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DERIVATIVE FINANCIAL INSTRUMENTS | 9 Months Ended
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Oct. 02, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVES FINANCIAL INSTRUMENTS | DERIVATIVE FINANCIAL INSTRUMENTS Our meat processing and hog production operations use various raw materials, primarily live hogs, corn and soybean meal, which are actively traded on commodity exchanges. We hedge these commodities when we determine conditions are appropriate to mitigate price risk. While this hedging may limit our ability to participate in gains from favorable commodity fluctuations, it also tends to reduce the risk of loss from adverse changes in raw material prices. We attempt to closely match the commodity contract terms with the hedged item. We also periodically enter into interest rate swaps to hedge exposure to changes in interest rates on certain financial instruments and foreign exchange forward contracts to hedge certain exposures to fluctuating foreign currency rates. We record all derivatives as either assets or liabilities at fair value in the balance sheet, with the exception of normal purchase and normal sale contracts that are expected to result in physical delivery. Accounting for changes in the fair value of a derivative depends on whether it qualifies and has been designated as part of a hedging relationship. For derivatives that qualify and have been designated as hedges for accounting purposes, changes in fair value have no net impact on earnings, to the extent the derivative is considered perfectly effective in achieving offsetting changes in fair value or cash flows attributable to the risk being hedged, until the hedged item is recognized in earnings (commonly referred to as the "hedge accounting" method). For derivatives that do not qualify or are not designated as hedging instruments for accounting purposes, changes in fair value are recorded in current period earnings (commonly referred to as the "mark-to-market" method). We may elect either method of accounting for our derivative portfolio, assuming all the necessary requirements are met. We have in the past availed ourselves of either acceptable method and expect to do so in the future. We believe all of our derivative instruments represent economic hedges against changes in prices and rates, regardless of their designation for accounting purposes. Changes in commodity prices could have a significant impact on cash deposit requirements under our broker and counter-party agreements. Additionally, certain of our derivative contracts contain credit risk-related contingent features, which would require us to post additional cash collateral to cover net losses on open derivative instruments if our credit rating was downgraded. As of October 2, 2016, the net liability position of our open derivative instruments that are subject to credit risk-related contingent features was not material. We are exposed to losses in the event of nonperformance or nonpayment by counter parties under financial instruments. Although our counter parties primarily consist of financial institutions that are investment grade, there is still a possibility that one or more of these companies could default. However, a majority of our financial instruments are exchange traded futures contracts held with brokers and counter parties with whom we maintain margin accounts that are settled on a daily basis, thereby limiting our credit exposure to non-exchange traded derivatives. Determination of the credit quality of our counter parties is based upon a number of factors, including credit ratings and our evaluation of their financial condition. As of October 2, 2016, we had gross credit exposure of $27.6 million on non exchange-traded derivative contracts. After taking into account the effect of netting arrangements, we had credit exposure of $6.8 million on non-exchange traded derivative contracts. The size and mix of our derivative portfolio varies from time to time based upon our analysis of current and future market conditions. All derivative contracts are recorded in prepaid expenses and other current assets or accrued expenses and other current liabilities within the consolidated condensed balance sheets, as appropriate. The following table presents the fair values of our open derivative financial instruments on a gross basis.
|  | Assets |  | Liabilities
|  | October 2, 2016 |  | January 3, 2016 |  | October 2, 2016 |  | January 3, 2016
|  | (in millions) |  | (in millions)
Derivatives using the "hedge accounting" method: |  |  |  |  |  |  |  |
Grain contracts |  | $ | 6.1 |  |  | $ | 1.1 |  |  | $ | 36.1 |  |  | $ | 32.3 |
Livestock contracts |  | 119.9 |  |  | 11.3 |  |  | 0.2 |  |  | — |
Interest rate swaps |  | — |  |  | — |  |  | 0.2 |  |  | 0.2 |
Foreign exchange contracts |  | 0.7 |  |  | — |  |  | 0.1 |  |  | 1.2 |
Total |  | 126.7 |  |  | 12.4 |  |  | 36.6 |  |  | 33.7 |
Derivatives using the "mark-to-market" method: |  |  |  |  |  |  |  |  |  |  |  |
Grain contracts |  | 1.7 |  |  | 4.2 |  |  | 7.7 |  |  | 1.0 |
Livestock contracts |  | 17.3 |  |  | 8.3 |  |  | 21.2 |  |  | 0.8 |
Energy contracts |  | 3.4 |  |  | — |  |  | 2.6 |  |  | 15.7 |
Foreign exchange contracts |  | 0.7 |  |  | 0.4 |  |  | — |  |  | 0.3 |
Total |  | 23.1 |  |  | 12.9 |  |  | 31.5 |  |  | 17.8 |
Total fair value of derivative instruments |  | $ | 149.8 |  |  | $ | 25.3 |  |  | $ | 68.1 |  |  | $ | 51.5 |
The majority of our derivatives are exchange traded futures contracts held with brokers, subject to netting arrangements that are enforceable during the ordinary course of business. Additionally, we have a smaller portfolio of over-the-counter derivatives that are held by counterparties under netting arrangements found in typical master netting agreements. These agreements legally allow for net settlement in the event of bankruptcy. We offset the fair values of derivative assets and liabilities, along with the related cash collateral, that are executed with the same counterparty under these arrangements in the consolidated balance sheets. The following tables reconcile the gross amounts of derivative assets and liabilities to the net amounts presented in our consolidated condensed balance sheets and the related effects of cash collateral under netting arrangements that provide a legal right of offset of assets and liabilities.
