Declining commodity prices at the end of 2008 caught Land O'Lakes in a bind that squeezed profit margins and resulted in inventory write-downs and significant unrealized hedging losses, all of which contributed to weaker-than-expected fourth-quarter results.

Land O'Lakes reported $2.7 billion in net sales and a net loss of $33 million for the quarter, compared to $2.6 billion in net sales and net earnings of $25.7 million in the fourth quarter of 2007.

Despite the weak fourth quarter, the farmer-owned food and agricultural cooperative still managed record net sales for the year of $12 billion and net earnings of $160 million that nearly matched the record earnings of 2007. The company expects that its pretax unrealized hedging losses of $17 million in the fourth quarter and $52 million for the year will largely be offset in 2009 as futures positions expire or are otherwise liquidated and the related product sales occur. In 2007, Land O'Lakes had recorded $13 million in pretax unrealized hedging gains.

Company officials noted that unrealized hedging gains and losses are more of an indicator of market conditions at a given time than of business performance.

The company's normalized cash flow (earnings before interest, taxes, depreciation and amortization), which excludes the unrealized hedging and other special items, was negative $500,000 for the fourth quarter but $370.9 million for the 12 months ended Dec. 31, compared with $99.7 million and $319.4 million gains for the same periods in 2007.

Land O'Lakes businesses are exposed to dairy and agricultural commodity prices and to currency exchange rates. It attempts to reduce that risk by using derivative instruments, primarily futures and options contracts. The volatility in commodity prices last year, and particularly in the fourth quarter, led to the unrealized hedging losses.

The unrealized gains and losses represent the change in value of open derivative instruments from one period to another; they do not represent what will be effectively realized by the company when the instruments expire.

Most of the company's hedging losses, $29 million, were in the company's feed business. The feed unit's sales were up about 25 percent to $3.9 billion, but the hedging losses meant they were basically break-even in 2008 after recording $30.9 million in pretax earnings in 2007.

The cooperative returned $98 million in cash to its members, up from $58 million in 2007, and it predicts that this year it will return $96 million.

Land O'Lakes also spent 2008 strengthening its balance sheet, and as a result the company's debt rating was upgraded to BB+ by Standard & Poor's Investor Service in the fourth quarter. Moody's Investors Service upgraded Land O' Lakes earlier in 2008.

Land O'Lakes chairman Pete Kappelman reminded the 1,000 delegates and visitors at Wednesday's annual meeting of the benefits of cooperative ownership during the recession. "We have built a system that has consistently created value by helping producers and partner cooperatives manage through down times and capitalize on the up times," Kappleman said. "Together, we will meet the challenges of 2009 and beyond."