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Financial Instruments
 3 Months Ended
Oct. 30, 2022
General Discussion of Derivative Instruments and Hedging Activities [Abstract]  
Financial Instruments Financial InstrumentsThe principal market risks to which we are exposed are changes in foreign currency exchange rates, interest rates and commodity prices. In addition, we are exposed to price changes related to certain deferred compensation obligations. In order to manage these exposures, we follow established risk management policies and procedures, including the use of derivative contracts such as swaps, rate locks, options, forwards and commodity futures. We enter into these derivative contracts for periods consistent with the related underlying exposures, and the contracts do not constitute positions independent of those exposures. We do not enter into derivative contracts for speculative purposes and do not use leveraged instruments. Our
derivative programs include instruments that qualify for hedge accounting treatment and instruments that are not designated as accounting hedges.
Concentration of Credit Risk
We are exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate counterparty credit risk, we enter into contracts only with carefully selected, leading, credit-worthy financial institutions, and distribute contracts among several financial institutions to reduce the concentration of credit risk. We did not have credit risk-related contingent features in our derivative instruments as of October 30, 2022, or July 31, 2022.
We are also exposed to credit risk from our customers. During 2022, our largest customer accounted for approximately 22% of consolidated net sales. Our five largest customers accounted for approximately 47% of our consolidated net sales in 2022.
We closely monitor credit risk associated with counterparties and customers.
Foreign Currency Exchange Risk
We are exposed to foreign currency exchange risk, primarily the Canadian dollar, related to intercompany transactions and third-party transactions. We utilize foreign exchange forward purchase and sale contracts to hedge these exposures. The contracts are either designated as cash-flow hedging instruments or are undesignated. We hedge portions of our forecasted foreign currency transaction exposure with foreign exchange forward contracts for periods typically up to 18 months. The notional amount of foreign exchange forward contracts accounted for as cash-flow hedges was $121 million as of October 30, 2022, and $140 million as of July 31, 2022. Changes in the fair value on the portion of the derivative included in the assessment of hedge effectiveness of cash-flow hedges are recorded in other comprehensive income (loss), until earnings are affected by the variability of cash flows. For derivatives that are designated and qualify as hedging instruments, the initial fair value of hedge components excluded from the assessment of effectiveness is recognized in earnings under a systematic and rational method over the life of the hedging instrument and is presented in the same statement of earnings line item as the earnings effect of the hedged item. Any difference between the change in the fair value of the hedge components excluded from the assessment of effectiveness and the amounts recognized in earnings is recorded as a component of other comprehensive income (loss). The notional amount of foreign exchange forward contracts that are not designated as accounting hedges was $18 million as of October 30, 2022, and $13 million as of July 31, 2022.
Interest Rate Risk
We manage our exposure to changes in interest rates by optimizing the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps in order to maintain our variable-to-total debt ratio within targeted guidelines. There were no interest rate swaps outstanding as of October 30, 2022, or July 31, 2022.
Commodity Price Risk
We principally use a combination of purchase orders and various short- and long-term supply arrangements in connection with the purchase of raw materials, including certain commodities and agricultural products. We also enter into commodity futures, options and swap contracts to reduce the volatility of price fluctuations of wheat, diesel fuel, natural gas, soybean oil, aluminum, cocoa, corn, soybean meal and butter. Commodity futures, options and swap contracts are either designated as cash-flow hedging instruments or are undesignated. We hedge a portion of commodity requirements for periods typically up to 18 months. The notional amount of commodity contracts designated as cash-flow hedges was $3 million as of July 31, 2022. There were no commodity contracts designated as cash-flow hedges as of October 30, 2022. Changes in the fair value on the portion of the derivative included in the assessment of hedge effectiveness of cash-flow hedges are recorded in other comprehensive income (loss), until earnings are affected by the variability of cash flows. The notional amount of commodity contracts not designated as accounting hedges was $281 million as of October 30, 2022, and $254 million as of July 31, 2022. The change in fair value on undesignated instruments is recorded in Cost of products sold.
We have a supply contract under which prices for certain raw materials are established based on anticipated volume requirements over a twelve-month period. Certain prices under the contract are based in part on certain component parts of the raw materials that are in excess of our needs or not required for our operations, thereby creating an embedded derivative requiring bifurcation. We net settle amounts due under the contract with our counterparty. The notional amount was approximately $15 million as of October 30, 2022, and $39 million as of July 31, 2022. The change in fair value on the embedded derivative is recorded in Cost of products sold.