|  | October 2, 2016
|  | Gross Amount of Derivative Assets/ Liabilities |  | Netting of Derivative Assets/ Liabilities |  | Net Derivative Assets/Liabilities |  | Cash Collateral |  | Net Amount Presented in the Condensed Consolidated Balance Sheet
|  | (in millions)
Assets: |  |  |  |  |  |  |  |  |  |
Commodities |  | $ | 148.4 |  |  | $ | (59.5 | ) |  | $ | 88.9 |  |  | $ | (33.5 | ) |  | $ | 55.4 |
Foreign exchange contracts |  | 1.4 |  |  | (0.1 | ) |  | 1.3 |  |  | — |  |  | 1.3 |
Total |  | $ | 149.8 |  |  | $ | (59.6 | ) |  | $ | 90.2 |  |  | $ | (33.5 | ) |  | $ | 56.7 |
Liabilities: |  |  |  |  |  |  |  |  |  |
Commodities |  | 67.8 |  |  | (59.5 | ) |  | 8.3 |  |  | (0.5 | ) |  | 7.8 |
Interest rate swaps |  | 0.2 |  |  | — |  |  | 0.2 |  |  | — |  |  | 0.2 |
Foreign exchange contracts |  | 0.1 |  |  | (0.1 | ) |  | — |  |  | — |  |  | — |
Total |  | $ | 68.1 |  |  | $ | (59.6 | ) |  | $ | 8.5 |  |  | $ | (0.5 | ) |  | $ | 8.0 |
|  | January 3, 2016
|  | Gross Amount of Derivative Assets/ Liabilities |  | Netting of Derivative Assets/ Liabilities |  | Net Derivative Assets/Liabilities |  | Cash Collateral |  | Net Amount Presented in the Condensed Consolidated Balance Sheet
|  | (in millions)
Assets: |  |  |  |  |  |  |  |  |  |
Commodities |  | $ | 24.9 |  |  | $ | (14.1 | ) |  | $ | 10.8 |  |  | $ | 16.1 |  |  | $ | 26.9 |
Foreign exchange contracts |  | 0.4 |  |  | (0.4 | ) |  | — |  |  | — |  |  | — |
Total |  | $ | 25.3 |  |  | $ | (14.5 | ) |  | $ | 10.8 |  |  | $ | 16.1 |  |  | $ | 26.9 |
Liabilities: |  |  |  |  |  |  |  |  |  |
Commodities |  | 49.8 |  |  | (14.1 | ) |  | 35.7 |  |  | (26.9 | ) |  | 8.8 |
Interest rate swaps |  | 0.2 |  |  | — |  |  | 0.2 |  |  | — |  |  | 0.2 |
Foreign exchange contracts |  | 1.5 |  |  | (0.4 | ) |  | 1.1 |  |  | — |  |  | 1.1 |
Total |  | $ | 51.5 |  |  | $ | (14.5 | ) |  | $ | 37.0 |  |  | $ | (26.9 | ) |  | $ | 10.1 |
See Note 7—Fair Value Measurements for additional information about the fair value of our derivatives. Hedge Accounting Method Cash Flow Hedges We enter into derivative instruments, such as futures, swaps and options contracts, to manage our exposure to the variability in expected future cash flows attributable to commodity price risk associated with the forecasted sale of live hogs and fresh pork, and the forecasted purchase of corn, wheat and soybean meal. In addition, we enter into interest rate swaps to manage our exposure to changes in interest rates associated with our variable interest rate debt, and we enter into foreign exchange contracts to manage our exposure to the variability in expected future cash flows attributable to changes in foreign exchange rates associated with the forecasted purchase or sale of assets denominated in foreign currencies. As of October 2, 2016, we had no commodity-related cash flow hedges for forecasted transactions beyond December 2018. When cash flow hedge accounting is applied, derivative gains or losses are recognized as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings. The ineffective portion of derivative gains and losses is recognized as part of current period earnings. Derivative gains and losses, when reclassified into earnings, are recorded in cost of sales for grain contracts, sales for lean hog contracts, interest expense for interest rate contracts, and sales and selling, general and administrative expenses (SG&A) for foreign exchange contracts. Gains and losses on derivatives designed to hedge price risk associated with fresh pork sales are recorded in the Hog Production segment. During the nine months ended October 2, 2016, the range of notional volumes associated with open derivative instruments designated in cash flow hedging relationships was as follows:
|  | Minimum |  | Maximum |  | Metric
Commodities: |  |  |  |  |  |
Corn |  | 34,660,000 |  |  | 93,335,000 |  |  | Bushels
Soybean meal |  | 315,600 |  |  | 1,270,200 |  |  | Tons
Lean hogs |  | 150,040,000 |  |  | 1,515,800,000 |  |  | Pounds
Interest rate |  | 17,238,832 |  |  | 18,385,250 |  |  | U.S. Dollars
Foreign currency (1) |  | 16,516,467 |  |  | 50,654,702 |  |  | U.S. Dollars
——————————————
(1) | Amounts represent the U.S. dollar equivalent of various foreign currency contracts.
