Derivatives and Fair Value of Financial Instruments

6 Months Ended

Jun. 29, 2019

Derivatives and Fair Value of Financial Instruments

Derivatives and Fair Value of Financial Instruments

Note 7 – Derivatives and Fair Value of Financial Instruments

The following tables shows assets and liabilities measured at fair value on a recurring basis as of June 29, 2019 and December 31, 2018, and also the level within the fair value hierarchy used to measure each category of assets and liabilities. The trading securities classified as other current assets below are assets held for Seaboard’s deferred compensation plans.

	Balance
	June 29,
(Millions of dollars)	2019		Level 1		Level 2		Level 3
Assets:
Trading securities – short-term investments:
Domestic equity securities	$	689	$	689	$	—	$	—
Domestic debt securities		392		115		277		—
Foreign equity securities		195		195		—		—
High yield securities		57		10		47		—
Foreign debt securities		49		2		47		—
Collateralized loan obligations		27		—		27		—
Money market funds held in trading accounts		21		21		—		—
Term deposits		5		5		—		—
Other trading securities		5		5		—		—
Trading securities – other current assets:
Domestic equity securities		36		36		—		—
Money market fund held in trading accounts		2		2		—		—
Foreign equity securities		2		2		—		—
Fixed income securities		2		2		—		—
Other		2		1		1		—
Derivatives:
Commodities (1)		8		8		—		—
Foreign currencies		1		—		1		—
Total Assets	$	1,493	$	1,093	$	400	$	—
Liabilities:
Contingent consideration	$	13	$	—	$	—	$	13
Derivatives:
Commodities (1)		6		6		—		—
Total Liabilities	$	19	$	6	$	—	$	13

(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 June 29, 2019, the commodity derivatives had a margin account balance of $11 million resulting in a net other current asset in the condensed consolidated balance sheet of $13 million.

	Balance
	December 31,
(Millions of dollars)	2018		Level 1		Level 2		Level 3
Assets:
Trading securities – short-term investments:
Domestic equity securities	$	632	$	632	$	—	$	—
Domestic debt securities		268		215		53		—
Foreign equity securities		218		218		—		—
Money market funds held in trading accounts		146		146		—		—
Collateralized loan obligations		28		—		28		—
High yield securities		19		7		12		—
Foreign debt securities		16		2		14		—
Term deposits		9		9		—		—
Other trading securities		5		5		—		—
Trading securities – other current assets:
Domestic equity securities		32		32		—		—
Money market fund held in trading accounts		5		5		—		—
Foreign equity securities		3		3		—		—
Fixed income securities		3		3		—		—
Other		1		1		—		—
Derivatives:
Commodities (1)		6		4		2		—
Foreign currencies		2		—		2		—
Total Assets	$	1,393	$	1,282	$	111	$	—
Liabilities:
Trading securities – short-term investments:
Other trading securities	$	5	$	—	$	5	$	—
Contingent consideration		13		—		—		13
Derivatives:
Commodities (1)		4	$	4	$	—	$	—
Total Liabilities	$	22	$	4	$	5	$	13

(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 December 31, 2018, the commodity derivatives had a margin account balance of $15 million resulting in a net other current asset in the condensed consolidated balance sheet of $17 million.

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 short-term investments is measured using multiple levels. Domestic debt securities categorized as level 1 in the fair value hierarchy include debt securities held in mutual funds and ETFs. Domestic debt securities categorized as level 2 include corporate bonds, mortgage-backed securities, asset-backed securities and U.S. Treasuries. Foreign debt securities categorized as level 1 in the fair value hierarchy include debt securities held in mutual funds and ETFs with a country of origin concentration outside the U.S. Foreign debt securities categorized as level 2 include foreign government or government related securities and asset-backed securities with a country of origin concentration outside the U.S. High yield securities categorized as level 1 in the fair value hierarchy include high yield securities held in mutual funds and ETFs, and level 2 includes corporate bonds and bank loans.

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 mostly variable-rate, the 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 related to a 2018 acquisition was classified as a level 3 in the fair value hierarchy since the calculation is dependent upon projected company specific inputs using a Monte Carlo simulation. Seaboard will remeasure the estimated fair value of the contingent consideration liability until settled.

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 reporting period. The nature of Seaboard’s market risk exposure has not changed materially since December 31, 2018.

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. As of June 29, 2019, Seaboard had open net derivative contracts to purchase 21 million bushels of grain and 11 million pounds of hogs and open net derivative contracts to sell 46 million pounds of soybean oil and 4 million gallons of heating oil. As of December 31, 2018, Seaboard had open net derivative contracts to purchase 33 million bushels of grain and 8 million pounds of soybean oil and open net derivative contracts to sell 26 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 (losses), net in the condensed consolidated statements of comprehensive income. As of June 29, 2019 and December 31, 2018, 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 $66 million and $82 million, respectively, primarily related to the South African rand and euro. 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 applicable agreements. As of June 29, 2019, Seaboard had a maximum amount of loss due to credit risk of $1 million with five counterparties related to foreign currency exchange agreements. Seaboard does not hold any collateral related to these agreements.

Equity Futures Contracts

Seaboard enters into equity futures contracts to manage the equity price risk with respect to certain short-term investments. Equity futures contracts are recorded at fair value with changes in value marked-to-market as a component of other investment income (loss), net in the condensed consolidated statements of comprehensive income. The notional amounts of these equity futures contracts were less than $1 million and $97 million as of June 29, 2019 and December 31, 2018, respectively.

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				Six Months Ended
		June 29,		June 30,		June 29,		June 30,
(Millions of dollars)		2019		2018		2019		2018
Commodities	Cost of sales	$	1	$	(25)	$	(31)	$	(16)
Foreign currencies	Cost of sales		1		2		4		(4)
Equity	Other investment income (loss), net		—		—		(3)		(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
		June 29,		December 31,			June 29,		December 31,
(Millions of dollars)		2019		2018			2019		2018
Commodities(1)	Other current assets	$	8	$	6	Other current liabilities	$	6	$	4
Foreign currencies	Other current assets		1		2	Other current liabilities		—		—
Equity (1)	Short-term investments		—		—	Short-term investments		—		5

(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. Seaboard’s equity derivatives are also presented on a net basis, including netting the derivatives within short-term investments.