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FINANCIAL INSTRUMENTS, RISK MANAGEMENT ACTIVITIES, AND FAIR VALUES

12 Months Ended

May 29, 2011

May 30, 2010

Notes To Consolidated Financial Statements

Financial Instruments, Risk Management Activities, and Fair Values

INTEREST RATE RISK

We are exposed to interest rate volatility with regard to future issuances of fixed-rate debt, and existing and future issuances of floating-rate debt. Primary exposures include U.S. Treasury rates, LIBOR, and commercial paper rates in the United States and Europe. We use interest rate swaps and forward-starting interest rate swaps to hedge our exposure to interest rate changes, to reduce the volatility of our financing costs, and to achieve a desired proportion of fixed versus floating-rate debt, based on current and projected market conditions. Generally under these swaps, we agree with a counterparty to exchange the difference between fixed-rate and floating-rate interest amounts based on an agreed upon notional principal amount.

FOREIGN EXCHANGE RISK

Foreign currency fluctuations affect our net investments in foreign subsidiaries and foreign currency cash flows related to foreign-denominated commercial paper, third party purchases, intercompany loans, and product shipments. We are also exposed to the translation of foreign currency earnings to the U.S. dollar. Our principal exposures are to the Australian dollar, British pound sterling, Canadian dollar, Chinese renminbi, euro, Japanese yen, Swiss franc, and Mexican peso. We mainly use foreign currency forward contracts to selectively hedge our foreign currency cash flow exposures. We also generally swap our foreign-denominated commercial paper borrowings and nonfunctional currency intercompany loans back to U.S. dollars or the functional currency; the gains or losses on these derivatives offset the foreign currency revaluation gains or losses recorded in earnings on the associated borrowings. We generally do not hedge more than 18 months forward.

COMMODITY PRICE RISK

Many commodities we use in the production and distribution of our products are exposed to market price risks. We utilize derivatives to manage price risk for our principal ingredients and energy costs, including grains (oats, wheat, and corn), oils (principally soybean), non-fat dry milk, natural gas, and diesel fuel. Our primary objective when entering into these derivative contracts is to achieve certainty with regard to the future price of commodities purchased for use in our supply chain. We manage our exposures through a combination of purchase orders, long-term contracts with suppliers, exchange-traded futures and options, and over-the-counter options and swaps. We offset our exposures based on current and projected market conditions and generally seek to acquire the inputs at as close to our planned cost as possible.

NOTE 7. FINANCIAL INSTRUMENTS, RISK MANAGEMENT ACTIVITIES, AND FAIR VALUES

FINANCIAL INSTRUMENTS

The carrying values of cash and cash equivalents, receivables, accounts payable, other current liabilities, and notes payable approximate fair value. Marketable securities are carried at fair value. As of May 29, 2011, and May 30, 2010, a comparison of cost and market values of our marketable debt and equity securities is as follows:

	Cost				Market Value				Gross Gains				Gross Losses
	Fiscal Year				Fiscal Year				Fiscal Year				Fiscal Year
In Millions		2011		2010		2011		2010		2011		2010		2011		2010
Available for sale:
Debt securities	$	8.9	$	11.8	$	9.0	$	11.9	$	0.1	$	0.1	$	-	$	-
Equity securities		2.0		6.1		6.0		15.5		4.0		9.4		-		-
Total	$	10.9	$	17.9	$	15.0	$	27.4	$	4.1	$	9.5	$	-	$	-

Earnings include $10.5 million of realized gains from sales of available-for-sale marketable securities. Gains and losses are determined by specific identification. Classification of marketable securities as current or noncurrent is dependent upon our intended holding period, the security's maturity date, or both. The aggregate unrealized gains and losses on available-for-sale securities, net of tax effects, are classified in AOCI within stockholders' equity. Scheduled maturities of our marketable securities are as follows:

		Available for Sale
In Millions		Cost		Market Value
Under 1 year (current)	$	2.7	$	2.7
From 1 to 3 years		0.7		0.7
From 4 to 7 years		5.2		5.3
Over 7 years		0.3		0.3
Equity securities		2.0		6.0
Total	$	10.9	$	15.0

Marketable securities with a market value of $2.3 million as of May 29, 2011, were pledged as collateral for certain derivative contracts.

The fair value and carrying amount of long-term debt, including the current portion, were $7,164.5 million and $6,573.8 million as of May 29, 2011. The fair value of long-term debt was estimated using market quotations and discounted cash flows based on our current incremental borrowing rates for similar types of instruments.