The following table presents the effects on our consolidated condensed financial statements of pre-tax gains and losses on derivative instruments designated in cash flow hedging relationships for the periods indicated:
|  | Gains (Losses) Recognized in Other Comprehensive Income (Loss) on Derivative (Effective Portion) |  | Gains (Losses) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion) |  | Gains (Losses) Recognized in Earnings on Derivative (Ineffective Portion)
|  | Three Months Ended |  | Three Months Ended |  | Three Months Ended
|  | October 2, 2016 |  | September 27, 2015 |  | October 2, 2016 |  | September 27, 2015 |  | October 2, 2016 |  | September 27, 2015
|  | (in millions) |  | (in millions) |  | (in millions)
Commodity contracts: |  |  |  |  |  |  |  |  |  |  |  |
Grain contracts |  | $ | (46.8 | ) |  | $ | (6.4 | ) |  | $ | 3.2 |  |  | $ | (15.7 | ) |  | $ | (2.6 | ) |  | $ | (0.3 | )
Lean hog contracts |  | 200.0 |  |  | 0.2 |  |  | 50.0 |  |  | 55.3 |  |  | 17.7 |  |  | 0.1 |
Interest rate swaps |  | (0.1 | ) |  | (0.2 | ) |  | (0.1 | ) |  | — |  |  | — |  |  | — |
Foreign exchange contracts |  | 0.8 |  |  | (0.5 | ) |  | 0.5 |  |  | (0.8 | ) |  | — |  |  | — |
Total |  | $ | 153.9 |  |  | $ | (6.9 | ) |  | $ | 53.6 |  |  | $ | 38.8 |  |  | $ | 15.1 |  |  | $ | (0.2 | )
|  | Nine Months Ended |  | Nine Months Ended |  | Nine Months Ended
|  | October 2, 2016 |  | September 27, 2015 |  | October 2, 2016 |  | September 27, 2015 |  | October 2, 2016 |  | September 27, 2015
|  | (in millions) |  | (in millions) |  | (in millions)
Commodity contracts: |  |  |  |  |  |  |  |  |  |  |  |
Grain contracts |  | $ | (2.2 | ) |  | $ | (40.2 | ) |  | $ | (15.6 | ) |  | $ | (60.3 | ) |  | $ | 0.1 |  |  | $ | (4.1 | )
Lean hog contracts |  | 186.7 |  |  | 145.8 |  |  | 61.2 |  |  | 225.3 |  |  | 17.6 |  |  | 2.1 |
Interest rate swaps |  | — |  |  | 0.1 |  |  | (0.1 | ) |  | — |  |  | — |  |  | — |
Foreign exchange contracts |  | 2.4 |  |  | (2.8 | ) |  | 0.6 |  |  | (2.4 | ) |  | — |  |  | — |
Total |  | $ | 186.9 |  |  | $ | 102.9 |  |  | $ | 46.1 |  |  | $ | 162.6 |  |  | $ | 17.7 |  |  | $ | (2.0 | )
For the periods presented, foreign exchange contracts were determined to be highly effective. We have excluded from the assessment of effectiveness differences between spot and forward rates, which we have determined to be immaterial. As of October 2, 2016, there were deferred gains of $66.2 million, net of tax of $41.8 million, in accumulated other comprehensive income. We expect to reclassify $17.1 million ($10.4 million net of tax) of deferred gains on closed commodity contracts into earnings within the next twelve months. We are unable to estimate the amount of unrealized gains or losses to be reclassified into earnings within the next twelve months related to open contracts as their values are subject to change. Fair Value Hedges We enter into derivative instruments (primarily futures contracts) that are designed to hedge changes in the fair value of live hog inventories and firm commitments to buy grains. When fair value hedge accounting is applied, derivative gains and losses are recognized in earnings currently along with the change in fair value of the hedged item attributable to the risk being hedged. The gains or losses on the derivative instruments and the offsetting losses or gains on the related hedged items are recorded in cost of sales for commodity contracts. During the nine months ended October 2, 2016, the range of notional volumes associated with open derivative instruments designated in fair value hedging relationships was as follows:
|  | Minimum |  | Maximum |  | Metric
Commodities: |  |  |  |  |  |
Corn |  | 1,025,000 |  |  | 11,705,000 |  |  | Bushels
The following table presents the effects on our consolidated condensed statements of income of gains and losses on derivative instruments designated in fair value hedging relationships and the related hedged items for the periods indicated:
|  | Gains Recognized in Earnings on Derivative |  | Losses Recognized in Earnings on Related Hedged Item
|  | Three Months Ended |  | Three Months Ended
|  | October 2, 2016 |  | September 27, 2015 |  | October 2, 2016 |  | September 27, 2015
|  | (in millions) |  | (in millions)
Commodity contracts |  | $ | 2.5 |  |  | $ | 2.8 |  |  | $ | (2.5 | ) |  | $ | (2.7 | )
|  | Nine Months Ended |  | Nine Months Ended
