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Derivatives and Fair Value of Financial Instruments | 9 Months Ended
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Sep. 27, 2014
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 September 27, 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 nine months of 2014. The trading securities classified as other current assets below are assets held for Seaboard’s deferred compensation plans.
|  | Balance |  |  |  |  |  |  |
|  | September 27, |  |  |  |  |  |  |
(Thousands of dollars) |  | 2014 |  | Level 1 |  | Level 2 |  | Level 3 |
Assets: |  |  |  |  |  |  |  |  |
Available-for-sale securities - short-term investments: |  |  |  |  |  |  |  |  |
Money market funds |  | $ | 62,965 |  | $ | 62,965 |  | $ | - |  | $ | - |
Corporate bonds |  | 10,439 |  | - |  | 10,439 |  | - |
U.S. Government agency securities |  | 10,355 |  | - |  | 10,355 |  | - |
Asset backed debt securities |  | 2,244 |  | - |  | 2,244 |  | - |
Collateralized mortgage obligations |  | 1,214 |  | - |  | 1,214 |  | - |
U.S. Treasury securities |  | 521 |  | - |  | 521 |  | - |
Trading securities - short-term investments: |  |  |  |  |  |  |  |  |
High yield debt securities |  | 188,645 |  | - |  | 188,645 |  | - |
Equity mutual fund |  | 65,050 |  | 65,050 |  | - |  | - |
Domestic equity ETF |  | 15,203 |  | 15,203 |  | - |  | - |
Emerging markets trading debt mutual fund |  | 2,849 |  | 2,849 |  | - |  | - |
Emerging markets trading debt securities |  | 1,660 |  | - |  | 1,660 |  | - |
Money market funds held in trading accounts |  | 390 |  | 390 |  | - |  | - |
Other trading investments |  | 1,430 |  | - |  | 1,430 |  | - |
Trading securities - other current assets: |  |  |  |  |  |  |  |  |
Domestic equity securities |  | 29,632 |  | 29,632 |  | - |  | - |
Foreign equity securities |  | 8,018 |  | 8,018 |  | - |  | - |
Fixed income mutual funds |  | 4,362 |  | 4,362 |  | - |  | - |
Money market funds |  | 2,727 |  | 2,727 |  | - |  | - |
Other |  | 1,357 |  | 616 |  | 741 |  | - |
Derivatives: |  |  |  |  |  |  |  |  |
Commodities(1) |  | 20,394 |  | 20,394 |  | - |  | - |
Interest rate swaps |  | - |  | - |  | - |  | - |
Foreign currencies |  | 4,674 |  | - |  | 4,674 |  | - |
Total Assets |  | $ | 434,129 |  | $ | 212,206 |  | $ | 221,923 |  | $ | - |
Liabilities: |  |  |  |  |  |  |  |  |
Derivatives: |  |  |  |  |  |  |  |  |
Commodities(1) |  | $ | 16,083 |  | $ | 15,974 |  | $ | 109 |  | $ | - |
Interest rate swaps |  | 5,766 |  | - |  | 5,766 |  | - |
Foreign currencies |  | 218 |  | - |  | 218 |  | - |
Total Liabilities |  | $ | 22,067 |  | $ | 15,974 |  | $ | 6,093 |  | $ | - |
(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 September 27, 2014, the commodity derivatives had a margin account balance of $13,006,000 resulting in a net other current asset on the Condensed Consolidated Balance Sheets of $17,426,000 and an other current liability of $109,000.
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 September 27, 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 |  | $ 87,667 |  | $ 87,738 |  | $ 224,314 |  | $ 224,076 |
Short-term investments, trading securities |  | 278,236 |  | 275,227 |  | 65,728 |  | 66,573 |
Long-term debt |  | - |  | - |  | 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 September 27, 2014, Seaboard had open net derivative contracts to purchase 37,980,000 pounds of soybean oil, 466,000 pounds of sugar and 44,000 pounds of dry whey powder and open net derivative contracts to sell 23,200,000 pounds of hogs, 9,427,000 bushels of grain, 5,838,000 gallons of heating oil and 48,000 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 September 27, 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 $88,295,000 and $127,389,000, respectively, primarily related to the South African Rand. Interest Rate Exchange Agreements During 2014, Seaboard put into place four, approximately eight-year interest rate exchange agreements with mandatory early termination dates in the second half of 2014 and early 2015 for one of the agreements. Two of these agreements have since been terminated that had mandatory early termination dates in the second half of 2014. Payments made by Seaboard to unwind these agreements were not material. Also in the second half of 2014, Seaboard entered into two new interest rate exchange agreements to replace the two that were terminated as noted above, each with a mandatory early termination date in early 2015 and similar terms as the interest rate exchange agreements terminated. These four exchange agreements, still outstanding as of September 27, 2014, 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 September 27, 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 September 27, 2014, Seaboard’s foreign currency exchange agreements have a maximum amount of loss due to credit risk in the amount of $4,674,000 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 nine months ended September 27, 2014 and September 28, 2013.
(Thousands of dollars) |  |  |  |  |  |  |  |  |  |  |
|  |  |  | Three Months Ended |  | Nine Months Ended |
|  |  |  | September 27, |  | September 28, |  | September 27, |  | September 28, |
|  |  |  | 2014 |  | 2013 |  | 2014 |  | 2013 |
Commodities |  | Cost of sales |  | $ | (296 | ) | $ | (8,790 | ) | $ | 3,082 |  | $ | (7,731) |
Foreign currencies |  | Cost of sales |  | 1,957 |  | 1,528 |  | 4,770 |  | 15,027 |
Foreign currencies |  | Foreign currency |  | 3,145 |  | (926 | ) | 2,725 |  | 4,961 |
Interest rate |  | Miscellaneous, net |  | 91 |  | (570 | ) | (3,804 | ) | 2,864 |
The following table provides the fair value of each type of derivative held as of September 27, 2014 and December 31, 2013 and where each derivative is included on the Condensed Consolidated Balance Sheets.
(Thousands of dollars) |  |  | Asset Derivatives |  |  |  | Liability Derivatives |
|  |  | September 27, |  | December 31, |  |  |  | September 27, |  | December 31, |
|  |  | 2014 |  | 2013 |  |  |  | 2014 |  | 2013 |
Commodities(1) | Other current assets |  | $ 20,394 |  | $ 2,331 |  | Other current liabilities |  | $ 16,083 |  | $ 16,014 |
Foreign currencies | Other current assets |  | 4,674 |  | 2,763 |  | Other current liabilities |  | 218 |  | 101 |
Interest rate | Other current assets |  | - |  | - |  | Other current liabilities |  | 5,766 |  | 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 September 27, 2014 and December 31, 2013, the commodity derivatives had a margin account balance of $13,006,000 and $29,822,000, respectively, resulting in a net other current asset on the Condensed Consolidated Balance Sheets of $17,426,000 and $16,731,000, respectively and other current liabilities of $109,000 and $592,000, respectively.

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