Derivatives and Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2021

Derivatives and Fair Value of Financial Instruments

Derivatives and Fair Value of Financial Instruments

Note 10 − 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 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)	2021		Level 1		Level 2		Level 3
Assets:
Trading securities – short-term investments:
Domestic debt securities	$	542	$	247	$	295	$	—
Domestic equity securities		472		472		—		—
Foreign equity securities		193		193		—		—
Foreign debt securities		133		2		131		—
Money market funds held in trading accounts		59		59		—		—
Other trading securities		17		—		17		—
Trading securities – other current assets:
Domestic equity securities		16		16		—		—
Other trading securities		13		12		1		—
Long-term investment - BDC		81		—		—		81
Derivatives:
Commodities		6		6		—		—
Foreign currencies		5		—		5		—
Total assets	$	1,537	$	1,007	$	449	$	81
Liabilities:
Contingent consideration	$	18	$	—	$	—	$	18
Derivatives:
Commodities		5		5		—		—
Foreign currencies		5		—		5		—
Total liabilities	$	28	$	5	$	5	$	18

	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		19		3		16		—
Trading securities – other current assets:
Domestic equity securities		14		14		—		—
Other trading securities		12		11		1		—
Long-term investment - BDC		31		—		—		31
Derivatives:
Commodities		28		28		—		—
Interest rate swaps		1		—		1		—
Total assets	$	1,551	$	1,134	$	386	$	31
Liabilities:
Contingent consideration	$	16	$	—	$	—	$	16
Derivatives:
Commodities		19		19		—		—
Foreign currencies		9		—		9		—
Total liabilities	$	44	$	19	$	9	$	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. 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 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 valued at net asset value (“NAV”), adjusted for a liquidity discount of $1 million, resulting in level 3 classification. The change in value during 2021 was primarily related to an additional contribution of $50 million. Equity market activity is recorded in other investment income (loss).

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 7 for a discussion of Seaboard’s long-term debt.

Seaboard’s contingent consideration, classified in other non-current liabilities, is related to a 2018 acquisition. The fair value is dependent on the probability of the acquiree achieving certain financial performance targets using earnings before interest, taxes, depreciation and amortization (“EBITDA”) as a metric. The contingent consideration ranges between zero and $48 million payable between five and eight years following the closing, at the discretion of the sellers. The fair value is classified as a level 3 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 value during 2021 was related to higher projected EBITDA and current foreign currency rates and interest rates at the measurement date.

Derivatives

Seaboard has derivatives to manage certain risks. 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 a result, fluctuations in prices, foreign currency exchange rates and interest rates could have a material impact on earnings in any given reporting period. Credit risks associated with derivative contracts are not

significant as Seaboard minimizes counterparty exposure by dealing with credit-worthy counterparties and uses margin accounts for some accounts. As of December 31, 2021, the maximum amount of credit risk, had the counterparties failed to perform according to the terms of the contract, was $5 million.

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. Seaboard had the following aggregated outstanding notional amounts:

		December 31,
(Millions)	Metric	2021	2020
Commodities:
Grain	Bushels	1	26
Hogs	Pounds	—	2
Soybean oil	Pounds	20	56
Heating oil	Gallons	15	—

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. Other foreign currency exchange agreements are recognized as a component of foreign currency gains (losses), net. As of December 31, 2021 and 2020, Seaboard had foreign currency exchange agreements with notional amounts of $95 million and $49 million, respectively, primarily related to the South African rand and euro.

Interest Rate Swap Agreements

From time to time, 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 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 year ended December 31, 2021. Seaboard paid fixed-rate interest payments at a weighted-average interest rate of 0.26% over the life of the agreements and received variable-rate interest payments based on the one-month LIBOR from the counterparty without the exchange of the underlying aggregate notional amounts of $400 million.

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)		2021		2020
Commodities	Cost of sales	$	(20)	$	55
Foreign currencies	Cost of sales		(2)		11
Foreign currencies	Foreign currency gains (losses), net		4		(5)
Interest rate swaps	Interest expense		5		—

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)		2021		2020			2021		2020
Commodities	Other current assets	$	6	$	28	Other current liabilities	$	5	$	19
Foreign currencies	Other current assets		5		—	Other current liabilities		5		9
Interest rate swaps	Other current assets		—		1	Other current liabilities		—		—

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, 2021 and 2020, the commodity

derivatives had a margin account balance of $28 million and $15 million, respectively, resulting in a net other current asset in the consolidated balance sheets of $29 million and $24 million, respectively.