00 $ 183,720.00 $ 7,740.00 $ 25,000.00 Credit Credit $ $ $ $ $

$ $ $

$ $ Amount 198,200.00 198,200.00 53,020.00

©2013 CliftonLarsonAllen LLP Q4 Balance Sheet, as of of as12/31/X2 Sheet, Balance Q4 Long-term debt Total current liabilities assetsFixed Total current assets Total equity Current liabilities: Total liabilities equity& Total liabilities Total liabilities Total assets Current assets: Accounts Accounts payable Cash Hedge accountHedge Hogs inventory, see Note 2 Note see Hogs inventory, Short-term debtShort-term Grain inventory, see Note 1 Note see Grain inventory, accounts hedge Net o con 173,200 61,000 Hog account Corn account Liabilities & Equity& Liabilities 53,020 23,500 Assets Cash 226,220 84,500 adjustment Market $

$ $

2,090,000 1,050,000 3,958,850 2,206,975 3,180,963

5,008,850 2,801,875 5,008,850 2,050,000 274, 495 711, 875 192, 672 310, 720

40, 000

©2013 CliftonLarsonAllen LLP Q4 Income Statement,12/31/X2 IncomeQ4 Other income (loss):comprehensive Total income (loss)comprehensive Net income (loss) Income: Total expenses Expenses: eea n diitaie(&)18,000 (G&A) and administrative General Depreciation Hedge gain (loss):gain Hedge Total income from hogs Total income Weaned pig costspig Weaned Other input costs input Other Interest Income from hogs:Income eg gi)ls nfe on(36,000) (82, grain inventory) in (change Accrual adjustments corn on feed loss (gain) Hedge Feed costsFeed Net feed costs feed Net Hog Corn oa te opeesv noe(os 100,840 (loss) income Total comprehensive other Hedge gain (loss)gain Hedge Beginning inventoryBeginning Ending inventoryEnding Cash sale of hogsof Cash sale 100,000 23,500

46,120 137,077

$ 3,180,963 8,472,822 $

440,480 (2,850,000) 1,699,000 430,000

8,351,905

(96,000) 6,181,250 ure ne Year to date Quarter ended (3,111,500) 5,919,828 8,792,385 2,200,768 3,180,963 2,086,425 2,220,288 1,569,378 1,687,500 125, 340 22,620 (165,422) 456, 000 115, 000 (24,500) (19,520) 66,000 (11,400) 25, 000 36, 910 81, 320 486,600 44, 880 122)

Year-to-Date Quarter Owner equity, 12/31/X1 Owner equity, 12/31/X2 Owner equity, 12/31/X2 Owner equity, 9/30/X2 we wtdaas - (withdrawals) Owner oa opeesv noe(os 46,120 (loss) Income Total comprehensive we wtdaas - (withdrawals) Owner oa opeesv noe(os 100,840 (loss) Income Total comprehensive As of 12/31/X2 of As Comprehensive Comprehensive

$ $ 1,800,375 $ 2,200,375 $ 440,480 (19,521) Accumulated Income Other (54,720) 2,160,855 2,160,855 46, 120 46, 120 - (80,000) (20,000) 486,600 1,800,375 $ $ $ 2,145,655 $ 81,319

Retained Capital 2,206,975 2,206,975 (80,000) (20,000) $ $ $ $ $ $ $ $ Total

©2013 CliftonLarsonAllen LLP Summary Balance Sheets on143,750 24,864 60,000 214,690 Corn Inventories Hogs Corn accounts:Hedge Cash oa ses4,640,304 3,072,000 1,125,000 Total assets assets Fixed Hogs ogtr et771,875 1,740,000 debt Long-term and A/P S/T debt oa aia 2,128,429 4,640,304 31,164 2,097,265 and capital Total liabilties 2,511,875 Total capital comp. Other income capital Retained Total liabilities Summary Balance Sheets Balance Summary 104,688 4,864,140 $ 754,375 1,815,000 $ 4,864,140 $ 93,800 25,000 412,402 $ 1,100,000 3,128,250 2,294,765 41,440 2,253,325 2,569,375 /1X /0X /0X 12/31/X2 9/30/X2 6/30/X2 3/31/X2 110,550 4,870,030 $ 734,375 4,870,030 $ 56,000 73,000 443,980 $ 1,075,000 3,111,500 1,990,000 2,145,655 (54,720) 2,200,375 2,724,375 192,672 5,008,850 $ 711,875 5,008,850 $ 226,220 84,500 274,495 $ 1,050,000 3,180,963 2,090,000 2,206,975 46,120 2,160,855 2,801,875