RISK MANAGEMENT ACTIVITIES

As a part of our ongoing operations, we are exposed to market risks such as changes in interest rates, foreign currency exchange rates, and commodity prices. To manage these risks, we may enter into various derivative transactions (e.g., futures, options, and swaps) pursuant to our established policies.

COMMODITY PRICE RISK

We use derivatives to manage our exposure to changes in commodity prices. We do not perform the assessments required to achieve hedge accounting for commodity derivative positions. Accordingly, the changes in the values of these derivatives are recorded currently in cost of sales in our Consolidated Statements of Earnings.

Although we do not meet the criteria for cash flow hedge accounting, we nonetheless believe that these instruments are effective in achieving our objective of providing certainty in the future price of commodities purchased for use in our supply chain. Accordingly, for purposes of measuring segment operating performance these gains and losses are reported in unallocated corporate items outside of segment operating results until such time that the exposure we are managing affects earnings. At that time we reclassify the gain or loss from unallocated corporate items to segment operating profit, allowing our operating segments to realize the economic effects of the derivative without experiencing any resulting mark-to-market volatility, which remains in unallocated corporate items.

Unallocated corporate items for fiscal 2011 and fiscal 2010 included:

	Fiscal Year
In Millions		2011		2010		2009
Net gain (loss) on mark-to-market valuation of commodity positions	$	160.3	$	(54.7)	$	(249.6)
Net loss (gain) on commodity positions reclassified from unallocated corporate items to segment operating profit		(93.6)		55.7		134.8
Net mark-to-market revaluation of certain grain inventories		28.5		(8.1)		(4.1)
Net mark-to-market valuation of certain commodity positions recognized in unallocated corporate items	$	95.2	$	(7.1)	$	(118.9)

As of May 29, 2011, the net notional value of commodity derivatives was $347.5 million, of which $160.7 million related to agricultural inputs and $186.8 million related to energy inputs. These contracts relate to inputs that generally will be utilized within the next 12 months.

Floating Interest Rate Exposures —Floating-to-fixed interest rate swaps are accounted for as cash flow hedges, as are all hedges of forecasted issuances of debt. Effectiveness is assessed based on either the perfectly effective hypothetical derivative method or changes in the present value of interest payments on the underlying debt. Effective gains and losses deferred to AOCI are reclassified into earnings over the life of the associated debt. Ineffective gains and losses are recorded as net interest. The amount of hedge ineffectiveness was less than $1 million in each of fiscal 2011, 2010 and 2009.

Fixed Interest Rate Exposures — Fixed-to-floating interest rate swaps are accounted for as fair value hedges with effectiveness assessed based on changes in the fair value of the underlying debt and derivatives, using incremental borrowing rates currently available on loans with similar terms and maturities. Ineffective gains and losses on these derivatives and the underlying hedged items are recorded as net interest. The amount of hedge ineffectiveness was less than $1 million in each of fiscal 2011, 2010 and 2009.

During the fourth quarter of fiscal 2011, we entered into swaps to convert $300.0 million of 1.55% fixed-rate notes due May 16, 2014, to floating rates. We also entered into $500.0 million of forward starting swaps with an average fixed rate of 3.9 percent in advance of a planned debt financing.

During the fourth quarter of fiscal 2010, in advance of a planned debt financing, we entered into $500.0 million of treasury lock derivatives with an average fixed rate of 4.3 percent. All of these treasury locks were cash settled for $17.1 million during the first quarter of fiscal 2011, coincident with the issuance of our $500.0 million 30-year fixed-rate notes. As of May 29, 2011, a $16.2 million pre-tax loss remained in AOCI, which will be reclassified to earnings over the term of the underlying debt.

During the second quarter of fiscal 2010 we entered into $700.0 million of interest rate swaps to convert $700.0 million of 5.65 percent fixed-rate notes to floating rates. In May 2010, we repurchased $179.2 million of our 5.65 percent notes, and as a result, we received $2.7 million to settle a portion of these swaps that related to the repurchased debt.

In anticipation of our acquisition of The Pillsbury Company (Pillsbury) and other financing needs, we entered into pay-fixed interest rate swap contracts during fiscal 2001 and 2002 totaling $7.1 billion to lock in our interest payments on the associated debt. The remaining $1.6 billion of these pay-fixed swap contracts along with $1.6 billion of offsetting pay-floating swaps were cash settled for $22.3 million during the third quarter of fiscal 2011. As of May 29, 2011, a $0.5 million pre-tax loss remained in AOCI, which will be reclassified to earnings over the remaining term of the underlying debt.

