Tyson Foods 2008 Annual Report Download - page 42

40 Tyson Foods, Inc.
Notes to Consolidated Financial Statements (continued)
Cash fl ow hedges: Derivative products, such as futures and options,
are designated as hedges against changes in the amount of future
cash fl ows related to commodities procurement. We do not purchase
derivative products related to grain procurement in excess of our
physical grain consumption requirements. Related to our grain hedges,
there were $5 million of net losses recorded in accumulated other
comprehensive income at September 27, 2008. These losses will be
recognized within the next 12 months. Of these losses, the portion
resulting from our open hedge positions was a net loss of $4 million
as of September 27, 2008. Ineffectiveness related to our cash fl ow
hedges was not signifi cant during fi scal 2008, 2007 or 2006.
Fair value hedges: We designate certain futures contracts as fair value
hedges of fi rm commitments to purchase livestock for slaughter.
Changes in the fair value of a derivative that is designated and quali-
fi es as a fair value hedge, along with changes in fair value of the
hedged asset or liability attributable to the hedged risk (including
gains or losses on fi rm commitments), 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. Ineffectiveness related to fair value hedges was not
signifi cant during fi scal 2008, 2007 and 2006.
During fi scal 2006, we discontinued the use of hedge accounting
for certain fi nancial instruments to hedge forward cattle purchases.
Hedge accounting was discontinued to provide a natural offset to the
gains and losses resulting from our derivatives tied to forward fi xed
price sales of boxed beef, as this activity does not qualify for hedge
accounting. The contracts for which hedge accounting was discontin-
ued had a fair value of approximately $28 million at the discontinued
date, and was primarily recognized as a component of cost of sales
in fi scal 2006. However, due to changes in our beef market strategies
and business conditions, we now have more forward cattle purchase
derivatives relative to fi xed forward boxed beef sales derivatives which
can and have caused mark-to-market earnings volatility. Accordingly,
effective in the fourth quarter fi scal 2008, we began designating
certain futures contracts as fair value hedges of forward cattle
purchases. We anticipate this change will help reduce volatility
of quarterly reported beef earnings.
Undesignated positions: We hold positions as part of our risk
management activities, primarily futures and options for grains
and livestock, for which we do not apply hedge accounting, but
instead mark these positions to fair value through earnings at each
reporting date. We generally do not enter into undesignated posi-
tions beyond 18 months. Related to grain positions for which we
did not apply hedge accounting, we recognized pretax net gains of
approximately $169 million, $50 million and $8 million, respectively,
in cost of sales for fi scal 2008, 2007 and 2006, which included an
unrealized pretax loss on open mark-to-market futures positions
of $4 million as of September 27, 2008.
We enter into certain forward sales of boxed beef and boxed pork
and forward purchases of cattle at fi xed prices. The fi xed price sales
contracts lock in the proceeds from a sale in the future and the fi xed
cattle purchases lock in the cost. However, the cost of the livestock
and the related boxed beef and boxed pork market prices at the time
of the sale or purchase could vary from this fi xed price. As we enter
into fi xed forward sales of boxed beef and boxed pork and forward
purchases of cattle, we also enter into the appropriate number of
livestock futures positions to mitigate a portion of this risk. 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 our fi xed prices being above or below the
market price is only realized at the time of sale or purchase. In con-
nection with these livestock futures, we recorded realized and
unrealized net gains of $83 million in fi scal 2008, which included
an unrealized pretax gain on open mark-to-market futures positions
of approximately $3 million as of September 27, 2008. We recorded
realized and unrealized net gains of $14 million and realized and
unrealized net losses of $39 million in fi scal 2007 and 2006, respec-
tively, related to livestock futures positions.
Additionally, we enter into grain derivatives to manage the risk of
costs associated with forward sales to certain customers for which
sales prices are determined under cost-plus arrangements. These
unrealized positions, which do not qualify for hedge treatment,
totaled a loss of $24 million and a gain of $9 million at September 27,
2008, and September 29, 2007, respectively. When these positions
are liquidated, we expect any realized gains or losses will be refl ected
in the prices of the poultry products sold. Since these derivative
positions do not qualify for hedge treatment, they initially create
volatility in our income statement associated with mark-to-market
changes. However, once the positions are liquidated and included
in the sales price to the customer, there is ultimately no income
statement impact as any previous mark-to-market gains or losses
are included in the prices of the poultry products.
Foreign currency positions: We enter into foreign currency forward
contracts to manage the risk from changes in the fair value or future
cash fl ows of receivables, payables and purchase commitments arising
from changes in the exchange rates of foreign currencies. We have
not applied hedge accounting to these contracts. The fair value
of the foreign exchange contracts was not signifi cant as of
September 27, 2008, and September 29, 2007.
Fair Values of Financial Instruments:
in millions 2008 2007
Commodity derivative positions, net liability $ 16 $ 32
Total debt 2,659 2,927