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Derivatives and Fair Value of Financial Instruments | 9 Months Ended
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Oct. 03, 2015
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 October 3, 2015 and also the level within the fair value hierarchy used to measure each category of assets and liabilities. 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 2015. The trading securities classified as other current assets below are assets held for Seaboard’s deferred compensation plans.
|  | Balance |  |  |  |  |  |  |  |  |  |
|  | October 3, |  |  |  |  |  |  |  |  |  |
(Thousands of dollars) |  | 2015 |  | Level 1 | Level 2 | Level 3 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities short-term investments: |  |  |  |  |  |  |  |  |  |  |  |  |
Money market funds |  | $ | 100,648 |  | $ | 100,648 |  | $ | - |  | $ | - |
Trading securities – short term investments: |  |  |  |  |  |  |  |  |  |  |  |  |
Domestic equity securities |  |  | 158,815 |  |  | 158,815 |  |  | - |  |  | - |
High yield debt securities |  |  | 122,178 |  |  | - |  |  | 122,178 |  |  | - |
Domestic equity mutual funds |  |  | 80,525 |  |  | 80,525 |  |  | - |  |  | - |
Domestic equity ETFs |  |  | 77,443 |  |  | 77,443 |  |  | - |  |  | - |
Foreign equity securities |  |  | 76,669 |  |  | 76,669 |  |  | - |  |  | - |
Money market funds held in trading accounts |  |  | 40,152 |  |  | 40,152 |  |  | - |  |  | - |
Foreign equity mutual fund |  |  | 19,831 |  |  | 19,831 |  |  | - |  |  | - |
Collateralized loan obligation |  |  | 9,791 |  |  | - |  |  | 9,791 |  |  | - |
Other trading securities |  |  | 3,391 |  |  | 2,187 |  |  | 1,204 |  |  | - |
Trading securities – other current assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Domestic equity securities |  |  | 34,044 |  |  | 34,044 |  |  | - |  |  | - |
Foreign equity securities |  |  | 6,246 |  |  | 6,246 |  |  | - |  |  | - |
Fixed income mutual funds |  |  | 3,366 |  |  | 3,366 |  |  | - |  |  | - |
Other |  |  | 3,104 |  |  | 2,617 |  |  | 487 |  |  | - |
Derivatives |  |  |  |  |  |  |  |  |  |  |  |  |
Commodities (1) |  |  | 9,639 |  |  | 9,639 |  |  | - |  |  | - |
Foreign currencies |  |  | 1,715 |  |  | - |  |  | 1,715 |  |  | - |
Total Assets |  | $ | 747,557 |  | $ | 612,182 |  | $ | 135,375 |  | $ | - |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |
Commodities (1) |  | $ | 21,739 |  | $ | 21,739 |  | $ | - |  | $ | - |
Interest rate swaps |  |  | 8,714 |  |  | - |  |  | 8,714 |  |  | - |
Foreign currencies |  |  | 1,417 |  |  | - |  |  | 1,417 |  |  | - |
Total Liabilities |  | $ | 31,870 |  | $ | 21,739 |  | $ | 10,131 |  | $ | - |
| (1) |  | 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 October 3, 2015, the commodity derivatives had a margin account balance of $34,852,000 resulting in a net other current asset in the Condensed Consolidated Balance Sheet of $22,949,000 and a net other current liability of $197,000.
The following table shows assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 and also the level within the fair value hierarchy used to measure each category of assets.
|  | Balance |  |  |  |  |  |  |  |  |  |
|  | December 31, |  |  |  |  |  |  |  |  |  |
(Thousands of dollars) |  | 2014 |  | Level 1 | Level 2 | Level 3 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities – short-term investments: |  |  |  |  |  |  |  |  |  |  |  |  |
Money market funds |  | $ | 142,432 |  | $ | 142,432 |  | $ | - |  | $ | - |
Corporate bonds |  |  | 11,015 |  |  | - |  |  | 11,015 |  |  | - |
U.S. Government agency securities |  |  | 9,666 |  |  | - |  |  | 9,666 |  |  | - |
Other available-for-sale securities |  |  | 3,983 |  |  | - |  |  | 3,983 |  |  | - |
Trading securities – short term investments: |  |  |  |  |  |  |  |  |  |  |  |  |
High yield debt securities |  |  | 181,483 |  |  | - |  |  | 181,483 |  |  | - |
Domestic equity mutual fund |  |  | 82,542 |  |  | 82,542 |  |  | - |  |  | - |
Domestic equity ETF |  |  | 32,651 |  |  | 32,651 |  |  | - |  |  | - |
Money market funds held in trading accounts |  |  | 21,401 |  |  | 21,401 |  |  | - |  |  | - |
Other trading securities |  |  | 5,393 |  |  | 2,614 |  |  | 2,779 |  |  | - |
Trading securities – other current assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Domestic equity securities |  |  | 33,857 |  |  | 33,857 |  |  | - |  |  | - |
Foreign equity securities |  |  | 6,532 |  |  | 6,532 |  |  | - |  |  | - |
Fixed income mutual funds |  |  | 4,570 |  |  | 4,570 |  |  | - |  |  | - |
Other |  |  | 2,676 |  |  | 2,405 |  |  | 271 |  |  | - |
Derivatives |  |  |  |  |  |  |  |  |  |  |  |  |
Commodities (1) |  |  | 6,136 |  |  | 6,136 |  |  | - |  |  | - |
Foreign currencies |  |  | 1,675 |  |  | - |  |  | 1,675 |  |  | - |
Total Assets |  | $ | 546,012 |  | $ | 335,140 |  | $ | 210,872 |  | $ | - |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |
Commodities (1) |  | $ | 1,779 |  | $ | 1,779 |  | $ | - |  | $ | - |
Interest rate swaps |  |  | 7,715 |  |  | - |  |  | 7,715 |  |  | - |
Foreign currencies |  |  | 407 |  |  | - |  |  | 407 |  |  | - |
Total Liabilities |  | $ | 9,901 |  | $ | 1,779 |  | $ | 8,122 |  | $ | - |
| (1) |  | 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 December 31, 2014, the commodity derivatives had a margin account balance of $4,314,000 resulting in a net other current asset in the Condensed Consolidated Balance Sheet of $9,267,000 and a net other current liability of $596,000.
