The Company is exposed to certain market risks such as changes in interest rates, foreign currency exchange rates, and commodity prices, which exist as a part of its ongoing business operations. Management uses derivative financial and commodity instruments, including futures, options, and swaps, where appropriate, to manage these risks. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract.

The Company designates derivatives as cash flow hedges, fair value hedges, net investment hedges, and uses other contracts to reduce volatility in interest rates, foreign currency and commodities. As a matter of policy, the Company does not engage in trading or speculative hedging transactions.

Total notional amounts of the Company's derivative instruments as of October 1, 2011 and January 1, 2011 were as follows:

Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that were included in each category at October 1, 2011 and January 1, 2011, measured on a recurring basis.

Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. For the Company, level 1 financial assets and liabilities consist primarily of commodity derivative contracts.

Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. For the Company, level 2 financial assets and liabilities consist of interest rate swaps and over-the-counter commodity and currency contracts.

The Company's calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve. Over-the-counter commodity derivatives are valued using an income approach based on the commodity index prices less the contract rate multiplied by the notional amount. Foreign currency contracts are valued using an income approach based on forward rates less the contract rate multiplied by the notional amount. The Company's calculation of the fair value of level 2 financial assets and liabilities takes into consideration the risk of nonperformance, including counterparty credit risk.

Level 3 – Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or liability. The Company did not have any level 3 financial assets or liabilities as of October 1, 2011 or January 1, 2011.

The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of October 1, 2011 and January 1, 2011:


			Level 1				Level 2				Total
			October 1,		January 1,		October 1,		January 1,		October 1,		January 1,
(millions)			2011		2011		2011		2011		2011		2011

Derivatives designated as hedging instruments:

Assets:
Foreign currency exchange contracts:
	Other prepaid assets	$	-	$	-	$	14	$	7	$	14	$	7
Interest rate contracts:
	Other prepaid assets		-		-		-		5		-		5
	Other assets		-		-		16		69		16		69
Commodity contracts:
	Other prepaid assets		2		23		-		-		2		23
Total assets		$	2	$	23	$	30	$	81	$	32	$	104

Liabilities:
Foreign currency exchange contracts:
	Other current liabilities	$	-	$	-	$	(15)	$	(27)	$	(15)	$	(27)
Commodity contracts:
	Other current liabilities		(12)		-		(10)		(10)		(22)		(10)
	Other liabilities		-		-		(27)		(29)		(27)		(29)
Total liabilities		$	(12)	$	-	$	(52)	$	(66)	$	(64)	$	(66)

The fair value of non designated hedging instruments as of October 1, 2011 and January 1, 2011 was immaterial.

The effect of derivative instruments on the Consolidated Statement of Income for the quarters ended October 1, 2011 and October 2, 2010 was as follows:


										Location of gain		Gain (loss)
Derivatives in fair value hedging										(loss) recognized		recognized in
relationships (millions)										in income		income
												October 1,		October 2,
												2011		2010

Foreign currency exchange contracts										Other income (expense), net	$	(9)	$	26


					Location of gain		Gain (loss)			Location of gain
Derivatives in cash flow hedging		Gain (loss)			(loss) reclassified		reclassified from			(loss) recognized		Gain (loss)
relationships (millions)		recognized in AOCI			from AOCI		AOCI into income			in income (a)		recognized in income(a)
		October 1,		October 2,			October 1,		October 2,			October 1,		October 2,
		2011		2010			2011		2010			2011		2010

Foreign currency exchange contracts	$	5	$	2	COGS	$	(1)	$	(8)	Other income (expense), net	$	(1)	$	-
Foreign currency exchange contracts		2		(2)	SGA expense		-		(1)	Other income (expense), net		-		-
Interest rate contracts		-		-	Interest expense		1		(1)	N/A		-		-
Commodity contracts		(8)		(2)	COGS		(1)		4	Other income (expense), net		-		-
Total	$	(1)	$	(2)		$	(1)	$	(6)		$	(1)	$	-


										Location of gain		Gain (loss)
Derivatives not designated as hedging										(loss) recognized		recognized in
instruments (millions)										in income		income
												October 1,		October 2,
												2011		2010

Foreign currency exchange contracts										Other income (expense), net	$	(1)	$	-
Interest rate contracts										Interest expense	$	2	$	-
Total											$	1	$	-
(a) Includes the ineffective portion and amount excluded from effectiveness testing.

