Financial Instruments, Risk Management Activities, and Fair Values

12 Months Ended

May 30, 2021

Financial Instruments, Risk Management Activities, and Fair Values [Abstract]

Financial Instruments, Risk Management Activities, and Fair Values [Text Block]

NOTE 8. 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 30, 2021, and May 31, 2020, a comparison of cost and market values of our marketable debt and equity securities is as follows:

	Cost				Fair Value				Gross Gains				Gross Losses
	Fiscal Year				Fiscal Year				Fiscal Year				Fiscal Year
In Millions		2021		2020		2021		2020		2021		2020		2021		2020
Available for sale debt securities	$	76.9	$	56.7	$	76.9	$	56.7	$	-	$	-	$	-	$	-
Equity securities		360.3		0.3		365.6		4.9		5.3		4.6		-		-
Total	$	437.2	$	57.0	$	442.5	$	61.6	$	5.3	$	4.6	$	-	$	-

There were no realized gains or losses from sales of marketable securities in fiscal 2021. During fiscal 2020, we received $16.0 million of proceeds and recorded $4.0 million of realized losses from the sale of 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 and the security’s maturity date. The aggregate unrealized gains and losses on available-for-sale debt securities, net of tax effects, are classified in AOCI within stockholders’ equity.

Scheduled maturities of our marketable securities are as follows:

		Marketable Securities
In Millions		Cost		Fair Value
Under 1 year (current)	$	76.9	$	76.9
Equity securities		360.3		365.6
Total	$	437.2	$	442.5

As of May 30, 2021, we had $2.4 million of marketable debt securities pledged as collateral for derivative contracts. As of May 30, 2021, $28.2 million of certain accounts receivable were pledged as collateral against a foreign uncommitted line of credit.

The fair value and carrying amounts of long-term debt, including the current portion, were $13,194.4 million and $12,250.7 million, respectively, as of May 30, 2021. 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. Long-term debt is a Level 2 liability in the fair value hierarchy.

RISK MANAGEMENT ACTIVITIES

As a part of our ongoing operations, we are exposed to market risks such as changes in interest and foreign currency exchange rates and commodity and equity 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

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), dairy products, 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 as possible to or below our planned cost.

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 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 2021, 2020, and 2019 included:

	Fiscal Year
In Millions		2021		2020		2019
Net gain (loss) on mark-to-market valuation of commodity positions	$	138.2	$	(63.0)	$	(39.0)
Net (gain) loss on commodity positions reclassified from unallocated corporate items to segment operating profit		(8.8)		35.6		10.0
Net mark-to-market revaluation of certain grain inventories		9.4		2.7		(7.0)
Net mark-to-market valuation of certain commodity positions recognized in unallocated corporate items	$	138.8	$	(24.7)	$	(36.0)

As of May 30, 2021, the net notional value of commodity derivatives was $337.0 million, of which $276.1 million related to agricultural inputs and $60.9 million related to energy inputs. These contracts relate to inputs that generally will be utilized within the next 12 months.

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, Euribor, and commercial paper rates in the United States and Europe. We use interest rate swaps, forward-starting interest rate swaps, and treasury locks to hedge our exposure to interest rate changes, to reduce the volatility of our financing costs, and to achieve a desired proportion of fixed rate 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.

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.

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.

In advance of planned debt financing, we entered into $750.0 million notional amount of treasury locks due April 2, 2020 with an average fixed rate of 0.67 percent. All of these treasury locks were cash settled for $1.4 million during the fourth quarter of fiscal 2020, concurrent with the issuance of our $750.0 million 10-year fixed rate notes.

In advance of planned debt financing, in the fourth quarter of fiscal 2020, we entered into $300.0 million notional amount of treasury locks due January 13, 2022 with an average fixed rate of 0.85 percent.

During the third quarter of fiscal 2020, we entered into a €600.0 million notional amount interest rate swap to convert our €600.0 million fixed rate notes due January 15, 2026, to a floating rate.

During the second quarter of fiscal 2020, we entered into a $500.0 million notional amount interest rate swap to convert a portion of our $850.0 million floating-rate notes due April 16, 2021, to a fixed rate.

