DERIVATIVES AND HEDGING

6 Months Ended

Apr. 28, 2013

DERIVATIVES AND HEDGING

DERIVATIVES AND HEDGING

NOTE I                 DERIVATIVES AND HEDGING

The Company uses hedging programs to manage price risk associated with commodity purchases.  These programs utilize futures contracts and swaps to manage the Company’s exposure to price fluctuations in the commodities markets.  The Company has determined that its programs which are designated as hedges are highly effective in offsetting the changes in fair value or cash flows generated by the items hedged.

Cash Flow Hedges:  The Company currently utilizes corn futures to offset the price fluctuation in the Company’s future direct grain purchases, and has historically entered into various swaps to hedge the purchases of grain and natural gas at certain plant locations.  The financial instruments are designated and accounted for as cash flow hedges, and the Company measures the effectiveness of the hedges on a regular basis.  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.  Any gains or losses related to hedge ineffectiveness are recognized in the current period cost of products sold.  The Company typically does not hedge its grain or natural gas exposure beyond the next two upcoming fiscal years.  As of April 28, 2013, and October 28, 2012, the Company had the following outstanding commodity futures contracts and swaps that were entered into to hedge forecasted purchases:

	Volume
Commodity	April 28, 2013	October 28, 2012
Corn	15.9 million bushels	12.0 million bushels

As of April 28, 2013, the Company has included in AOCL, hedging losses of $6.2 million (before tax) relating to these positions, compared to gains of $15.2 million (before tax) as of October 28, 2012.  The Company expects to recognize the majority of these losses over the next 12 months.

Fair Value Hedges:  The Company utilizes futures to minimize the price risk assumed when forward priced contracts are offered to the Company’s commodity suppliers.  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.  The futures contracts are designated and accounted for as fair value hedges, and the Company measures the effectiveness of the hedges on a regular basis.  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 are 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.  Any gains or losses related to hedge ineffectiveness are recognized in the current period cost of products sold.  As of April 28, 2013, and October 28, 2012, the Company had the following outstanding commodity futures contracts designated as fair value hedges:

	Volume
Commodity	April 28, 2013	October 28, 2012
Corn	9.5 million bushels	8.0 million bushels
Lean hogs	0.7 million cwt	0.9 million cwt

Other Derivatives:  During fiscal years 2013 and 2012, the Company has held certain futures to manage the Company’s exposure to fluctuations in commodity markets.  The Company has not applied hedge accounting to these positions.  As of April 28, 2013, and October 28, 2012, the Company had the following outstanding futures contracts related to other programs:

	Volume
Commodity	April 28, 2013	October 28, 2012
Soybean meal	6,700 tons	—

Fair Values:  The fair values of the Company’s derivative instruments (in thousands) as of April 28, 2013, and October 28, 2012, were as follows:

	Location on Consolidated	Fair Value (1)
	Statements of Financial Position	April 28, 2013			October 28, 2012
Asset Derivatives:
Derivatives Designated as Hedges:
Commodity contracts	Other current assets	$	(7,909	)	$	7,483
Derivatives Not Designated as Hedges:
Commodity contracts	Other current assets	(739		)	—
Total Asset Derivatives		$	(8,648	)	$	7,483

(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 Statement of Financial Position.   See Note J - Fair Value Measurements for a discussion of these net amounts as reported in the Consolidated Statements of Financial Position.

Derivative Gains and Losses:  Gains or losses (before tax, in thousands) related to the Company’s derivative instruments for the second quarter ended April 28, 2013, and April 29, 2012, were as follows:

Gain/(Loss) Recognized in Accumulated Other Comprehensive Loss (AOCL) (Effective Portion) (1)

Location on

Gain/(Loss) Reclassified from AOCL into Earnings (Effective Portion) (1)

Gain/(Loss) Recognized in Earnings (Ineffective Portion) (2) (3)

Three Months Ended

Consolidated

Three Months Ended

Three Months Ended

Cash Flow Hedges:

April 28, 2013

April 29, 2012

Statements of Operations

April 28, 2013

April 29, 2012

April 28, 2013

April 29, 2012

Commodity contracts

$

(8,378

)

$

(4,843

)

Cost of products sold

$

2,156

$

3,751

$

(392

)

$

—

Location on

Gain/(Loss) Recognized in Earnings (Effective Portion) (4)

Gain/(Loss) Recognized in Earnings (Ineffective Portion) (2) (5)

Consolidated

Three Months Ended

Three Months Ended

Fair Value Hedges:

Statements of Operations

April 28, 2013

April 29, 2012

April 28, 2013

April 29, 2012

Commodity contracts

Cost of products sold

$

3,628

$

2,695

$

85

$

135

Location on

Gain/(Loss) Recognized in Earnings

Consolidated

Three Months Ended

Derivatives Not Designated as Hedges:

Statements of Operations

April 28, 2013

April 29, 2012

Commodity contracts

Cost of products sold

$

351

$

86

Derivative Gains and Losses:  Gains or losses (before tax, in thousands) related to the Company’s derivative instruments for the six months ended April 28, 2013, and April 29, 2012, were as follows:

	Gain/(Loss) Recognized in Accumulated Other Comprehensive Loss (AOCL) (Effective Portion) (1)						Location on	Gain/(Loss) Reclassified from AOCL into Earnings (Effective Portion) (1)					Gain/(Loss) Recognized in Earnings (Ineffective Portion) (2) (3)
	Six Months Ended						Consolidated	Six Months Ended					Six Months Ended
	April 28,			April 29,			Statements	April 28,			April 29,		April 28,				April 29,
Cash Flow Hedges:	2013			2012			of Operations	2013			2012		2013				2012
Commodity contracts	$	(12,469	)	$	(12,085	)	Cost of products sold	$	8,986		$	14,641	$	(226		)	$	—
							Location on	Gain/(Loss) Recognized in Earnings (Effective Portion) (4)					Gain/(Loss) Recognized in Earnings (Ineffective Portion) (2) (5)
							Consolidated	Six Months Ended					Six Months Ended
							Statements	April 28,			April 29,		April 28,				April 29,
Fair Value Hedges:							of Operations	2013			2012		2013				2012
Commodity contracts							Cost of products sold	$	2,542		$	5,349	$		55		$	46
							Location on	Gain/(Loss) Recognized in Earnings
							Consolidated	Six Months Ended
Derivatives Not							Statements	April 28,			April 29,
Designated as Hedges:							of Operations	2013			2012
Commodity contracts							Cost of products sold	$	(733	)	$	46

(1)	Amounts represent gains or losses in AOCL before tax. See the Consolidated Statements of Comprehensive Income for the after tax impact of these gains or losses on net earnings.
(2)	There were no gains or losses excluded from the assessment of hedge effectiveness during the second quarter or first six months of fiscal years 2013 and 2012.
(3)	There were no gains or losses resulting from the discontinuance of cash flow hedges during the second quarter or first six months of fiscal years 2013 and 2012.
(4)	Amounts represent (losses) gains on commodity contracts designated as fair value hedges that were closed during the second quarter or first six months of fiscal years 2013 and 2012, 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.
(5)	There were no gains or losses recognized as a result of a hedged firm commitment no longer qualifying as a fair value hedge during the second quarter or first six months of fiscal years 2013 and 2012.