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Derivatives and Fair Value of Financial Instruments | 9 Months Ended
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Sep. 30, 2017
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 September 30, 2017, and also the level within the fair value hierarchy used to measure each category of assets and liabilities. Seaboard determines if there are any transfers between levels at the end of a reporting period. There were no transfers between levels that occurred in the first nine months of 2017. The trading securities classified as other current assets below are assets held for Seaboard’s deferred compensation plans.
|  | Balance |  |  |  |  |  |  |  |  |  |
|  | September 30, |  |  |  |  |  |  |  |  |  |
(Millions of dollars) |  | 2017 |  | Level 1 | Level 2 | Level 3 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Trading securities – short-term investments: |  |  |  |  |  |  |  |  |  |  |  |  |
Domestic equity securities |  | $ | 716 |  | $ | 716 |  | $ | — |  | $ | — |
Foreign equity securities |  |  | 310 |  |  | 310 |  |  | — |  |  | — |
Domestic debt securities held in mutual funds/ETFs/U.S. Treasuries |  |  | 175 |  |  | 173 |  |  | 2 |  |  | — |
High yield securities |  |  | 86 |  |  | 20 |  |  | 66 |  |  | — |
Money market funds held in trading accounts |  |  | 36 |  |  | 36 |  |  | — |  |  | — |
Collateralized loan obligations |  |  | 29 |  |  | — |  |  | 29 |  |  | — |
Other trading securities |  |  | 6 |  |  | 5 |  |  | 1 |  |  | — |
Trading securities – other current assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Domestic equity securities |  |  | 38 |  |  | 38 |  |  | — |  |  | — |
Foreign equity securities |  |  | 5 |  |  | 5 |  |  | — |  |  | — |
Fixed income mutual funds |  |  | 4 |  |  | 4 |  |  | — |  |  | — |
Other |  |  | 2 |  |  | 2 |  |  | — |  |  | — |
Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |
Commodities (1) |  |  | 3 |  |  | 3 |  |  | — |  |  | — |
Foreign currencies |  |  | 4 |  |  | — |  |  | 4 |  |  | — |
Total Assets |  | $ | 1,414 |  | $ | 1,312 |  | $ | 102 |  | $ | — |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |
Commodities (1) |  | $ | 2 |  | $ | 2 |  | $ | — |  | $ | — |
Interest rate swaps |  |  | 3 |  |  | — |  |  | 3 |  |  | — |
Total Liabilities |  | $ | 5 |  | $ | 2 |  | $ | 3 |  | $ | — |
| (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 September 30, 2017, the commodity derivatives had a margin account balance of $16 million resulting in a net other current asset in the condensed consolidated balance sheet of $17 million.
The following table shows assets and liabilities measured at fair value on a recurring basis as of December 31, 2016, and also the level within the fair value hierarchy used to measure each category of assets and liabilities.
|  | Balance |  |  |  |  |  |  |  |  |  |
|  | December 31, |  |  |  |  |  |  |  |  |  |
(Millions of dollars) |  | 2016 |  | Level 1 | Level 2 | Level 3 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Trading securities – short-term investments: |  |  |  |  |  |  |  |  |  |  |  |  |
Domestic equity securities |  | $ | 482 |  | $ | 482 |  | $ | — |  | $ | — |
Domestic debt securities held in mutual funds/ETFs/U.S. Treasuries |  |  | 437 |  |  | 437 |  |  | — |  |  | — |
Foreign equity securities |  |  | 199 |  |  | 199 |  |  | — |  |  | — |
High yield securities |  |  | 115 |  |  | 15 |  |  | 100 |  |  | — |
Collateralized loan obligations |  |  | 26 |  |  | — |  |  | 26 |  |  | — |
Money market funds held in trading accounts |  |  | 13 |  |  | 13 |  |  | — |  |  | — |
Other trading securities |  |  | 5 |  |  | 5 |  |  | — |  |  | — |
Trading securities – other current assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Domestic equity securities |  |  | 30 |  |  | 30 |  |  | — |  |  | — |
Foreign equity securities |  |  | 3 |  |  | 3 |  |  | — |  |  | — |
Fixed income mutual funds |  |  | 3 |  |  | 3 |  |  | — |  |  | — |
Other |  |  | 4 |  |  | 4 |  |  | — |  |  | — |
Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |
Commodities (1) |  |  | 3 |  |  | 3 |  |  | — |  |  | — |
Foreign currencies |  |  | 1 |  |  | — |  |  | 1 |  |  | — |
Total Assets |  | $ | 1,321 |  | $ | 1,194 |  | $ | 127 |  | $ | — |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |
