The Soybean Crush and South America – Outlook on Crush Margins and Inclement Weather

By Eric Oeth

Many analysts have noted the strength of the domestic soybean crush in recent weeks. In many ways, this record-setting crush shouldn’t be surprising, given the size of the soybean harvest, and the ongoing trade dispute with China.

Another angle to all this crushing has to do with crop quality. While many have commented on the weakness of the basis in many areas of the country, much of the weakness has been attributed to the trade dispute.

The long, wet, often-snowy harvest we experienced in 2018 caused moisture and splitting issues for a lot of soybean producers nationwide. While the USDA didn’t significantly revise many of their quality estimates for soybeans late last year, I suspect that with the government just recently re-opened, we could see some fairly significant downward revisions in quality for the bean crop.

So, the record crush we are seeing right now is a consequence of demand overseas drying up, and crops at home getting too wet. In South America, a lot has been made about the poor weather in their early soybean crop, too, and that is going to have some interesting implications in demand for the soy complex.

Brazilian producers jumped headfirst into planting this year in order to capitalize on the trade dispute between the U.S. and China. As you know, a lot of that crop is in danger of loss due to drought. This issue has been supporting soybean futures stateside, and the bullish news coming out of South America doesn’t end there. Argentina, which lost about 12% of its crush in 2018 due to drought, is having the opposite problem this year – heavy rain has caused some acreage loss, and analysts are pegging a smaller crop for the country in the upcoming harvest.

Between the bulls pointing towards weather trouble in South America, and bears pointing towards uncertainties in U.S./Chinese trade negotiations, I’m personally curious to how the weather situation will develop over the coming months (as the trade negotiations are anyone’s guess at this point).

Argentina, despite producing a fraction of the soybeans that Brazil does, crushes much more as a percentage of their crop than the Brazilians do. A vast majority of the soybeans Brazil sends to China, for instance, are crushed in China rather than in Brazil, and much of the crushing capacity in the country is dedicated to producing oil for biodiesel.

 Due to the ample crushing capacity in Argentina (the drought caused some facilities to close or idle), and the fact that they are dealing with rain rather than drought, I see the fundamental situation in the country as somewhat rosier than that of their northerly neighbor. While Argentina is certainly still exporting unprocessed soybeans abroad (they sent $3.3B worth in 2016, mostly to China), it pales in comparison to the $4.14B and $9.95B they export in oil and meal, respectively, and those exports are aimed primarily at non-China Asian destinations and the European Union.

With that, it will be interesting to see how Argentinian exports compare in price to their American counterparts – particularly if the Chinese don’t come back to the table come March  2^nd. If U.S. crushing continues at such a strong pace, and no “safety valve” for American beans emerges from a trade deal, we may see more bushels get funneled to crushers for the domestic and export markets.