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Derivatives and Fair Value of Financial Instruments | 3 Months Ended
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Mar. 31, 2012
Derivatives and Fair Value of Financial Instruments |
Derivatives and Fair Value of Financial Instruments |
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 March 31, 2012 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 quarter of 2012. The trading securities classified as other current assets below are assets held for Seaboard’s deferred compensation plans.
|  | Balance |  |  |  |  |  |  |
|  | March 31, |  |  |  |  |  |  |
(Thousands of dollars) |  | 2012 |  | Level 1 |  | Level 2 |  | Level 3 |
Assets: |  |  |  |  |  |  |  |  |
Available-for-sale securities - short-term |  |  |  |  |  |  |  |  |
investments: |  |  |  |  |  |  |  |  |
Corporate bonds |  | $133,989 |  | $ - |  | $133,989 |  | $ - |
Money market funds |  | 69,867 |  | 69,867 |  | - |  | - |
U.S. Treasury securities |  | 36,095 |  | - |  | 36,095 |  | - |
Collateralized mortgage obligations |  | 22,720 |  | - |  | 22,720 |  | - |
Fixed rate municipal notes and bonds |  | 21,335 |  | - |  | 21,335 |  | - |
U.S. Government agency securities |  | 18,603 |  | - |  | 18,603 |  | - |
Emerging markets debt mutual fund |  | 17,687 |  | 17,687 |  | - |  | - |
Asset backed debt securities |  | 10,536 |  | - |  | 10,536 |  | - |
Other |  | 1,483 |  | - |  | 1,483 |  | - |
Trading securities - short-term investments: |  |  |  |  |  |  |  |  |
High yield debt securities |  | 22,349 |  | - |  | 22,349 |  | - |
Emerging markets trading debt mutual fund |  | 2,686 |  | 2,686 |  | - |  | - |
Emerging markets trading debt securities |  | 2,246 |  | - |  | 2,246 |  | - |
Other debt securities |  | 238 |  | - |  | 238 |  | - |
Trading securities - other current assets: |  |  |  |  |  |  |  |  |
Domestic equity securities |  | 16,614 |  | 16,614 |  | - |  | - |
Foreign equity securities |  | 6,946 |  | 3,887 |  | 3,059 |  | - |
Fixed income mutual funds |  | 4,914 |  | 4,914 |  | - |  | - |
Money market funds |  | 3,674 |  | 3,674 |  | - |  | - |
U.S. Government agency securities |  | 2,405 |  | - |  | 2,405 |  | - |
U.S. Treasury securities |  | 1,409 |  | - |  | 1,409 |  | - |
Corporate bonds |  | 64 |  | - |  | 64 |  | - |
Other |  | 365 |  | 316 |  | 49 |  | - |
Derivatives: |  |  |  |  |  |  |  |  |
Commodities(1) |  | 2,398 |  | 2,398 |  | - |  | - |
Interest rate swaps |  | - |  | - |  | - |  | - |
Foreign currencies |  | 88 |  | - |  | 88 |  | - |
Total Assets |  | $398,711 |  | $ 122,043 |  | $276,668 |  | $ - |
Liabilities: |  |  |  |  |  |  |  |  |
Derivatives: |  |  |  |  |  |  |  |  |
Commodities(1) |  | $ 3,360 |  | $ 3,360 |  | $ - |  | $ - |
Interest rate swaps |  | 9,900 |  | - |  | 9,900 |  | - |
Foreign currencies |  | 500 |  | - |  | 500 |  | - |
Total Liabilities |  | $ 13,760 |  | $ 3,360 |  | $ 10,400 |  | $ - |
(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 March 31, 2012, the commodity derivatives had a margin account balance of $6,188,000 resulting in a net other current asset on the Condensed Consolidated Balance Sheets of $5,226,000. The following table shows assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and also the level within the fair value hierarchy used to measure each category of assets.
