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Derivatives and Fair Value of Financial Instruments | 12 Months Ended
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Dec. 31, 2015
Derivatives and Fair Value of Financial Instruments |
Derivatives and Fair Value of Financial Instruments | Note 8 Derivatives and Fair Value of Financial Instruments GAAP discusses several 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). The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fai r value into three broad levels, as described below: Level 1: Quoted Prices in Active Markets for Identical Assets - 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: Significant Other Observable Inputs - 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: Significant Unobservable Inputs - Unobservable inputs that reflect the reporting entity’s own assumptions. The following tables show assets and liabilities measured at fair value (derivatives exclude margin accounts) on a recurring basis as of December 31, 2015 and 2014, respectively, 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 2015 and 2014.
|  | Balance |  |  |  |  |  |  |  |  |  |
|  | December 31, |  |  |  |  |  |  |  |  |  |
(Millions of dollars) |  | 2015 |  | Level 1 | Level 2 | Level 3 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities short-term investments: |  |  |  |  |  |  |  |  |  |  |  |  |
Money market funds |  | $ | 81 |  | $ | 81 |  | $ | — |  | $ | — |
Trading securities – short term investments: |  |  |  |  |  |  |  |  |  |  |  |  |
Domestic equity securities |  |  | 466 |  |  | 466 |  |  | — |  |  | — |
Domestic debt securities |  |  | 450 |  |  | 450 |  |  | — |  |  | — |
Foreign equity securities |  |  | 120 |  |  | 120 |  |  | — |  |  | — |
High yield debt securities |  |  | 104 |  |  | — |  |  | 104 |  |  | — |
Money market funds held in trading accounts |  |  | 22 |  |  | 22 |  |  | — |  |  | — |
Collateralized loan obligation |  |  | 10 |  |  | — |  |  | 10 |  |  | — |
Other trading securities |  |  | 1 |  |  | — |  |  | 1 |  |  | — |
Trading securities – other current assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Domestic equity securities |  |  | 31 |  |  | 31 |  |  | — |  |  | — |
Foreign equity securities |  |  | 5 |  |  | 5 |  |  | — |  |  | — |
Fixed income mutual funds |  |  | 4 |  |  | 4 |  |  | — |  |  | — |
Other |  |  | 3 |  |  | 2 |  |  | 1 |  |  | — |
Derivatives |  |  |  |  |  |  |  |  |  |  |  |  |
Commodities (1) |  |  | 4 |  |  | 4 |  |  | — |  |  | — |
Foreign currencies |  |  | 8 |  |  | — |  |  | 8 |  |  | — |
Total Assets |  | $ | 1,309 |  | $ | 1,185 |  | $ | 124 |  | $ | — |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |
Commodities (1) |  | $ | 18 |  | $ | 18 |  | $ | — |  | $ | — |
Interest rate swaps |  |  | 6 |  |  | — |  |  | 6 |  |  | — |
Total Liabilities |  | $ | 24 |  | $ | 18 |  | $ | 6 |  | $ | — |
(1) Seaboard’s commodity derivative assets and liabilities are presented in the Consolidated Balance Sheets on a net basis, including netting the derivatives with the related margin accounts. As of December 31, 2015, the commodity derivatives had a margin account balance of $29 million resulting in a net other current asset on the Consolidated Balance Sheet of $15 million.
|  | Balance |  |  |  |  |  |  |  |  |  |
|  | December 31, |  |  |  |  |  |  |  |  |  |
(Millions of dollars) |  | 2014 |  | Level 1 | Level 2 | Level 3 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities – short-term investments: |  |  |  |  |  |  |  |  |  |  |  |  |
Money market funds |  | $ | 142 |  | $ | 142 |  | $ | — |  | $ | — |
Corporate bonds |  |  | 11 |  |  | — |  |  | 11 |  |  | — |
U.S. Government agency securities |  |  | 10 |  |  | — |  |  | 10 |  |  | — |
Other available-for-sale securities |  |  | 4 |  |  | — |  |  | 4 |  |  | — |
Trading securities – short term investments: |  |  |  |  |  |  |  |  |  |  |  |  |
High yield debt securities |  |  | 182 |  |  | — |  |  | 182 |  |  | — |
Domestic equity securities |  |  | 115 |  |  | 115 |  |  | — |  |  | — |
Money market funds held in trading accounts |  |  | 21 |  |  | 21 |  |  | — |  |  | — |
Domestic debt securities |  |  | 5 |  |  | 3 |  |  | 2 |  |  | — |
Other trading securities |  |  | 1 |  |  | — |  |  | 1 |  |  | — |
Trading securities – other current assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Domestic equity securities |  |  | 34 |  |  | 34 |  |  | — |  |  | — |
Foreign equity securities |  |  | 7 |  |  | 7 |  |  | — |  |  | — |
Fixed income mutual funds |  |  | 5 |  |  | 5 |  |  | — |  |  | — |
Other |  |  | 2 |  |  | 2 |  |  | — |  |  | — |
Derivatives |  |  |  |  |  |  |  |  |  |  |  |  |
Commodities (1) |  |  | 6 |  |  | 6 |  |  | — |  |  | — |
Foreign currencies |  |  | 1 |  |  | — |  |  | 1 |  |  | — |
Total Assets |  | $ | 546 |  | $ | 335 |  | $ | 211 |  | $ | — |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |
Commodities (1) |  | $ | 2 |  | $ | 2 |  | $ | — |  | $ | — |
Interest rate swaps |  |  | 8 |  |  | — |  |  | 8 |  |  | — |
Total Liabilities |  | $ | 10 |  | $ | 2 |  | $ | 8 |  | $ | — |
(1) Seaboard’s commodity derivative assets and liabilities are presented in the 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 million resulting in a net other current asset on the Consolidated Balance Sheet of $9 million and a net other current liability of $1 million. 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 Consolidated Balance Sheets, it would have been classified as level 2 in the fair value hierarchy. As Seaboard’s debt was issued during the latter part of the year and is variable-rate, carrying amount approximates fair value. The amortized cost and estimated fair values of investments and long-term debt at December 31, 2015 and 2014, are presented below:
December 31, |  | 2015 |  | 2014 |
(Millions of dollars) |  | Amortized Cost |  | Fair Value |  | Amortized Cost |  | Fair Value |
Short-term investments, available-for-sale |  | $ | 81 |  | $ | 81 |  | $ | 167 |  | $ | 167 |
