9. DERIVATIVE FINANCIAL INSTRUMENTS

The company measures the fair value of its derivative portfolio by using the price that would be received to sell an asset or paid to transfer a liability in the principal market for that asset or liability. These measurements are classified into a hierarchy by the inputs used to perform the fair value calculation as follows:

Level 1:

Fair value based on unadjusted quoted prices for identical assets or liabilities at the measurement date

Level 2:

Modeled fair value with model inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly

Level 3:

Modeled fair value with unobservable model inputs that are used to estimate the fair value of the asset or liability

Commodity Risk

The company enters into commodity derivatives designated as cash-flow hedges of existing or future exposure to changes in commodity prices. The company’s primary raw materials are flour, sweeteners and shortening, along with pulp, paper and petroleum-based packaging products. Natural gas, which is used as oven fuel, is also an important commodity input for production.

As of April 21, 2018, the company’s hedge portfolio contained commodity derivatives, which are recorded in the following accounts with fair values measured as indicated (amounts in thousands):

	Level 1			Level 2		Level 3		Total
Assets:
Other current	$	4,071		$	—	$	—	$	4,071
Other long-term		563			—		—		563
Total		4,634			—		—		4,634

Liabilities:
Other current		(689	)		—		—		(689	)
Other long-term		(384	)		—		—		(384	)
Total		(1,073	)		—		—		(1,073	)
Net Fair Value	$	3,561		$	—	$	—	$	3,561

As of December 30, 2017, the company’s hedge portfolio contained commodity derivatives, which are recorded in the following accounts with fair values measured as indicated (amounts in thousands):

	Level 1			Level 2		Level 3		Total
Assets:
Other current	$	259		$	—	$	—	$	259
Other long-term		32			—		—		32
Total		291			—		—		291

Liabilities:
Other current		(10,247	)		—		—		(10,247	)
Other long-term		(639	)		—		—		(639	)
Total		(10,886	)		—		—		(10,886	)
Net Fair Value	$	(10,595	)	$	—	$	—	$	(10,595	)

The positions held in the portfolio are used to hedge economic exposure to changes in various raw material prices and effectively fix, or limit increases in, prices for a period of time extending primarily into fiscal 2020. These instruments are designated as cash-flow hedges. The change in the fair value for these derivatives is reported in AOCI. All of the company-held commodity derivatives at April 21, 2018 and December 30, 2017, respectively, qualified for hedge accounting.

Interest Rate Risk

The company entered into treasury rate locks on August 5, 2016 and August 8, 2016 to fix the interest rate for the 2026 notes issued on September 28, 2016. The derivative positions were closed when the debt was priced on September 23, 2016 with a net cash receipt of $1.0 million that offset changes in the benchmark treasury rate between execution of the treasury rate locks and the debt pricing date. These rate locks were designated as a cash flow hedge. During fiscal 2016, the company recognized $0.1 million of ineffectiveness due to issuing the debt earlier than the settlement date of the treasury locks. The ineffectiveness amount was reported as a selling, distribution, and administrative expense in our Condensed Consolidated Statements of Operations.

The company entered into a treasury rate lock on March 28, 2012 to fix the interest rate for the 2022 notes issued on April 3, 2012. The derivative position was closed when the debt was priced on March 29, 2012 with a cash settlement of $3.1 million that offset changes in the benchmark treasury rate between the execution of the treasury rate lock and the debt pricing date. This treasury rate lock was designated as a cash flow hedge.

The following table outlines the company’s derivatives, which were hedging the risk of changes in forecasted interest payments on forecasted issuance of long-term debt (amounts in thousands, before tax, and an asset is a positive value and a liability is a negative value):

Terminated	Description	Aggregate Notional Amount		Fair Value When Terminated			Fair Value Deferred in AOCI(1)			Ineffective Portion at Termination
April/2012	Treasury lock	$	500,000	$	(3,137	)	$	2,510		$	627
September/2016	Treasury lock	$	200,000	$	1,298		$	(1,298	)	$	—
September/2016	Treasury lock	$	150,000	$	(323	)	$	215		$	108

(1)	The amount reported in AOCI is reclassified to interest expense as interest payments are made on the related notes through the maturity date.

Derivative Assets and Liabilities

The company has the following derivative instruments located on the Condensed Consolidated Balance Sheets, which are utilized for the risk management purposes detailed above (amounts in thousands):

	Derivative Assets						Derivative Liabilities
	April 21, 2018			December 30, 2017			April 21, 2018			December 30, 2017
Derivatives Designated as Hedging Instruments	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity contracts	Other current assets	$	4,071	Other current assets	$	259	Other current accrued liabilities	$	689	Other current accrued liabilities	$	10,247
Commodity contracts	Other assets		563	Other assets		32	Other long-term liabilities		384	Other long-term liabilities		639
Total		$	4,634		$	291		$	1,073		$	10,886

Derivative AOCI transactions

The company had the following derivative instruments for deferred gains and (losses) on closed contracts and the effective portion for changes in fair value recorded in AOCI (no amounts were excluded from the effectiveness test), all of which are utilized for the risk management purposes detailed above (amounts in thousands and net of tax):

	Amount of Gain or (Loss)						Amount of (Gain) or Loss
	Recognized in AOCI on Derivatives						Reclassified from AOCI
	(Effective Portion)					Location of (Gain) or Loss	into Income (Effective Portion)
Derivatives in Cash Flow	For the Sixteen Weeks Ended					Reclassified from AOCI	For the Sixteen Weeks Ended
Hedge Relationships(1)	April 21, 2018		April 22, 2017			into Income (Effective Portion)(2)	April 21, 2018		April 22, 2017
Interest rate contracts	$	—	$	—		Interest expense	$	33	$	27
Commodity contracts		10,470		(3,518	)	Production costs(3)		264		447
Total	$	10,470	$	(3,518	)		$	297	$	474

1.	Amounts in parentheses indicate debits to determine net income (loss).

2.	Amounts in parentheses, if any, indicate credits to determine net income (loss).

3.	Included in materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately).

There was no hedging ineffectiveness, and no amounts were excluded from the ineffectiveness testing, during the sixteen weeks ended April 21, 2018 and April 22, 2017, respectively, related to the company’s commodity risk hedges.

At April 21, 2018, the balance in AOCI related to commodity price risk and interest rate risk derivative transactions that closed or will expire over the following years are as follows (amounts in thousands and net of tax) (amounts in parenthesis indicate a debit balance):

	Commodity Price Risk Derivatives			Interest Rate Risk Derivatives			Totals
Closed contracts	$	(29	)	$	(58	)	$	(87	)
Expiring in 2018		1,226			—			1,226
Expiring in 2019		1,505			—			1,505
Expiring in 2020		(69	)		—			(69	)
Total	$	2,633		$	(58	)	$	2,575

Derivative Transactions Notional Amounts

As of April 21, 2018, the company had the following outstanding financial contracts that were entered to hedge commodity risk (amounts in thousands):

	Notional Amount
Wheat contracts	$	94,608
Soybean oil contracts		26,321
Natural gas contracts		11,604
Corn contracts		14,363
Total	$	146,896

The company’s derivative instruments contain no credit-risk related contingent features at April 21, 2018. As of April 21, 2018 and December 30, 2017, the company had $1.1 million and $16.3 million, respectively, in other current assets representing collateral for hedged positions. There were $0.9 million in other current liabilities representing collateral for hedged positions on April 21, 2018. There were no amounts representing collateral recorded in other current accrued liabilities for hedged positions as of December 30, 2017.