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 amortized cost and estimated fair values of investments at October 3, 2015 and December 31, 2014 are presented in Note 2. 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 the derivatives 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, 2014. 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 October 3, 2015, Seaboard had open net derivative contracts to purchase 17,228,000 bushels of grain, 9,438,000 pounds of sugar, 7,960,000 pounds of hogs, 7,260,000 pounds of soybean oil, 704,000 pounds of dry whey powder, 276,000 tons of soybean meal and 40,000 pounds of cheese and open net derivative contracts to sell 2,940,000 gallons of heating oil. At December 31, 2014, Seaboard had open net derivative contracts to purchase 19,800,000 pounds of hogs, 19,620,000 pounds of soybean oil, 15,551,000 pounds of sugar, 10,697,000 bushels of grain, 88,000 pounds of dry whey powder and 85,000 tons of soybean meal and open net derivative contracts to sell 4,326,000 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 in 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 are primarily related to an underlying commodity transaction are recorded at fair value with changes in value marked-to-market as a component of cost of sales in the Condensed Consolidated Statements of Comprehensive Income. Foreign currency exchange agreements that are not related to an underlying commodity transaction are recorded at fair value with changes in value marked-to-market as a component of foreign currency gains (losses), net in the Condensed Consolidated Statements of Comprehensive Income. At October 3, 2015 and December 31, 2014, Seaboard had trading foreign currency exchange agreements to cover a portion of its firm sales and purchase commitments and related trade receivables and payables with net notional amounts of $66,084,000 and $143,961,000, respectively, primarily related to the South African rand. Interest Rate Exchange Agreements During 2014, Seaboard initially 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. During 2014 and 2015, these interest rate exchange agreements were terminated and replaced, each with a mandatory early termination date, which coincides with the revised anticipated delivery dates in 2015 and 2016 of dry bulk vessels to be leased, and have similar terms as the original agreements terminated. In June 2015, one agreement was terminated and not renewed with the delivery of a bulk vessel now leased. Payments made by Seaboard to unwind these agreements were not material. These 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 four dry bulk vessel leases in 2015 and 2016. Seaboard pays a fixed rate and receives a variable rate of interest on these three notional amounts outstanding 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 of Seaboard’s outstanding 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 October 3, 2015 and December 31, 2014, Seaboard had six and seven interest rate exchange agreements outstanding respectively, with a total notional value of $141,000,000 and $163,000,000, 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 October 3, 2015, Seaboard had a maximum amount of loss due to credit risk in the amount of $1,715,000 with three counterparties related to foreign c urrency exchange agreements and no counterparty credit risk 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 October 3, 2015 and September 27, 2014.
|  |  |  | Three Months Ended |  | Nine Months Ended |
|  |  |  | October 3, |  | September 27, |  | October 3, |  | September 27, |
(Thousands of dollars) |  |  |  | 2015 |  | 2014 |  | 2015 |  | 2014 |
Commodities |  | Cost of sales |  | $ | (15,945) |  | $ | (296) |  | $ | (18,007) |  | $ | 3,082 |
Foreign currencies |  | Cost of sales |  |  | 3,820 |  |  | 1,957 |  |  | 5,241 |  |  | 4,770 |
Foreign currencies |  | Foreign currency |  |  | 352 |  |  | 3,145 |  |  | 1,954 |  |  | 2,725 |
Interest rate |  | Miscellaneous, net |  |  | (4,994) |  |  | 91 |  |  | (6,117) |  |  | (3,804) |
The following table provides the fair value of each type of derivative held as of October 3, 2015 and December 31, 2014 and where each derivative is included in the Condensed Consolidated Balance Sheets.
|  |  |  | Asset Derivatives |  |  |  | Liability Derivatives |
|  |  |  | October 3, |  | December 31, |  |  |  | October 3, |  | December 31, |
(Thousands of dollars) |  |  |  | 2015 |  | 2014 |  |  |  | 2015 |  | 2014 |
Commodities(1) |  | Other current assets |  | $ | 9,639 |  | $ | 6,136 |  | Other current liabilities |  | $ | 21,739 |  | $ | 1,779 |
Foreign currencies |  | Other current assets |  |  | 1,715 |  |  | 1,675 |  | Other current liabilities |  |  | 1,417 |  |  | 407 |
Interest rate |  | Other current assets |  |  | - |  |  | - |  | Other current liabilities |  |  | 8,714 |  |  | 7,715 |
| (1) |  | 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 October 3, 2015 and December 31, 2014, the commodity derivatives had a margin account balance of $34,852,000 and $4,314,000, respectively, resulting in a net other current asset in the Condensed Consolidated Balance Sheets of $22,949,000 and $9,267,000, respectively and a net other current liability of $197,000 and $596,000, respectively.

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