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 profit, as 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, biofuel 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 sales 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 biofuel prices, we may enter into exchange-traded commodity futures and options contracts. We account for these derivative instruments in accordance with ASC 815. 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 six months of 2026 or 2025. 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 the 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 June 30, 2026 and December 31, 2025, the fair value of our derivative instruments was a net asset of $721 and a net liability of $13, 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 yellow grease, used cooking oil, and cottonseed oil. 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 six months of 2026. 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. Due to the currently compressed six-month gross profit, we also eliminated raw materials and conversion costs with less than a $250 impact on gross profit to prevent abnormal results. Assuming that the prices of the associated finished goods could not be increased and assuming no change in quantities sold, a hypothetical adverse 10% change in the average price of the commodity listed below would result in the following change in gross profit. Volume Requirements Hypothetical Adverse Decrease in Percentage Decrease Item (in thousands) (a) Units Change in Price Gross Profit in Gross Profit Biodiesel feedstocks 6,054 GAL 10 % $ 2,844 340.6 % Electricity 50 MWH 10 % 286 34.3 % (a) Volume requirements and average price information are based upon volumes used and prices obtained for the six months ended June 30, 2026. Volume requirements may differ materially from these quantities in future periods as our business evolves. We had no borrowings at June 30, 2026, or December 31, 2025, 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. 31