Fair Value Measurement

9 Months Ended

May 31, 2012

7. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

The fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:

Level 1: Quoted prices in active markets for identical assets or liabilities

Level 2: Includes the following inputs:

· Quoted prices in active markets for similar assets or liabilities

· Quoted prices for identical or similar assets or liabilities in markets that are not active· Or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.

· Long-Term Debt, Inclusive of Current Maturities - Based upon discounted cash flows and current borrowing rates with similar maturities, the book value of the Bank debt of approximately $13.3 million and $15.8 million compares to fair values of $13.3 million and $15.8 million respectively as of May 31, 2012 and August 31, 2011. Also included in the Company's long-term debt was $28.1 million and $28.1 million in tax exempt bonds, in comparison to the fair value of $28.1 million and $28.1 million respectively as of May 31, 2012 and August 31, 2011.

· Proceeds for Bond Issuance Transferred to Restricted Investment – included in the Company's current bond trust and restricted long-term other assets was $0.0 million and $3.6 million in comparison to the fair value of $0.0 million and $3.6 million respectively as of May 31, 2012 and August 31, 2011.

· Investments in Other Cooperatives and Other Corporations - The Company believes it is not practical to estimate the fair value of these investments without incurring excessive costs because there is no established market for these securities and equity interests, and it is inappropriate to estimate future cash flows which are largely dependent on future earnings of these organizations.

· Investments in Unconsolidated Marketing Subsidiaries - The Company believes it is not practical to estimate the fair value of these investments without incurring excessive costs because there is no established market for these securities and equity interests, and it is inappropriate to estimate future cash flows which are largely dependent on future earnings of these organizations.

· Interest Rate Contracts — Based on the zero coupon method in which the term, notional amount, and repricing date of the interest rate swap match the term, re-pricing date, and principal amount of the interest-bearing liability on which the hedging interest payments are due, the fair value of the interest rate contracts as of May 31, 2012 was a liability of $0.9 million and August 31, 2011 was a liability of $0.9 million. The current portion of the liability ($0.3 million as of May 31, 2012 and $0.2 million as of August 31, 2011) is included in accrued liabilities and the long-term portion of the liability ($0.6 million as of May 31, 2012 and $0.7 million as of August 31, 2011) is included in other long-term liabilities. Inputs used to measure the fair value of the interest rate swap contracts are quoted prices in active markets for similar assets or liabilities and therefore are contained within level 2 of the fair value hierarchy. Because the critical terms of the swap contracts and the notes payable are the same, the swap contracts effectively hedge the risk of changes in interest payments. Due to this, the changes in the fair value of the swap contracts have been excluded from the statement of operations. Financial instruments recorded at fair value on a recurring basis are as follows:


		Fair Value of Liabilities as of May 31, 2012
Interest Rate Swaps
(In Millions)				Level 1		Level 2		Level 3		Total

Fiscal Year - Notional Amt. - Ave Interest Rate

2012	$45.0 Million	0.853	%	$	-	$	0.0	$	-	$	0.0
2013	$40.0 Million	1.607	%		-		0.4		-		0.4
2014	$30.0 Million	2.305	%		-		0.4		-		0.4
2015	$ 5.0 Million	3.685	%		-		0.1		-		0.1

Total				$	-	$	0.9	$	-	$	0.9


		Fair Value of Liabilities as of August 31, 2011
Interest Rate Swaps
(In Millions)				Level 1		Level 2		Level 3		Total

Fiscal Year - Notional Amt. - Ave Interest Rate

2012	$30.0 Million	0.853	%	$	-	$	0.2	$	-	$	0.2
2013	$25.0 Million	1.870	%		-		0.3		-		0.3
2014	$15.0 Million	2.879	%		-		0.3		-		0.3
2015	$ 5.0 Million	3.685	%		-		0.1		-		0.1

Total				$	-	$	0.9	$	-	$	0.9

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

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Reference 3: http://www.xbrl.org/2003/role/presentationRef

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Reference 4: http://www.xbrl.org/2003/role/presentationRef

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-Publisher FASB

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Reference 6: http://www.xbrl.org/2003/role/presentationRef

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+ Details

MINN DAK FARMERS COOPERATIVE 10-Q