As of May 29, 2011, a $12.7 million pre-tax loss on cash settled interest rate swaps for our $1.0 billion 10-year note issued January 24, 2007 remained in AOCI, which will be reclassified to earnings over the term of the underlying debt.

The following table summarizes the notional amounts and weighted-average interest rates of our interest rate swaps. Average floating rates are based on rates as of the end of the reporting period.

In Millions		May 29, 2011		May 30, 2010
Pay-floating swaps - notional amount	$	838.0	$	2,155.6
Average receive rate		1.8%		4.8%
Average pay rate		0.2%		0.3%
Pay-fixed swaps - notional amount	$	-	$	1,600.0
Average receive rate		-%		0.3%
Average pay rate		-%		7.3%
Pay-fixed forward starting swaps - notional amount	$	500.0	$	-

The swap contracts mature at various dates from fiscal 2012 to 2014 as follows:

	Fiscal Year Maturity Date
In Millions		Pay Floating		Pay Fixed
2012	$	3.4	$	500.0
2013		534.6		-
2014		300.0		-
Total	$	838.0	$	500.0

FOREIGN EXCHANGE RISK

As of May 29, 2011, the notional value of foreign exchange derivatives was $2,436.5 million. The amount of hedge ineffectiveness was less than $1 million in each of fiscal 2011, 2010 and 2009.

As discussed in Note 3, during the fourth quarter of fiscal 2011 we entered into definitive agreements with PAI Partners and Sodiaal International to purchase interests in Yoplait entities for $1.2 billion. To reduce the risk of the U.S. dollar cost of the euro-denominated acquisition, we purchased call options covering €637 million at a cost of $12.7 million. As of May 29, 2011, we recorded a $2.2 million unrealized gain on these derivatives.

We also have many net investments in foreign subsidiaries that are denominated in euros. We hedged a portion of these net investments by issuing euro-denominated commercial paper and foreign exchange forward contracts. As of May 29, 2011, we had deferred net foreign currency transaction losses of $95.7 million in AOCI associated with hedging activity.

FAIR VALUE MEASUREMENTS AND FINANCIAL STATEMENT PRESENTATION

We categorize assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing the asset or liability. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are defined as follows:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

Level 3: Unobservable inputs reflecting management's assumptions about the inputs used in pricing the asset or liability.

The fair values of our assets, liabilities, and derivative positions recorded at fair value as of May 29, 2011 and May 30, 2010, were as follows:

	May 29, 2011								May 29, 2011
	Fair Values of Assets								Fair Values of Liabilities
In Millions		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Derivatives designated as hedging instruments:
Interest rate contracts (a) (b)	$	-	$	11.2	$	-	$	11.2	$	-	$	(21.3)	$	-	$	(21.3)
Foreign exchange contracts (c) (d)		-		10.1		-		10.1		-		(14.9)		-		(14.9)
Total		-		21.3		-		21.3		-		(36.2)		-		(36.2)

Derivatives not designated as hedging instruments:
Interest rate contracts (a) (b)		-		2.2		-		2.2		-		(0.9)		-		(0.9)
Foreign exchange contracts (c) (d)		-		57.1		-		57.1		-		(19.9)		-		(19.9)
Commodity contracts (c) (e)		14.6		16.3		-		30.9		-		-		-		-
Grain contracts (c) (e)		-		61.1		-		61.1		-		(29.0)		-		(29.0)
Total		14.6		136.7		-		151.3		-		(49.8)		-		(49.8)

Other assets and liabilities reported at fair value:
Marketable investments (a) (f)		5.9		9.1		-		15.0		-		-		-		-
Total		5.9		9.1		-		15.0		-		-		-		-
Total assets, liabilities, and derivative positions recorded at fair value	$	20.5	$	167.1	$	-	$	187.6	$	-	$	(86.0)	$	-	$	(86.0)

(a) These contracts and investments are recorded as other assets or as other liabilities, as appropriate, based on whether in a gain or loss position. Certain marketable investments are recorded as cash and cash equivalents.

(b) Based on LIBOR and swap rates.

(c) These contracts are recorded as prepaid expenses and other current assets or as other current liabilities, as appropriate, based on whether in a gain or loss position.

(d) Based on observable market transactions of spot currency rates and forward currency prices.

(e) Based on prices of futures exchanges and recently reported transactions in the marketplace.

(f) Based on prices of common stock and bond matrix pricing.

(g) We recorded a $6.6 million non-cash impairment charge in fiscal 2010 to write down certain long-lived assets to their fair value of $0.4 million. Fair value was based on recently reported transactions for similar assets in the marketplace. These assets had a book value of $7.0 million and were associated with the exit activities described in Note 4.

