Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We use certain derivative instruments to manage our interest rate, foreign currency exchange rate and commodity price risks. We monitor and manage these exposures as part of our overall risk management program.

We enter into interest rate swap agreements and foreign currency forward exchange contracts for periods consistent with related underlying exposures. We enter into commodities futures and options contracts and other derivative instruments for varying periods. These commodity derivative instruments are intended to be, and are effective as, economic hedges of market price risks associated with anticipated raw material purchases, energy requirements and transportation costs. We do not hold or issue derivative instruments for trading purposes and are not a party to any instruments with leverage or prepayment features.

In entering into these contracts, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. We mitigate this risk by entering into exchange-traded contracts with collateral posting requirements and/or by performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. We do not expect any significant losses from counterparty defaults.

Refer to Note 1 and Note 5 to the Consolidated Financial Statements for further discussion of these derivative instruments and our hedging policies.

Interest Rate Risk

In December 2020, our fixed-to-floating interest rate swap matured in connection with the repayment of certain long-term debt upon its maturity. Therefore, as of December 31, 2021 and December 31, 2020, we had no interest rate swap derivative instruments in a fair value hedging relationship. Prior to maturing in December 2020, the total notional amount of interest rate swaps was $350 million. The notional amount relates to fixed-to-floating interest rate swaps which convert a comparable amount of fixed-rate debt to variable rate debt. A hypothetical 100 basis point increase in interest rates applied to this variable-rate debt through its December 2020 maturity would have increased interest expense by approximately $3.2 million for 2020.

In addition, the total amount of short-term debt, net of cash, amounted to net debt of $610 million and net cash of $1.1 billion, respectively, at December 31, 2021 and 2020. A hypothetical 100 basis point increase in interest rates applied to this variable-rate short-term debt as of December 31, 2021 would have changed interest expense by approximately $2.4 million for 2021 and $8.6 million for 2020.

We consider our current risk related to market fluctuations in interest rates on our remaining debt portfolio, excluding fixed-rate debt converted to variable rates with fixed-to-floating instruments, to be minimal since this debt is largely long-term and fixed-rate in nature. Generally, the fair market value of fixed-rate debt will increase as interest rates fall and decrease as interest rates rise. A 100 basis point increase in market interest rates would decrease the fair value of our fixed-rate long-term debt at December 31, 2021 and December 31, 2020 by approximately $319 million and $357 million, respectively. However, since we currently have no plans to repurchase our outstanding fixed-rate instruments before their maturities, the impact of market interest rate fluctuations on our long-term debt does not affect our results of operations or financial position.

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Foreign Currency Exchange Rate Risk

We are exposed to currency fluctuations related to manufacturing or selling products in currencies other than the U.S. dollar. We may enter into foreign currency forward exchange contracts to reduce fluctuations in our long or short currency positions relating primarily to purchase commitments or forecasted purchases for equipment, raw materials and finished goods denominated in foreign currencies. We also may hedge payment of forecasted intercompany transactions with our subsidiaries outside of the United States. We generally hedge foreign currency price risks for periods from 3 to 12 months.

A summary of foreign currency forward exchange contracts and the corresponding amounts at contracted forward rates is as follows:

The fair value of foreign currency forward exchange contracts represents the difference between the contracted and current market foreign currency exchange rates at the end of the period. We estimate the fair value of foreign currency forward exchange contracts on a quarterly basis by obtaining market quotes of spot and forward rates for contracts with similar terms, adjusted where necessary for maturity differences. At December 31, 2021 and 2020, the net fair value of these instruments was an asset of $2.8 million and a liability of $3.1 million, respectively. In addition, assuming an unfavorable 10% change in year-end foreign currency exchange rates, the fair value of these instruments would have declined by $24.8 million and $25.6 million, respectively, generally offset by a reduction in foreign exchange associated with our transactional activities.

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Commodities—Price Risk Management and Futures Contracts

Our most significant raw material requirements include cocoa products, sugar, corn products, dairy products, peanuts and almonds. The cost of cocoa products and prices for related futures contracts and costs for certain other raw materials historically have been subject to wide fluctuations attributable to a variety of factors. These factors include:

• Commodity market fluctuations;

• Foreign currency exchange rates;

• Imbalances between supply and demand;

• Rising levels of inflation related to domestic and global economic conditions or supply chain issues;

• The effects of climate change and extreme weather on crop yield and quality;

• Speculative influences;

• Trade agreements among producing and consuming nations;

• Supplier compliance with commitments;

• Import/export requirements for raw materials and finished goods;

• Political unrest in producing countries;

• Introduction of living income premiums or similar requirements; and

• Changes in governmental agricultural programs and energy policies.

