Derivatives and Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2019

Derivatives and Fair Value of Financial Instruments

Derivatives and Fair Value of Financial Instruments

Note 11 - Derivatives and Fair Value of Financial Instruments

The fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value into three broad levels:

Level 1 — Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs other than quoted prices in active markets that are observable either directly or indirectly, including: quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Unobservable inputs that are supported by little or no market data and require the reporting entity to develop its own assumptions.

The following tables show assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018, respectively, and 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.

	December 31,
(Millions of dollars)	2019		Level 1		Level 2		Level 3
Assets:
Trading securities – short-term investments:
Domestic equity securities	$	706	$	706	$	—	$	—
Domestic debt securities		409		117		292		—
Foreign equity securities		189		189		—		—
High yield securities		56		10		46		—
Foreign debt securities		43		—		43		—
Collateralized loan obligations		15		—		15		—
Money market funds held in trading accounts		12		12		—		—
Other trading securities		4		4		—		—
Trading securities – other current assets:
Domestic equity securities		40		40		—		—
Money market funds held in trading accounts		6		6		—		—
Foreign equity securities		3		3		—		—
Fixed income securities		2		2		—		—
Derivatives:
Commodities		6		6		—		—
Total assets	$	1,491	$	1,095	$	396	$	—
Liabilities:
Contingent consideration	$	13	$	—	$	—	$	13
Derivatives:
Commodities		4		4		—		—
Foreign currencies		3		—		3		—
Total liabilities	$	20	$	4	$	3	$	13

	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		—
Other trading securities		14		14		—		—
Trading securities – other current assets:
Domestic equity securities		32		32		—		—
Money market funds held in trading accounts		5		5		—		—
Foreign equity securities		3		3		—		—
Fixed income securities		3		3		—		—
Other		1		1		—		—
Derivatives:
Commodities		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		4		4		—		—
Total liabilities	$	22	$	4	$	5	$	13

Financial instruments consisting of cash and cash equivalents, net receivables, lines of credit and accounts payable are carried at cost, which approximates fair value, as a result of the short-term nature of the instruments.

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 included 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, corporate bonds 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 primarily 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, its carrying amount approximates fair value. If Seaboard’s long-term debt was measured at fair value on its consolidated balance sheets, it would have been classified as level 2 in the fair value hierarchy. See Note 8 for a discussion of Seaboard’s long-term debt. 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 remeasures the estimated fair value of the contingent consideration liability until settled.

While management believes its derivatives are primarily economic hedges, 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.

Commodity Instruments

Seaboard uses various derivative futures and options to manage its risk to price fluctuations for raw materials and other inventories, finished product sales and firm sales commitments. Occasionally, Seaboard also enters into speculative derivative transactions not directly related to its raw material requirements. 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 consolidated statements of comprehensive income.

As of December 31, 2019, Seaboard had open net derivative contracts to purchase 17 million bushels of grain and open net derivative contracts to sell 132 million pounds of soybean oil and 12 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.

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 primarily relate 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 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 consolidated statements of comprehensive income. As of December 31, 2019 and 2018, Seaboard had foreign currency exchange agreements with notional amounts of $78 million and $82 million, respectively, primarily related to the South African rand, euro and the Canadian dollar. 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 December 31, 2019, Seaboard had a maximum aggregate amount of loss due to credit risk of less than $1 million of credit risk with three counterparties related to its 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 consolidated statements of comprehensive income. The notional amounts of these equity futures contracts were $0 million and $97 million as of December 31, 2019 and 2018, respectively.

The following table provides the amount of gain (loss) recognized for each type of derivative and where it was recognized in the consolidated statements of comprehensive income for the years ended December 31, 2019 and 2018:

(Millions of dollars)		2019		2018
Commodities	Cost of sales	$	(52)	$	(12)
Foreign currencies	Cost of sales		1		2
Foreign currencies	Foreign currency gains (losses), net		(1)		1
Equity	Other investment income (loss), net		(4)		(6)

The following table provides the fair value of each type of derivative held as of December 31, 2019 and 2018 and where each derivative is included in the consolidated balance sheets:

		Asset Derivatives					Liability Derivatives
		December 31,		December 31,			December 31,		December 31,
(Millions of dollars)		2019		2018			2019		2018
Commodities(a)	Other current assets	$	6	$	6	Other current liabilities	$	4	$	4
Foreign currencies	Other current assets		—		2	Other current liabilities		3		—
Equity(a)	Short-term investments		—		—	Short-term investments		—		5

^(a)Seaboard’s commodity derivative assets and liabilities are presented in the consolidated balance sheets on a net basis, including netting the derivatives with the related margin accounts. As of December 31, 2019 and 2018, the commodity derivatives had a margin account balance of $13 million and $15 million, respectively, resulting in a net other current asset in the consolidated balance sheets of $15 million and $17 million, respectively. Seaboard’s equity derivatives are also presented on a net basis, including netting the derivatives within short-term investments.