At this timing where the threat of Argentina accelerating soybean marketing and the demand for world and U.S meal is the talk of the marketplace, a reflection and analysis of the last year in the protein arena is compelling. Changes are evident everywhere but most apparent is the meal inverse markets disappearing, gulf basis levels steadily eroding, and crush margins forcing processors to look at their hole card. Only the stability of the oil market, headlined by El Nino impacts on world oil markets, can be considered fighting off the hungry bears in the oilseed arena.
The US crushing industry has had a very profitable year. The crush rate has been at a record monthly total all through the summer and fall taking the total crush for last year to a record 1.873 bil bushels. The crusher was able to hold meal basis at historically high levels all of last year as U.S. users looked for the big increase in South American supplies to weaken the U.S. meal basis. It did not happen and users were forced to price meal basis contracts at the end of each delivery as the contract period ended. This tended to support meal futures prices keeping inverses in all the meal spreads through the year.
Holding the basis high gave cash crush margins in the range of $1.00 to nearly 2.00 a bushel for a good part of the year. Feeders paid the strong meal basis into the summer due to growing hog and poultry numbers along with profitable feeding margins. Starting in the late summer, meal basis started to soften. Basis offers today are $40 to $50 off the summer levels and now trading at historical lows vs historical highs last summer. Board crush margins have deteriorated 30 to 35 cents per bushel over the last three months. The combination of a weaker meal basis and weaker board crush margins have pushed cash crush margins into the red. Cost of crush varies greatly, but is thought to be around 50 to 55 cents on average for the industry. Cash margins today calculate at 20 to 30 cents below that breakeven level.
Those feed manufactures that can use mid-proteins like DDG’s, corn gluten, rapeseed meal, and cotton seed meal have been very slow to go back to using soymeal even as it appears to be cheaper in rations. They are still smarting at the high basis levels they were forced to pay last year. So soymeal is going to have to go to larger discounts than normal to buy its’ way back into rations.
U.S. bean supplies are more than adequate with big yields at harvest eclipsing expectations. There were a lot of beans that moved into cash channels at harvest but the door to the bin is now closed and locked up. It will take considerably higher prices or the calendar rolling into Jan-Feb next year when bills come due to get the producer to be a seller again. Cash crush margins below break even will not cause the crushing industry to close down. This industry is one of the few that can almost mandate profitability. This will back off bean basis bids (starting to see that happening this week), slow the crush rate, and raise meal basis offers. This will tend to slow the widening meal spreads as cash supplies tighten.
US soy oil values have been more competitive with the world offers as the South American soy oil basis levels have firmed. Concern about El Nino weather creating dry conditions in SE Asia palm oil production has firmed palm values. Palm normally trades at $200 to $300 a ton discount to soybean oil values but for the last several months has been trading at $70 to $100 under soy oil. This has converted a great deal of vegetable oil demand around the world back to soy oil. Current US soy oil export sales are 67 pct ahead of last year at 480 TMT. Shipments are also 76 pct ahead of last year. US biodiesel uses about 25 pct of the US soy oil production. Usage year to date is increased about 8 pct over last year through August. If the US crush industry starts to slow the crush to support margins, the initial attention will be on meal—but the real trade will be tightening soy oil supplies.