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Derivatives and Fair Value of Financial Instruments | 3 Months Ended
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Apr. 02, 2016
Derivatives and Fair Value of Financial Instruments |
Derivatives and Fair Value of Financial Instruments | Note 5 – Derivatives and Fair Value of Financial Instruments 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). Seaboard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three broad levels: Level 1: Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities that Seaboard 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 April 2, 2016 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 three months of 2016. The trading securities classified as other current assets below are assets held for Seaboard’s deferred compensation plans.
|  | Balance |  |  |  |  |  |  |  |  |  |
|  | April 2, |  |  |  |  |  |  |  |  |  |
(Millions of dollars) |  | 2016 |  | Level 1 | Level 2 | Level 3 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities – short-term investments: |  |  |  |  |  |  |  |  |  |  |  |  |
Money market funds |  | $ | 133 |  | $ | 133 |  | $ | — |  | $ | — |
Trading securities – short term investments: |  |  |  |  |  |  |  |  |  |  |  |  |
Domestic equity securities |  |  | 469 |  |  | 469 |  |  | — |  |  | — |
Domestic debt securities |  |  | 351 |  |  | 351 |  |  | — |  |  | — |
Foreign equity securities |  |  | 114 |  |  | 114 |  |  | — |  |  | — |
High yield debt securities |  |  | 93 |  |  | — |  |  | 93 |  |  | — |
Money market funds held in trading accounts |  |  | 17 |  |  | 17 |  |  | — |  |  | — |
Collateralized loan obligation |  |  | 8 |  |  | — |  |  | 8 |  |  | — |
Trading securities – other current assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Domestic equity securities |  |  | 29 |  |  | 29 |  |  | — |  |  | — |
Foreign equity securities |  |  | 4 |  |  | 4 |  |  | — |  |  | — |
Fixed income mutual funds |  |  | 3 |  |  | 3 |  |  | — |  |  | — |
Other |  |  | 2 |  |  | 2 |  |  | — |  |  | — |
Derivatives |  |  |  |  |  |  |  |  |  |  |  |  |
Commodities (1) |  |  | 5 |  |  | 5 |  |  | — |  |  | — |
Foreign currencies |  |  | 2 |  |  | — |  |  | 2 |  |  | — |
Total Assets |  | $ | 1,230 |  | $ | 1,127 |  | $ | 103 |  | $ | — |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |
Commodities (1) |  | $ | 8 |  | $ | 8 |  | $ | — |  | $ | — |
Interest rate swaps |  |  | 7 |  |  | — |  |  | 7 |  |  | — |
Foreign currencies |  |  | 14 |  |  | — |  |  | 14 |  |  | — |
Total Liabilities |  | $ | 29 |  | $ | 8 |  | $ | 21 |  | $ | — |
| (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 April 2, 2016, the commodity derivatives had a margin account balance of $23 million resulting in a net other current asset in the Condensed Consolidated Balance Sheet of $19 million.
The following table shows assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 and also the level within the fair value hierarchy used to measure each category of assets.
|  | 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 Condensed 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 in the Condensed Consolidated Balance Sheet of $15 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 amortized cost and estimated fair values of investments at April 2, 2016 and December 31, 2015 are presented in Note 2 to the Condensed Consolidated Financial Statements. The fair value of long-term debt is estimated by comparing interest rates for debt with similar terms and maturities. As Seaboard’s debt was issued during late 2015 and is variable-rate, carrying amount approximates fair value. 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. 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, foreign 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, 2015. 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 April 2, 2016, Seaboard had open net derivative contracts to purchase 18 million bushels of grain and open net derivative contracts to sell 105 million pounds of hogs and 2 million gallons of heating oil. At December 31, 2015, Seaboard had open net derivative contracts to purchase 25 million pounds of hogs, 22 million bushels of grain, and 3 million pounds of sugar and open net derivative contracts to sell 8 million pounds of soybean 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 April 2, 2016 and December 31, 2015, 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 $162 million and $94 million, respectively, primarily related to the South African rand. Interest Rate Exchange Agreements During 2014 and 2015, Seaboard entered into four, approximately eight-year interest rate exchange agreements with mandatory early termination dates, which coincided with the anticipated delivery dates in 2015 and 2016 of dry bulk vessels to be leased. These agreements involved 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. As of December 31, 2015, two agreements remained, each with a $22 million notional amount outstanding. In the first quarter of 2016, these agreements were terminated and not renewed with the delivery of the final two bulk vessels. Payments to unwind these agreements were $2 million. During 2010, Seaboard entered into three ten-year interest rate exchange agreements to mitigate the effects of fluctuations in interest rates on variable-rate debt. These agreements 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. Seaboard pays a fixed rate and receives a variable rate of interest on the notional amounts of $25 million each. At April 2, 2016 and December 31, 2015, Seaboard had three and five interest rate exchange agreements outstanding, respectively, with a total notional value of $75 million and $119 million, respectively. None of Seaboard’s outstanding interest rate exchange agreements 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. 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 April 2, 2016, Seaboard had a maximum amount of loss due to credit risk in the amount of $2 million 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 months ended April 2, 2016 and April 4, 2015.
|  |  |  | Three Months Ended |
|  |  |  | April 2, |  | April 4, |
(Millions of dollars) |  |  |  | 2016 |  | 2015 |
Commodities |  | Cost of sales |  | $ | — |  | $ | (6) |
Foreign currencies |  | Cost of sales |  |  | (12) |  |  | (1) |
Foreign currencies |  | Foreign currency |  |  | — |  |  | 2 |
Interest rate |  | Miscellaneous, net |  |  | (3) |  |  | (5) |
The following table provides the fair value of each type of derivative held as of April 2, 2016 and December 31, 2015 and where each derivative is included in the Condensed Consolidated Balance Sheets.
|  |  |  | Asset Derivatives |  |  |  | Liability Derivatives |
|  |  |  | April 2, |  | December 31, |  |  |  | April 2, |  | December 31, |
(Millions of dollars) |  |  |  | 2016 |  | 2015 |  |  |  | 2016 |  | 2015 |
Commodities(1) |  | Other current assets |  | $ | 5 |  | $ | 4 |  | Other current liabilities |  | $ | 8 |  | $ | 18 |
Foreign currencies |  | Other current assets |  |  | 2 |  |  | 8 |  | Other current liabilities |  |  | 14 |  |  | — |
Interest rate |  | Other current assets |  |  | — |  |  | — |  | Other current liabilities |  |  | 7 |  |  | 6 |
| (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 April 2, 2016 and December 31, 2015, the commodity derivatives had a margin account balance of $23 million and $29 million, respectively, resulting in a net other current asset in the Condensed Consolidated Balance Sheets of $19 million and $15 million, respectively.

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