FutureFuel Corp. 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk.   All dollar amounts expressed as numbers in these   Market Risk Disclosures   are in thousands (except per share amounts).     In recent years, general economic inflation has not had a material adverse impact on our costs and, as described elsewhere herein, we have passed some price increases along to our customers. However, we are subject to certain market risks as described below.   Market risk represents the potential loss arising from adverse changes in market rates and prices. Commodity price risk is inherent in the chemicals and biofuels business both with respect to inputs (electricity, coal, raw materials, biofuels feedstock, etc.) and outputs (manufactured chemicals and biofuels).   We seek to mitigate our market risks associated with the manufacturing and sale of chemicals by entering into long-term sale contracts that include contractual market price adjustment protections to allow changes in market prices of key raw materials to be passed on to the customer. Such price protections are not always obtained, however, and some raw material price risk remains significant.   In order to manage price risk caused by market fluctuations in biofuels prices, we may enter into exchange-traded commodity futures and options contracts. We account for these derivative instruments in accordance with Topic 815, Derivatives and Hedging.  Under this standard, the accounting for changes in the fair value of a derivative instrument depends upon whether it has been designated as an accounting hedging relationship and, further, on the type of hedging relationship. To qualify for designation as an accounting hedging relationship, specific criteria must be met and appropriate documentation maintained. We had no derivative instruments that qualified under these rules as designated accounting hedges in the first nine months of 2021 or 2020. Changes in the fair value of our derivative instruments are recognized at the end of each accounting period and recorded in the consolidated statement of operations as a component of cost of goods sold within the biodiesel segment.   Our immediate recognition of derivative instrument gains and losses can cause net income to be volatile from period to period due to the timing of the change in value of the derivative instruments relative to the volume of biofuel being sold. At September 30, 2021 and December 31, 2020, the fair values of our derivative instruments were a net liability and asset of $2,023 and $124, respectively.   Our gross profit will be impacted by the prices we pay for raw materials and conversion costs (costs incurred in the production of chemicals and biofuels) for which we do not possess contractual market price adjustment protection. These items are principally composed of crude corn oil and yellow grease and petrodiesel. The availability and price of these items are subject to fluctuations due to unpredictable factors such as weather conditions, overall economic conditions, governmental policies, commodity markets, and global supply and demand.   We prepared a sensitivity analysis of our exposure to market risk with respect to key raw materials and conversion costs for which we do not possess contractual market price adjustment protections, based on average prices for the first nine months of 2021. We included only those raw materials and conversion costs for which a hypothetical adverse change in price would result in a 1.0% or greater decrease in gross profit. Assuming that the prices of the associated finished goods could not be increased and assuming no change in quantities sold, a hypothetical 10% increase in the average price of the commodity listed below would result in the following change in gross profit.   (Volume and dollars in thousands)   Item   Volume Requirements (a)   Units   Hypothetical Adverse Change in Price     Decrease in Gross Profit     Percentage Decrease in Gross Profit   Biodiesel feedstocks     307,046   LB     10.0 %   $ 14,707       563.9 % Natural Gas     916   MCF     10.0 %   $ 1,029       39.4 % Methanol     53,548   LB     10.0 %   $ 975       37.4 % Electricity     81   MWH     10.0 %   $ 418       16.0 % Sodium Methylate     9,116   LB     10.0 %   $ 370       14.2 % Coal     25   Ton     10.0 %   $ 180       6.9 % Caustic Soda     9,291   LB     10.0 %   $ 110       4.2 % Xylene     1,024   LB     10.0 %   $ 35       1.3 % Hydrogen Chloride     94   LB     10.0 %   $ 34       1.3 % 190 Proof SDA     674   LB     10.0 %   $ 33       1.3 % Oleum     2,768   LB     10.0 %   $ 27       1.0 % Methyl Acetoacetate     261   LB     10.0 %   $ 25       1.0 %   (a) Volume requirements and average price information are based upon volumes used and prices obtained for the nine months ended September 30, 2021. Volume requirements may differ materially from these quantities in future years as our business evolves.     We had no borrowings at September 30, 2021 or December 31, 2020 and, as such, we were not exposed to interest rate risk for those periods. Due to the relative insignificance of transactions denominated in foreign currency, we consider our foreign currency risk to be immaterial.     23