General Mills (NYSE: GIS) is eating its competition for breakfast by getting into the complex world of commodity derivatives. The cereal-maker announced a 61% increase in net earnings that can be largely attributed to a successful bet on the fall of commodity prices. Meanwhile, the company also saw continued strength in customer demand and would have beat earnings by a healthy margin even without the one-time gain from commodity hedges.

General Mills saw its sales jump 12% amid product price increases and stronger shipments while its commodity hedge resulted in a one-time gain of 27 cents per share. The cereal-maker also raised its financial forecast for fiscal 2008 to reflect the one-time hedging and tax gains booked this quarter; the lack of a greater forecast suggests that the company will continue to pour more money into marketing its products.

Many companies prefer to hedge their bets against commodities that they use in order to offset price increases and it is not uncommon for these actions to turn a profit in volatile environments like the current one. Some companies like Goldman Sachs (NYSE: GS) even managed to turn a profit by betting against the very products they were offering investors! However, the big question is whether or not the hedges will last long enough.

Hedges that these companies use are often derivative securities like options or swap contracts. These securities are essentially contracts that let companies purchase products at a certain price and date in the future. For example, back in 2006, General Mills may have purchased grain for a dollar to be delivered in 2007 when prices are now two dollars on the open market. The process lets companies plan ahead for raw material costs and keep costs low during tough environments.

In the end, General Mills continues to be a strong company that is trading very close to its 52-week low. The commodity hedge proved to be a boost to its bottom line while its existing product sales still managed to outperform. How long this will last remains to be seen as food costs continue to rise, but this is definitely a stock worth watching in the meantime!

Related Companies
Ralcorp Holdings, Inc. (RAH)
Kellogg Company (K)
ConAgra Foods, Inc. (CAG)
Kraft Foods, Inc. (KFT)
The Hain Celestial Group, Inc. (HAIN)