We use futures and options contracts and other commodity derivative instruments in combination with forward purchasing of cocoa products, sugar, corn products, certain dairy products, wheat products, natural gas and diesel fuel primarily to mitigate price volatility and provide visibility to future costs within our supply chain. Currently, active futures contracts are not available for use in pricing our other major raw material requirements, primarily peanuts and almonds. We attempt to minimize the effect of future raw material and energy price fluctuations by using derivatives and forward purchasing to cover future manufacturing requirements generally for 3 to 24 months. However, dairy futures liquidity is not as developed as many of the other commodity futures markets and, therefore, it can be difficult to hedge dairy costs for extended periods of time. We use diesel fuel futures to minimize price fluctuations associated with our transportation costs. Our commodity procurement practices are intended to mitigate price volatility and provide visibility to future costs, but also may potentially limit our ability to benefit from possible price decreases. Our costs for major raw materials will not necessarily reflect market price fluctuations because of our forward purchasing and hedging practices.

Cocoa Products

During 2021, average cocoa futures contract prices increased 2.7% compared with 2020 and traded in a narrow range between $1.04 and $1.27 per pound, based on the Intercontinental Exchange futures contract. Strong global production growth more than offset a firmer consumption picture with a corresponding increase in global stocks, especially in the United States. While the global surplus weighed on the price outlook for the first half of 2021, concerns over the next main crop, owing to early pod counts and below average rainfall, underpinned prices through year-end. The table below shows annual average cocoa futures prices and the highest and lowest monthly averages for each of the calendar years indicated. The prices reflect the monthly averages of the quotations at noon of the three active futures trading contracts closest to maturity on the Intercontinental Exchange.

Source: International Cocoa Organization Quarterly Bulletin of Cocoa Statistics

Our costs for cocoa products will not necessarily reflect market price fluctuations because of our forward purchasing and hedging practices, premiums and discounts reflective of varying delivery times, and supply and demand for our specific varieties and grades of cocoa liquor, cocoa butter and cocoa powder. As a result, the average futures contract prices are not necessarily indicative of our average costs.

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Sugar

The price of sugar is subject to price supports under U.S. farm legislation. Such legislation establishes import quotas and duties to support the price of sugar. As a result, sugar prices paid by users in the U.S. are currently higher than prices on the world sugar market. The U.S. delivered east coast refined sugar prices traded in a range from $0.45 to $0.58 per pound during 2021. Prices were historically high throughout 2021 due to lack of imports by the U.S. government resulting in an extremely tight domestic raw sugar market.

Corn Products

We use corn futures to price our corn sweetener product requirements. A strong rebound in ethanol production, along with continued strong exports, drove prices higher in 2021. Corn prices traded in a range from $4.84 to $7.32 per bushel during 2021.

Dairy Products

During 2021 prices for fluid dairy milk ranged from a low of $13.19 per pound to a high of $19.88 per pound, on a Class IV milk basis. Fluid dairy milk prices were higher than 2020, driven by declines in U.S. milk production and higher dairy demand.

Wheat Products

In 2021 we began utilizing soft and hard wheat futures as a risk management tool for our flour purchasing. Poor U.S. weather impacted production and resulted in lower stocks and higher prices compared to 2020. Hard wheat prices traded in the range of $5.62 to $8.84 per bushel during 2021, while soft wheat prices traded in the range of $5.99 to $8.67 per bushel during 2021.

Peanuts and Almonds

Peanut prices in the U.S. ranged from a low of $0.53 per pound to a high of $0.55 per pound during 2021. Prices rose this year due strong demand and tight supply. Almond prices began the year at $2.03 per pound and closed the year at $2.85 per pound during 2021. Persistent drought and concerns over the 2021 almond crop size drove price volatility.

Changes in the Value of Futures Contracts

We make or receive cash transfers to or from commodity futures brokers on a daily basis reflecting changes in the value of futures contracts on the Intercontinental Exchange or various other exchanges. These changes in value represent unrealized gains and losses. The cash transfers offset higher or lower cash requirements for the payment of future invoice prices of raw materials, energy requirements and transportation costs.

Commodity Sensitivity Analysis

Our open commodity derivative contracts had a notional value of $313.2 million as of December 31, 2021 and $279.8 million as of December 31, 2020. At the end of 2021, the potential change in fair value of commodity derivative instruments, assuming a 10% decrease in the underlying commodity price, would have increased our net unrealized losses in 2021 by $34.8 million, generally offset by a reduction in the cost of the underlying commodity purchases.

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