Derivatives and Fair Value of Financial Instruments

6 Months Ended

Jun. 27, 2020

Derivatives and Fair Value of Financial Instruments

Derivatives and Fair Value of Financial Instruments

Note 6 – 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 27, 2020 and December 31, 2019, 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 27,
(Millions of dollars)	2020		Level 1		Level 2		Level 3
Assets:
Trading securities – short-term investments:
Domestic equity securities	$	546	$	546	$	—	$	—
Domestic debt securities		389		121		268		—
Foreign equity securities		100		100		—		—
Foreign debt securities		54		—		54		—
High yield securities		46		7		39		—
Money market funds held in trading accounts		24		24		—		—
Collateralized loan obligations		14		—		14		—
Other trading securities		5		4		1		—
Trading securities – other current assets:
Domestic equity securities		40		40		—		—
Money market fund held in trading accounts		6		6		—		—
Foreign equity securities		2		2		—		—
Fixed income securities		2		2		—		—
Long-term investments		29		—		—		29
Derivatives:
Commodities		9		9		—		—
Total Assets	$	1,266	$	861	$	376	$	29
Liabilities:
Contingent consideration	$	15	$	—	$	—	$	15
Derivatives:
Commodities		2		2		—		—
Interest rate swaps		1		—		1		—
Foreign currencies		2		—		2		—
Total Liabilities	$	20	$	2	$	3	$	15

	Balance
	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 fund 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

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. 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.

During the first quarter of 2020, Seaboard invested $30 million in a financial services company that primarily lends to and invests in debt securities of privately held companies. This long-term investment is classified in “Other non-current assets” on the condensed consolidated balance sheet and is valued at net asset value (“NAV”), adjusted for specific liquidity factors, resulting in level 3 classification.

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 with adjustments included in net earnings (loss). The increase in the liability during 2020 was related to lower interest rates at the measurement date.

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, interest rates and equity prices could have a material impact on earnings in any given period. The nature of Seaboard’s market risk exposure has not changed materially since December 31, 2019.

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 27, 2020, Seaboard had open net derivative contracts to purchase 35 million pounds of sugar and open net derivative contracts to sell 29 million pounds of soybean oil. 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. 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. As of June 27, 2020 and December 31, 2019, Seaboard had 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 $50 million and $78 million, respectively, primarily related to the South African rand and the 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 contracts. As of June 27, 2020, Seaboard had a maximum aggregate 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.

Interest Rate Swap Agreements

Seaboard enters into interest rate swap agreements to manage the interest rate risk with respect to certain variable rate long-term debt. During the second quarter of 2020, Seaboard entered into two interest rate exchange agreements with an aggregate notional value totaling $100 million that mature in May 2025. Seaboard pays fixed-rate interest payments in the range of 0.30% to 0.35% over the life of the agreements and receives variable-rate interest payments based on the one-month LIBOR from the counterparty without the exchange of the underlying notional amounts. Interest rate exchange agreements are recorded at fair value with changes in value marked-to-market as a component of interest expense, net in the condensed consolidated statements of comprehensive income. Subsequently in the third quarter of 2020, Seaboard entered into an interest rate exchange agreement with a notional value of $300 million that matures in July 2025 with a fixed interest rate of 0.24%.

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 $131 million and $0 million as of June 27, 2020 and December 31, 2019, 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 27,		June 29,		June 27,		June 29,
(Millions of dollars)		2020		2019		2020		2019
Commodities	Cost of sales	$	(4)	$	1	$	17	$	(31)
Foreign currencies	Cost of sales		1		1		13		4
Foreign currencies	Foreign currency gains (losses), net		—		—		1		—
Equity	Other investment income (loss), net		(5)		—		23		(3)
Interest rate swaps	Interest expense		(1)		—		(1)		—

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 27,		December 31,			June 27,		December 31,
(Millions of dollars)		2020		2019			2020		2019
Commodities	Other current assets	$	9	$	6	Other current liabilities	$	2	$	4
Foreign currencies	Other current assets		—		—	Other current liabilities		2		3
Interest rate swaps	Other current assets		—		—	Other current liabilities		1		—
Equity	Short-term investments		1		—	Short-term investments		—		—

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 27, 2020 and December 31, 2019, the commodity derivatives had a margin account balance of $17 million and $13 million, respectively, resulting in a net other current asset in the condensed consolidated balance sheets of $24 million and $15 million, respectively. Seaboard’s equity derivatives are also presented on a net basis, including netting the derivatives within short-term investments.