Note 5 – Derivatives and Fair Value of Financial Instruments

U.S. GAAP discusses valuation techniques, such as the market approach (prices and other relevant information generated by market conditions involving identical or comparable assets or liabilities), the income approach (techniques to convert future amounts to single present amounts based on market expectations including present value techniques and option-pricing), and the cost approach (amount that would be required to replace the service capacity of an asset which is often referred to as replacement cost). U.S. GAAP utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1: Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

The following table shows assets and liabilities measured at fair value on a recurring basis as of June 28, 2014 and also the level within the fair value hierarchy used to measure each category of assets. Seaboard uses the end of the reporting period to determine if there were any transfers between levels. There were no transfers between levels that occurred in the first six months of 2014. The trading securities classified as other current assets below are assets held for Seaboard’s deferred compensation plans.

	Balance
	June 28,
(Thousands of dollars)	2014		Level 1		Level 2		Level 3
Assets:
Available-for-sale securities - short-term investments:
Money market funds	$	66,993	$	66,993	$	-	$	-
Corporate bonds	49,921		-		49,921		-
U.S. Government agency securities	43,629		-		43,629		-
Asset backed debt securities	10,791		-		10,791		-
Collateralized mortgage obligations	5,584		-		5,584		-
U.S. Treasury securities	5,035		-		5,035		-
Trading securities - short-term investments:
High yield debt securities	103,163		-		103,163		-
Equity mutual fund	25,017		25,017		-		-
Money market funds held in trading accounts	5,728		5,728		-		-
Domestic equity ETF	5,107		5,107		-		-
Emerging markets trading debt mutual fund	2,988		2,988		-		-
Emerging markets trading debt securities	621		-		621		-
Other trading investments	557		-		557		-
Trading securities - other current assets:
Domestic equity securities	30,869		30,869		-		-
Foreign equity securities	8,450		7,049		1,401		-
Fixed income mutual funds	4,945		4,945		-		-
Money market funds	2,273		2,273		-		-
Other	2,083		177		1,906		-
Derivatives:
Commodities(1)	9,560		9,560		-		-
Interest rate swaps	-		-		-		-
Foreign currencies	2,101		-		2,101		-

Total Assets	$	385,415	$	160,706	$	224,709	$	-
Liabilities:
Derivatives:
Commodities(1)	$	38,166	$	38,014	$	152	$	-
Interest rate swaps	6,901		-		6,901		-
Foreign currencies	378		-		378		-

Total Liabilities	$	45,445	$	38,014	$	7,431	$	-

(1) Seaboard’s commodities 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 28, 2014, the commodity derivatives had a margin account balance of $44,039,000 resulting in a net other current asset on the Condensed Consolidated Balance Sheets of $15,585,000 and an other current liability of $152,000.

The following table shows assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and also the level within the fair value hierarchy used to measure each category of assets.

	Balance
	December 31,
(Thousands of dollars)	2013		Level 1		Level 2		Level 3
Assets:
Available-for-sale securities - short-term investments:
Money market funds	$	88,430	$	88,430	$	-	$	-
Corporate bonds	70,258		-		70,258		-
U.S. Government agency securities	27,147		-		27,147		-
Emerging markets debt mutual fund	16,941		16,941		-		-
Asset backed debt securities	8,477		-		8,477		-
Collateralized mortgage obligations	7,600		-		7,600		-
U.S. Treasury securities	5,223		-		5,223		-
Trading securities - short term investments:
High yield debt securities	50,428		-		50,428		-
Money market funds held in trading accounts	11,033		11,033		-		-
Emerging markets trading debt mutual fund	2,858		2,858		-		-
Emerging markets trading debt securities	1,336		-		1,336		-
Other trading investments	918		-		918		-
Trading securities - other current assets:
Domestic equity securities	26,672		26,672		-		-
Foreign equity securities	9,570		7,317		2,253		-
Fixed income mutual funds	3,974		3,974		-		-
Money market funds	1,931		1,931		-		-
Other	3,203		1,628		1,575		-
Derivatives:
Commodities(1)	2,331		2,331		-		-
Foreign currencies	2,763		-		2,763		-
Total Assets	$	341,093	$	163,115	$	177,978	$	-
Liabilities:
Derivatives:
Commodities(1)	$	16,014	$	15,422	$	592	$	-
Interest rate swaps	4,103		-		4,103		-
Foreign currencies	101		-		101		-
Total Liabilities	$	20,218	$	15,422	$	4,796	$	-

(1) Seaboard’s commodities 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 December 31, 2013, the commodity derivatives had a margin account balance of $29,822,000 resulting in a net other current asset on the Condensed Consolidated Balance Sheets of $16,731,000 and an other current liability of $592,000.

Financial instruments consisting of cash and cash equivalents, net receivables, notes payable, 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 long-term debt is estimated by comparing interest rates for debt with similar terms and maturities. If Seaboard’s 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. The amortized cost and estimated fair values of investments and long-term debt at June 28, 2014 and December 31, 2013 are presented below.


