Derivatives and Hedging

12 Months Ended

Oct. 30, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Hedging

Derivatives and Hedging

The Company uses hedging programs to manage risk associated with commodity purchases and interest rates. These programs utilize futures, swaps, and options contracts to manage the Company’s exposure to market fluctuations. 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. If the requirements of hedge accounting are no longer met, hedge accounting is discontinued immediately and any future changes to fair value are recorded directly through earnings.

Cash Flow Commodity Hedges: The Company designates grain and lean hog futures, swaps, and options used to offset price fluctuations in the Company’s future 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 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 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 Current Liability, respectively. Gains or losses related to these fair value hedges are recognized through Cost of Products Sold in the periods in which the hedged transactions affect earnings. 

Cash Flow Interest Rate Hedges: In the second quarter of fiscal 2021, the Company designated two separate interest rate locks as cash flow hedges to manage interest rate risk associated with the anticipated debt transactions required to fund the acquisition of the Planters® snack nuts business. The total notional amount of the Company's locks was $1.25 billion. In the third quarter of fiscal 2021, the associated unsecured senior notes were issued with a tenor of seven and thirty years and both locks were lifted (See Note L - Long-term Debt and Other Borrowing Arrangements). Mark-to-market gains and losses on these instruments were deferred as a component of AOCL. The resulting gain in AOCL is reclassified to Interest Expense in the period in which the hedged transactions affect earnings.

Fair Value Interest Rate Hedge: In the first quarter of fiscal 2022, the Company entered into an interest rate swap to protect against changes in the fair value of a portion of previously issued senior unsecured notes attributable to the change in the benchmark interest rate. The hedge specifically designated the last $450 million of the notes due June 2024 (the “2024 Notes”). The Company terminated the swap in the fourth quarter of fiscal 2022. The loss related to the swap was recorded as a fair value hedging adjustment to the hedged debt and will be amortized into earnings over the remaining life of the debt.

Other Derivatives:  The Company holds certain futures 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 contracts related to its commodity hedging programs include:

	Volume
Commodity Contracts	October 30, 2022	October 31, 2021
Corn	34.3 million bushels	33.1 million bushels
Lean Hogs	177.5 million pounds	120.0 million pounds

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

	Location on Consolidated	Gross Fair Value(1)
In thousands	Statements of Financial Position	October 30, 2022		October 31, 2021
Commodity Contracts	Other Current Assets	$	13,504	$	21,798

(1) Amounts represent the gross fair value of commodity derivative assets and liabilities. The Company nets the derivative assets and liabilities for each of its commodity 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 commodity derivative in the Consolidated Statements of Financial Position. The gross asset position as of October 30, 2022, is offset by the obligation to return cash collateral of $1.3 million contained within the master netting arrangement. The gross asset position as of October 31, 2021, is offset by the obligation to return cash collateral of $10.8 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 amount of the Company’s fair value hedge assets (liabilities) are:

	Location on Consolidated	Carrying Amount of the Hedged Assets/(Liabilities)
In thousands	Statements of Financial Position	October 30, 2022		October 31, 2021
Commodity Contracts	Accounts Payable(1)	$	5,725	$	3,432
Interest Rate Contracts	Long-term Debt - Less Current Maturities(2)	(430,050)		—

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

(2) Represents the carrying amount of the hedged portion of the "2024 Notes". As of October 30, 2022, the carrying amount of the "2024 Notes" included a cumulative fair value hedging adjustment of $20.0 million from discontinued hedges.

Accumulated Other Comprehensive Loss Impact: As of October 30, 2022, the Company included in AOCL hedging gains (before tax) of $26.0 million on commodity contracts and $13.5 million related to interest rate settled positions. The Company expects to recognize the majority of the gains on commodity contracts over the next twelve months. Gains on interest rate contracts offset the hedged interest payments over the tenor of the associated debt instruments.

The effect of AOCL for gains or losses (before tax) related to the Company's derivative instruments are:

	Gain/(Loss) Recognized in AOCL(1)				Location on Consolidated Statements of Operations	Gain/(Loss) Reclassified from AOCL into Earnings(1)
In thousands	Fiscal Year Ended					Fiscal Year Ended
Cash Flow Hedges:	October 30, 2022		October 31, 2021			October 30, 2022		October 31, 2021
Commodity Contracts	$	56,371	$	59,143	Cost of Products Sold	$	57,592	$	31,044
Excluded Component(2)	(4,748)		1,078			—		—
Interest Rate Contracts	—		14,864		Interest Expense	988		399

(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 of corn 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 are:

	Consolidated Statement of Operations Impact
	Fiscal Year Ended
In thousands	October 30, 2022		October 31, 2021		October 25, 2020
Net Earnings Attributable to Hormel Foods Corporation	$	999,987	$	908,839	$	908,082
Cash Flow Hedges - Commodity Contracts
Gain (Loss) Reclassified from AOCL	55,350		31,787		(37,834)
Amortization of Excluded Component from Options	(4,369)		(3,033)		—
Gain (Loss) Due to Discontinuance of Cash Flow Hedges(1)	2,242		(743)		—
Fair Value Hedges - Commodity Contracts
Gain (Loss) on Commodity Futures(2)	(18,122)		(28,078)		13,192
Total Gain (Loss) on Commodity Contracts(3)	$	35,101	$	(67)	$	(24,642)
Cash Flow Hedges - Interest Rate Locks
Amortization of Gain on Interest Rate Locks	988		399		—
Fair Value Hedge - Interest Rate Swap
Gain (Loss) on Interest Rate Swap	928		—		—
Amortization of Loss Due to Discontinuance of Fair Value Hedge(4)	(1,923)		—		—
Total Gain (Loss) on Interest Rate Contracts(5)	$	(7)	$	399	$	—
Total Gain (Loss) Recognized in Earnings	$	35,094	$	332	$	(24,642)

(1) In fiscal years ended 2022 and 2021, the Company discontinued hedge accounting related to corn usage deemed to no longer probable to occur resulting in the immediate recognition of gains of $2.2 million (1.0 million bushels) and losses of $0.7 million (2.8 million bushels), respectively.

(2) Represents gains or losses on commodity contracts designated as fair value hedges that were closed during the year, 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.

(3) Total Gain (Loss) on Commodity Contracts is recognized in earnings through Cost of Products Sold.

(4) Represents the fair value hedging adjustment amortized into earnings.

(5) Total Loss on Interest Rate Contracts is recognized in earnings through Interest Expense.