Note 6 – Derivatives and Fair Value of Financial Instruments

Seaboard uses a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three broad levels:

Level 1: Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities that Seaboard has the ability to access at the measurement date.

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

The following table shows assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 and also the level within the fair value hierarchy used to measure each category of assets and liabilities. Seaboard determines if there are any transfers between levels at the end of a reporting period. There were no transfers between levels that occurred in the first three months of 2018. The trading securities classified as other current assets below are assets held for Seaboard’s deferred compensation plans.



	Balance
	March 31,
(Millions of dollars)	2018		Level 1		Level 2		Level 3
Assets:
Trading securities – short-term investments:
Domestic equity securities	$	744	$	744	$	—	$	—
Foreign equity securities		320		320		—		—
Domestic debt securities held in mutual funds/ETFs/U.S. Treasuries		135		111		24		—
Collateralized loan obligations		28		—		28		—
High yield securities		21		21		—		—
Money market funds held in trading accounts		8		8		—		—
Other trading securities		8		5		3		—
Trading securities – other current assets:
Domestic equity securities		34		34		—		—
Money market fund held in trading accounts		5		5		—		—
Foreign equity securities		4		4		—		—
Fixed income securities		3		3		—		—
Derivatives:
Commodities (1)		5		5		—		—
Total Assets	$	1,315	$	1,260	$	55	$	—
Liabilities:
Derivatives:
Commodities (1)	$	11	$	11	$	—	$	—
Foreign currencies		1		—		1		—
Total Liabilities	$	12	$	11	$	1	$	—

⁽¹⁾

The following table shows assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 and also the level within the fair value hierarchy used to measure each category of assets and liabilities.



	Balance
	December 31,
(Millions of dollars)	2017		Level 1		Level 2		Level 3
Assets:
Trading securities – short-term investments:
Domestic equity securities	$	752	$	752	$	—	$	—
Domestic debt securities held in mutual funds/ETFs/U.S. Treasuries		439		438		1		—
Foreign equity securities		319		319		—		—
Collateralized loan obligations		29		—		29		—
High yield securities		21		21		—		—
Money market funds held in trading accounts		10		10		—		—
Other trading securities		6		6		—		—
Trading securities – other current assets:
Domestic equity securities		35		35		—		—
Money market fund held in trading accounts		5		5		—		—
Foreign equity securities		4		4		—		—
Fixed income securities		2		2		—		—
Derivatives:
Commodities (1)		4		4		—		—
Foreign currencies		3		—		3		—
Total Assets	$	1,629	$	1,596	$	33	$	—
Liabilities:
Derivatives:
Commodities (1)	$	6	$	6	$	—	$	—
Foreign currencies		6		—		6		—
Total Liabilities	$	12	$	6	$	6	$	—

⁽¹⁾

Financial instruments consisting of cash and cash equivalents, net receivables, notes payable, and accounts payable are carried at cost, which approximates fair value as a result of the short-term nature of the instruments. The fair value of long-term debt is estimated by comparing interest rates for debt with similar terms and maturities. As Seaboard’s long-term debt is variable-rate, its carrying amount approximates fair value. If Seaboard’s long-term debt was measured at fair value in its condensed consolidated balance sheets, it would have been classified as level 2 in the fair value hierarchy. The fair value of Seaboard’s contingent consideration recorded in conjunction with the acquisition discussed further in Note 10 was classified as a level 3 in the fair value hierarchy as the calculation is dependent upon a company specific model.

While management believes its derivatives are primarily economic hedges of its firm purchase and sales contracts or anticipated sales contracts, Seaboard does not perform the extensive record-keeping required to account for these types of transactions as hedges for accounting purposes. As the derivatives discussed below are not accounted for as hedges, fluctuations in the related commodity prices, foreign currency exchange rates and equity prices could have a material impact on earnings in any given period. Seaboard also enters into speculative derivative transactions not directly related to its raw material requirements. The nature of Seaboard’s market risk exposure has not changed materially since December 31, 2017.

Commodity Instruments

Seaboard uses various derivative futures and options to manage its risk of price fluctuations for raw materials and other inventories, finished product sales and firm sales commitments. At March 31, 2018, Seaboard had open net derivative contracts to purchase 91 million pounds of soybean oil, 30 million bushels of grain and 26 million pounds of hogs, and open net derivative contracts to sell 17 million gallons of heating oil. At December 31, 2017, Seaboard had open net derivative contracts to purchase 29 million bushels of grain and 1 million pounds of soybean oil, and open net derivative contracts to sell 13 million pounds of hogs and 7 million gallons of heating oil. Commodity derivatives are recorded at fair value with any changes in fair value being marked-to-market as a component of cost of sales in the condensed consolidated statements of comprehensive income.

Foreign Currency Exchange Agreements

Seaboard enters into foreign currency exchange agreements to manage the foreign currency exchange rate risk with respect to certain transactions denominated in foreign currencies. Foreign currency exchange agreements that are primarily related to an underlying commodity transaction are recorded at fair value with changes in value marked-to-market as a component of cost of sales in the condensed consolidated statements of comprehensive income. Foreign currency exchange agreements that are not related to an underlying commodity transaction are recorded at fair value with changes in value marked-to-market as a component of foreign currency gains, net in the condensed consolidated statements of comprehensive income. At March 31, 2018 and December 31, 2017, Seaboard had trading foreign currency exchange agreements to cover a portion of its firm sales and purchase commitments and related trade receivables and payables with net notional amounts of $70 million and $20 million, respectively, primarily related to the South African rand, Canadian dollar and euro.

Equity Future Contracts

Seaboard enters into equity future contracts to manage the equity price risk with respect to certain short-term investments. Equity future contracts are recorded at fair value with changes in value marked-to-market as a component of other investment income (loss) in the condensed consolidated statements of comprehensive income. The notional amounts of these equity future contracts were $371 million and $0 million at March 31, 2018 and December 31, 2017, respectively.

Counterparty Credit Risk

From time to time Seaboard is subject to counterparty credit risk related to its foreign currency exchange agreements should the counterparties fail to perform according to the terms of the contracts. As of March 31, 2018, Seaboard had a maximum amount of loss due to credit risk of less than $1 million with two counterparties related to foreign currency exchange agreements. Seaboard does not hold any collateral related to these agreements.

The following table provides the amount of gain or (loss) recognized in income for each type of derivative and where it was recognized in the condensed consolidated statements of comprehensive income.



		Three Months Ended
		March 31,		April 1,
(Millions of dollars)		2018		2017
Commodities	Cost of sales	$	9	$	2
Foreign currencies	Cost of sales		(6)		(5)
Equity	Other investment income (loss), net		(10)		—

The following table provides the fair value of each type of derivative held and where each derivative is included in the condensed consolidated balance sheets.



		Asset Derivatives					Liability Derivatives
		March 31,		December 31,			March 31,		December 31,
(Millions of dollars)		2018		2017			2018		2017
Commodities (1)	Other current assets	$	5	$	4	Other current liabilities	$	11	$	6
Foreign currencies	Other current assets		—		3	Other current liabilities		1		6
Equity (1)			—		—	Short-term investments		1		—

⁽¹⁾

Seaboard’s commodity derivative assets and liabilities are presented in the condensed consolidated balance sheets on a net basis, including netting the derivatives with the related margin accounts. As of March 31, 2018 and December 31, 2017, the commodity derivatives had a margin account balance of $23 million and $20 million, respectively, resulting in a net other current asset in the condensed consolidated balance sheets of $17 million and $18 million, respectively. Seaboard’s equity derivatives are also presented on a net basis, including netting the derivatives within short-term investments.