Tyson Foods 2014 Annual Report Download - page 74

NOTE 12: DERIVATIVE FINANCIAL INSTRUMENTS
Our business operations give rise to certain market risk exposures mostly due to changes in commodity prices, foreign currency exchange rates
and interest rates. We manage a portion of these risks through the use of derivative financial instruments, primarily futures and options, to
reduce our exposure to commodity price risk, foreign currency risk and interest rate risk. Forwards on various commodities, including grains,
livestock and energy, are primarily entered into to manage the price risk associated with forecasted purchases of these inputs used in our
production processes. Foreign exchange forward contracts are entered into to manage the fluctuations in foreign currency exchange rates,
primarily as a result of certain receivable and payable balances. We also periodically utilize interest rate swaps to manage interest rate risk
associated with our variable-rate borrowings.
Our risk management programs are periodically reviewed by our Board of Directors’ Audit Committee. These programs are monitored by
senior management and may be revised as market conditions dictate. Our current risk management programs utilize industry-standard models
that take into account the implicit cost of hedging. Risks associated with our market risks and those created by derivative instruments and the
fair values are strictly monitored, using Value-at-
Risk and stress tests. Credit risks associated with our derivative contracts are not significant as
we minimize counterparty concentrations, utilize margin accounts or letters of credit, and deal with credit-worthy counterparties. Additionally,
our derivative contracts are mostly short-term in duration and we generally do not make use of credit-risk-related contingent features. No
significant concentrations of credit risk existed at September 27, 2014 .
We recognize all derivative instruments as either assets or liabilities at fair value in the Consolidated Balance Sheets, with the exception of
normal purchases and normal sales expected to result in physical delivery. The accounting for changes in the fair value (i.e., gains or losses) of
a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and the type of hedging
relationship. For those derivative instruments that are designated and qualify as hedging instruments, we designate the hedging instrument
based upon the exposure being hedged (i.e., cash flow hedge or fair value hedge). We qualify, or designate, a derivative financial instrument as
a hedge when contract terms closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. 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) (OCI) until the hedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value is
recognized in earnings immediately. We designate certain forward contracts as follows:
Cash flow hedges
Derivative instruments, such as futures and options, are designated as hedges against changes in the amount of future cash flows related to
procurement of certain commodities utilized in our production processes. We do not purchase forward and option commodity contracts in
excess of our physical consumption requirements and generally do not hedge forecasted transactions beyond 18 months
. The objective of these
hedges is to reduce the variability of cash flows associated with the forecasted purchase of those commodities. For the derivative instruments
we designate and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of OCI and
reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses representing
hedge ineffectiveness are recognized in earnings in the current period. Ineffectiveness related to our cash flow hedges was not significant
during fiscal 2014 , 2013 and 2012 .
We had the following aggregated notional values of outstanding forward and option contracts accounted for as cash flow hedges:
As of September 27, 2014 , the net amounts expected to be reclassified into earnings within the next 12 months are pretax losses of $4 million
related to grain. During fiscal 2014 , 2013 and 2012 , we did not reclassify significant pretax gains/losses into earnings as a result of the
discontinuance of cash flow hedges due to the probability the original forecasted transaction would not occur by the end of the originally
specified time period or within the additional period of time allowed by generally accepted accounting principles.
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• Cash Flow Hedges – include certain commodity forward and option contracts of forecasted purchases (i.e., grains) and certain foreign
exchange forward contracts.
• Fair Value Hedges –
include certain commodity forward contracts of firm commitments (i.e., livestock).
in millions, except soy meal tons
Metric
September 27, 2014
September 28, 2013
Commodity:
Corn
Bushels
—
5
Soy Meal
Tons
2,300
96,800
Foreign Currency
United States dollar
$
1
$
60