Derivatives and Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2020

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 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)	2020		Level 1		Level 2		Level 3
Assets:
Trading securities – short-term investments:
Domestic equity securities	$	702	$	702	$	—	$	—
Domestic debt securities		496		196		300		—
Foreign equity securities		133		133		—		—
Foreign debt securities		68		—		68		—
Money market funds held in trading accounts		47		47		—		—
Other trading securities		20		3		17		—
Trading securities – other current assets:
Domestic equity securities		14		14		—		—
Money market funds held in trading accounts		6		6		—		—
Foreign equity securities		3		3		—		—
Fixed income mutual funds		3		2		1		—
Long-term investment		31		—		—		31
Derivatives:
Commodities		28		28		—		—
Interest rate swaps		1		—		1		—
Total assets	$	1,552	$	1,134	$	387	$	31
Liabilities:
Trading securities – short-term investments:
Other trading securities	$	1	$	—	$	1	$	—
Contingent consideration		16		—		—		16
Derivatives:
Commodities		19		19		—		—
Foreign currencies		9		—		9		—
Total liabilities	$	45	$	19	$	10	$	16

	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		460		127		333		—
Foreign equity securities		189		189		—		—
Foreign debt securities		48		—		48		—
Money market funds held in trading accounts		12		12		—		—
Other trading securities		19		4		15		—
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

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, U.S. Treasuries and high-yield securities. Foreign debt securities categorized as level 2 include foreign government or government related securities, corporate bonds, asset-backed securities and high-yield securities with a country of origin concentration outside the U.S.

During 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 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 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 with adjustments included in net earnings (loss). The increase in the liability from 2019 to 2020 was related to lower interest rates.

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 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. Commodity derivatives are recorded at fair value, with any changes in fair value recognized as a component of cost of sales in the consolidated statements of comprehensive

income. As of December 31, 2020, Seaboard had open net derivative contracts to purchase 26 million bushels of grain and 2 million pounds of hogs and open net derivative contracts to sell 56 million pounds of soybean oil. As of December 31, 2019, Seaboard had open net derivative contracts to purchase 17 million bushels of grain and net derivative contracts to sell 132 million pounds of soybean oil and 12 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 recognized 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 recognized as a component of foreign currency gains (losses), net in the consolidated statements of comprehensive income. As of December 31, 2020 and 2019, Seaboard had foreign currency exchange agreements with notional amounts of $49 million and $78 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 contracts. As of December 31, 2020, Seaboard had a maximum aggregate amount of loss due to credit risk of less than $1 million with four counterparties related to its 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. Interest rate swap agreements are recorded at fair value with changes in value recognized as a component of interest expense, net in the consolidated statements of comprehensive income. During 2020, Seaboard entered into three interest rate swap agreements with an aggregate notional value of $400 million that mature in mid-2025. Seaboard pays fixed-rate interest payments at a weighted-average interest rate of 0.26% 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. Seaboard had a maximum aggregate amount of loss due to credit risk of less than $1 million with one counterparty related to interest rate swap 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 recognized 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 $3 million and $0 million as of December 31, 2020 and 2019, respectively.

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

(Millions of dollars)		2020		2019
Commodities	Cost of sales	$	55	$	(52)
Foreign currencies	Cost of sales		11		1
Foreign currencies	Foreign currency gains (losses), net		(5)		(1)
Equity	Other investment income (loss), net		—		(4)
Interest rate swaps	Interest expense		—		—

The following table provides the fair value of each type of derivative held 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)		2020		2019			2020		2019
Commodities	Other current assets	$	28	$	6	Other current liabilities	$	19	$	4
Foreign currencies	Other current assets		—		—	Other current liabilities		9		3
Interest rate swaps	Other current assets		1		—	Other current liabilities		—		—
Equity	Short-term investments		—		—	Short-term investments		—		—

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, 2020 and 2019, the commodity derivatives had a margin account balance of $15 million and $13 million, respectively, resulting in a net other current asset

in the 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.