Tyson Foods 2008 Annual Report Download - page 30

28 Tyson Foods, Inc.
Management’s Discussion and Analysis (continued)
Changes in market value of derivatives used in our risk management
activities relating to forward sales contracts are recorded in sales.
Changes in market value of derivatives used in our risk management
activities surrounding inventories on hand or anticipated purchases
of inventories are recorded in cost of sales.
The sensitivity analyses presented below are the measures of poten-
tial losses of fair value resulting from hypothetical changes in market
prices related to commodities. Sensitivity analyses do not consider
the actions we may take to mitigate our exposure to changes, nor
do they consider the effects such hypothetical adverse changes may
have on overall economic activity. Actual changes in market prices
may differ from hypothetical changes.
Commodities Risk: We purchase certain commodities, such as grains
and livestock, in the course of normal operations. As part of our
commodity risk management activities, we use derivative fi nancial
instruments, primarily futures and options, to reduce the effect
of changing prices and as a mechanism to procure the underlying
commodity. However, as the commodities underlying our derivative
fi nancial instruments can experience signifi cant price fl uctuations,
any requirement to mark-to-market the positions that have not been
designated or do not qualify as hedges under SFAS No. 133 could
result in volatility in our results of operations. Contract terms of a
hedge instrument closely mirror those of the hedged item providing
a high degree of risk reduction and correlation. Contracts designated
and highly effective at meeting this risk reduction and correlation
criteria are recorded using hedge accounting. The following table
presents a sensitivity analysis resulting from a hypothetical change
of 10% in market prices as of September 27, 2008, and September 29,
2007, on the fair value of open positions. The fair value of such posi-
tions is a summation of the fair values calculated for each commod-
ity by valuing each net position at quoted futures prices. The market
risk exposure analysis includes hedge and non-hedge derivative
fi nancial instruments.
Effect of 10% change in fair value
in millions 2008 2007
Livestock:
Cattle $78 $33
Hogs 31 64
Grain 88 9
Interest Rate Risk: At September 27, 2008, we had fi xed-rate debt of
$2.9 billion with a weighted average interest rate of 7.0%. We have
exposure to changes in interest rates on this fi xed-rate debt. Market
risk for fi xed-rate debt is estimated as the potential increase in fair
value, resulting from a hypothetical 10% decrease in interest rates.
A hypothetical 10% decrease in interest rates would have increased
the fair value of our fi xed-rate debt by approximately $45 million at
September 27, 2008, and $58 million at September 29, 2007. The fair
values of our debt were estimated based on quoted market prices
and/or published interest rates.
At September 27, 2008, we had variable rate debt of $19 million with
a weighted average interest rate of 4.6%. A hypothetical 10% increase
in interest rates effective at September 27, 2008, and September 29,
2007, would have a minimal effect on interest expense.
Foreign Currency Risk: We have foreign exchange gain/loss exposure
from fl uctuations in foreign currency exchange rates primarily as a
result of certain receivable and payable balances. The primary cur-
rency exchanges we have exposure to are the Canadian dollar, the
Mexican peso, the European euro, the British pound sterling and
the Brazilian real. We periodically enter into foreign exchange
forward contracts to hedge some portion of our foreign currency
exposure. A hypothetical 10% change in foreign exchange rates
effective at September 27, 2008, and September 29, 2007, related
to the foreign exchange forward contracts would have an $11 million
and $3 million, respectively, impact on pretax income. In the future,
we may enter into more foreign exchange forward contracts as a
result of our international growth strategy.
Concentrations of Credit Risk: Our fi nancial instruments exposed to
concentrations of credit risk consist primarily of cash equivalents and
trade receivables. Our cash equivalents are in high quality securities
placed with major banks and fi nancial institutions. Concentrations
of credit risk with respect to receivables are limited due to our large
number of customers and their dispersion across geographic areas.
We perform periodic credit evaluations of our customers’ fi nancial
condition and generally do not require collateral. At September 27,
2008, and September 29, 2007, 12.2% and 12.1%, respectively, of our
net accounts receivable balance was due from Wal-Mart Stores, Inc.
No other single customer or customer group represents greater than
10% of net accounts receivable.