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Derivatives and Fair Value of Financial Instruments | 9 Months Ended
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Sep. 29, 2018
Derivatives and Fair Value of Financial Instruments |
Derivatives and Fair Value of Financial Instruments | Note 6 – Derivatives and Fair Value of Financial Instruments Seaboard uses 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 29, 2018 and also the level within the fair value hierarchy used to measure each category of assets and liabilities. The trading securities classified as other current assets below are assets held for Seaboard’s deferred compensation plans.
|  | Balance |  |  |  |  |  |  |  |  |  |
|  | September 29, |  |  |  |  |  |  |  |  |  |
(Millions of dollars) |  | 2018 |  | Level 1 | Level 2 | Level 3 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Trading securities – short-term investments: |  |  |  |  |  |  |  |  |  |  |  |  |
Domestic equity securities |  | $ | 812 |  | $ | 812 |  | $ | — |  | $ | — |
Domestic debt securities held in mutual funds/ETFs/U.S. Treasuries |  |  | 399 |  |  | 397 |  |  | 2 |  |  | — |
Foreign equity securities |  |  | 305 |  |  | 305 |  |  | — |  |  | — |
Collateralized loan obligations |  |  | 31 |  |  | — |  |  | 31 |  |  | — |
High yield securities |  |  | 21 |  |  | 21 |  |  | — |  |  | — |
Term deposits |  |  | 10 |  |  | 10 |  |  | — |  |  | — |
Money market funds held in trading accounts |  |  | 7 |  |  | 7 |  |  | — |  |  | — |
Other trading securities |  |  | 5 |  |  | 5 |  |  | — |  |  | — |
Trading securities – other current assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Domestic equity securities |  |  | 37 |  |  | 37 |  |  | — |  |  | — |
Money market fund held in trading accounts |  |  | 5 |  |  | 5 |  |  | — |  |  | — |
Foreign equity securities |  |  | 3 |  |  | 3 |  |  | — |  |  | — |
Fixed income securities |  |  | 3 |  |  | 3 |  |  | — |  |  | — |
Other |  |  | 2 |  |  | 1 |  |  | 1 |  |  | — |
Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |
Commodities (1) |  |  | 2 |  |  | 2 |  |  | — |  |  | — |
Foreign currencies |  |  | 1 |  |  | — |  |  | 1 |  |  | — |
Total Assets |  | $ | 1,643 |  | $ | 1,608 |  | $ | 35 |  | $ | — |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent consideration |  | $ | 14 |  | $ | — |  | $ | — |  | $ | 14 |
Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |
Commodities (1) |  |  | 10 |  |  | 10 |  |  | — |  |  | — |
Total Liabilities |  | $ | 24 |  | $ | 10 |  | $ | — |  | $ | 14 |
| (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 29, 2018, the commodity derivatives had a margin account balance of $25 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, 2017 and also the level within the fair value hierarchy used to measure each category of assets and liabilities.
|  | Balance |  |  |  |  |  |  |  |  |  |
|  | December 31, |  |  |  |  |  |  |  |  |  |
(Millions of dollars) |  | 2017 |  | Level 1 | Level 2 | Level 3 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Trading securities – short-term investments: |  |  |  |  |  |  |  |  |  |  |  |  |
Domestic equity securities |  | $ | 752 |  | $ | 752 |  | $ | — |  | $ | — |
Domestic debt securities held in mutual funds/ETFs/U.S. Treasuries |  |  | 439 |  |  | 438 |  |  | 1 |  |  | — |
Foreign equity securities |  |  | 319 |  |  | 319 |  |  | — |  |  | — |
Collateralized loan obligations |  |  | 29 |  |  | — |  |  | 29 |  |  | — |
High yield securities |  |  | 21 |  |  | 21 |  |  | — |  |  | — |
Money market funds held in trading accounts |  |  | 10 |  |  | 10 |  |  | — |  |  | — |
Other trading securities |  |  | 6 |  |  | 6 |  |  | — |  |  | — |
Trading securities – other current assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Domestic equity securities |  |  | 35 |  |  | 35 |  |  | — |  |  | — |
Money market fund held in trading accounts |  |  | 5 |  |  | 5 |  |  | — |  |  | — |
Foreign equity securities |  |  | 4 |  |  | 4 |  |  | — |  |  | — |
Fixed income securities |  |  | 2 |  |  | 2 |  |  | — |  |  | — |
Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |
Commodities (1) |  |  | 4 |  |  | 4 |  |  | — |  |  | — |
Foreign currencies |  |  | 3 |  |  | — |  |  | 3 |  |  | — |
Total Assets |  | $ | 1,629 |  | $ | 1,596 |  | $ | 33 |  | $ | — |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |
Commodities (1) |  | $ | 6 |  | $ | 6 |  | $ | — |  | $ | — |
Foreign currencies |  |  | 6 |  |  | — |  |  | 6 |  |  | — |
