DERIVATIVES AND HEDGING

6 Months Ended

Apr. 26, 2015

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 at least quarterly.  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 26, 2015, and October 26, 2014, the Company had the following outstanding commodity futures contracts that were entered into to hedge forecasted purchases:

	Volume
Commodity	April 26, 2015	October 26, 2014
Corn	20.4 million bushels	18.3 million bushels

As of April 26, 2015, the Company has included in AOCL, hedging losses of $9.1 million (before tax) relating to these positions, compared to losses of $14.8 million (before tax) as of October 26, 2014.  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 at least quarterly.  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 26, 2015, and October 26, 2014, the Company had the following outstanding commodity futures contracts designated as fair value hedges:

	Volume
Commodity	April 26, 2015	October 26, 2014
Corn	3.5 million bushels	8.0 million bushels
Lean hogs	0.3 million cwt	0.7 million cwt

Other Derivatives:  During fiscal years 2015 and 2014, the Company has held 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.

As of April 26, 2015, and October 26, 2014, the Company had the following outstanding futures related to these programs:

	Volume
Commodity	April 26, 2015	October 26, 2014
Corn	1.9 million bushels	2.9 million bushels

Fair Values:  The fair values of the Company’s derivative instruments (in thousands) as of April 26, 2015, and October 26, 2014, were as follows:

			Fair Value(1)
		Location on Consolidated Statements of Financial Position	April 26, 2015	October 26, 2014
Asset Derivatives:
Derivatives Designated as Hedges:
Commodity contracts		Other current assets	$ (3,354)	$ (7,124)
Derivatives Not Designated as Hedges:
Commodity contracts		Other current assets	99	(938)
Total Asset Derivatives			$ (3,255)	$ (8,062)
(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 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 26, 2015, and April 27, 2014, were as follows:

	Gain/(Loss) Recognized in AOCL (Effective Portion) (1)		Location on Consolidated	Gain/(Loss) Reclassified from AOCL into Earnings (Effective Portion) (1)		Gain/(Loss) Recognized in Earnings (Ineffective Portion) (2) (4)
	Three Months Ended			Three Months Ended		Three Months Ended
Cash Flow Hedges:	April 26, 2015	April 27, 2014	Statements of Operations	April 26, 2015	April 27, 2014	April 26, 2015		April 27, 2014
Commodity contracts	$  (5,033)	$  8,309	Cost of products sold	$ (2,705)	$ (2,867)	$ 0		$ 517
			Location on Consolidated	Gain/(Loss) Recognized in Earnings (Effective Portion) (3)		Gain/(Loss) Recognized in Earnings (Ineffective Portion) (2) (5)
				Three Months Ended		Three Months Ended
Fair Value Hedges:			Statements of Operations	April 26, 2015	April 27, 2014	April 26, 2015		April 27, 2014
Commodity contracts			Cost of products sold	$ (3,769)	$ (15,889)		$ 203	$    (19)
				Gain/(Loss) Recognized in Earnings
			Location on Consolidated Statements of Operations
				Three Months Ended
Derivatives Not Designated as Hedges:				April 26, 2015	April 27, 2014
Commodity contracts			Cost of products sold	$ (264)	$ 1,206

Derivative Gains and Losses:  Gains or losses (before tax, in thousands) related to the Company’s derivative instruments for the six months ended April 26, 2015, and April 27, 2014, were as follows:

	Gain/(Loss) Recognized in AOCL (Effective Portion) (1)		Location on	Gain/(Loss) Reclassified from AOCL into Earnings (Effective Portion) (1)		Gain/(Loss) Recognized in Earnings  (Ineffective Portion) (2)(4)
	Six Months Ended		Consolidated	Six Months Ended		Six Months Ended
Cash Flow Hedges:	April 26, 2015	April 27, 2014	Statements of Operations	April 26, 2015	April 27, 2014	April 26, 2015	April 27, 2014
Commodity contracts	$ (1,370)	$  4,305	Cost of products sold	$ (7,084)	$ (6,116)	$    0	$    223

	Location on	Gain/(Loss) Recognized in Earnings (Effective Portion) (3)		Gain/(Loss) Recognized in Earnings (Ineffective Portion) (2)(5)
	Consolidated	Six Months Ended		Six Months Ended
Fair Value Hedges:	Statements of Operations	April 26, 2015	April 27, 2014	April 26, 2015	April 27, 2014
Commodity contracts	Cost of products sold	$ (3,937)	$ (14,635)	$    93	$    (57)

	Location on	Gain/(Loss) Recognized in Earnings
	Consolidated	Six Months Ended
Derivatives Not Designated as Hedges:	Statements of Operations	April 26, 2015	April 27, 2014
Commodity contracts	Cost of products sold	$   (135)	$     689

(1)	Amounts represent gains or losses in AOCL before tax.  See Note G “Accumulated Other Comprehensive Loss” or 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.
(3)	Amounts represent losses on commodity contracts designated as fair value hedges that were closed during the second quarter or first six months, 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.
(4)	There were no gains or losses resulting from the discontinuance of cash flow hedges during the second quarter or first six months.
(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.