DERIVATIVES AND HEDGING

6 Months Ended

Apr. 25, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company uses hedging programs to manage price risk associated with commodity purchases and interest rates. These programs utilize futures contracts to manage the Company’s exposure to price fluctuations in the 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 Commodity 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. Due to extreme market volatility, subsequent to the end of the second quarter, the Company took strategic hedges to cover a significant portion of its expected grain purchases for the remainder of the fiscal year.

Fair Value Commodity 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.

Cash Flow Interest Rate Hedges: The Company is utilizing derivative instruments to manage interest rate risk associated with the anticipated debt transactions required to fund the acquisition of the Planters® snack nuts portfolio in the third quarter of fiscal 2021. The Company designated two separate interest rate locks as cash flow hedges. As of April 25, 2021, the total notional amount of the Company's locks was $1,250 million. The associated debt instruments are expected to have a tenor of seven and thirty years. Mark to market gains or losses on these instruments are deferred as a component of Accumulated Other Comprehensive Loss and will be reclassified to Interest Expense in the period when the hedged transactions affect earnings. On May 25, 2021, subsequent to the end of the second quarter, both interest rate locks were lifted in conjunction with the issuance of unsecured senior notes. For more detail on the notes issued, see Note J - Long-term Debt and Other Borrowing Arrangements.

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: The Company's outstanding commodity futures and options contracts related to its hedging programs include:

Volume

Commodity Contracts

April 25, 2021

October 25, 2020

Corn

31.9 million bushels

26.0 million bushels

Lean Hogs

120.6 million pounds

153.7 million pounds

Fair Value of Derivatives: The fair values of the Company’s derivative instruments are:


		Gross Fair Value
(in thousands)	Location on Consolidated Statements of Financial Position	April 25, 2021		October 25, 2020
Derivatives Designated as Hedges:
Commodity Contracts(1)	Other Current Assets	$	23,848	$	(1,330)
Interest Rate Contracts	Other Current Assets	$	18,539	$	—

(1) Amounts represent the gross fair value of commodity derivative assets and liabilities. The Company nets the commodity 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 commodity derivative contract. The amount or timing of cash collateral balances may impact the classification of the commodity derivative in the Consolidated Statements of Financial Position. The gross asset position as of April 25, 2021 is offset by the obligation to return net cash collateral of $16.1 million contained within the master netting arrangement. The gross liability position as of October 25, 2020 is offset by the right to reclaim net cash collateral of $12.3 million. See Note I - 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 amounts of the Company's fair value hedge assets (liabilities) are:


Location on Consolidated Statements of Financial Position	Carrying Amount of the Hedged Assets/(Liabilities)
(in thousands)	April 25, 2021		October 25, 2020
Accounts Payable(1)	$	15,690	$	4,269

(1) Amounts represent the carrying amount of fair value hedged assets and liabilities which are offset by other assets included in master netting arrangements described above.

Accumulated Other Comprehensive Loss Impact: As of April 25, 2021, the Company included in Accumulated Other Comprehensive Loss hedging gains (before tax) of $51.0 million on commodity contracts and $18.5 million related to interest rate positions. The Company expects to recognize the majority of the gains on commodity contracts over the next twelve months. Gains on interest rate contracts will offset the hedged interest payments over the tenor of the debt instruments.

The effect of Accumulated Other Comprehensive Loss for gains or losses (before tax) related to the Company's derivative instruments is as follows:


	Gain/(Loss) Recognized in AOCL (1)				Location on Consolidated Statements of Operations	Gain/(Loss) Reclassified from AOCL into Earnings (1)
	Thirteen Weeks Ended					Thirteen Weeks Ended
(in thousands)	April 25, 2021		April 26, 2020			April 25, 2021		April 26, 2020
Cash Flow Hedges:
Commodity Contracts	$	36,109	$	(47,944)	Cost of Products Sold	$	4,512	$	(5,477)
Interest Rate Contracts	$	18,539	$	—	Interest Expense	$	—	$	—


	Gain/(Loss) Recognized in AOCL (1)				Location on Consolidated Statements of Operations	Gain/(Loss) Reclassified from AOCL into Earnings (1)
	Twenty-Six Weeks Ended					Twenty-Six Weeks Ended
(in thousands)	April 25, 2021		April 26, 2020			April 25, 2021		April 26, 2020
Cash Flow Hedges:
Commodity Contracts	$	52,661	$	(56,571)	Cost of Products Sold	$	4,462	$	(7,352)
Interest Rate Contracts	$	18,539	$	—	Interest Expense	$	—	$	—

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

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 is as follows:


	Cost of Products Sold
	Thirteen Weeks Ended				Twenty-Six Weeks Ended
(in thousands)	April 25, 2021		April 26, 2020		April 25, 2021		April 26, 2020
Consolidated Statements of Operations	$	2,130,314	$	1,945,113	$	4,141,291	$	3,861,127

Cash Flow Hedges - Commodity Contracts
Gain (Loss) Reclassified from AOCL	4,512		(5,477)		4,462		(7,352)


Fair Value Hedges - Commodity Contracts
Gain (Loss) on Commodity Futures (1)	(11,357)		5,960		(14,271)		9,146

Total Gain (Loss) Recognized in Earnings	$	(6,845)	$	483	$	(9,809)	$	1,794

(1) Amounts represent gains or losses on commodity contracts designated as fair value hedges that were closed during the thirteen and twenty-six weeks ended April 25, 2021, and April 26, 2020, which were offset by a corresponding gain or loss 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.