We did not significantly change our valuation techniques from prior periods.

Information related to our cash flow hedges, fair value hedges, and other derivatives not designated as hedging instruments for the fiscal years ended May 29, 2011, and May 30, 2010, follows:

(b) Based on LIBOR and swap rates.

(c) These contracts are recorded as prepaid expenses and other current assets or as other current liabilities, as appropriate, based on whether in a gain or loss position.

(d) Based on observable market transactions of spot currency rates and forward currency prices.

(e) Based on prices of futures exchanges and recently reported transactions in the marketplace.

(f) Based on prices of common stock and bond matrix pricing.

We did not significantly change our valuation techniques from prior periods.

Information related to our cash flow hedges, fair value hedges, and other derivatives not designated as hedging instruments for the fiscal years ended May 29, 2011, and May 30, 2010, follows:

(b) Based on LIBOR and swap rates.

(c) These contracts are recorded as prepaid expenses and other current assets or as other current liabilities, as appropriate, based on whether in a gain or loss position.

(d) Based on observable market transactions of spot currency rates and forward currency prices.

(e) Based on prices of futures exchanges and recently reported transactions in the marketplace.

(f) Based on prices of common stock and bond matrix pricing.

We did not significantly change our valuation techniques from prior periods.

Information related to our cash flow hedges, fair value hedges, and other derivatives not designated as hedging instruments for the fiscal years ended May 29, 2011, and May 30, 2010, follows:

(b) Based on LIBOR and swap rates.

(c) These contracts are recorded as prepaid expenses and other current assets or as other current liabilities, as appropriate, based on whether in a gain or loss position.

(d) Based on observable market transactions of spot currency rates and forward currency prices.

(e) Based on prices of futures exchanges and recently reported transactions in the marketplace.

(f) Based on prices of common stock and bond matrix pricing.

We did not significantly change our valuation techniques from prior periods.

Information related to our cash flow hedges, fair value hedges, and other derivatives not designated as hedging instruments for the fiscal years ended May 29, 2011, and May 30, 2010, follows:

(b) Based on LIBOR and swap rates.

(c) These contracts are recorded as prepaid expenses and other current assets or as other current liabilities, as appropriate, based on whether in a gain or loss position.

(d) Based on observable market transactions of spot currency rates and forward currency prices.

(e) Based on prices of futures exchanges and recently reported transactions in the marketplace.

(f) Based on prices of common stock and bond matrix pricing.

We did not significantly change our valuation techniques from prior periods.

Information related to our cash flow hedges, fair value hedges, and other derivatives not designated as hedging instruments for the fiscal years ended May 29, 2011, and May 30, 2010, follows:

		Interest Rate Contracts				Foreign Exchange Contracts				Equity Contracts				Commodity Contracts				Total
		Fiscal Year				Fiscal Year				Fiscal Year				Fiscal Year				Fiscal Year
In Millions		2011		2010		2011		2010		2011		2010		2011		2010		2011		2010
Derivatives in Cash Flow Hedging Relationships:
Amount of loss recognized in other comprehensive income (OCI) (a)	$	(20.9)	$	(11.7)	$	(18.9)	$	(13.3)	$	-	$	-	$	-	$	-	$	(39.8)	$	(25.0)
Amount of loss reclassified from AOCI into earnings (a) (b)		(13.1)		(18.0)		(16.7)		(26.4)		-		-		-		-		(29.8)		(44.4)
Amount of gain (loss) recognized in earnings (c) (d)		(0.4)		(0.3)		0.3		(0.5)		-		-		-		-		(0.1)		(0.8)

Derivatives in Fair Value Hedging Relationships:
Amount of net gain recognized in earnings (e)		0.3		0.2		-		-		-		-		-		-		0.3		0.2

Derivatives Not Designated as Hedging Instruments:
Amount of gain (loss) recognized in earnings (e)		1.0		0.2		23.7		13.3		-		0.2		160.3		(54.7)		185.0		(41.0)

(a) Effective portion.

(b) Loss reclassified from AOCI into earnings is reported in interest, net for interest rate swaps and in cost of sales and SG&A expenses for foreign exchange contracts.

(c) All gain (loss) recognized in earnings is related to the ineffective portion of the hedging relationship. No amounts were reported as a result of being excluded from the assessment of hedge effectiveness.

(d) Gain (loss) recognized in earnings is reported in SG&A expenses for foreign exchange contracts.

