Use these three skills to overcome the merchandising challenges that hit your profit margin.
Small soybean processing plants provide an outlet for local soybean producers and a valuable service to their local feed industry.
Unlike larger hexane gas plants, most of these plants use a mechanical extraction method where more oil is retained in meal for feed. While this is beneficial for feed, it creates merchandising challenges that many in the business struggle with.
To meet these challenges, there are three skills that need to be used:
- Exercising effective routines and processes
- Understanding and managing spreads
- Recognizing and capturing margins
Exercising effective routines and processes
Daily routines that accurately assess your price risk, basis risk and spread risk are critical to making the right managerial decisions. Disciplined routines and processes are a cornerstone of merchandising for any operation but even more important for the soybean processor.
Are you managing your price risk for soybeans, soybean meal and soybean oil? These three commodities have their own pricing mechanism, basis and futures price.
The question that must be answered is, “where and how much price exposure do I have?” It would not be unusual for the typical processing plant to be long cash soybeans to be processed while also being short soybean meal and oil in the cash market.
Solid routines will help assess how much price risk you have for each piece. The traditional “long and short” position report is one that every grain elevator knows very well. A report like this is easy to put together for soybeans, meal and oil. What is less easy is to connect is all the pieces to identify just how much price exposure there is to the operation. The good news is that it is possible, and there is nothing more important than taking the time to make sure you are doing it accurately and in a timely fashion.
Understanding and managing spreads
Managing soybean spreads is a critical facet of making sure you own the best soybean basis possible for your facility to crush. You must take a proactive role in locking in carries when they are available. Most merchandisers will tell you spreads are very important when it comes to managing flow of grain through your facility.
Ideally, you lock in spreads that pay the full cost of carrying soybeans out of harvest until they are processed. This is not always possible, so you must plan how your processing needs can be matched with how the farmers sell beans to you. Even more important to the bean processor is the crush spread. Accuracy in managing this spread is crucial. An error in setting the crush spread can lead to unintended financial risk and serious problems in your outcomes.
What is the difference in your mechanical spread needs versus the synthetic CME crush spread? Understanding your crush needs and tracking them along with your production is necessary for profitable operation. The CME offers the “Soybean Crush Synthetic” to its customers to help manage the crush spread.
This crush spread is based on one 60-pound bushel of soybeans producing 44 pounds of soybean meal and 11 pounds of soybean oil. To set the crush for 50,000 bushels of soybeans, you would need to buy 10 contracts of soybeans then sell 11 100-ton contracts of meal and nine 60,000-pound contracts of oil. These ratios work well for hexane gas plants, but not so much for extruders.
The typical extruder plant will produce 47 to 48 pounds of meal and seven to eight pounds of oil for each bushel of soybeans. These differences in meal and oil yield have significant implications for the crush spread.
For this plant to set the crush on 50,000 bushels of soybeans, they would need to buy that same 50,000 bushels of soybean and sell 12 100-ton contracts of soybean meal and six 60,000-pound contracts of soybean oil.
Recognizing and locking in profitable margins
Implementing solid tracking routines and processes and managing futures spreads gives your company a better chance of success because you can make accurate, informed decisions.
By managing and monitoring your price risk, you will reduce your market exposure to price movement. Doing the same thing with each of the commodity’s basis risk is just as important.
Paying attention to and knowing what the typical basis pattern is for each can have a huge impact on the outcome. Do your internal and external team members have a firm grasp of where the risks are and what is being done to manage them? Every company should have a firm accounting foundation to assist in tracking and monitoring its outcomes.
Internally, the accounting and management teams must understand the steps that the merchandising team is taking when it comes to managing price risk, basis risk and spread. Externally, the auditor, accountant and lender need to know what is being done as well.