Commodities (1) |  | $ | 1 |  | $ | 1 |  | $ | — |  | $ | — |
Interest rate swaps |  |  | 4 |  |  | — |  |  | 4 |  |  | — |
Foreign currencies |  |  | 4 |  |  | — |  |  | 4 |  |  | — |
Total Liabilities |  | $ | 9 |  | $ | 1 |  | $ | 8 |  | $ | — |
| (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, 2016, the commodity derivatives had a margin account balance of $10 million resulting in a net other current asset in the condensed consolidated balance sheet of $12 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 short-term investments at September 30, 2017 and December 31, 2016 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 long-term debt is variable-rate, its carrying amount approximates fair value. If Seaboard’s long-term debt was measured at fair value in 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. As 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, 2016. Commodity Instruments Seaboard uses various derivative futures and options to manage its risk of price fluctuations for raw materials and other inventories, finished product sales and firm sales commitments. At September 30, 2017, Seaboard had open net derivative contracts to purchase 34 million bushels of grain and 13 million pounds of hogs and open net derivative contracts to sell 55 million pounds of soybean oil and 4 million gallons of heating oil. At December 31, 2016, Seaboard had open net derivative contracts to purchase 22 million bushels of grain and 14 million pounds of hogs and open net derivative contracts to sell 35 million pounds of soybean oil and 4 million 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 September 30, 2017 and December 31, 2016, 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 $73 million and $81 million, respectively, primarily related to the South African rand and Canadian dollar. Interest Rate Exchange Agreements 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. At September 30, 2017 and December 31, 2016, Seaboard had three interest rate exchange agreements outstanding with a total notional value of $75 million. 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 September 30, 2017, Seaboard had a maximum amount of loss due to credit risk of $4 million with six counterparties related to foreign currency 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 September 30, 2017 and October 1, 2016.
|  |  |  | Three Months Ended |  | Nine Months Ended |
|  |  |  | September 30, |  | October 1, |  | September 30, |  | October 1, |
(Millions of dollars) |  |  |  | 2017 |  | 2016 |  | 2017 |  | 2016 |
Commodities |  | Cost of sales |  | $ | (6) |  | $ | (14) |  | $ | (5) |  | $ | 17 |
Foreign currencies |  | Cost of sales |  |  | 2 |  |  | (12) |  |  | (3) |  |  | (25) |
Foreign currencies |  | Foreign currency gains, net |  |  | (1) |  |  | — |  |  | (2) |  |  | — |
Interest rate swaps |  | Miscellaneous, net |  |  | — |  |  | 1 |  |  | — |  |  | (3) |
The following table provides the fair value of each type of derivative held as of September 30, 2017 and December 31, 2016 and where each derivative is included in the condensed consolidated balance sheets.
|  |  |  | Asset Derivatives |  |  |  | Liability Derivatives |
|  |  |  | September 30, |  | December 31, |  |  |  | September 30, |  | December 31, |
(Millions of dollars) |  |  |  | 2017 |  | 2016 |  |  |  | 2017 |  | 2016 |
Commodities(1) |  | Other current assets |  | $ | 3 |  | $ | 3 |  | Other current liabilities |  | $ | 2 |  | $ | 1 |
Foreign currencies |  | Other current assets |  |  | 4 |  |  | 1 |  | Other current liabilities |  |  | — |  |  | 4 |
Interest rate swaps |  | Other current assets |  |  | — |  |  | — |  | Other current liabilities |  |  | 3 |  |  | 4 |
| (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 September 30, 2017 and December 31, 2016, the commodity derivatives had a margin account balance of $16 million and $10 million, respectively, resulting in a net other current asset in the condensed consolidated balance sheets of $17 million and $12 million, respectively.

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- Definition The entire disclosure for derivatives and fair value of assets and liabilities. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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