Derivative Financial Instruments

6 Months Ended

Mar. 28, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

DERIVATIVE FINANCIAL INSTRUMENTS

Our business operations give rise to certain market risk exposures mostly due to changes in commodity prices, foreign currency exchange rates and interest rates. We manage a portion of these risks through the use of derivative financial instruments to reduce our exposure to commodity price risk, foreign currency risk and interest rate risk. Our risk management programs are periodically reviewed by our Board of Directors' Audit Committee. These programs are monitored by senior management and may be revised as market conditions dictate. Our current risk management programs utilize industry-standard models that take into account the implicit cost of hedging. Risks associated with our market risks and those created by derivative instruments and the fair values are strictly monitored, using value-at-risk and stress tests. Credit risks associated with our derivative contracts are not significant as we minimize counterparty concentrations, utilize margin accounts or letters of credit, and deal with credit worthy counterparties. Additionally, our derivative contracts are mostly short-term in duration and we generally do not make use of credit-risk-related contingent features. No significant concentrations of credit risk existed at March 28, 2020.

We had the following aggregated outstanding notional amounts related to our derivative financial instruments:

in millions, except soy meal tons	Metric	March 28, 2020		September 28, 2019
Commodity:
Corn	Bushels	121		111
Soy Meal	Tons	728,700		1,078,800
Live Cattle	Pounds	82		14
Lean Hogs	Pounds	65		309
Foreign Currency	United States dollar	$	488	$	148
Interest Rate Swaps	Average monthly debt	$	400	$	400

We recognize all derivative instruments as either assets or liabilities at fair value in the Consolidated Condensed Balance Sheets, with the exception of normal purchases and normal sales expected to result in physical delivery. For those derivative instruments that are designated and qualify as hedging instruments, we designate the hedging instrument based upon the exposure being hedged (e.g., cash flow hedge or fair value hedge). We designate certain forward contracts as follows:

• Cash Flow Hedges – include certain commodity forward and option contracts of forecasted purchases (e.g., grains), interest rate swaps and locks, and certain foreign exchange forward contracts.

• Fair Value Hedges – include certain commodity forward contracts of firm commitments (e.g., livestock).

Cash Flow Hedges

Derivative instruments are designated as hedges against changes in the amount of future cash flows related to procurement of certain commodities utilized in our production processes as well as interest rates related to our variable rate debt. For the derivative instruments we designate and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income ("OCI") and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. As of March 28, 2020, we have net pretax losses of $12 million for our commodity contracts and net pretax losses of $3 million for our interest rate swap hedges, expected to be reclassified into earnings within the next 12 months. Additionally, we have $18 million of realized losses related to treasury rate locks in connection with our 364-day term loan extinguished during the second quarter of fiscal 2019, which will be reclassified to earnings over the lives of the 2026, 2029 and 2048 Notes. During the six months ended March 28, 2020, and March 30, 2019, we did not reclassify significant pretax gains or losses into earnings as a result of the discontinuance of cash flow hedges. The following table sets forth the pretax impact of cash flow hedge derivative instruments recognized in Other Comprehensive Income (in millions):

Gain (Loss) Recognized in OCI On Derivatives	Three Months Ended						Six Months Ended
	March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019
Cash flow hedge – derivatives designated as hedging instruments:
Commodity contracts	$	(11	)	$	(5	)	$	(11	)	$	(7	)
Interest rate hedges	(1		)	(5		)	(1		)	(23		)
Total	$	(12	)	$	(10	)	$	(12	)	$	(30	)

Fair Value Hedges

We designate certain derivative contracts as fair value hedges of firm commitments to purchase livestock for harvest. Our objective of these hedges is to minimize the risk of changes in fair value created by fluctuations in commodity prices associated with fixed price livestock firm commitments. For these derivative instruments we designate and qualify as a fair value hedge, the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in earnings in the same period. We include the gain or loss on the hedged items (e.g., livestock purchase firm commitments) in the same line item, Cost of Sales, as the offsetting gain or loss on the related livestock forward position. Ineffectiveness related to fair value hedges was insignificant for the three and six months ended March 28, 2020, and March 30, 2019. The carrying amount of fair value hedge (assets) liabilities as of March 28, 2020 and September 28, 2019 were as follows (in millions):

Consolidated Condensed Balance Sheets Classification	March 28, 2020			September 28, 2019
Inventory	$	(77	)	$	(19	)

Undesignated Positions

In addition to our designated positions, we also hold derivative contracts for which we do not apply hedge accounting. These include certain derivative instruments related to commodities price risk, including grains, livestock, energy and foreign currency risk. We mark these positions to fair value through earnings at each reporting date.

Reclassification to Earnings

The following table sets forth the total amounts of each income and expense line item presented in the Consolidated Condensed Statements of Income in which the effects of hedges are recorded (in millions):

Consolidated Condensed Statements of Income Classification	Three Months Ended						Six Months Ended
	March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019
Cost of Sales	$	9,867		$	9,251		$	19,242		$	18,089
Interest Expense	119			119			239			218
Other, net	(106		)	(7		)	(122		)	(10		)

The following table sets forth the pretax impact of the cash flow, fair value and undesignated derivative instruments in the Consolidated Condensed Statements of Income (in millions):

Consolidated Condensed Statements of Income Classification		Three Months Ended						Six Months Ended
		March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019
Sales	Gain (Loss) on derivatives not designated as hedging instruments:
	Commodity contracts	$	—		$	13		$	—		$	14
Cost of Sales	Gain (Loss) on cash flow hedges reclassified from OCI to Earnings:
	Commodity contracts	$	(5	)	$	(5	)	$	(7	)	$	(12	)
	Gain (Loss) on fair value hedges:
	Commodity contracts (a)	31			1			47			—
	Gain (Loss) on derivatives not designated as hedging instruments:
	Commodity contracts	(126		)	(24		)	(97		)	(21		)
Total		$	(100	)	$	(28	)	$	(57	)	$	(33	)
Interest Expense	Gain (Loss) on cash flow hedges reclassified from OCI to Earnings:
	Interest rate contracts	$	(1	)	$	—		$	(2	)	$	—
Other, net	Gain (Loss) on derivatives not designated as hedging instruments:
	Foreign exchange contracts	$	(3	)	$	3		$	1		$	3

(a) Amounts represent gains/(losses) on commodity contracts designated as fair value hedges of firm commitments that were realized during the period presented, which were offset by a corresponding gain/(loss) on the underlying hedged inventory. Gains or losses related to changes in the fair value of unrealized commodity contracts, along with the offsetting gain or loss on the hedged inventory, are also marked-to-market through earnings with no impact on a net basis.

The fair value of all outstanding derivative instruments in the Consolidated Condensed Balance Sheets are included in Note 14: Fair Value Measurements.