$ $

©2013 CliftonLarsonAllen LLP ae ons2,887,500 Pounds Sales umr noeSaeet s ure ert-ae2nd Year-to-Date 1st Quarter Summary Income Statements xessFe ot 1,293,750 costs Feed Expenses oa op noeHdigGL348,054 G/L Hedging Total comp. income opeesv egn / 31,164 G/L Hedging Comprehensive e noe(os 316,890 (loss) income Net Summary Income StatementsIncome Summary v.pieprct93.7300 cwt per price Ave. ah2,029,840 Cash cra dutet222,000 Accrual Adjustment egn / (201,300) G/L Hedging noe2,050,540 Income edivnoyaj (116,500) adj. inventory Feed egn gis oss- losses (gains) Hedging e edcss1,177,250 costs feed Net tre i ot 385,000 Starter costs pig te nu ot 100,000 costs Other input neet31,400 Interest ercain25,000 Depreciation te 15,000 Other xess1,733,650 Expenses 2,887,500 93.7300 $ 2,029,840 $ 222,000 (201,300) 1,293,750 2,050,540 (116,500) - 1,177,250 385,000 100,000 31,400 25,000 348,054 $ 15,000 31,164 316,890 1,733,650 3,025,000 94.4000 $ 2,141,700 $ 56,250 113,660 1,562,500 2,311,610 39,063 (60,000) 1,541,563 414,000 105,000 33,988 25,000 186,336 $ 16,000 10,276 176,060 2,135,551 5,912,500 94.0728 $ 4,171,540 $ 278,250 (87,640) 2,856,250 4,362,150 (77,438) (60,000) 2,718,813 799,000 205,000 65,388 50,000 534,390 $ 31,000 41,440 492,950 3,869,201 QatrYa-oDt r ure ert-ae4th Quar Year-to-Date 3rd Quarter Year-to-Date Quarter 3,162,500 93.3800 $ 2,214,857 $ (16,750) 31,360 1,637,500 2,229,467 (5,863) - 1,631,638 444,000 110,000 34,779 25,000 (129,110) $ 17,000 (96,160) (32,950) 2,262,417 9,075,000 93.8314 $ 6,386,397 $ 261,500 (56,280) 4,493,750 6,591,617 (83,300) (60,000) 4,350,450 1,243,000 315,000 100,167 75,000 405,280 $ 48,000 (54,720) 460,000 6,131,617 3,300,000 84.3000 $ 2,086,425 $ 69,463 44,880 1,687,500 2,200,768 (82,122) (36,000) 1,569,378 456,000 115,000 36,910 25,000 81,319 $ 18,000 100,840 (19,521) 2,220,288 12,375,000 91.2897 $ 8,472,822 $ 330,963 (11,400) 6,181,250 8,792,385 (165,422) (96,000) 5,919,828 1,699,000 430,000 137,077 100,000 486,600 $ 66,000 46,120 440,480 8,351,905 e Year-to-Date ter

$ $

©2013 CliftonLarsonAllen LLP ihrwl - Dec 'X2 235,000.00 (210,136.00) 'X2 Sep gain/(loss) Hedging 24,864.00 - Jun 'X2 Withdrawals Deposits Mar 'X2 balance Ending balance Beginning account Hedging Dec 'X2 Hog AccountHedging 30,000.00 40,000.00 10,000.00 'X2 Sep gain/(loss) Hedging 60,000.00 - Jun 'X2 Withdrawals Deposits Mar 'X2 balance Ending balance Beginning account Hedging CornAccount Hedging Alternative Method Alternative o nig6mnedn o nig12 mon ending 9 mon ending 6 mon ending 3 mon ending o nig6mnedn o nig12 mon ending 9 mon ending 6 mon ending 3 mon ending 60,000.00 65,000.00 30,000.00 25,000.00$ - $ $ $ $ (46,200.00) 265,000.00 93,800.00$ 125,000.00 - $ $ $ $ 108,000.00 65,000.00 30,000.00 73,000.00$ - $ $ $ $ (159,000.00) 125,000.00 340,000.00 56,000.00$ - $ $ $ $ 119,500.00 65,000.00 30,000.00 84,500.00 $ - $ $ $ $ 11,220.00 150,000.00 365,000.00 226,220.00$ - $ $ $ $ $ $ $ $ $ $ $ $ $ $

©2013 CliftonLarsonAllen LLP ©2013 CliftonLarsonAllen LLP CLAconnect.com [email protected] 509-961-9739 (cell) 509-823-2920 (direct) Paul Neiffer, CPA Conclusion Farmcpa blog blog on www.agweb.comFarmcpa www.farmcpatoday.com or CLAconnect twitter.com/ cliftonlarsonallen facebook.com/ cliftonlarsonallen linkedin.com/company/ 89 ©2013 CliftonLarsonAllen LLP