As of May 30, 2021, the pre-tax amount of cash-settled interest rate hedge gain or loss remaining in AOCI, which will be reclassified to earnings over the remaining term of the related underlying debt, follows:

In Millions		Gain/(Loss)
3.15% notes due December 15, 2021	$	(5.3)
2.6% notes due October 12, 2022		1.0
1.0% notes due April 27, 2023		(0.5)
3.7% notes due October 17, 2023		(0.8)
3.65% notes due February 15, 2024		4.9
4.0% notes due April 17, 2025		(2.3)
3.2% notes due February 10, 2027		9.7
1.5% notes due April 27, 2027		(1.9)
4.2% notes due April 17, 2028		(7.0)
4.55% notes due April 17, 2038		(9.2)
5.4% notes due June 15, 2040		(10.6)
4.15% notes due February 15, 2043		8.5
4.7% notes due April 17, 2048		(12.8)
Net pre-tax hedge loss in AOCI	$	(26.3)

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

In Millions		May 30, 2021			May 31, 2020
Pay-floating swaps - notional amount	$	731.5		$	666.1
Average receive rate		0.4	%		0.4	%
Average pay rate		0.1	%		0.3	%
Pay-fixed swaps - notional amount	$	-		$	500.0
Average receive rate		-	%		1.7	%
Average pay rate		-	%		2.1	%

The floating rate swap contracts outstanding as of May 30, 2021, mature in fiscal 2026.

FOREIGN EXCHANGE RISK

Foreign currency fluctuations affect our net investments in foreign subsidiaries and foreign currency cash flows related to third party purchases, intercompany loans, product shipments, and foreign-denominated debt. We are also exposed to the translation of foreign currency earnings to the U.S. dollar. Our principal exposures are to the Australian dollar, Brazilian real, British pound sterling, Canadian dollar, Chinese renminbi, euro, Japanese yen, Mexican peso, and Swiss franc. We primarily 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 of the entity with foreign exchange exposure. 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 in advance.

As of May 30, 2021, the net notional value of foreign exchange derivatives was $1,176.8 million.

We also have net investments in foreign subsidiaries that are denominated in euros. We previously hedged a portion of these net investments by issuing euro-denominated commercial paper and foreign exchange forward contracts. As of May 30, 2021, we hedged a portion of these net investments with €2,510.4 million of euro denominated bonds. As of May 30, 2021, we had deferred net foreign currency transaction losses of $216.6 million in AOCI associated with net investment hedging activity.

EQUITY INSTRUMENTS

Equity price movements affect our compensation expense as certain investments made by our employees in our deferred compensation plan are revalued. We use equity swaps to manage this risk. As of May 30, 2021, the net notional amount of our equity swaps was $201.1 million of which $191.2 million of swap contracts mature in fiscal 2022 and $9.9 million of swap contracts mature in fiscal 2023.

FAIR VALUE MEASUREMENTS AND FINANCIAL STATEMENT PRESENTATION

The fair values of our assets, liabilities, and derivative positions recorded at fair value and their respective levels in the fair value hierarchy as of May 30, 2021, and May 31, 2020, were as follows:

	May 30, 2021								May 30, 2021
	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)	$	-	$	28.8	$	-	$	28.8	$	-	$	-	$	-	$	-
Foreign exchange contracts (a) (c)		-		2.3		-		2.3		-		(36.3)		-		(36.3)
Total		-		31.1		-		31.1		-		(36.3)		-		(36.3)
Derivatives not designated as hedging instruments:
Foreign exchange contracts (a) (c)		-		2.5		-		2.5		-		(1.6)		-		(1.6)
Commodity contracts (a) (d)		11.1		20.5		-		31.6		(0.8)		(0.5)		-		(1.3)
Grain contracts (a) (d)		-		12.0		-		12.0		-		(0.9)		-		(0.9)
Total		11.1		35.0		-		46.1		(0.8)		(3.0)		-		(3.8)
Other assets and liabilities reported at fair value:
Marketable investments (a) (e)		365.6		76.9		-		442.5		-		-		-		-
Total		365.6		76.9		-		442.5		-		-		-		-
Total assets, liabilities, and derivative positions recorded at fair value	$	376.7	$	143.0	$	-	$	519.7	$	(0.8)	$	(39.3)	$	-	$	(40.1)

(a)These contracts and investments are recorded as prepaid expenses and other current assets, other assets, other current liabilities or 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. As of May 30, 2021, the carrying amount of hedged debt designated as the hedged item in a fair value hedge was $736.9 million and was classified on the Consolidated Balance Sheet within long-term debt. As of May 30, 2021, the cumulative amount of fair value hedging basis adjustments was $5.4 million.

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

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

(e)Based on prices of common stock, mutual fund net asset values, and bond matrix pricing.