|  | Balance |  |  |  |  |  |  |
|  | December 31, |  |  |  |  |  |  |
(Thousands of dollars) |  | 2011 |  | Level 1 |  | Level 2 |  | Level 3 |
Assets: |  |  |  |  |  |  |  |  |
Available-for-sale securities - short-term |  |  |  |  |  |  |  |  |
investments: |  |  |  |  |  |  |  |  |
Money market funds |  | $139,420 |  | $139,420 |  | $ - |  | $ - |
Corporate bonds |  | 89,146 |  | - |  | 89,146 |  | - |
Fixed rate municipal notes and bonds |  | 17,788 |  | - |  | 17,788 |  | - |
Emerging markets debt mutual fund |  | 16,399 |  | 16,399 |  | - |  | - |
Collateralized mortgage obligations |  | 15,011 |  | - |  | 15,011 |  | - |
U.S. Government agency securities |  | 9,757 |  | - |  | 9,757 |  | - |
U.S. Treasury securities |  | 4,905 |  | - |  | 4,905 |  | - |
Asset backed debt securities |  | 3,533 |  | - |  | 3,533 |  | - |
Other |  | 1,484 |  | - |  | 1,484 |  | - |
Trading securities - short term investments: |  |  |  |  |  |  |  |  |
High yield debt securities |  | 20,750 |  | - |  | 20,750 |  | - |
Emerging markets trading debt mutual fund |  | 2,487 |  | 2,487 |  | - |  | - |
Emerging markets trading debt securities |  | 2,355 |  | - |  | 2,355 |  | - |
Other debt securities |  | 221 |  | - |  | 221 |  | - |
Trading securities - other current assets: |  |  |  |  |  |  |  |  |
Domestic equity securities |  | 13,563 |  | 13,563 |  | - |  | - |
Foreign equity securities |  | 7,490 |  | 3,991 |  | 3,499 |  | - |
Money market funds |  | 4,521 |  | 4,521 |  | - |  | - |
Fixed income mutual funds |  | 4,483 |  | 4,483 |  | - |  | - |
U.S. Government agency securities |  | 2,085 |  | - |  | 2,085 |  | - |
U.S. Treasury securities |  | 1,474 |  | - |  | 1,474 |  | - |
Corporate bonds |  | 72 |  | - |  | 72 |  | - |
Other |  | 236 |  | 159 |  | 77 |  | - |
Derivatives: |  |  |  |  |  |  |  |  |
Commodities(1) |  | 5,144 |  | 5,144 |  | - |  | - |
Interest rate swaps |  | - |  | - |  | - |  | - |
Foreign currencies |  | 2,247 |  | - |  | 2,247 |  | - |
Total Assets |  | $364,571 |  | $190,167 |  | $174,404 |  | $ - |
Liabilities: |  |  |  |  |  |  |  |  |
Derivatives: |  |  |  |  |  |  |  |  |
Commodities(1) |  | $ 5,529 |  | $ 5,529 |  | $ - |  | $ - |
Interest rate swaps |  | 11,268 |  | - |  | 11,268 |  | - |
Foreign currencies |  | 3,380 |  | - |  | 3,380 |  | - |
Total Liabilities |  | $ 20,177 |  | $ 5,529 |  | $ 14,648 |  | $ - |
(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, 2011, the commodity derivatives had a margin account balance of $8,619,000 resulting in a net other current asset on the Condensed Consolidated Balance Sheets of $8,234,000. 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 March 31, 2012 and December 31, 2011 are presented below.
