DERIVATIVES AND HEDGING

9 Months Ended

Jul. 24, 2016

DERIVATIVES AND HEDGING

DERIVATIVES AND HEDGING

NOTE GDERIVATIVES 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 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 exposure beyond the next two upcoming fiscal years.  As of July 24, 2016, and October 25, 2015, the Company had the following outstanding commodity futures contracts that were entered into to hedge forecasted purchases:

	Volume
Commodity	July 24, 2016	October 25, 2015
Corn	23.2 million bushels	20.1 million bushels

As of July 24, 2016, the Company has included in AOCL, hedging gains of $5.9 million (before tax) relating to these positions, compared to gains of $1.0 million (before tax) as of October 25, 2015.  The Company expects to recognize the majority of these gains 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 July 24, 2016, and October 25, 2015, the Company had the following outstanding commodity futures contracts designated as fair value hedges:

	Volume
Commodity	July 24, 2016	October 25, 2015
Corn	5.9 million bushels	5.3 million bushels
Lean hogs	0.3 million cwt	0.4 million cwt

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.

As of July 24, 2016, and October 25, 2015, the Company had the following outstanding futures related to these programs:

	Volume
Commodity	July 24, 2016	October 25, 2015
Corn	4.8 million bushels	2.6 million bushels
Soybean meal	15,200 tons	11,500 tons

Fair Values:  The fair values of the Company’s derivative instruments (in thousands) as of July 24, 2016, andOctober 25, 2015, were as follows:

		Fair Value (1)
	Location on Consolidated Statements of Financial Position	July 24, 2016		October 25, 2015
Asset Derivatives:
Derivatives Designated as Hedges:
Commodity contracts	Other current assets	$	(2,495)	$	305
Derivatives Not Designated as Hedges:
Commodity contracts	Other current assets	(93)		248
Total Asset Derivatives		$	(2,588)	$	553

(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 L “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 third quarter ended July 24, 2016, and July 26, 2015, were as follows:

	Gain/(Loss) Recognized in AOCL (Effective Portion) (1)				Location on Consolidated Statements of Operations	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:	July 24, 2016		July 26, 2015			July 24, 2016		July 26, 2015		July 24, 2016		July 26, 2015
Commodity contracts	$	7,702	$	8,184	Cost of products sold	$	(346)	$	(3,330)	$	(14,277)	$	(6,127)
					Location on Consolidated Statements of Operations	Gain/(Loss) Recognized in Earnings (Effective Portion) (3)				Gain/(Loss) Recognized in Earnings (Ineffective Portion) (2) (5)
						Three Months Ended				Three Months Ended
						July 24,		July 26,		July 24,		July 26,
Fair Value Hedges:						2016		2015		2016		2015
Commodity contracts					Cost of products sold	$	(1)	$	(1,727)	$	4,658	$	2,221
					Location on Consolidated Statements of Operations	Gain/(Loss) Recognized in Earnings
						Three Months Ended
Derivatives Not Designated as Hedges:						July 24, 2016		July 26, 2015
Commodity contracts					Cost of products sold	$	(244)	$	310

Derivative Gains and Losses:  Gains or losses (before tax, in thousands) related to the Company’s derivative instruments for the nine months ended July 24, 2016, and July 26, 2015, were as follows:

	Gain/(Loss) Recognized in AOCL (Effective Portion) (1)				Location on Consolidated Statements of Operations	Gain/(Loss) Reclassified from AOCL into Earnings (Effective Portion) (1)				Gain/(Loss) Recognized in Earnings (Ineffective Portion) (2) (4)
	Nine Months Ended					Nine Months Ended				Nine Months Ended
Cash Flow Hedges:	July 24, 2016		July 26, 2015			July 24, 2016		July 26, 2015		July 24, 2016		July 26, 2015
Commodity contracts	$	3,234	$	6,814	Cost of products sold	$	(1,690)	$	(10,414)	$	(14,255)	$	(6,127)
					Location on Consolidated Statements of Operations	Gain/(Loss) Recognized in Earnings (Effective Portion) (3)				Gain/(Loss) Recognized in Earnings (Ineffective Portion) (2) (5)
						Nine Months Ended				Nine Months Ended
Fair Value Hedges:						July 24, 2016		July 26, 2015		July 24, 2016		July 26, 2015
Commodity contracts					Cost of products sold	$	1,905	$	(5,664)	$	4,419	$	2,314
					Location on Consolidated Statements of Operations	Gain/(Loss) Recognized in Earnings
						Nine Months Ended
Derivatives Not Designated as Hedges:						July 24, 2016		July 26, 2015
Commodity contracts					Cost of products sold	$	(674)	$	175

(1) Amounts represent gains or losses in AOCL before tax.  See Note I “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 third quarter or first nine months.  During the third quarter, due to market volatility the Company temporarily suspended the use of the special hedge accounting exemption for its Jennie-O Turkey Store corn futures contracts.  During the time of suspension, all gains or losses related to these contracts were recognized as ineffectiveness in earnings as incurred.

(3) Amounts represent losses on commodity contracts designated as fair value hedges that were closed during the third quarter or first nine 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 third quarter or first nine 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 third quarter or first nine months.