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DERIVATIVES AND HEDGING
 9 Months Ended
Jul. 30, 2017
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 to manage the Company’s exposure to price fluctuations in the commodities markets.  The Company has determined 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 utilizes corn and lean hog futures to offset price fluctuations in the Company’s future direct grain and hog purchases.  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 and its hog exposure beyond the next fiscal year.  As of July 30, 2017, and October 30, 2016, the Company had the following outstanding commodity futures contracts that were entered into to hedge forecasted purchases:

 

 

 

Volume

Commodity

 

July 30, 2017

 

October 30, 2016

Corn

 

12.1 million bushels

 

22.4 million bushels

Lean hogs

 

0.1 million cwt

 

-

 

As of July 30, 2017, the Company has included in AOCL, hedging gains of $4.9 million (before tax) relating to these positions, compared to gains of $9.2 million (before tax) as of October 30, 2016.  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 30, 2017, and October 30, 2016, the Company had the following outstanding commodity futures contracts designated as fair value hedges:

 

 

 

Volume

Commodity

 

July 30, 2017

 

October 30, 2016

Corn

 

3.9 million bushels

 

3.6 million bushels

Lean hogs

 

0.4 million cwt

 

0.2 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 30, 2017, and October 30, 2016, the Company had the following outstanding futures and options contracts related to these programs:

 

 

 

Volume

Commodity

 

July 30, 2017

 

October 30, 2016

Corn

 

0.3 million bushels

 

4.0 million bushels

Soybean meal

 

-

 

11,000 tons

 

Fair Values:  The fair values of the Company’s derivative instruments (in thousands) as of July 30, 2017, and October 30, 2016, were as follows:

 

 

 

 

 

Fair Value (1)

 

 

Location on Consolidated

 

 

 

 

 

 

Statements of Financial
Position

 

July 30,
2017

 

October 30,
2016

Asset Derivatives:

 

 

 

 

 

 

Derivatives Designated as Hedges:

 

 

 

 

 

 

    Commodity contracts

 

Other current assets

 

$
1,109

 

$
(194)

 

 

 

 

 

 

 

Derivatives Not Designated as Hedges:

 

 

 

 

 

 

    Commodity contracts

 

Other current assets

 
19

 
144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         Total Asset Derivatives

 

 

 

$
1,128

 

$
(50)

 

 

 

 

 

 

 

 

 

 

 

(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 30, 2017, and July 24, 2016, 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)

 

 

Three Months Ended

 

Consolidated

 

Three Months Ended

 

Three Months Ended

Cash Flow Hedges:

 

July 30,
2017

 

July 24,
2016

 

Statements

of Operations

 

July 30,
2017

 

July 24,
2016

 

July 30,
2017

 

July 24,
2016

Commodity contracts

 

  $
1,490

 

  $
7,702

 

Cost of products sold

 

  $
1,758

 

  $
(346)

 

  $
(22)

 

  $
(14,277)

 

 

 

 

 

 

 

 

 

 

 

 

 

Location on

 

Gain/(Loss)

Recognized in
Earnings (Effective
Portion) (3)

 

Gain/(Loss)

Recognized in
Earnings (Ineffective

Portion) (2) (5)

 

 

 

 

Consolidated

 

Three Months Ended

 

Three Months Ended

Fair Value Hedges:

 

 

 

 

 

Statements

of Operations

 

July 30,
2017

 

July 24,
2016

 

July 30,
2017

 

July 24,
2016

Commodity contracts

 

 

 

 

 

Cost of products sold

 

  $
(730)

 

  $
(1)

 

  $
51

 

  $
4,658

 

 

 

 

 

 

 

 

 

 

 

 

 

Location on

 

Gain/(Loss)

Recognized

in Earnings

 

 

 

 

 

 

Consolidated

 

Three Months Ended

 

 

Derivatives Not
Designated as Hedges:

 

 

 

 

 

Statements

of Operations

 

July 30,
2017

 

July 24,
2016

 

 

 

 

Commodity contracts

 

 

 

 

 

Cost of products sold

 

  $
9

 

  $
(244)

 

 

 

 

 

Derivative Gains and Losses:  Gains or losses (before tax, in thousands) related to the Company’s derivative instruments for the nine months ended July 30, 2017, and July 24, 2016, 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)

 

 

Nine Months Ended

 

Consolidated

 

Nine Months Ended

 

Nine Months Ended

Cash Flow Hedges:

 

July 30,
2017

 

July 24,
2016

 

Statements

of Operations

 

July 30,
2017

 

July 24,
2016

 

July 30,
2017

 

July 24,
2016

Commodity contracts

 

  $
703

 

  $
3,234

 

Cost of products sold

 

  $
4,980

 

  $
(1,690)

 

  $
17

 

  $
(14,255)

 

 

 

 

 

 

 

 

 

 

 

 

 

Location on

 

Gain/(Loss)

Recognized in
Earnings (Effective
Portion) (3)

 

Gain/(Loss)

Recognized in
Earnings (Ineffective

Portion) (2) (5)

 

 

 

 

Consolidated

 

Nine Months Ended

 

Nine Months Ended

Fair Value Hedges:

 

 

 

 

 

Statements

of Operations

 

July 30,
2017

 

July 24,
2016

 

July 30,
2017

 

July 24,
2016

Commodity contracts

 

 

 

 

 

Cost of products sold

 

  $
(1,321)

 

  $
1,905

 

  $
52

 

  $
4,419

 

 

 

 

 

 

 

 

 

 

 

 

 

Location on

 

Gain/(Loss)

Recognized

in Earnings

 

 

 

 

 

 

Consolidated

 

Nine Months Ended

 

 

Derivatives Not
Designated as Hedges:

 

 

 

 

 

Statements

of Operations

 

July 30,
2017

 

July 24,
2016

 

 

 

 

Commodity contracts

 

 

 

 

 

Cost of products sold

 

  $
(228)

 

  $
(674)

 

 

 

 

 

(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.  Due to market volatility, the Company temporarily suspended the use of the special hedge accounting exemption for its JOTS corn futures contracts in the third quarter of fiscal 2016 due to ineffectiveness.  During the time of suspension, all gains or losses related to these contracts were recorded in earnings as incurred.

(3)

Amounts represent losses on commodity contracts designated as fair value hedges that were closed during the third quarter or the 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 the 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.