Derivatives and Fair Value of Financial Instruments

9 Months Ended

Oct. 02, 2021

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 show assets and liabilities measured at fair value on a recurring basis as of October 2, 2021 and December 31, 2020, 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
	October 2,
(Millions of dollars)	2021		Level 1		Level 2		Level 3
Assets:
Trading securities – short-term investments:
Domestic debt securities	$	724	$	480	$	244	$	—
Domestic equity securities		446		446		—		—
Foreign equity securities		192		192		—		—
Foreign debt securities		124		2		122		—
Money market funds held in trading accounts		9		9		—		—
Other trading securities		22		—		22		—
Trading securities – other current assets:
Domestic equity securities		14		14		—		—
Money market fund held in trading accounts		6		6		—		—
Foreign equity securities		4		4		—		—
Fixed income mutual funds		3		2		1		—
Long-term investment - BDC		82		—		—		82
Derivatives:
Commodities		16		16		—		—
Foreign currencies		3		—		3		—
Total Assets	$	1,645	$	1,171	$	392	$	82
Liabilities:
Trading securities – short-term investments:
Other trading securities	$	1	$	—	$	1	$	—
Contingent consideration		18		—		—		18
Derivatives:
Commodities		11		11		—		—
Foreign currencies		1		—		1		—
Total Liabilities	$	31	$	11	$	2	$	18

	Balance
	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 fund held in trading accounts		6		6		—		—
Foreign equity securities		3		3		—		—
Fixed income mutual funds		3		2		1		—
Long-term investment - BDC		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

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. Seaboard’s long-term debt is recorded on the financials at amortized cost. Since most long-term debt is variable-rate, its carrying amount approximates fair value, and would have been classified as level 2.

Seaboard has a long-term investment in a BDC that primarily lends to and invests in debt securities of privately held companies. This long-term investment is classified in other non-current assets and is valued at net asset value (“NAV”), adjusted for specific liquidity factors, resulting in level 3 classification. The change in value during 2021 is related to an additional contribution of $50 million and equity market activity and is recorded in other investment income (loss).

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 interest expense. The change in value during 2021 was related to new financial information, foreign currency rates, interest rates and estimated earnings before interest taxes depreciation and amortization projections at the measurement date.

Seaboard’s operations are exposed to market risks from changes in commodity prices, foreign currency exchange rates, interest rates and equity prices. Seaboard uses various commodity derivative futures and options to manage its risk of price fluctuations for raw materials and other inventories, finished product sales and firm sales commitments. Also, Seaboard enters into foreign currency exchange agreements to manage the foreign currency exchange rate risk with respect to certain

transactions denominated in foreign currencies, interest rate swap agreements to manage the interest rate risk with respect to certain variable rate long-term debt, and equity futures contracts to manage the equity price risk with respect to certain short-term investments. 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. These derivative contracts are recorded at fair value, with any changes in fair value recognized in the condensed consolidated statements of comprehensive income. As the derivative contracts are not accounted for as hedges, fluctuations in the related prices or rates 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, 2020.

Seaboard had the following aggregated outstanding notional amounts related to derivative financial instruments:

		October 2,	December 31,
(Millions)	Metric	2021	2020
Commodities
Grain	Bushels	33	26
Hogs	Pounds	1	2
Soybean oil	Pounds	10	56
Heating oil	Gallons	11	—
Foreign currencies	U.S. dollar	92	49
Interest rate swaps	U.S. dollar	—	400
Equity futures	U.S. dollar	14	3

During the third quarter of 2021, all of Seaboard’s interest rate swap agreements were terminated resulting in a realized gain of $5 million for the nine months ended October 2, 2021, recognized as an offset to interest expense. The agreements were structured with early termination rights allowing Seaboard to terminate them at no cost. Seaboard paid fixed-rate interest payments at a weighted-average interest rate of 0.26% and received variable-rate interest payments based on the one-month LIBOR from the counterparty.

Credit risks associated with these derivative contracts are not significant as Seaboard minimizes counterparty exposure by dealing with credit-worthy counterparties and uses margin accounts for some contracts. At October 2, 2021, the maximum amount of credit risk, had the counterparties failed to perform according to the terms of the contract, was $3 million.

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

		Three Months Ended				Nine Months Ended
		October 2,		September 26,		October 2,		September 26,
(Millions of dollars)		2021		2020		2021		2020
Commodities	Cost of sales	$	(12)	$	10	$	(32)	$	27
Foreign currencies	Cost of sales		6		2		9		15
Foreign currencies	Foreign currency gains (losses), net		1		(3)		4		(2)
Interest rate swaps	Interest expense		(1)		—		5		(1)
Equity futures	Other investment income (loss), net		(1)		(16)		(1)		7

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
		October 2,		December 31,			October 2,		December 31,
(Millions of dollars)		2021		2020			2021		2020
Commodities	Other current assets	$	16	$	28	Other current liabilities	$	11	$	19
Foreign currencies	Other current assets		3		—	Other current liabilities		1		9
Interest rate swaps	Other current assets		—		1	Other current liabilities		—		—
Equity futures	Short-term investments		—		—	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 October 2, 2021 and December 31, 2020, the commodity derivatives had a margin account balance of $37 million and $15 million, respectively, resulting in a net other current asset in the condensed consolidated balance sheets of $42 million and $24 million, respectively. Seaboard’s equity future derivatives are also presented on a net basis, including netting the derivatives within short-term investments.