Excluding the farmers who both grow cash crops and feed livestock, there are not too many producers who keep an eye on both the price of soymeal and the value of soybeans at the same time. There are a few farmers who sell a load of soybeans every time that they buy a load of soymeal as an in-house hedge on feed costs, but those farmers tend to be the exception rather than the rule. However, paying attention to the crush spread should be an important market signal to everyone marketing oilseeds and it is a clue to the profitability (and therefore the buying behaviour) of our end use customer, the oilseed crusher.
Normally in Ontario we see soymeal trade at values of $30 to $60 per tonne higher than the price for a tonne of raw soybeans, however in the winter of 2016 we have seen that gap close to as little as a $5 per tonne spread. So what does that mean about commodity prices in the soy complex and potential market direction in the weeks and months ahead?
The concept of the soybean complex is somewhat unique. Since there are well established and liquid futures markets for both the oilseed crusher’s raw material (soybeans) and their finished products (soymeal and soybean oil), it is possible for oilseed processors to lock in their crush margins using futures contracts as a proxy for cash feedstock or finished product transactions. This is typically referred to as “board crush,” since they are locking in margins on the Chicago Board of Trade (CBOT).
On the CBOT exchange, the value of the May 2016 soymeal futures contract has been on the decline since July 2015. Soybean oil futures for May 2016 have been drifting lower since December. If the price of the finished products being manufactured from soybeans have been dropping for several months in a row, it does not take a business analyst to determine that the value of the raw material for processing (the soybeans themselves), needs to move lower as well in order to sustain crusher’s financial viability.
Somebody reading this is certain to be thinking, soybean prices don’t have to go lower if soybean oil and soybean meal prices rally. That statement is completely correct, except that we are moving into the time of year when the southern hemisphere begins their soybean harvest and the sheer magnitude of Brazil and Argentina’s soybean crop typically puts some downward pressure on soybean prices. Based on the timing of the South American harvest, it is tough to rationally justify how soybeans could become scarce at a time when another 90 million tonne harvest is being fed into the world’s soybean supply.
No farmer’s soybean marketing plan should be jolted by the fact that oilseed values drop off through the South American harvest period, when that sourcing area is under the most pressure to export soybean onto the world market. This price doldrum is entirely to be expected.
Poor crush margins might more significantly impact the marketing plans of domestic soybean growers towards the end of the crop year.
It’s difficult to imagine why crushers will run their soybean processing facilities at full speed when margins are poor. If they run at slower speeds or take longer maintenance shut-downs in the months ahead, the likelihood of a late summer price rally in the soybean complex essentially vanishes. The potential for an August/September price rally for old crop soybeans has already all but been eliminated. Barring a catastrophic drought in the summer ahead, the poor crush margins and resulting slowdown in demand will have ensured a significant carry out of 2015 crop soybeans being held into the 2016 harvest in Ontario.
Steve Kell operates a crop farm in Simcoe County and is a grain merchant for Parrish and Heimbecker Ltd. in Toronto.