DERIVATIVES AND HEDGING

3 Months Ended

Jan. 26, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company uses hedging programs to manage price risk associated with commodity purchases. These programs utilize futures and options contracts to manage the Company’s exposure to price fluctuations in the commodities markets. The Company has determined its designated hedging programs to be highly effective in offsetting the changes in fair value or cash flows generated by the items hedged. Effectiveness testing is performed on a quarterly basis to ascertain a high level of effectiveness for cash flow and fair value hedging programs.

Cash Flow Hedges: The Company designates corn and lean hog futures and options used to offset price fluctuations in the Company’s future direct grain and hog purchases as cash flow hedges. Effective gains or losses related to these cash flow hedges are reported in Accumulated Other Comprehensive Loss (AOCL) and reclassified into earnings, through Cost of Products Sold, in the period or periods in which the hedged transactions affect earnings. The Company typically does not hedge its grain exposure beyond the next two upcoming fiscal years and its hog exposure beyond the next fiscal year.

Fair Value Hedges: The Company designates the futures it uses to minimize the price risk assumed when fixed forward priced contracts are offered to the Company’s commodity suppliers as fair value hedges. The intent of the program is to make the forward priced commodities cost nearly the same as cash market purchases at the date of delivery. Changes in the fair value of the futures contracts, along with the gain or loss on the hedged purchase commitment, are marked-to-market through earnings and recorded on the Consolidated Statements of Financial Position as a Current Asset and Liability, respectively. Effective gains or losses related to these fair value hedges are recognized through Cost of Products Sold in the period or periods in which the hedged transactions affect earnings.

Other Derivatives: The Company holds certain futures and options contract positions as part of a merchandising program and to manage the Company’s exposure to fluctuations in commodity markets. The Company has not applied hedge accounting to these positions. Activity related to derivatives not designated as hedges is immaterial to the consolidated financial statements.

Volume: As of January 26, 2020, and October 27, 2019, the Company had the following outstanding commodity futures and options contracts related to its hedging programs:



	Volume
Commodity Contracts	January 26, 2020	October 27, 2019
Corn	25.3 million bushels	30.4 million bushels
Lean Hogs	182.0 million pounds	187.3 million pounds

Fair Value of Derivatives: The fair values of the Company’s derivative instruments as of January 26, 2020, and October 27, 2019, were as follows:



		Fair Value ⁽¹⁾
(in thousands)	Location on Consolidated Statements of Financial Position	January 26, 2020			October 27, 2019
Derivatives Designated as Hedges:
Commodity Contracts	Other Current Assets	$	(921	)	$	6,405

⁽¹⁾ Amounts represent the gross fair value of derivative assets and liabilities. The Company nets the derivative assets and liabilities for each of its hedging programs, including cash collateral, when a master netting arrangement exists between the Company and the counterparty to the derivative contract. The amount or timing of cash collateral balances may impact the classification of the derivative in the Consolidated Statements of Financial Position. See Note K - Fair Value Measurements for a discussion of these net amounts as reported in the Consolidated Statements of Financial Position.

Fair Value Hedge - Assets (Liabilities): The carrying amount of the Company's fair value hedge assets (liabilities) as of January 26, 2020, and October 27, 2019, were as follows:



Location on Consolidated Statements of Financial Position	Carrying Amount of the Hedged Assets/(Liabilities)
(in thousands)	January 26, 2020			October 27, 2019
Accounts Payable	$	(2,347	)	$	(2,805	)

Accumulated Other Comprehensive Loss Impact: As of January 26, 2020, the Company has included in Accumulated Other Comprehensive Loss hedging losses of $3.6 million, before tax, relating to its positions. The Company expects to recognize the majority of these gains over the next twelve months.

The effect of Accumulated Other Comprehensive Loss for gains or losses (before tax) related to the Company's derivative instruments for the three months ended January 26, 2020, and January 27, 2019, were as follows:



	Gain/(Loss) Recognized in AOCL ⁽¹⁾						Location on Consolidated Statements of Operations	Gain/(Loss) Reclassified from AOCL into Earnings ⁽¹⁾
	Three Months Ended							Three Months Ended
(in thousands)	January 26, 2020			January 27, 2019				January 26, 2020			January 27, 2019
Cash Flow Hedges:
Commodity Contracts	$	(8,626	)	$	(843	)	Cost of Products Sold	$	(1,875	)	$	(1,243	)
Excluded Component ⁽²⁾	—			(687		)


⁽¹⁾	See Note H - Accumulated Other Comprehensive Loss for the after-tax impact of these gains or losses on Net Earnings.


⁽²⁾	Represents the time value amount of lean hog options excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in AOCL.

Consolidated Statements of Operations Impact: The effect on the Consolidated Statements of Operations for gains or losses (before tax) related to the Company's derivative instruments for the three months ended January 26, 2020, and January 27, 2019, were as follows:



	Cost of Products Sold
	Three Months Ended
(in thousands)	January 26, 2020			January 27, 2019
Consolidated Statements of Operations	$	1,916,014		$	1,872,021

Cash Flow Hedges - Commodity Contracts
Gain (Loss) Reclassified from AOCL	(1,875		)	(1,243		)
Amortization of Excluded Component from Options	—			(1,358		)

Fair Value Hedges - Commodity Contracts
Gain (Loss) on Commodity Futures ⁽¹⁾	3,186			932
Total Gain (Loss) Recognized in Earnings	$	1,311		$	(1,669	)


⁽¹⁾	Amounts represent losses on commodity contracts designated as fair value hedges that were closed during the

quarter, which were offset by a corresponding gain on the underlying hedged purchase commitment. Additional gains or losses related to changes in the fair value of open commodity contracts, along with the offsetting gain or loss on the hedged purchase commitment, are also marked-to-market through earnings with no impact on a net basis.