Tyson Foods 2012 Annual Report Download - page 36

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk relating to our operations results primarily from changes in commodity prices, interest rates and foreign exchange rates, as
well as credit risk concentrations. To address certain of these risks, we enter into various derivative transactions as described below. If
a derivative instrument is accounted for as a hedge, depending on the nature of the hedge, changes in the fair value of the instrument
either will be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings, or be
recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of an
instrument’s change in fair value is recognized immediately. Additionally, we hold certain positions, primarily in grain and livestock
futures that either do not meet the criteria for hedge accounting or are not designated as hedges. With the exception of normal
purchases and normal sales that are expected to result in physical delivery, we record these positions at fair value, and the unrealized
gains and losses are reported in earnings at each reporting date. 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 potential 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 financial 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
financial instruments can experience significant price fluctuations, any requirement to mark-to-market the positions that have not been
designated or do not qualify as hedges 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 29, 2012, and October 1, 2011, on
the fair value of open positions. The fair value of such positions is a summation of the fair values calculated for each commodity by
valuing each net position at quoted futures prices. The market risk exposure analysis includes hedge and non-hedge derivative
financial instruments.
Effect of 10% change in fair value in millions
2012 2011
Livestock:
Cattle $ 42 $ 34
Hogs 37 57
Grain 30 11
Interest Rate Risk: At September 29, 2012, we had variable rate debt of $219 million with a weighted average interest rate of 3.9%.
A hypothetical 10% increase in interest rates effective at September 29, 2012, and October 1, 2011, would have a minimal effect on
interest expense.
Additionally, changes in interest rates impact the fair value of our fixed-rate debt. At September 29, 2012, we had fixed-rate debt of
$2.2 billion with a weighted average interest rate of 5.9%. Market risk for fixed-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 fixed-rate debt by approximately $16 million at September 29, 2012, and $5 million at October 1, 2011. The fair
values of our debt were estimated based on quoted market prices and/or published interest rates.
Foreign Currency Risk: We have foreign exchange exposure from fluctuations in foreign currency exchange rates primarily as a
result of certain receivable and payable balances. The primary currencies we have exposure to are the Brazilian real, the British pound
sterling, the Canadian dollar, the Chinese renminbi, the European euro, and the Mexican peso. We periodically enter into foreign
exchange forward and option contracts to hedge some portion of our foreign currency exposure. A hypothetical 10% change in foreign
exchange rates effective at September 29, 2012, and October 1, 2011, related to the foreign exchange forward and option contracts
would have a $21 million and $18 million impact, respectively, on pretax income. In the future, we may enter into more foreign
exchange forward and option contracts as a result of our international growth strategy.