|  | October 2, 2016 |  | September 27, 2015 |  | October 2, 2016 |  | September 27, 2015
|  | (in millions) |  | (in millions)
Commodity contracts |  | $ | 6.9 |  |  | $ | 5.0 |  |  | $ | (6.8 | ) |  | $ | (4.8 | )
We recognized gains of $1.0 million for the three months ended October 2, 2016 and gains of $3.4 million and $1.4 million for the nine months ended October 2, 2016 and September 27, 2015, respectively, on closed commodity derivative contracts as the underlying cash transactions affected earnings. Mark-to-Market Method Derivative instruments that are not designated as a hedge, have been de-designated from a hedging relationship, or do not meet the criteria for hedge accounting are marked-to-market with the unrealized gains and losses together with actual realized gains and losses from closed contracts being recognized in current period earnings. Under the mark-to-market method, gains and losses are recorded in cost of sales for commodity contracts and SG&A for foreign exchange contracts. During the nine months ended October 2, 2016, the range of notional volumes associated with open derivative instruments using the "mark-to-market" method was as follows:
|  | Minimum |  | Maximum |  | Metric
Commodities: |  |  |  |  |  |
Lean hogs |  | 200,000 |  |  | 223,240,000 |  |  | Pounds
Corn |  | 45,000 |  |  | 24,140,000 |  |  | Bushels
Soybean meal |  | 900 |  |  | 50,600 |  |  | Tons
Soybeans |  | 55,000 |  |  | 4,810,000 |  |  | Bushels
Wheat |  | — |  |  | 5,190,000 |  |  | Bushels
Natural gas |  | 7,790,000 |  |  | 10,720,000 |  |  | Million BTU
Heating oil |  | 630,000 |  |  | 2,100,000 |  |  | Gallons
Live cattle |  | 2,320,000 |  |  | 13,440,000 |  |  | Pounds
Diesel |  | 3,619,000 |  |  | 17,444,000 |  |  | Gallons
Crude oil |  | 9,000 |  |  | 36,000 |  |  | Barrels
Foreign currency (1) |  | 13,206,842 |  |  | 58,507,350 |  |  | U.S. Dollars
——————————————
(1) | Amounts represent the U.S. dollar equivalent of various foreign currency contracts.
The following table presents the amount of gains (losses) recognized in the consolidated condensed statements of income on derivative instruments using the "mark-to-market" method by type of derivative contract for the periods indicated:
|  | Three Months Ended |  | Nine Months Ended
|  | October 2, 2016 |  | September 27, 2015 |  | October 2, 2016 |  | September 27, 2015
|  | (in millions) |  | (in millions)
Commodity contracts |  | $ | (4.8 | ) |  | $ | 10.4 |  |  | $ | 7.1 |  |  | $ | (0.7 | )
Foreign exchange contracts |  | 0.8 |  |  | — |  |  | 1.1 |  |  | (0.6 | )
Total |  | $ | (4.0 | ) |  | $ | 10.4 |  |  | $ | 8.2 |  |  | $ | (1.3 | )
The table above reflects gains and losses from both open and closed contracts including, among other things, gains and losses related to contracts designed to hedge price movements that occur entirely within a quarter. The table includes amounts for both realized and unrealized gains and losses. The table is not, therefore, a simple representation of unrealized gains and losses recognized in the income statement during any period presented.

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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://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624171-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41620-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624163-113959 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5579240-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4D -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624177-113959 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80784-113994 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41641-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5579245-113959 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624258-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80748-113994 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5708775-113959 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5708773-113959 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5618551-113959 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5580258-113959 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624181-113959 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41638-113959 Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 + Details
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