RISK MANAGEMENT ACTIVITIES

9 Months Ended

Feb. 23, 2020

Risk Management Activities [Abstract]

Risk Management Activities

(7) Risk Management Activities

Many commodities we use in the production and distribution of our products are exposed to market price risks. We utilize derivatives to manage price risk for our principal ingredients and energy costs, including grains (oats, wheat, and corn), oils (principally soybean), dairy products, natural gas, and diesel fuel. Our primary objective when entering into these derivative contracts is to achieve certainty with regard to the future price of commodities purchased for use in our supply chain. We manage our exposures through a combination of purchase orders, long-term contracts with suppliers, exchange-traded futures and options, and over-the-counter options and swaps. We offset our exposures based on current and projected market conditions and generally seek to acquire the inputs at as close to our planned cost as possible.

We use derivatives to manage our exposure to changes in commodity prices. We do not perform the assessments required to achieve hedge accounting for commodity derivative positions. Accordingly, the changes in the values of these derivatives are recorded currently in cost of sales in our Consolidated Statements of Earnings.

Although we do not meet the criteria for cash flow hedge accounting, we believe that these instruments are effective in achieving our objective of providing certainty in the future price of commodities purchased for use in our supply chain. Accordingly, for purposes of measuring segment operating performance, these gains and losses are reported in unallocated corporate items outside of segment operating results until such time that the exposure we are managing affects earnings. At that time we reclassify the gain or loss from unallocated corporate items to segment operating profit, allowing our operating segments to realize the economic effects of the derivative without experiencing any resulting mark-to-market volatility, which remains in unallocated corporate items.

Unallocated corporate items for the quarters and nine-month periods ended February 23, 2020, and February 24, 2019, included:

	Quarter Ended				Nine-Month Period Ended
In Millions		Feb. 23, 2020		Feb. 24, 2019		Feb. 23, 2020		Feb. 24, 2019
Net (loss) gain on mark-to-market valuation of certain commodity positions	$	(8.7)	$	10.2	$	(19.7)	$	(26.8)
Net loss (gain) on commodity positions reclassified from unallocated corporate items to segment operating profit		4.5		0.8		19.8		(0.7)
Net mark-to-market revaluation of certain grain inventories		(4.4)		(4.5)		(1.1)		(8.9)
Net mark-to-market valuation of certain commodity positions recognized in unallocated corporate items	$	(8.6)	$	6.5	$	(1.0)	$	(36.4)

As of February 23, 2020, the net notional value of commodity derivatives was $321.7 million, of which $101.7 million related to energy inputs and $220.0 million related to agricultural inputs. These contracts relate to inputs that generally will be utilized within the next 12 months.

In advance of planned debt financing, subsequent to the end of the third quarter of fiscal 2020, we entered into $300 million of treasury locks due January 13, 2022 with an average fixed rate of 0.85 percent.

During the third quarter of fiscal 2020, we entered into a €600 million interest rate swap to convert our €600 million fixed rate notes due January 15, 2026, to a floating rate.  

During the second quarter of fiscal 2020, we entered into a $500 million interest rate swap to convert a portion of our $850 million floating-rate notes due April 16, 2021, to a fixed rate.

The fair values of the derivative positions used in our risk management activities and other assets recorded at fair value were not material as of February 23, 2020, and were Level 1 or Level 2 assets and liabilities in the fair value hierarchy. We did not significantly change our valuation techniques from prior periods.

We offer certain suppliers access to third party services that allow them to view our scheduled payments online. The third party services also allow suppliers to finance advances on our scheduled payments at the sole discretion of the supplier and the third party. We have no economic interest in these financing arrangements and no direct relationship with the suppliers, the third parties, or any financial institutions concerning these services. All of our accounts payable remain as obligations to our suppliers as stated in our supplier agreements. As of February 23, 2020, $1,269.6 million of our total accounts payable were payable to suppliers who utilize these third party services.