July 23, 2007

 

US soy crushing margins seen steady amid tight 2007/08 soy supplies

 

 

Lower planted US soybean acreage and sizable projected drawdowns in 2007/08 soybean inventories will tighten carryout forecasts, but crushing margins are not expected to be adversely affected by the changing supply dynamics.

 

The US Department of Agriculture in its July 12 supply and demand report projected 2007/08 ending inventories at 245 million bushels, far below projected 2006/07 stocks of 600 million bushels. The decline in inventories is attributed to smaller 2007 production amid acreage reductions to 64.1 million acres from 2006 acreage of 75.5 million.

 

The data pushed soybean futures at the Chicago Board of Trade sharply higher, with November soybeans, which represent the new crop, having rallied nearly US$1 bushel from the day prior to the release of the acreage report on June 29. November soybean futures have given back some of those gains, but remain above late June levels. The CBOT crush spread currently stands near 58 cents per bushel, down from 63 ½ cents just before the acreage report release.

 

"There should be higher prices right across the board in the soy complex, but the crushing industry should be able to maintain its margins pretty well," said Darrel Good, marketing specialist with University of Illinois at Urbana.

 

The higher end-product prices of the crushing process will allow processors to continue crushing soybeans at a favourable clip as long as demand remains constant, industry analysts said.

 

The crush margin is the difference between the value of soymeal plus soyoil and the purchase price of raw soybeans.

 

The USDA reported Thursday the average price of yellow soybeans at Illinois points was US$8.55 a bushel as of July 12. Forty-eight percent soymeal was US$246.70 a tonne and soyoil was 36.30 cents per pound. Based on these prices, the value of soymeal from a bushel of soybeans was $5.43, and the value of soyoil was US$4.07. These figures produce 96 cents in profit from crushing soybeans.

 

"The debate over the future of the crush centres around new-crop inventories, as there is no urgency in this marketing year amid the abundance of old crop supplies," said Thomas Hammer, president of the National Oilseed Processors Association.

 

"There is no urgency in this marketing year at all, but there are a lot more questions than answers out there for the next marketing year amid the potential for tighter soybean supplies," Hammer added.

 

With normal yields for the 2007 crop and adequate carryover inventories from the 2006/07 marketing year, crushing margins should not be affected, as the industry should be able to dip into carryover supplies without bidding up input costs, industry analysts added.

 

Soymeal is high in protein and energy and is one of the most commonly used protein supplements in North America. It is a used as the major protein supplement in rations for dairy cattle. Soyoil is the world's most widely used edible oil. In the US, soyoil accounts for nearly 80 percent of edible oil consumption. Almost all margarine and shortenings contain soyoil. It also is frequently found in mayonnaise, salad dressings, frozen foods, imitation dairy and meat products and commercially baked goods.

 

Good said, however, if there is a crop problem in the last couple of months of the growing season produces low yields, "then that would change the environment quite a bit. That would lead to a situation where processors would have to bid prices up a little stronger for soybeans and that may negatively impact there crushing margins, but we are still weeks away from that."

 

Another piece of the puzzle is how strong export demand will be for soybeans in 2007/08. If supplies tighten and exports stay strong, then crushers may have to compete aggressively with exporters for soy supplies, Good added.

 

The market is currently looking into the future, with tighter soybean supplies making an impact in the industry in spring 2008, said Dan Basse, president of AgResource Co. in Chicago.

 

For the next year, the soybean market won't have the surplus of supplies on hand and might have to attract more US soy acres, and that will present a different dynamic. Currently, the market is anticipating South America will ramp up production enough that will take the strain away from US soybean supplies dwindling to uncomfortable levels, analysts said.

 

The immediate effect of higher soybean prices has been seen in the movement of soy product futures prices.

 

Until recently most of the strength in the crush was attributed to strength in soyoil, as higher world wide demand for vegoils for biodiesel, made a tighter world picture for vegoils, Good said.

 

"However, over the last few weeks soymeal has been picking up the pace, but as long as crude stays above US$70 a barrel, you will continue to see a lot of vegoils going into biodiesel," Good added.

 

Nevertheless, soymeal has made strong strides with soybeans. Soymeal is much more responsive to soybean production concerns, as soybeans account for more world meal supplies. World vegoil supplies are not affected as much by soybean supply declines, as there is more competition from alternative vegoils in the world, said Anne Frick, senior oilseeds analyst with Prudential Financial in New York.

 

When there is a soybean crop scare, soymeal gains on soyoil, Frick added.

 

Soymeal is a bigger component of soybeans in the crush, and is affected more by price increases in soybeans than soyoil, Basse said. With meal what is crushed is used, as it does not have the shelf life of soyoil or soybeans. Therefore, demand will play a key role in soymeal prices as well, analysts added.

 

Nonetheless, smaller soybean production will continue to be an underpinning feature for soymeal. Soymeal is not high priced by historic standards, as soymeal in the US$220 to US$230 range is not that expensive, said Good.

 

The nearby CBOT 2007 August soymeal future settled at US$227.50 per short tonne Thursday (July 19).

 

Meanwhile, tighter soybean supplies are expected to favour soymeal price strength.

 

"Looking forward, I would expect soymeal to continue to gain product share if crop worries persist for the 2007 US soybean crop," Frick said.

 

The oil share percentage of the soy products reported by the CBOT stood at 45.26 percent basis August contracts Thursday.