Short-term investments, trading debt securities |  |  | 1,188 |  |  | 1,173 |  |  | 330 |  |  | 324 |
Long-term debt |  |  | 522 |  |  | 522 |  |  | — |  |  | — |
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. 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. 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 derivatives are recorded at fair value, with any cha nges in fair value being marked-to-market as a component of cost of sales on the Consolidated Statements of Comprehensive Income. Since these derivatives are not accounted for as hedges, fluctuations in the related commodity prices could have a material impact on earnings in any given period. At December 31, 2015, Seaboard had open net derivative contracts to purchase 25 million pounds of hogs, 22 million bushels of grain, 3 million pounds of sugar, and open net derivative contracts to sell 8 million pounds of soybean oil. At December 31, 2014, Seaboard had open net derivative contracts to purchas e 20 million pounds of hogs, 20 million pounds of soybean oil, 16 million pounds of sugar, 11 million bushels of grain, and open net derivative contracts to sell 4 million gallons of heating oil. For the years ended December 31, 2015, 2014 and 2013, Seaboard recognized net realized and unrealized gains (losses) of $(45) million, $18 million and $(17) million, respectively, related to commodity contracts, primarily included in cost of sales on the 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 primarily relate to an un derlying commodity transaction are recorded at fair value with changes in value marked-to-market as a compone nt of cost of sales on the Consolidated Statements of Comprehensive Income. For eign currency exchange agreements that a re not related to an underlying commodity transaction are recorded at fair value with changes in value marked-to-market as a com ponent of foreign currency gains (losses), net on the Consolidated Statements of Comprehensive Income. Since these agreements are not accounted for as hedges, fluctuations in the related foreign currency exchange rates could have a material impact on earnings in any given year. At December 31, 2015 and 2014, Seaboard had foreign currency exchange agreement s to cover its firm sales and purchase commitments and related trade receivables and payables, with notional amounts of $94 million and $144 million, r espectively, 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 terminatio n dates in the second half of 2014 and early 2015 for one of the agreements. During 2014 and 2015 these agreements were terminated and replaced, each with a mandatory early termination date, which coincided 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. The interest rate 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. Seaboard pays a fixed rate and receives a variable rate of interest on the notional amounts of $22 million e ach. In 2015, two agreements were terminated and not renewed with the delivery of two bulk vessels. Payments made by Seaboard to unwind these agreements were not material. During 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 fluctuation s in interest rates on variable-rate debt. Seaboard pays a fixed rate and receives a variable rate of interest on the notional amounts of $25 million e ach. 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 m iscellaneous, net in the Consolidated Statements of Comprehensive Income. At December 31, 2015 and 2014, Seaboard had five and seven agreements outstanding, respectively, with a total notional value of $119 million and $163 million, r espectively. The following tabl e provides the amount of gain (loss) recognized for each type of derivative and where it was recognized in the Consolidated Statements of Comprehensive Income for the year ended December 31, 2015 and 2014:
(Millions of dollars) |  |  |  |  | 2015 |  | 2014 |
Commodities |  | Cost of sales |  |  | $ | (45) |  | $ | 18 |
Foreign currencies |  | Cost of sales |  |  |  | 16 |  |  | 4 |
Foreign currencies |  | Foreign currency |  |  |  | 2 |  |  | 4 |
Interest rate |  | Miscellaneous, net |  |  |  | (4) |  |  | (8) |
The following table provides the fair value of each type of derivative held as of December 31, 2015 and 2014 and where each derivative is included on the Consolidated Balance Sheets:
|  |  |  | Asset Derivatives |  |  |  | Liability Derivatives |
|  |  |  | December 31, |  | December 31, |  |  |  | December 31, |  | December 31, |
(Millions of dollars) |  |  |  | 2015 |  | 2014 |  |  |  | 2015 |  | 2014 |
Commodities(1) |  | Other current assets |  | $ | 4 |  | $ | 6 |  | Other current liabilities |  | $ | 18 |  | $ | 2 |
Foreign currencies |  | Other current assets |  |  | 8 |  |  | 1 |  | Other current liabilities |  |  | — |  |  | — |
Interest rate |  | Other current assets |  |  | — |  |  | — |  | Other current liabilities |  |  | 6 |  |  | 8 |
(1) Seaboard’s commodity derivative assets and liabilities are presented in the Consolidated Balance Sheets on a net basis, including netting the derivatives wit h the related margin accounts. As of December 31, 2015 and 2014, the commodity derivatives had a margin account balance of $29 million and $4 million, respectively, resulting in a net other current asset on the Consolidated Balance Sheets of $15 million and $9 million, respectively, and a net other current liability of $0 million and $1 million as of December 31, 2015 and 2014. Counterparty Credit Risk From time to time Seaboard is subject to counterparty credit risk related to its foreign currency exchange agreements and interest rate swa ps should the counterparties fail to perform according to the terms of the contracts. As of December 31, 2015, Seaboard had $8 million of credit risk to seven co unterparties related to its foreign currency exchange agreements and no credit risk related to its interest rate swaps. Seaboard does not hold any collateral related to these agreements.

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