Derivatives and Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2023

Derivatives and Fair Value of Financial Instruments

Derivatives and Fair Value of Financial Instruments

Note 5 – Derivatives and Fair Value of Financial Instruments

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.

	September 30,
(Millions of dollars)	2023		Level 1		Level 2		Level 3
Assets:
Trading securities – short-term investments:
Domestic equity securities	$	131	$	131	$	—	$	—
Foreign equity securities		89		89		—		—
Domestic debt securities		450		166		284		—
Foreign debt securities		100		3		97		—
Money market funds held in trading accounts		359		359		—		—
Other trading securities		5		—		5		—
Trading securities – other current assets		21		20		1		—
Long-term investment - BDC		68		—		68		—
Derivatives		16		11		5		—
Total assets	$	1,239	$	779	$	460	$	—
Liabilities:
Derivatives	$	18	$	17	$	1	$	—
Total liabilities	$	18	$	17	$	1	$	—

	December 31,
(Millions of dollars)	2022		Level 1		Level 2		Level 3
Assets:
Trading securities – short-term investments:
Domestic equity securities	$	433	$	433	$	—	$	—
Foreign equity securities		169		169		—		—
Domestic debt securities		399		162		237		—
Foreign debt securities		66		—		66		—
Money market funds held in trading accounts		12		12		—		—
Other trading securities		7		—		7		—
Trading securities – other current assets		26		25		1		—
Long-term investment - BDC		63		—		63		—
Derivatives		26		26		—		—
Total assets	$	1,201	$	827	$	374	$	—
Liabilities:
Contingent consideration	$	19	$	—	$	—	$	19
Derivatives		12		2		10		—
Total liabilities	$	31	$	2	$	10	$	19

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 exchange-traded funds.

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, but is subject to contractual sale restrictions pursuant to shareholder arrangements.

Seaboard’s contingent consideration was related to a 2018 acquisition. The fair value was 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 ranged between zero and $48 million payable between five and eight years following the closing, with timing at the discretion of the sellers. The fair value was classified

as level 3 since the calculation depended upon projected company-specific inputs using a Monte Carlo simulation. Seaboard remeasured the estimated fair value of the contingent consideration liability until settled, with adjustments included in net earnings (loss). During the third quarter of 2023, the contingent consideration liability was settled and Seaboard paid $30 million to the sellers.

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 condensed consolidated balance sheets, it would have been classified as level 2 in the fair value hierarchy. See Note 4 for a discussion of Seaboard’s long-term debt.

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 some of its risk of price fluctuations for raw materials and other inventories, finished product sales and firm sales commitments. Seaboard also enters into foreign currency exchange agreements to manage the foreign currency exchange rate risk with respect to certain transactions denominated in foreign currencies. 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 and enters into equity futures contracts to manage the equity price risk with respect to certain short-term investments. Although 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 materially changed since December 31, 2022.

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

		September 30,	December 31,
(Millions)	Metric	2023	2022
Commodities:
Grain	Bushels	20	8
Hogs	Pounds	155	16
Soybean oil	Pounds	48	26
Sugar	Pounds	22	—
Foreign currencies	U.S. dollar	84	190

Credit risks associated with these derivative contracts are not significant because Seaboard minimizes counterparty exposure by dealing with credit-worthy counterparties and using margin accounts for some contracts. As of September 30, 2023, the maximum amount of credit risk, had the counterparties failed to perform according to the terms of the contract, was $5 million.

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					Liability
		September 30,		December 31,			September 30,		December 31,
(Millions of dollars)		2023		2022			2023		2022
Commodities	Other current assets	$	11	$	26	Other current liabilities	$	17	$	2
Foreign currencies	Other current assets		5		—	Other current liabilities		1		10

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 September 30, 2023 and December 31, 2022, the commodity derivatives had a margin account balance of $33 million and $3 million, respectively, resulting in a net other current asset in the condensed consolidated balance sheets of $27 million and $27 million, respectively.

The following table provides the amount of gain (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				Nine Months Ended
		September 30,		October 1,		September 30,		October 1,
(Millions of dollars)		2023		2022		2023		2022
Commodities	Cost of sales	$	—	$	13	$	(25)	$	(45)
Foreign currencies	Cost of sales		1		(19)		3		(25)
Foreign currencies	Foreign currency gains (losses), net		4		9		—		18