Total Liabilities |  | $ | 12 |  | $ | 6 |  | $ | 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, 2017, the commodity derivatives had a margin account balance of $20 million resulting in a net other current asset in the condensed consolidated balance sheet of $18 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. 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. The fair value of Seaboard’s contingent consideration recorded in conjunction with the acquisition discussed further in Note 10 was classified as a level 3 in the fair value hierarchy since the calculation is dependent upon projected company specific inputs using a Monte Carlo simulation. In future reporting periods, Seaboard will remeasure the estimated fair value of the contingent consideration liability until settled. There was no change to the estimated fair value during the third quarter of 2018. 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 equity prices could have a material impact on earnings in any given reporting 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, 2017. 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 29, 2018, Seaboard had open net derivative contracts to purchase 31 million pounds of soybean oil, 5 million pounds of hogs and 1 million bushels of grain and open net derivative contracts to sell 7 million gallons of heating oil. At December 31, 2017, Seaboard had open net derivative contracts to purchase 29 million bushels of grain and 1 million pounds of soybean oil and open net derivative contracts to sell 13 million pounds of hogs and 7 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 29, 2018 and December 31, 2017, 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 $49 million and $20 million, respectively, primarily related to the South African rand, Canadian dollar and the euro. Equity Futures Contracts Seaboard enters into equity futures contracts to manage the equity price risk with respect to certain short-term investments. Equity futures contracts are recorded at fair value with changes in value marked-to-market as a component of other investment income (loss), net in the condensed consolidated statements of comprehensive income. The notional amounts of these equity futures contracts were $13 million and $0 million at September 29, 2018 and December 31, 2017, respectively. Counterparty Credit Risk From time to time, Seaboard is subject to counterparty credit risk related to its foreign currency exchange agreements should the counterparties fail to perform according to the terms of the applicable agreements. As of September 29, 2018, Seaboard had a maximum amount of loss due to credit risk of $1 million with six counterparties related to foreign currency exchange agreements. 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 29, 2018 and September 30, 2017.
|  |  |  | Three Months Ended |  | Nine Months Ended |
|  |  |  | September 29, |  | September 30, |  | September 29, |  | September 30, |
(Millions of dollars) |  |  |  | 2018 |  | 2017 |  | 2018 |  | 2017 |
Commodities |  | Cost of sales |  | $ | — |  | $ | (6) |  | $ | (16) |  | $ | (5) |
Foreign currencies |  | Cost of sales |  |  | 2 |  |  | 2 |  |  | (2) |  |  | (3) |
Foreign currencies |  | Foreign currency gains (losses), net |  |  | — |  |  | (1) |  |  | — |  |  | (2) |
Equity |  | Other investment income (loss), net |  |  | — |  |  | — |  |  | (10) |  |  | — |
The following table provides the fair value of each type of derivative held as of September 29, 2018 and December 31, 2017 and where each derivative is included in the condensed consolidated balance sheets.
|  |  |  | Asset Derivatives |  |  |  | Liability Derivatives |
|  |  |  | September 29, |  | December 31, |  |  |  | September 29, |  | December 31, |
(Millions of dollars) |  |  |  | 2018 |  | 2017 |  |  |  | 2018 |  | 2017 |
Commodities(1) |  | Other current assets |  | $ | 2 |  | $ | 4 |  | Other current liabilities |  | $ | 10 |  | $ | 6 |
Foreign currencies |  | Other current assets |  |  | 1 |  |  | 3 |  | Other current liabilities |  |  | — |  |  | 6 |
Equity (1) |  | Short-term investments |  |  | — |  |  | — |  | Short-term investments |  |  | — |  |  | — |
| (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 29, 2018 and December 31, 2017, the commodity derivatives had a margin account balance of $25 million and $20 million, respectively, resulting in a net other current asset in the condensed consolidated balance sheets of $17 million and $18 million, respectively. Seaboard’s equity derivatives are also presented on a net basis, including netting the derivatives within short-term investments.

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