	2014				2013
(Thousands of dollars)	Amortized Cost		Fair Value		Amortized Cost		Fair Value

Short-term investments, available-for-sale	$	181,319	$	181,953	$	224,314	$	224,076
Short-term investments, trading debt securities	141,862		143,181		65,728		66,573
Long-term debt	86,128		88,220		92,177		94,578

While management believes its derivatives are primarily economic hedges of its firm purchase and sales contracts or anticipated sales contracts, Seaboard does not perform the extensive record-keeping required to account for these types of transactions as hedges for accounting purposes. Since these derivatives and interest rate exchange agreements discussed below are not accounted for as hedges, fluctuations in the related commodity prices, currency exchange rates and interest rates could have a material impact on earnings in any given period. Seaboard also enters into speculative derivative transactions not directly related to its raw material requirements. The nature of Seaboard’s market risk exposure has not changed materially since December 31, 2013.

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. At June 28, 2014, Seaboard had open net derivative contracts to purchase 17,760,000 pounds of hogs, 220,000 pounds of milk powder, 80,000 pounds of cheese and 44,000 pounds of dry whey powder and open net derivative contracts to sell 3,759,000 pounds of sugar, 720,000 bushels of grain, 420,000 gallons of heating oil and 178,000 tons of soybean meal. At December 31, 2013, Seaboard had open net derivative contracts to purchase 51,184,000 pounds of sugar, 32,440,000 pounds of hogs, 6,540,000 bushels of grain, 440,000 pounds of cheese and 308,000 pounds of dry whey powder and open net derivative contracts to sell 12,125,000 pounds of palm oil and 76,000 tons of soybean meal. Commodity derivatives are recorded at fair value with any changes in fair value being marked to market as a component of cost of sales on 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. Foreign currency exchange agreements that were primarily related to an underlying commodity transaction were recorded at fair value with changes in value marked to market as a component of cost of sales on the Condensed Consolidated Statements of Comprehensive Income. Foreign exchange agreements that were not related to an underlying commodity transaction were recorded at fair value with changes in value marked to market as a component of foreign currency losses, net on the Condensed Consolidated Statements of Comprehensive Income.

At June 28, 2014 and December 31, 2013, Seaboard had trading foreign currency exchange agreements to cover its firm sales and purchase commitments and related trade receivables and payables with net notional amounts of $88,271,000 and $127,389,000, respectively, primarily related to the South African Rand.

Interest Rate Exchange Agreements

In March and April 2014, Seaboard entered into four approximately eight-year interest rate exchange agreements with mandatory early termination dates in the second half of 2014 for three of the agreements and early 2015 for one of the agreements. These four exchange agreements involve the exchange of fixed-rate and variable-rate interest payments without the exchange of the underlying notional amounts to mitigate the potential effects of fluctuations in interest rates on the anticipated dry bulk vessel leases in the last half of 2014 and early 2015. Seaboard pays a fixed rate and receives a variable rate of interest on these four notional amounts of $22,000,000 each. In 2010, Seaboard entered into three ten-year interest rate exchange agreements which involve the exchange of fixed-rate and variable-rate interest payments over the life of the agreements without the exchange of the underlying notional amounts to mitigate the effects of fluctuations in interest rates on variable rate debt. Seaboard pays a fixed rate and receives a variable rate of interest on these three notional amounts of $25,000,000 each. All seven of these interest rate exchange agreements do not qualify as hedges for accounting purposes. Accordingly, the changes in fair value of these agreements are recorded in miscellaneous, net in the Condensed Consolidated Statements of Comprehensive Income. At June 28, 2014 and December 31, 2013, Seaboard had seven and three interest rate exchange agreements outstanding, respectively, with a total notional value of $163,000,000 and $75,000,000, respectively.

Counterparty Credit Risk

From time to time Seaboard is subject to counterparty credit risk related to its foreign currency exchange agreements and interest rate swaps, should the counterparties fail to perform according to the terms of the contracts. As of June 28, 2014, Seaboard’s foreign currency exchange agreements have a maximum amount of loss due to credit risk in the amount of $2,101,000 with six counterparties and no such exposures related to the interest rate swaps. Seaboard does not hold any collateral related to these agreements.

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 for the three and six months ended June 28, 2014 and June 29, 2013.

(Thousands of dollars)

		Three Months Ended					Six Months Ended
		June 28,			June 29,		June 28,			June 29,
		2014			2013		2014			2013
Commodities	Cost of sales	$	9,962		$	5,867	$	3,378		$	1,059
Foreign currencies	Cost of sales	2,328			1,993		2,813			13,499
Foreign currencies	Foreign currency	(1,185		)	1,820		(420		)	5,887
Interest rate	Miscellaneous, net	(3,293		)	2,962		(3,895		)	3,434

The following table provides the fair value of each type of derivative held as of June 28, 2014 and December 31, 2013 and where each derivative is included on the Condensed Consolidated Balance Sheets.

(Thousands of dollars)		Asset Derivatives					Liability Derivatives
		June 28,		December 31,			June 28,		December 31,
		2014		2013			2014		2013
Commodities	Other current assets	$	9,560 (1)	$	2,331	Other current liabilities	$	38,166 (1)	$	16,014
Foreign currencies	Other current assets	2,101		2,763		Other current liabilities	378		101
Interest rate	Other current assets	-		-		Other current liabilities	6,901		4,103

(1) Seaboard’s commodities 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 28, 2014 and December 31, 2013, the commodity derivatives had a margin account balance of $44,039,000 and $29,822,000, respectively, resulting in a net other current asset on the Condensed Consolidated Balance Sheets of $15,585,000 and $16,731,000, respectively and other current liabilities of $152,000 and $592,000, respectively.