The effect of derivative instruments on the Consolidated Statement of Income for the year-to-date periods ended October 1, 2011 and October 2, 2010 were as follows:


										Location of gain		Gain (loss)
Derivatives in fair value hedging										(loss) recognized		recognized in
relationships (millions)										in income		income
												October 1,		October 2,
												2011		2010

Foreign currency exchange contracts										Other income (expense), net	$	16	$	(25)


					Location of gain		Gain (loss)			Location of gain
Derivatives in cash flow hedging		Gain (loss)			(loss) reclassified		reclassified from			(loss) recognized		Gain (loss)
relationships (millions)		recognized in AOCI			from AOCI		AOCI into income			in income (a)		recognized in income(a)
		October 1,		October 2,			October 1,		October 2,			October 1,		October 2,
		2011		2010			2011		2010			2011		2010

Foreign currency exchange contracts	$	2	$	(10)	COGS	$	(4)	$	(21)	Other income (expense), net	$	(2)	$	-
Foreign currency exchange contracts		-		-	SGA expense		-		(1)	Other income (expense), net		-		-
Interest rate contracts		(13)		-	Interest expense		3		(3)	N/A		-		-
Commodity contracts		(25)		(31)	COGS		11		(12)	Other income (expense), net		-		(1)
Total	$	(36)	$	(41)		$	10	$	(37)		$	(2)	$	(1)


										Location of gain		Gain (loss)
Derivatives not designated as hedging										(loss) recognized		recognized in
instruments (millions)										in income		income
												October 1,		October 2,
												2011		2010

Foreign currency exchange contracts										Other income (expense), net	$	0	$	0
Interest rate contracts										Interest expense	$	(1)	$	-
Total											$	(1)	$	-
(a) Includes the ineffective portion and amount excluded from effectiveness testing.

Contracts with certain of the Company's counterparties contain provisions requiring the Company to post collateral if the derivative instruments held with that counterparty are in a net liability position and the Company's credit rating falls below BB+ (S&P), or Ba1 (Moody's). The fair value of all derivative instruments with credit-risk-related contingent features in a net liability position on October 1, 2011 was $27 million. If the credit-risk-related contingent features were triggered as of October 1, 2011, the Company would be required to post collateral of $27 million. In addition, certain derivative instruments contain provisions that would be triggered in the event the Company defaults on its debt agreements. There were no collateral posting requirements as of October 1, 2011 triggered by credit-risk-related contingent features.

The carrying values of the Company's short-term items, including cash, cash equivalents, accounts receivable, accounts payable and notes payable approximate fair value. The fair value of the Company's long-term debt is calculated based on broker quotes and was as follows at October 1, 2011:

The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative financial and commodity contracts. Management believes a concentration of credit risk with respect to derivative counterparties is limited due to the credit ratings and use of master netting and reciprocal collateralization agreements with the counterparties and the use of exchange-traded commodity contracts.

Master netting agreements apply in situations where the Company executes multiple contracts with the same counterparty. There were no counterparties representing a concentration of credit risk to the Company at October 1, 2011.

For certain derivative contracts, reciprocal collateralization agreements with counterparties call for the posting of collateral in the form of cash, treasury securities or letters of credit if a fair value liability position to the Company or our counterparties exceeds a certain amount. There were no collateral balance requirements at October 1, 2011.

Management believes concentrations of credit risk with respect to accounts receivable is limited due to the generally high credit quality of the Company's major customers, as well as the large number and geographic dispersion of smaller customers. However, the Company conducts a disproportionate amount of business with a small number of large multinational grocery retailers, with the five largest accounts encompassing approximately 28% of consolidated trade receivables at October 1, 2011.