Smithfield also indicated that it does not expect its fourth quarter Hog Production segment results to reflect the benefits of the recently and dramatically improved live hog production environment because of significant mark-to-market losses on a portion of its lean hog
hedged position. The spokesman added: "Smithfield noted that these losses are the result of the sizeable and unexpected run-up in the futures curve for lean hogs for the summer and fall months of 2010.
"With our balanced portfolio of assets and
hedged position, we are positioned to build liquidity and strengthen our balance sheet during this low commodity price environment and we will continue to monitor our discretionary drilling capital on an ongoing basis."
The German bank cited recent progress in the company's strategy to address four key business issues, recent share price weakness and the company's well
hedged position to fuel price rises, as the reasons behind its decision.
This type of accounting is required when a
hedged position is not measured at fair value with recognition of gains/losses in income in accordance with regular GAAP.
Accordingly, firms using the fair value option could mark to market both the credit derivative and the
hedged position and report changes in their fair values in current earnings.
For example, suppose that the change in the value of the
hedged position is always -$0.20.
The taxpayer would then hold the
hedged position until a future tax year, and eventually cover it with the low-basis long position.
From experience, an unhedged future cash flow is just as risky as a 100%
hedged position unless the business is 100% certain that it will realize a cash flow.