Tyson Foods 2006 Annual Report Download - page 36

Derivative products related to grain procurement, such as futures
and option contracts that meet the criteria for hedge accounting,
are considered cash flow hedges, as they hedge against changes in
the amount of future cash flows related to commodities procure-
ment. The Company does not purchase derivative products related
to grain procurement in excess of its physical grain consumption
requirements. The Company’s grain procurement hedging activities
are for the grain commodity purchase price only and do not hedge
other components of grain cost such as basis differential and freight
costs. The after tax losses, net of gains, recorded in accumulated
other comprehensive loss at September 30, 2006, related to cash
flow hedges, were $3 million. These losses will be recognized within
the next 12 months. Of these losses, the portion resulting from the
Company’s open mark-to-market hedge positions was not signifi-
cant as of September 30, 2006. The Company generally does not
hedge cash flows related to commodities beyond 12 months.
• Fair value hedges: The Company designates certain futures
contracts as fair value hedges of firm commitments to purchase
market hogs for slaughter and natural gas for the operation of its
plants. From time to time, the Company also enters into foreign
currency forward contracts to hedge changes in fair value of receiv-
ables and purchase commitments arising from changes in the exchange
rates of foreign currencies; however, the fair value of the foreign
exchange contracts was not material as of September 30, 2006, and
October 1, 2005. The changes in the fair value of a derivative highly
effective and that is designated and qualifies as a fair value hedge,
along with the gain or loss on the hedged asset or liability attribut-
able to the hedged risk (including gains or losses on firm commit-
ments), are recorded in current period earnings. Ineffectiveness
results when the change in the fair value of the hedge instrument
differs from the change in fair value of the hedged item. Ineffective-
ness related to the Company’s fair value hedges was not significant
during fiscal 2006, 2005 and 2004.
During fiscal 2006, the Company discontinued the use of hedge
accounting for certain financial instruments in place to hedge for-
ward cattle purchases. Hedge accounting was discontinued to provide
a natural offset to the gains and losses resulting from the Company’s
derivatives tied to its forward fixed price sales of boxed beef, as
this activity does not qualify for SFAS No. 133 hedge accounting.
The contracts for which hedge accounting was discontinued had
a fair value of approximately $28 million at the date hedge account-
ing was discontinued. The $28 million primarily was recognized as
a component of cost of sales in the second quarter of fiscal 2006.
• Undesignated positions: The Company holds positions as part
of its risk management activities, primarily certain grains, livestock
and natural gas futures, for which it does not apply hedge account-
ing, but instead marks these positions to fair value through earnings
at each reporting date. Changes in market value of derivatives used
in the Company’s risk management activities surrounding inventories
on hand or anticipated purchases of inventories or supplies are
recorded in cost of sales. Changes in market value of derivatives
used in the Company’s risk management activities surrounding
forward sales contracts are recorded in sales. The Company
generally does not enter into undesignated positions beyond
12 months. The Company recognized pretax net gains of approxi-
mately $8 million, $2 million and $58 million in cost of sales for
fiscal 2006, 2005 and 2004, respectively, related to grain positions
for which it did not apply hedge accounting.
The Company enters into certain forward sales of boxed beef and
boxed pork and forward purchases of cattle at fixed prices. The fixed
price sales contracts lock in the proceeds from a sale in the future
and the fixed cattle purchases lock in the cost of raw material in
the future, although the cost of the livestock and the related boxed
beef and pork market prices at the time of the sale or purchase will
vary from this fixed price. Therefore, as fixed forward sales and for-
ward purchases of cattle are entered into, the Company also enters
into the appropriate number of livestock futures positions. 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 the Company’sfixed prices being above or
below the market price is only realized at the time of sale or pur-
chase. In connection with these livestock futures, the Company
recorded realized and unrealized net losses of $54 million in fiscal
2006, which included an unrealized pretax loss on open mark-
to-market futures positions of approximately $12 million asof
September 30, 2006. Included in the net losses in fiscal 2006, are
net gains of $28 million recorded subsequent to the removal of
certain fair value designations described above. The Company
recorded realized and unrealized net losses of $9 million and real-
ized and unrealized net gains of $33 million in fiscal 2005 and 2004,
respectively, related to livestock futures positions.
FAIR VALUES OF FINANCIAL INSTRUMENT LIABILITIES:
in millions 2006 2005
Commodity derivative positions $12 $ 7
Interest-rate derivative positions –1
Total debt 4,094 3,232
34 Ty s on Foods, Inc. 2006 Annual Report
Notes to Consolidated Financial Statements continued