partnering for the future The availability and price of agricultural commodities used in Bunge’s operations are subject to wide fluctuations due to unpre- dictable factors such as weather, plantings, government (domestic and foreign) farm programs and policies, changes in global demand and global production of similar and competitive crops. Inventories that are not included in the agribusiness segment are principally stated at the lower of cost or market. Cost is determined using the weighted average cost method. Bunge’s reporting currency is the U.S. dollar. The functional currency of the majority of Bunge’s foreign subsidiaries is their local currency and, as such, amounts included in the consolidated statements of income are translated at the weighted average exchange rates for the period. Assets and liabilities are translated at year-end exchange rates and resulting foreign exchange trans- lation adjustments are recorded in the consolidated balance sheets as a component of accumulated other comprehensive income (loss). foreign currency transactions Monetary assets and  liabilities denominated in currencies other than their functional currency are remeasured into their respective functional cur- rencies at exchange rates in effect at the balance sheet date. The resulting exchange gains or losses are included in Bunge’s consolidated statements of income as foreign exchange  gain (loss). cash and cash equivalents Cash and cash equivalents include time deposits and readily marketable securities with original maturity dates of three months or less. inventories Inventories in the agribusiness segment, which consist of merchandisable agricultural commodities, are stated  at market value (net realizable value). The merchandisable  agricultural commodities are freely traded, have quoted market prices, may be sold without significant further processing and have predictable and insignificant disposal costs. Changes in  the market values of merchandisable agricultural commodities inventories are recognized in earnings as a component of cost  of goods sold. Readily marketable inventories are agricultural commodities inventories that are readily convertible to cash because of their commodity characteristics, widely available markets and inter- national pricing mechanisms. Bunge records interest expense attributable to readily marketable inventories based on the average interest rates incurred on the debt financing these inventories  in interest expense in its consolidated statements of income. 57 In addition, Bunge hedges portions of its forecasted U.S. oilseed processing production requirements, including forecasted pur- chases of soybeans and sales of soy commodity products for quantities that usually do not exceed three months of processing capacity. The instruments used are exchange-traded futures contracts, which are designated as cash flow hedges. The changes in the market value of such futures contracts have historically been, and are expected to continue to be, highly effective at off- setting changes in price movements of the hedged item. To the extent they provide effective offset, gains or losses arising from hedging transactions are deferred in accumulated other compre- hensive income (loss), net of applicable taxes, and are reclassified to cost of goods sold in the consolidated statements of income when the products associated with the hedged item are sold. Bunge expects to reclassify approximately $5 million after tax net gains to cost of goods sold in the year ending December 31, 2005, relating to exchange-traded futures contracts designated as cash flow hedges. If at any time during the hedging relation- ship Bunge no longer expects the hedge to be highly effective, the changes in the market value of such futures contracts  would prospectively be recorded in the consolidated statements of income. Bunge uses exchange-traded futures and options contracts to minimize the effects of changes in the prices of agricultural commodities on its agribusiness inventories and agricultural commodities forward cash purchase and sales contracts. Exchange-traded futures and options contracts are valued at the quoted market prices. Forward purchase contracts and forward sale contracts are valued at the quoted market prices, which  are based on exchange quoted prices adjusted for differences in local markets. Changes in the market value of forward purchase and sale contracts, and exchange-traded futures and options contracts, are recognized in earnings as a component of cost of goods sold. These contracts are predominantly settled in cash. Bunge is exposed to loss in the event of non-performance by the counter-party to forward purchase and forward sales contracts. The values of these contracts are reduced by a provision related to the potential loss in the event of non-performance. derivatives Bunge enters into derivatives that are related to  its inherent business and financial exposure as a multinational agricultural commodities company. translation of foreign currency financial statements