Derivative Financial Instruments

12 Months Ended

Oct. 01, 2011

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

NOTE 11: DERIVATIVE FINANCIAL INSTRUMENTS

Our business operations give rise to certain market risk exposures mostly due to changes in commodity prices, foreign currency exchange rates and interest rates. We manage a portion of these risks through the use of derivative financial instruments, primarily futures and options, to reduce our exposure to commodity price risk, foreign currency risk and interest rate risk. Forward contracts on various commodities, including grains, livestock and energy, are primarily entered into to manage the price risk associated with forecasted purchases of these inputs used in our production processes. Foreign exchange forward contracts are entered into to manage the fluctuations in foreign currency exchange rates, primarily as a result of certain receivable and payable balances. We also periodically utilize interest rate swaps to manage interest rate risk associated with our variable-rate borrowings.

Our risk management programs are periodically reviewed by our Board of Directors' Audit Committee. These programs are monitored by senior management and may be revised as market conditions dictate. Our current risk management programs utilize industry-standard models that take into account the implicit cost of hedging. Risks associated with our market risks and those created by derivative instruments and the fair values are strictly monitored at all times, using Value-at-Risk and stress tests. Credit risks associated with our derivative contracts are not significant as we minimize counterparty concentrations, utilize margin accounts or letters of credit, and deal with credit-worthy counterparties. Additionally, our derivative contracts are mostly short-term in duration and we generally do not make use of credit-risk-related contingent features. No significant concentrations of credit risk existed at October 1, 2011.

We recognize all derivative instruments as either assets or liabilities at fair value in the Consolidated Balance Sheets, with the exception of normal purchases and normal sales expected to result in physical delivery. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we designate the hedging instrument based upon the exposure being hedged (i.e., fair value hedge, cash flow hedge, or hedge of a net investment in a foreign operation). We qualify, or designate, a derivative financial instrument as a hedge when contract terms closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. If a derivative instrument is accounted for as a hedge, depending on the nature of the hedge, changes in the fair value of the instrument either will be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings, or be recognized in other comprehensive income (loss) (OCI) until the hedged item is recognized in earnings. The ineffective portion of an instrument's change in fair value is recognized in earnings immediately. We designate certain forward contracts as follows:

— Cash Flow Hedges – include certain commodity forward and option contracts of forecasted purchases (i.e., grains) and certain foreign exchange forward contracts.

— Fair Value Hedges – include certain commodity forward contracts of forecasted purchases (i.e., livestock).

— Net Investment Hedges – include certain foreign currency forward contracts of permanently invested capital in certain foreign subsidiaries.

Cash flow hedges

Derivative instruments, such as futures and options, are designated as hedges against changes in the amount of future cash flows related to procurement of certain commodities utilized in our production processes. We do not purchase forward and option commodity contracts in excess of our physical consumption requirements and generally do not hedge forecasted transactions beyond 18 months. The objective of these hedges is to reduce the variability of cash flows associated with the forecasted purchase of those commodities. For the derivative instruments we designate and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses representing hedge ineffectiveness are recognized in earnings in the current period. Ineffectiveness related to our cash flow hedges was not significant during fiscal 2011, 2010 and 2009.

We had the following aggregated notionals of outstanding forward and option contracts accounted for as cash flow hedges:

	Metric		October 1, 2011		October 2, 2010
Commodity:
Corn		Bushels		6 million		16 million
Soy Meal		Tons		82,300		101,500
Foreign Currency		United States dollar		$75 million		$0

As of October 1, 2011, the net amounts expected to be reclassified into earnings within the next 12 months are pretax losses of $21 million related to grain and pretax gains of $9 million related to foreign currency. During fiscal 2011, 2010 and 2009, we did not reclassify significant pretax gains/losses into earnings as a result of the discontinuance of cash flow hedges due to the probability the original forecasted transaction would not occur by the end of the originally specified time period or within the additional period of time allowed by generally accepted accounting principles.

The following table sets forth the pretax impact of cash flow hedge derivative instruments on the Consolidated Statements of Income (in millions):

	Gain/(Loss)     Recognized in OCI     on Derivatives						Consolidated   Statements of Income   Classification		Gain/(Loss)   Reclassified from   OCI to Earnings
	2011		2010		2009				2011		2010		2009
Cash Flow Hedge – Derivatives designated
as hedging instruments:
Commodity contracts		$(5)		$6		$(61)		Cost of Sales		$25		$(6)		$(67)
Foreign exchange contracts		9		1		8		Other Income/Expense		0		1		6
Total		$4		$7		$(53)				$25		$(5)		$(61)

Fair value hedges

We designate certain futures contracts as fair value hedges of firm commitments to purchase livestock for slaughter. Our objective of these hedges is to minimize the risk of changes in fair value created by fluctuations in commodity prices associated with fixed price livestock firm commitments. We had the following aggregated notionals of outstanding forward contracts entered into to hedge forecasted commodity purchases which are accounted for as a fair value hedge:

	Metric		October 1, 2011		October 2, 2010
Commodity:
Live Cattle		Pounds		318 million		361 million
Lean Hogs		Pounds		601 million		508 million

For these derivative instruments we designate and qualify as a fair value hedge, the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in earnings in the same period. We include the gain or loss on the hedged items (i.e., livestock purchase firm commitments) in the same line item, Cost of Sales, as the offsetting gain or loss on the related livestock forward position.

			in millions
	Consolidated Statements of Income Classification		2011		2010		2009
Gain/(Loss) on forwards		Cost of Sales	$	(78)	$	(58)	$	152
Gain/(Loss) on purchase contract		Cost of Sales		78		58		(152)

Ineffectiveness related to our fair value hedges was not significant during fiscal 2011, 2010 and 2009.

