Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
 
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 chemical and biofuels business both with respect to input (electricity, coal, raw materials, biofuel feedstocks, etc.) and output (manufactured chemicals and biofuels).
 
We seek to mitigate our market risks associated with the manufacturing and sale of chemicals by entering into 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, so raw material price risk remains a significant risk.
 
In order to manage price risk caused by market fluctuations in biofuel 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 2022 or 2021. 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.
 
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 sale of biofuel being sold. As of December 31, 2022 and 2021, the fair values of our derivative instruments were in a liability position in the amount of $142 and $485, 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 comprised of crude corn oil and yellow grease and petrodiesel. The availability and price of these items are subject to wide 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 in 2022. We included only those raw materials and conversion costs for which a hypothetical adverse change in price would result in a 1% 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% change in the average price of the commodities listed below would result in the following change in annual gross profit.
 
(Volumes 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
 
 
51,675
 
GAL
 
 
10
%
 
$
26,437
 
 
 
91.2
%
Methanol
 
 
8,630
 
GAL
 
 
10
%
 
$
1,102
 
 
 
3.8
%
Natural gas
 
 
1,330
 
MCF
 
 
10
%
 
$
913
 
 
 
3.1
%
Electricity
 
 
103
 
MWH
 
 
10
%
 
$
598
 
 
 
2.1
%
Sodium Methylate
 
 
10,982
 
LB
 
 
10
%
 
$
550
 
 
 
1.9
%
Coal
 
 
33
 
Ton
 
 
10
%
 
$
374
 
 
 
1.3
%
 
(a) Volume requirements and average price information are based upon volumes used and prices obtained for the twelve months ended December 31, 2022.  Volume requirements may differ materially from these quantities in future years as our business evolves.
 
We had no borrowings as of December 31, 2022 or 2021, and, as such, we were not exposed to interest rate risk for those years. Due to the relative insignificance of transactions denominated in a foreign currency, we consider our foreign currency risk to be immaterial.
 
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