|  | 2012 |  | 2011 |
(Thousands of dollars) |  | Amortized Cost |  | Fair Value |  | Amortized Cost |  | Fair Value |
Short-term investments, available-for-sale |  | $ | 330,892 |  | $ | 332,315 |  | $ | 297,916 |  | $ | 297,443 |
Short-term investments, trading debt securities |  | 26,184 |  | 27,519 |  | 25,437 |  | 25,813 |
Long-term debt |  | 162,612 |  | 166,038 |  | 157,252 |  | 161,636 |
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. From time to time, Seaboard may enter 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, 2011. Commodity Instruments Seaboard uses various grain, meal, hog, and energy resource related futures and options to manage its risk to price fluctuations for raw materials and other inventories, finished product sales and firm sales commitments. At March 31, 2012, Seaboard had open net derivative contracts to purchase 7,160,000 pounds of hogs and 1,213,000 pounds of sugar and open net derivative contracts to sell 714,000 gallons of heating oil, 595,000 bushels of grain and 114,000 tons of soybean meal. At December 31, 2011, Seaboard had open net derivative contracts to purchase 23,300 tons of soybean meal, 2,580,000 pounds of soybean oil and 2,280,000 pounds of hogs and open net derivative contracts to sell 10,599,000 bushels of grain and 1,176,000 gallons of heating oil. 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 Earnings. 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 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 Earnings. 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 gain (loss) on the Condensed Consolidated Statements of Earnings. At March 31, 2012 and December 31, 2011, Seaboard had trading foreign exchange contracts to cover its firm sales and purchase commitments and related trade receivables and payables with net notional amounts of $127,029,000 and $158,266,000, respectively, primarily related to the South African Rand. Interest Rate Exchange Agreements In May 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 three notional amounts of $25,000,000 each. In August 2010, Seaboard entered into another ten-year interest rate exchange agreement with a notional amount of $25,000,000 that has terms similar to those for the other three interest rate exchange agreements referred to above. While Seaboard has certain variable rate debt, 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 Statement of Earnings. At March 31, 2012 and December 31, 2011, Seaboard had four interest rate exchange agreements outstanding with a total notional value of $100,000,000. Counterparty Credit Risk 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. Seaboard’s foreign currency exchange agreements have a maximum amount of loss due to credit risk in the amount of $88,000 with four counterparties. Seaboard does not hold any collateral related to these agreements. The following table provides the amount of gain or (loss) recognized for each type of derivative and where it was recognized in the Condensed Consolidated Statement of Earnings for the three months ended March 31, 2012 and April 2, 2011.
(Thousands of dollars) |  |  |  |  |  |  |
|  | Location of |  | March 31, 2012 |  | April 2, 2011 |
|  | Gain or (Loss) |  | Amount of Gain or (Loss) |  | Amount of Gain or (Loss) |
|  | Recognized in Income |  | Recognized in Income |  | Recognized in Income |
Commodities |  | Cost of sales |  |  | $ | (2,415 | ) |  |  | $ | 13,986 |  |
Foreign currencies |  | Cost of sales |  |  | (5,417 | ) |  |  | 8,787 |  |
Foreign currencies |  | Foreign currency |  |  | (3,713 | ) |  |  | (136 | ) |
Interest rate |  | Miscellaneous, net |  |  | 648 |  |  |  | 519 |  |
The following table provides the fair value of each type of derivative held as of March 31, 2012 and December 31, 2011 and where each derivative is included on the Condensed Consolidated Balance Sheets.
(Thousands of dollars) |  |  |  | Asset Derivatives |  |  |  | Liability Derivatives |
|  | Balance |  |  | Fair Value |  | Balance |  |  | Fair Value |
|  | Sheet |  |  | March 31, |  | December 31, |  | Sheet |  |  | March 31, |  | December 31, |
|  | Location |  |  | 2012 |  | 2011 |  | Location |  |  | 2012 |  | 2011 |
Commodities(1) |  | Other current assets |  | $ 2,398 |  |  | $ 5,144 |  |  | Other current assets |  | $ 3,360 |  |  | $ 5,529 |  |
Foreign currencies |  | Other current assets |  | 88 |  |  | 2,247 |  |  | Other current liabilities |  | 500 |  |  | 3,380 |  |
Interest rate |  | Other current assets |  | - |  |  | - |  |  | Other current liabilities |  | 9,900 |  |  | 11,268 |  |
(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 March 31, 2012 and December 31, 2011, the commodity derivatives had a margin account balance of $6,188,000 and $8,619,000, respectively, resulting in a net other current asset on the Condensed Consolidated Balance Sheets of $5,226,000 and $8,234,000, respectively.

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