Foreign net investment hedges

We utilize forward foreign exchange contracts to protect the value of our net investments in certain foreign subsidiaries. For derivative instruments that are designated and qualify as a hedge of a net investment in a foreign currency, the gain or loss is reported in OCI as part of the cumulative translation adjustment to the extent it is effective, with the related amounts due to or from counterparties included in other liabilities or other assets. We utilize the forward-rate method of assessing hedge effectiveness. Any ineffective portions of net investment hedges are recognized in the Consolidated Statements of Income during the period of change. Ineffectiveness related to our foreign net investment hedges was not significant during fiscal 2011, 2010 and 2009. At October 1, 2011, and October 2, 2010, we had $35 million and $49 million aggregate outstanding notionals related to our forward foreign currency contracts accounted for as foreign net investment hedges.

The following table sets forth the pretax impact of these derivative instruments on the Consolidated Statements of Income (in millions):

	Gain/(Loss)     Recognized in OCI     on Derivatives						Consolidated   Statements of Income   Classification		Gain/(Loss) Reclassified from OCI to Earnings
	2011		2010		2009				2011		2010		2009
Net Investment Hedge – Derivatives designated as
hedging instruments:
Foreign exchange contracts		$(2)		$(1)		$(5)		Other Income/Expense		$0		$0		$(2)

Undesignated positions

In addition to our designated positions, we also hold forward and option contracts for which we do not apply hedge accounting. These include certain derivative instruments related to commodities price risk, including grains, livestock and energy, foreign currency risk and interest rate risk. We mark these positions to fair value through earnings at each reporting date. We generally do not enter into undesignated positions beyond 18 months.

The objective of our undesignated grains, energy and livestock commodity positions is to reduce the variability of cash flows associated with the forecasted purchase of certain grains, energy and livestock inputs to our production processes. We also enter into certain forward sales of boxed beef and boxed pork and forward purchases of cattle and hogs at fixed prices. The fixed price sales contracts lock in the proceeds from a sale in the future and the fixed cattle and hog purchases lock in the cost. However, the cost of the livestock and the related boxed beef and boxed pork market prices at the time of the sale or purchase could vary from this fixed price. As we enter into fixed forward sales of boxed beef and boxed pork and forward purchases of cattle and hogs, we also enter into the appropriate number of livestock futures positions to mitigate a portion of this risk. Changes in market value of the open livestock futures positions are marked to market and reported in earnings at each reporting date, even though the economic impact of our fixed prices being above or below the market price is only realized at the time of sale or purchase. These positions generally do not qualify for hedge treatment due to location basis differences between the commodity exchanges and the actual locations when we purchase the commodities.

We have a foreign currency cash flow hedging program to hedge portions of forecasted transactions denominated in foreign currencies, primarily with forward and option contracts, to protect against the reduction in value of forecasted foreign currency cash flows. Our undesignated foreign currency positions generally would qualify for cash flow hedge accounting. However, to reduce earnings volatility, we normally will not elect hedge accounting treatment when the position provides an offset to the underlying related transaction that currently impacts earnings.

The objective of our undesignated interest rate swap is to manage interest rate risk exposure on a floating-rate bond. Our interest rate swap agreement effectively modifies our exposure to interest rate risk by converting a portion of the floating-rate bond to a fixed rate basis for the first five years, thus reducing the impact of the interest-rate changes on future interest expense. This interest rate swap does not qualify for hedge treatment due to differences in the underlying bond and swap contract interest-rate indices.

We had the following aggregate outstanding notionals related to our undesignated positions:

	Metric		October 1, 2011		October 2, 2010
Commodity:
Corn		Bushels		17 million		38 million
Soy Meal		Tons		174,600		367,000
Soy Oil		Pounds		13 million		2 million
Live Cattle		Pounds		72 million		73 million
Lean Hogs		Pounds		19 million		134 million
Natural Gas		British thermal units		0		450 billion
Foreign Currency		United States dollars		$110 million		$146 million
Interest Rate		Average monthly notional debt		$39 million		$53 million

The following table sets forth the pretax impact of the undesignated derivative instruments on the Consolidated Statements of Income (in millions):

	Consolidated             Statements of Income              Classification		Gain/(Loss) Recognized in Earnings
			2011		2010		2009
Derivatives not designated   as hedging instruments:
Commodity contracts		Sales		$20		$27		$(34)
Commodity contracts		Cost of Sales		(2)		(20)		(151)
Foreign exchange contracts		Other Income/Expense		(3)		(5)		0
Interest rate contracts		Interest Expense		0		1		(4)
Total				$15		$3		$(189)

The following table sets forth the fair value of all derivative instruments outstanding in the Consolidated Balance Sheets (in millions):

	Fair Value
	2011		2010
Derivative Assets:
Derivatives designated as hedging instruments:
Commodity contracts		$3		$20
Foreign exchange contracts		12		0
Total derivative assets – designated		15		20
Derivatives not designated as hedging instruments:
Commodity contracts		21		10
Foreign exchange contracts		5		1
Total derivative assets – not designated		26		11
Total derivative assets		$41		$31
Derivative Liabilities:
Derivatives designated as hedging instruments:
Commodity contracts		$41		$16
Derivatives not designated as hedging instruments:
Commodity contracts		121		34
Foreign exchange contracts		1		6
Interest rate contracts		2		3
Total derivative liabilities – not designated		124		43
Total derivative liabilities		$165		$59

Our derivative assets and liabilities are presented in our Consolidated Balance Sheets on a net basis. We net derivative assets and liabilities, including cash collateral when a legally enforceable master netting arrangement exists between the counterparty to a derivative contract and us. See Note 12: Fair Value Measurements for a reconciliation to amounts reported in the Consolidated Balance Sheets in Other current assets and Other current liabilities.