HardAssetsInvestor

Written by Brad Zigler  |

June 05, 2008

Soybean Crush Crushed

Details

Summer must have started, judging from the state of the soybean crush. Processing margins were, well, crushed to the year's lowest level by the time the markets closed yesterday. Going into the week, processors like Archer Daniels Midland (NYSE: ADM) and Bunge (NYSE: BG) had been eyeing gross margins averaging a shade under 7%. At the bell yesterday, the profit potential in the November/December spread had collapsed to less than 5%.

CBOT Soybean Crush

Supply and demand, of course, figure large in the soybean crush's seasonal pattern. Prices for the outputs (soybean meal and soybean oil) play against the input cost (soybeans), which are, in turn, influenced by the economic environment and seasonal weather patterns to render a sort of roller coaster ride through the calendar. The supply of beans generally peaks during the fall harvest and decreases throughout the rest of the year as inventory is consumed.

Year-to-date, new crop soybean prices are up 20%. That's bad for crushing. Bean oil prices have flagged in recent weeks, but percentagewise have pretty much kept up with the cost of beans. Middling news there. The culprit's been laggard meal prices, which are up only 16% this year.

Meal accounts for about 2/3 of the crush value, defining processing profitability more than oil does. Meal prices have been rising since their early April lows, but bean prices have just risen faster on supply concerns. Plantings are catching up in the wake of a soggy spring, but still lag behind averages for this time of year. As of June 1, about 69% of the new crop had been planted, compared with 86% in the ground a year ago. By five-year averages, 81% of the crop should have been planted by now.

When you look at emergence - that is, the above-ground show of the new crop - the numbers are even scarier. Only 32% of the new crop's emerged, half the show this time last year. Granted, last season was a banner year, but a 55% show is the five-year average for the beginning of June.

As the year progresses, more and more of the soybean crush's vagaries will trickle through to processors' bottom lines. The increasing correlation of the harvest crush to ADM's stock price reflects the concern shareholders have about this line in the company's portfolio.

ADM's share price took a 4% hit for the week ending Wednesday, following an 8% knockdown the previous week.

ADM Margins Crushed?