	May 31, 2020								May 31, 2020
	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)	$	-	$	5.6	$	-	$	5.6	$	-	$	(7.8)	$	-	$	(7.8)
Foreign exchange contracts (a) (c)		-		19.8		-		19.8		-		(3.8)		-		(3.8)
Total		-		25.4		-		25.4		-		(11.6)		-		(11.6)
Derivatives not designated as hedging instruments:
Foreign exchange contracts (a) (c)		-		18.8		-		18.8		-		(0.2)		-		(0.2)
Commodity contracts (a) (d)		4.6		1.6		-		6.2		(3.4)		(26.7)		-		(30.1)
Grain contracts (a) (d)		-		5.0		-		5.0		-		(1.2)		-		(1.2)
Total		4.6		25.4		-		30.0		(3.4)		(28.1)		-		(31.5)
Other assets and liabilities reported at fair value:
Marketable investments (a) (e)		4.9		56.7		-		61.6		-		-		-		-
Total		4.9		56.7		-		61.6		-		-		-		-
Total assets, liabilities, and derivative positions recorded at fair value	$	9.5	$	107.5	$	-	$	117.0	$	(3.4)	$	(39.7)	$	-	$	(43.1)

(a)These contracts and investments are recorded as prepaid expenses and other current assets, other assets, other current liabilities or 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. As of May 31, 2020, the carrying amount of hedged debt designated as the hedged item in a fair value hedge was $670.9 million and was classified on the Consolidated Balance Sheet within long-term debt. As of May 31, 2020, the cumulative amount of fair value hedging basis adjustments was $4.8 million.

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

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

(e)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 30, 2021, and May 31, 2020, follows:

		Interest Rate Contracts				Foreign Exchange Contracts				Equity Contracts				Commodity Contracts				Total
		Fiscal Year				Fiscal Year				Fiscal Year				Fiscal Year				Fiscal Year
In Millions		2021		2020		2021		2020		2021		2020		2021		2020		2021		2020
Derivatives in Cash Flow Hedging Relationships:
Amount of gain (loss) recognized in other comprehensive income (OCI)	$	31.2	$	(6.9)	$	(58.7)	$	11.3	$	-	$	-	$	-	$	-	$	(27.5)	$	4.4
Amount of net (loss) gain reclassified from AOCI into earnings (a)		(9.4)		(9.5)		(9.8)		4.6		-		-		-		-		(19.2)		(4.9)
Derivatives in Fair Value Hedging Relationships:
Amount of net loss recognized in earnings (b)		(0.3)		(4.9)		-		-		-		-		-		-		(0.3)		(4.9)
Derivatives Not Designated as Hedging Instruments:
Amount of net (loss) gain recognized in earnings (c)		-		(1.4)		4.2		15.7		47.7		8.6		134.6		(55.6)		186.5		(32.7)

(a)(Loss) gain 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. For the fiscal year ended May 30, 2021, the amount of loss reclassified from AOCI into cost of sales was $9.3 million and the amount of loss reclassified from AOCI into SG&A was $0.5 million. For the fiscal year ended May 31, 2020, the amount of gain reclassified from AOCI into cost of sales was $5.1 million and the amount of loss reclassified from AOCI into SG&A was $0.5 million.

(b)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

(c)Gain (loss) recognized in earnings is related to the ineffective portion of the hedging relationship, reported in SG&A expenses for foreign exchange contracts and interest, net for interest rate contracts. No amounts were reported as a result of being excluded from the assessment of hedge effectiveness.

The following tables reconcile the net fair values of assets and liabilities subject to offsetting arrangements that are recorded in our Consolidated Balance Sheets to the net fair values that could be reported in our Consolidated Balance Sheets:

		May 30, 2021
		Assets												Liabilities
								Gross Amounts Not Offset in the Balance Sheet (e)												Gross Amounts Not Offset in the Balance Sheet (e)
In Millions	Gross Amounts of Recognized Assets		Gross Liabilities Offset in the Balance Sheet (a)		Net Amounts of Assets (b)		Financial Instruments		Cash Collateral Received		Net Amount (c)		Gross Amounts of Recognized Liabilities		Gross Assets Offset in the Balance Sheet (a)		Net Amounts of Liabilities (b)		Financial Instruments		Cash Collateral Pledged		Net Amount (d)
Commodity contracts	$	31.6	$	-	$	31.6	$	(1.3)	$	(9.1)	$	21.2	$	(1.3)	$	-	$	(1.3)	$	1.3	$	-	$	-
Interest rate contracts		29.8		-		29.8		-		-		29.8		-		-		-		-		-		-
Foreign exchange contracts		4.8		-		4.8		(4.1)		-		0.7		(37.9)		-		(37.9)		4.1		-		(33.8)
Equity contracts		2.2		-		2.2		-		-		2.2		-		-		-		-		-		-
Total	$	68.4	$	-	$	68.4	$	(5.4)	$	(9.1)	$	53.9	$	(39.2)	$	-	$	(39.2)	$	5.4	$	-	$	(33.8)

