
NOTE 3:	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 in the balance sheet as either assets or liabilities at fair value. 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 September 28, 2014, 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 September 28, 2014, we had no significant credit exposure on non-exchange traded derivative contracts. No significant concentrations of credit risk existed as of September 28, 2014.

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
	September 28, 2014		December 29, 2013		September 28, 2014		December 29, 2013
	(in millions)				(in millions)
Derivatives using the "hedge accounting" method:
Grain contracts	$	2.0	$	5.5	$	139.0	$	16.2
Livestock contracts	25.1		0.7		21.8		1.1
Foreign exchange contracts	—		0.6		0.3		—
Total	27.1		6.8		161.1		17.3

Derivatives using the "mark-to-market" method:
Grain contracts	12.3		0.6		1.7		1.1
Livestock contracts	9.3		2.8		1.9		9.5
Energy contracts	0.3		2.9		0.5		—
Foreign exchange contracts	0.1		0.6		0.1		0.2
Total	22.0		6.9		4.2		10.8
Total fair value of derivative instruments	$	49.1	$	13.7	$	165.3	$	28.1

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 sheet. 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.



	September 28, 2014
	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	$	49.0	$	(33.9	)	$	15.1	$	34.0		$	49.1
Foreign exchange contracts	0.1		(0.1		)	—		—			—
Total	$	49.1	$	(34.0	)	$	15.1	$	34.0		$	49.1
Liabilities:
Commodities	$	164.9	$	(33.9	)	$	131.0	$	(118.3	)	$	12.7
Foreign exchange contracts	0.4		(0.1		)	0.3		—			0.3
Total	$	165.3	$	(34.0	)	$	131.3	$	(118.3	)	$	13.0



	December 29, 2013
	Gross Amount of Derivative Assets/ Liabilities		Netting of Derivative Assets/ Liabilities			Net Amount Presented in the Condensed Consolidated Balance Sheet		Cash Collateral			Net Amount
	(in millions)
Assets:
Commodities	$	12.5	$	(7.4	)	$	5.1	$	—		$	5.1
Foreign exchange contracts	1.2		—			1.2		—			1.2
Total	$	13.7	$	(7.4	)	$	6.3	$	—		$	6.3
Liabilities:
Commodities	$	27.9	$	(7.4	)	$	20.5	$	(15.6	)	$	4.9
Foreign exchange contracts	0.2		—			0.2		—			0.2
Total	$	28.1	$	(7.4	)	$	20.7	$	(15.6	)	$	5.1

See Note 10—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 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 September 28, 2014, we had no cash flow hedges for forecasted transactions beyond December 2015.

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 loses 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 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 September 28, 2014, the range of notional volumes associated with open derivative instruments designated in cash flow hedging relationships was as follows:



	Minimum	Maximum	Metric
Commodities:
Corn	42,575,000	99,580,000	Bushels
Soybean meal	346,500	827,300	Tons
Lean hogs	103,280,000	1,847,680,000	Pounds
Foreign currency ⁽¹⁾	15,144,435	33,413,152	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)
	Successor			Predecessor			Successor			Predecessor			Successor			Predecessor
	Three Months Ended						Three Months Ended						Three Months Ended
	September 28, 2014			September 26, 2013			September 28, 2014			September 26, 2013			September 28, 2014			September 26, 2013
	(in millions)						(in millions)						(in millions)
Commodity contracts:
Grain contracts	$	(159.5	)	$	(1.7	)	$	8.6		$	3.5		$	(4.7	)	$	(0.8	)
Lean hog contracts	93.0			(35.5		)	(83.5		)	—			9.1			0.2
Foreign exchange contracts	(0.6		)	0.5			0.1			(0.2		)	—			—
Total	$	(67.1	)	$	(36.7	)	$	(74.8	)	$	3.3		$	4.4		$	(0.6	)

	Nine Months Ended						Nine Months Ended						Nine Months Ended
	September 28, 2014			September 26, 2013			September 28, 2014			September 26, 2013			September 28, 2014			September 26, 2013
	(in millions)						(in millions)						(in millions)
Commodity contracts:
Grain contracts	$	(122.0	)	$	(59.3	)	$	14.9		$	84.0		$	(5.0	)	$	(1.3	)
Lean hog contracts	(217.1		)	(14.3		)	(200.1		)	4.5			(8.7		)	(0.6		)
Foreign exchange contracts	(0.1		)	0.4			3.3			1.9			—			—
Total	$	(339.2	)	$	(73.2	)	$	(181.9	)	$	90.4		$	(13.7	)	$	(1.9	)

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 September 28, 2014, there were deferred net losses of $99.0 million, net of tax of $62.9 million, in accumulated other comprehensive income (loss). We expect to reclassify $28.7 million ($17.5 million net of tax) of deferred net losses 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 September 28, 2014, the range of notional volumes associated with open derivative instruments designated in fair value hedging relationships was as follows:



	Minimum	Maximum	Metric
Commodities:
Corn	450,000	8,200,000	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
	Successor		Predecessor			Successor			Predecessor
	Three Months Ended					Three Months Ended
	September 28, 2014		September 26, 2013			September 28, 2014			September 26, 2013
	(in millions)					(in millions)
Commodity contracts	$	5.9	$	(2.5	)	$	(5.6	)	$	2.4

	Nine Months Ended					Nine Months Ended
	September 28, 2014		September 26, 2013			September 28, 2014			September 26, 2013
	(in millions)					(in millions)
Commodity contracts	$	7.9	$	0.8		$	(7.3	)	$	(1.0	)

We recognized gains of $0.7 million and $2.9 million for the three months ended September 28, 2014 and September 26, 2013, respectively, and gains of $0.7 million and $2.0 million for the nine months ended September 28, 2014 and September 26, 2013, 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 September 28, 2014, 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	600,000	414,600,000	Pounds
Corn	490,000	17,680,000	Bushels
Soybean meal	—	5,500	Tons
Soybeans	75,000	3,330,000	Bushels
Wheat	—	85,000	Bushels
Natural gas	8,030,000	11,040,000	Million BTU
Live cattle	—	80,000	Pounds
Diesel	—	1,722,000	Gallons
Propane	—	966,000	Gallons
Foreign currency ⁽¹⁾	6,377,390	47,619,816	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:



	Successor		Predecessor			Successor			Predecessor
	Three Months Ended					Nine Months Ended
	September 28, 2014		September 26, 2013			September 28, 2014			September 26, 2013
	(in millions)					(in millions)
Commodity contracts	25.2		9.6			39.8			38.6
Foreign exchange contracts	—		(1.4		)	(0.1		)	(0.6		)
Total	$	25.2	$	8.2		$	39.7		$	38.0

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.