(e) Gain (loss) recognized in earnings is reported in interest, net for interest rate contracts, in cost of sales for commodity contracts, and in SG&A expenses for equity contracts and foreign exchange contracts.

AMOUNTS RECORDED IN ACCUMULATED OTHER COMPREHENSIVE LOSS

Unrealized losses from interest rate cash flow hedges recorded in AOCI as of May 29, 2011, totaled $30.0 million after tax. These deferred losses are primarily related to interest rate swaps that we entered into in contemplation of future borrowings and other financing requirements and that are being reclassified into net interest over the lives of the hedged forecasted transactions. Unrealized losses from foreign currency cash flow hedges recorded in AOCI as of May 29, 2011, were $5.8 million after-tax. The net amount of pre-tax gains and losses in AOCI as of May 29, 2011, that we expect to be reclassified into net earnings within the next 12 months is $11.7 million of expense.

CREDIT-RISK-RELATED CONTINGENT FEATURES

Certain of our derivative instruments contain provisions that require us to maintain an investment grade credit rating on our debt from each of the major credit rating agencies. If our debt were to fall below investment grade, the counterparties to the derivative instruments could request full collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position on May 29, 2011, was $6.3 million. We would be required to post this amount of collateral to the counterparties if the contingent features were triggered.

CONCENTRATIONS OF CREDIT AND COUNTERPARTY CREDIT RISK

During fiscal 2011, Wal-Mart Stores, Inc. and its affiliates (Wal-Mart) accounted for 23 percent of our consolidated net sales and 30 percent of our net sales in the U.S. Retail segment. No other customer accounted for 10 percent or more of our consolidated net sales. Wal-Mart also represented 6 percent of our net sales in the International segment and 7 percent of our net sales in the Bakeries and Foodservice segment. As of May 29, 2011, Wal-Mart accounted for 26 percent of our U.S. Retail receivables, 5 percent of our International receivables, and 9 percent of our Bakeries and Foodservice receivables. The five largest customers in our U.S. Retail segment accounted for 53 percent of its fiscal 2011 net sales, the five largest customers in our International segment accounted for 24 percent of its fiscal 2011 net sales, and the five largest customers in our Bakeries and Foodservice segment accounted for 45 percent of its fiscal 2011 net sales.

We enter into interest rate, foreign exchange, and certain commodity and equity derivatives, primarily with a diversified group of highly rated counterparties. We continually monitor our positions and the credit ratings of the counterparties involved and, by policy, limit the amount of credit exposure to any one party. These transactions may expose us to potential losses due to the risk of nonperformance by these counterparties; however, we have not incurred a material loss. We also enter into commodity futures transactions through various regulated exchanges.

The amount of loss due to the credit risk of the counterparties, should the counterparties fail to perform according to the terms of the contracts, is $63.1 million against which we do not hold collateral. Under the terms of master swap agreements, some of our transactions require collateral or other security to support financial instruments subject to threshold levels of exposure and counterparty credit risk. Collateral assets are either cash or U.S. Treasury instruments and are held in a trust account that we may access if the counterparty defaults

	May 30, 2010								May 30, 2010
	Fair Values of Assets								Fair Values of Liabilities
In Millions		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Derivatives designated as hedging instruments:
Interest rate contracts (a) (b)	$	-		5.8		-	$	5.8	$	-		(17.1)		-	$	(17.1)
Foreign exchange contracts (c) (d)		-		8.6		-		8.6		-		(12.5)		-		(12.5)
Total		-		14.4		-		14.4		-		(29.6)		-		(29.6)

Derivatives not designated as hedging instruments:
Interest rate contracts (a) (b)		-		124.3		-		124.3		-		(163.1)		-		(163.1)
Foreign exchange contracts (c) (d)		-		9.5		-		9.5		-		(1.0)		-		(1.0)
Commodity contracts (c) (e)		-		7.4		-		7.4		(5.6)		-		-		(5.6)
Grain contracts (c) (e)		-		11.9		-		11.9		-		(13.0)		-		(13.0)
Total		-		153.1		-		153.1		(5.6)		(177.1)		-		(182.7)

Other assets and liabilities reported at fair value:
Marketable investments (a) (f)		15.5		11.9		-		27.4		-		-		-		-
Long-lived assets (g)		-		0.4		-		0.4		-		-		-		-
Total		15.5		12.3		-		27.8		-		-		-		-
Total assets, liabilities, and derivative positions recorded at fair value	$	15.5	$	179.8	$	-	$	195.3	$	(5.6)	$	(206.7)	$	-	$	(212.3)

7.0