		May 31, 2020
		Assets												Liabilities
								Gross Amounts Not Offset in the Balance Sheet (e)												Gross Amounts Not Offset in the Balance Sheet (e)
In Millions		Gross Amounts of Recognized Assets		Gross Liabilities Offset in the Balance Sheet (a)		Net Amounts of Assets (b)		Financial Instruments		Cash Collateral Received		Net Amount (c)		Gross Amounts of Recognized Liabilities		Gross Assets Offset in the Balance Sheet (a)		Net Amounts of Liabilities (b)		Financial Instruments		Cash Collateral Pledged		Net Amount (d)
Commodity contracts	$	6.2	$	-	$	6.2	$	(4.2)	$	-	$	2.0	$	(30.1)	$	-	$	(30.1)	$	4.2	$	15.9	$	(10.0)
Interest rate contracts		6.0		-		6.0		(0.8)		-		5.2		(8.0)		-		(8.0)		0.8		-		(7.2)
Foreign exchange contracts		38.6		-		38.6		(3.7)		-		34.9		(4.0)		-		(4.0)		3.7		-		(0.3)
Equity contracts		8.6		-		8.6		-		-		8.6		-		-		-		-		-		-
Total	$	59.4	$	-	$	59.4	$	(8.7)	$	-	$	50.7	$	(42.1)	$	-	$	(42.1)	$	8.7	$	15.9	$	(17.5)

(a)Includes related collateral offset in our Consolidated Balance Sheets.

(b)Net fair value as recorded in our Consolidated Balance Sheets.

(c)Fair value of assets that could be reported net in our Consolidated Balance Sheets.

(d)Fair value of liabilities that could be reported net in our Consolidated Balance Sheets.

(e)Fair value of assets and liabilities reported on a gross basis in our Consolidated Balance Sheets.

AMOUNTS RECORDED IN ACCUMULATED OTHER COMPREHENSIVE LOSS

As of May 30, 2021, the after-tax amounts of unrealized gains and losses in AOCI related to hedge derivatives follows:

In Millions		After-Tax Gain/(Loss)
Unrealized gains from interest rate cash flow hedges	$	0.4
Unrealized losses from foreign currency cash flow hedges		(18.9)
After-tax loss in AOCI related to hedge derivatives	$	(18.5)

The net amount of pre-tax gains and losses in AOCI as of May 30, 2021, that we expect to be reclassified into net earnings within the next 12 months is a $12.5 million net loss.

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 30, 2021, was $11.0 million. We have posted no collateral under these contracts. If the credit-risk-related contingent features underlying these agreements had been triggered on May 30, 2021, we would have been required to post $11.0 million of collateral to counterparties.

CONCENTRATIONS OF CREDIT AND COUNTERPARTY CREDIT RISK

During fiscal 2021, customer concentration was as follows:

Percent of total	Consolidated		North America Retail		Convenience Stores & Foodservice		Europe & Australia		Asia & Latin America		Pet
Walmart (a):
Net sales	20	%	29	%	7	%	-	%	5	%	13	%
Accounts receivable			28	%	6	%	-	%	5	%	14	%
Five largest customers:
Net sales			53	%	42	%	32	%	11	%	71	%
(a) Includes Walmart Inc. and its affiliates.

No customer other than Walmart accounted for 10 percent or more of our consolidated 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 $55.8 million, against which we hold $9.1 million of collateral. Under the terms of our 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.

We offer certain suppliers access to third-party services that allow them to view our scheduled payments online. The third-party services also allow suppliers to finance advances on our scheduled payments at the sole discretion of the supplier and the third party. We have no economic interest in these financing arrangements and no direct relationship with the suppliers, the third parties, or any financial institutions concerning this service. All of our accounts payable remain as obligations to our suppliers as stated in our supplier agreements. As of May 30, 2021, $1,411.3 million of our accounts payable was payable to suppliers who utilize these third-party services. As of May 31, 2020, $1,328.9 million of our accounts payable was payable to suppliers who utilize these third-party services.