Strength in soy crush margins 'down to more than Argentine drought' - ADM


The rebound in soybean crushing margins is down to more than Argentine drought, Archer Daniels Midland said, flagging changes in buyer behaviour too - while flagging a cloud over the US ethanol industry.

The US-based agricultural trading giant, which on Tuesday cited improved soybean processing profitability as a key driver behind larger-than-expected earnings growth, acknowledged the boost to margins from depressed soy crop prospects in Argentina, the top soymeal exporting country.

“The drought in Argentina certainly contributed to the increasing soy crush margins,” Juan Luciano, the ADM chief executive, told investors.

In Chicago, the crush margin – in essence, the value of processing products soymeal and soyoil compared with that of raw soybeans - closed at $1.75 per bushel on Tuesday, the best finish on a spot basis since November 2014.

The crush has been helped in particular by higher prices of soymeal, a market which Benson Quinn Commodities said “is trading like the masses simply don’t have enough coverage”, with “trade worried about the flow of product”.

Biodiesel tariff

However, Mr Luciano said that in Argentina factors beyond drought were also involved in boosting margins, with the government’s gradual phasing out of the export tax giving farmers an extra cause to hang on to crop, in hope of better farmgate prices ahead, so limiting supplies to crushers.

Furthermore, the tariff imposed last year by the US on imports of Argentine biodiesel has also “changed a little bit the dynamics”, in that the “Argentine crusher has become more disciplined.

“I think we see less of mills being subsidised by biodiesel,” which is made from vegetable oils – mainly soyoil in Argentina’s case.

This is a “more permanent factor” supporting margins.

Brazilian soy selling accelerates

Brazil too has contributed to the improved crushing profitability, thanks to a “more rational” turn in soybean origination in the country, after the withholding last year which supported prices of the oilseed while squeezing processors’ margins.

“We are not facing the same mismatch between farmer selling and customer buying that we faced,” Mr Luciano said, noting that crushers had reduced “take-or-pay” commitments, which force them to pay compensation to producers if they do not take contracted crop.

In fact, Brazilian growers were 56-60% sold the current soybean crop, compared with a 44% figure a year ago, encouraged too by a boost to domestic prices from a weaker real.

‘Big destocking’

Furthermore, “the global buyer” of soymeal “has become less hand-to-mouth” in the face of rising prices of the feed ingredient, and less ample supplies of feed wheat and distillers’ grains (DDGs) as alternatives.

While there had been a “big destocking” among soymeal users now “with more of the scarcity value returning to the market, the global buyer wants to lock in their costs, and that resulting in better operating environment for us”.

With ADM itself – which processes some 30m tonnes of soybeans a year - having also curbed costs at its plants, and improved capacity use, “we feel very strongly about not only the sustainability of this [crush] margin but the sustainability and improvement of our performance in the years to come”, Mr Luciano said.

Ethanol concern

However, he was less upbeat over margins in the ethanol production industry, which uses largely grains as its feedstock, terming them “weak” and “pressured”, highlighting a setback from China’s decision last month to slap an extra 15% on imports of the biofuel from the US.

“At the beginning of the year, we were probably thinking about 1.8bn gallons of exports.

“Now with China we’re probably thinking more in the range of 1.6bn gallons” in US exports of the biofuel this year, with Mr Luciano estimating that the import levy will cut volumes by 200m gallons.

“I think the industry export like about 100m gallons in the first quarter to China, but we’re probably estimating 200m less for the rest of the year,” he said.


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