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DERIVATIVES AND HEDGING | 6 Months Ended
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May 01, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVES AND HEDGING | DERIVATIVES AND HEDGING The Company uses hedging programs to manage price 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. 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 direct 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 Condensed Statements of Financial Position as a Current Asset and Current Liability, respectively. Effective 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 J - 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 periods 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 designates the last $450 million of the notes due June 2024 (the “2024 Notes”). The swap compounds quarterly and settles semi-annually with gains and losses recognized in earnings through interest expense. The swap includes SOFR plus a spread adjustment as a fallback rate to be used when LIBOR ceases to be published in June 2023. Mark-to-market changes in the fair value of the interest rate swap and hedged debt are also recognized as interest expense. 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 | May 1, 2022 |  | October 31, 2021
Corn | 37.7 million bushels |  | 33.1 million bushels
Lean Hogs | 162.0 million pounds |  | 120.0 million pounds
Fair Value of Derivatives: The fair values of the Company’s derivative instruments designated as hedges are:
|  | Gross Fair Value
in thousands | Location on Consolidated Condensed Statements of Financial Position | May 1, 2022 |  | October 31, 2021
Derivatives Designated as Hedges: |  |  |  |
Commodity Contracts(1) | Other Current Assets | $ | 51,269 |  |  | $ | 21,798 |
Interest Rate Contracts | Interest and Dividends Payable | (18,723) |  |  | — |
(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 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 Condensed Statements of Financial Position. The gross asset position as of May 1, 2022 is offset by the obligation to return net cash collateral of $39.4 million contained within the master netting arrangement. The gross asset position as of October 31, 2021 is offset by the obligation to return net cash collateral of $10.8 million. See Note I - Fair Value Measurements for a discussion of these net amounts as reported in the Consolidated Condensed Statements of Financial Position. Fair Value Hedge - Assets (Liabilities): The carrying amount of the Company's fair value hedged assets (liabilities) are:
|  | Carrying Amount of Hedged Assets/(Liabilities)
in thousands | Location on Consolidated Condensed Statements of Financial Position | May 1, 2022 |  | October 31, 2021
Fair Value Hedges: |  |  |  |
Commodity Contracts | Accounts Payable(1) | $ | 20,428 |  |  | $ | 3,432 |
Interest Rate Contracts | Long-term Debt - Less Current Maturities(2) | (431,277) |  |  | — |
(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 May 1, 2022, a cumulative basis adjustment of $18.7 million has been included in the carrying amount. Accumulated Other Comprehensive Loss Impact: As of May 1, 2022, the Company included in AOCL hedging gains (before tax) of $80.1 million on commodity contracts and $14.0 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 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) | Gain/(Loss) Reclassified from AOCL into Earnings (1) | Location on Consolidated Statements of Operations
| Quarter Ended | Quarter Ended
in thousands | May 1, 2022 |  | April 25, 2021 | May 1, 2022 |  | April 25, 2021
Cash Flow Hedges: |  |  |  |  |  |  |
Commodity Contracts | $ | 50,331 |  |  | $ | 36,109 |  | $ | 11,269 |  |  | $ | 4,512 |  | Cost of Products Sold
Excluded Component (2) | (2,271) |  |  | — |  | — |  |  | — |  |
Interest Rate Contracts | — |  |  | 18,539 |  | 247 |  |  | — |  | Interest Expense
| Gain/(Loss) Recognized in AOCL (1) | Gain/(Loss) Reclassified from AOCL into Earnings (1) | Location on Consolidated Statements of Operations
| Six Months Ended | Six Months Ended
in thousands | May 1, 2022 |  | April 25, 2021 | May 1, 2022 |  | April 25, 2021
Cash Flow Hedges: |  |  |  |  |  |  |
Commodity Contracts | $ | 70,611 |  |  | $ | 52,661 |  | $ | 19,015 |  |  | $ | 4,462 |  | Cost of Products Sold
Excluded Component (2) | (3,444) |  |  | — |  | — |  |  | — |  |
Interest Rate Contracts | — |  |  | 18,539 |  | 494 |  |  | — |  | Interest Expense
(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 Statements of Operations Impact
| Quarter Ended |  | Six Months Ended
in thousands | May 1, 2022 |  | April 25, 2021 |  | May 1, 2022 |  | April 25, 2021
Net Earnings Attributable to Hormel Foods Corporation | $ | 261,617 |  |  | $ | 227,901 |  |  | $ | 501,188 |  |  | $ | 450,184 |
Cash Flow Hedges - Commodity Contracts |  |  |  |  |  |  |
Gain (Loss) Reclassified from AOCL | 9,599 |  |  | 4,512 |  |  | 17,345 |  |  | 4,462 |
Amortization of Excluded Component from Options | (1,120) |  |  | — |  |  | (1,945) |  |  | — |
Gain (Loss) Reclassified from AOCL Due to Discontinuance of Cash Flow Hedges (1) | 1,620 |  |  | — |  |  | 1,620 |  |  | — |
Fair Value Hedges - Commodity Contracts |  |  |  |  |  |  |
Gain (Loss) on Commodity Futures (2) | (9,757) |  |  | (11,357) |  |  | (13,407) |  |  | (14,271) |
Total Gain (Loss) on Commodity Contracts (3) | $ | 342 |  |  | $ | (6,845) |  |  | $ | 3,613 |  |  | $ | (9,809) |
Cash Flow Hedges - Interest Rate Locks |  |  |  |  |  |  |
Amortization of Gain on Interest Rate Locks | 247 |  |  | — |  |  | 494 |  |  | — |
Fair Value Hedge - Interest Rate Swap |  |  |  |  |  |  |
Gain (Loss) on Interest Rate Swap | 699 |  |  | — |  |  | 1,491 |  |  | — |
Total Gain (Loss) on Interest Rate Contracts (4) | $ | 946 |  |  | $ | — |  |  | $ | 1,985 |  |  | $ | — |
Total Gain (Loss) Recognized in Earnings | $ | 1,288 |  |  | $ | (6,845) |  |  | $ | 5,598 |  |  | $ | (9,809) |
(1) During the second quarter of fiscal 2022, the Company discontinued hedge accounting on 0.6 million bushels of corn usage that was deemed no longer probable to occur. A gain of $1.7 million related to the discontinued hedges and an immaterial loss related to the excluded component from options was reclassified directly into earnings. (2) Amounts represent gains or losses on commodity contracts designated as fair value hedges that were closed during the quarter and six months ended May 1, 2022, 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) Total Gain (Loss) on Interest Rate Contracts is recognized in earnings through Interest Expense.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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