Tyson Foods 2012 Annual Report Download - page 57

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57
Undesignated positions
In addition to our designated positions, we also hold forward and option contracts for which we do not apply hedge accounting. These
include certain derivative instruments related to commodities price risk, including grains, livestock, energy, foreign currency risk and
interest rate risk. We mark these positions to fair value through earnings at each reporting date. We generally do not enter into
undesignated positions beyond 18 months.
The objective of our undesignated grains, livestock and energy commodity positions is to reduce the variability of cash flows
associated with the forecasted purchase of certain grains, energy and livestock inputs to our production processes. We also enter into
certain forward sales of boxed beef and boxed pork and forward purchases of cattle and hogs at fixed prices. The fixed price sales
contracts lock in the proceeds from a future sale and the fixed cattle and hog 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 fixed price.
As we enter into fixed forward sales of boxed beef and boxed pork and forward purchases of cattle and hogs, we also enter into the
appropriate number of livestock options and futures positions to mitigate a portion of this risk. Changes in market value of the open
livestock options and futures positions are marked to market and reported in earnings at each reporting date, even though the
economic impact of our fixed prices being above or below the market price is only realized at the time of sale or purchase. These
positions generally do not qualify for hedge treatment due to location basis differences between the commodity exchanges and the
actual locations when we purchase the commodities.
We have a foreign currency cash flow hedging program to hedge portions of forecasted transactions denominated in foreign
currencies, primarily with forward and option contracts, to protect against the reduction in value of forecasted foreign currency cash
flows. Our undesignated foreign currency positions generally would qualify for cash flow hedge accounting. However, to reduce
earnings volatility, we normally will not elect hedge accounting treatment when the position provides an offset to the underlying
related transaction that impacts current impacts.
The objective of our undesignated interest rate swap is to manage interest rate risk exposure on a floating-rate bond. Our interest rate
swap agreement effectively modifies our exposure to interest rate risk by converting a portion of the floating-rate bond to a fixed rate
basis for the first five years, thus reducing the impact of the interest-rate changes on future interest expense. This interest rate swap
does not qualify for hedge treatment due to differences in the underlying bond and swap contract interest-rate indices.
We had the following aggregate outstanding notional values related to our undesignated positions (in millions, except soy meal tons):
Metric September 29, 2012 October 1, 2011
Commodity:
Corn Bushels 19 17
Soy Meal Tons 1,200 174,600
Soy Oil Pounds 17 13
Live Cattle Pounds 68 72
Lean Hogs Pounds 108 19
Foreign Currency United States dollars $ 165 $ 110
Interest Rate Average monthly notional debt $ 27 $ 39
The following table sets forth the pretax impact of the undesignated derivative instruments on the Consolidated Statements of Income
(in millions):
Consolidated
Statements of Income
Classification
Gain/(Loss)
Recognized
in Earnings
2012 2011 2010
Derivatives not designated as hedging instruments:
Commodity contracts Sales $ (10) $ 20 $ 27
Commodity contracts Cost of Sales 51 (2) (20)
Foreign exchange contracts Other Income/Expense — (3) (5)
Interest rate contracts Interest Expense — — 1
Total $ 41 $ 15 $ 3