Deferred Compensation Obligation Price Risk
We enter into swap contracts which hedge a portion of exposures relating to certain deferred compensation obligations linked to the total return of the Vanguard Extended Market Index Plus Fund, the Vanguard Institutional Index Institutional Plus Fund, the Vanguard Short-Term Bond Index Fund and the Vanguard Total International Stock Index Fund. These contracts are not designated as hedges for accounting purposes. Unrealized gains (losses) and settlements are included in Administrative
expenses in the Consolidated Statements of Earnings. We enter into these contracts for periods typically not exceeding 12 months. The notional amounts of the contracts were $50 million as of October 30, 2022, and July 31, 2022.
The following table summarizes the fair value of derivative instruments on a gross basis as recorded in the Consolidated Balance Sheets as of October 30, 2022, and July 31, 2022:
(Millions)Balance Sheet ClassificationOctober 30, 2022July 31, 2022
Asset Derivatives
Derivatives designated as hedges:
Commodity contractsOther current assets$— $3 
Foreign exchange forward contractsOther current assets7 2 
Total derivatives designated as hedges$7 $5 
Derivatives not designated as hedges:
Commodity contractsOther current assets$13 $20 
Deferred compensation contractsOther current assets2 — 
Total derivatives not designated as hedges$15 $20 
Total asset derivatives$22 $25 
(Millions)Balance Sheet ClassificationOctober 30, 2022July 31, 2022
Liability Derivatives
Derivatives not designated as hedges:
Commodity contractsAccrued liabilities$19 $30 
Deferred compensation contractsAccrued liabilities— 4 
Total derivatives not designated as hedges$19 $34 
Total liability derivatives$19 $34 
We do not offset the fair values of derivative assets and liabilities executed with the same counterparty that are generally subject to enforceable netting agreements. However, if we were to offset and record the asset and liability balances of derivatives on a net basis, the amounts presented in the Consolidated Balance Sheets as of October 30, 2022, and July 31, 2022, would be adjusted as detailed in the following table:
October 30, 2022July 31, 2022
(Millions)Gross Amounts Presented in the Consolidated Balance SheetGross Amounts Not Offset in the Consolidated Balance Sheet Subject to Netting AgreementsNet AmountGross Amounts Presented in the Consolidated Balance SheetGross Amounts Not Offset in the Consolidated Balance Sheet Subject to Netting AgreementsNet Amount
Total asset derivatives$22 $(12)$10 $25 $(17)$8 
Total liability derivatives$19 $(12)$7 $34 $(17)$17 
We are required to maintain cash margin accounts in connection with funding the settlement of open positions for exchange-traded commodity derivative instruments. Cash margin asset balances of $11 million at October 30, 2022, and $8 million at July 31, 2022, were included in Other current assets in the Consolidated Balance Sheets.
The following table shows the effect of our derivative instruments designated as cash-flow hedges for the three-month periods ended October 30, 2022, and October 31, 2021, in other comprehensive income (loss) (OCI) and the Consolidated Statements of Earnings:
 Total Cash-Flow Hedge
OCI Activity
(Millions) October 30, 2022October 31, 2021
Three Months Ended
OCI derivative gain (loss) at beginning of quarter$— $(5)
Effective portion of changes in fair value recognized in OCI:
Commodity contracts— 3 
Foreign exchange forward contracts7 — 
Amount of loss (gain) reclassified from OCI to earnings:Location in Earnings
Commodity contractsCost of products sold(3)(1)
Foreign exchange forward contractsCost of products sold(1)1 
OCI derivative gain (loss) at end of quarter$3 $(2)
Based on current valuations, the amount expected to be reclassified from OCI into earnings within the next 12 months is a gain of $7 million.
The following table shows the total amounts of line items presented in the Consolidated Statements of Earnings for the three-month periods ended October 30, 2022, and October 31, 2021, in which the effects of derivative instruments designated as cash-flow hedges are recorded and the total effect of hedge activity on these line items are as follows:
Three Months Ended
October 30, 2022October 31, 2021
(Millions)Cost of products soldCost of products sold
Consolidated Statements of Earnings:$1,741 $1,514 
Loss (gain) on cash-flow hedges:
Amount of loss (gain) reclassified from OCI to earnings$(4)$— 
The amount excluded from effectiveness testing recognized in each line item of earnings using an amortization approach was not material in all periods presented.
The following table shows the effects of our derivative instruments not designated as hedges in the Consolidated Statements of Earnings:
Location of Loss (Gain) Recognized in EarningsThree Months Ended
(Millions)October 30, 2022October 31, 2021
Foreign exchange forward contractsCost of products sold$(1)$— 
Commodity contractsCost of products sold(12)(9)
Deferred compensation contractsAdministrative expenses2 (1)
Total loss (gain)$(11)$(10)