Crushing it! – Promising Outlook for US Soy Crush Despite Trade War

Economics for US soybean crushers have changed in 2018. Some drivers might be long lasting, potentially changing the future growth of the US soybean crush industry along export channels.

The dawn of a new normal for US soybean crushers

This year two major events have supported the economics of the US soybean processing industry. The first, a severe Argentine drought that elevated global soymeal prices, will fade in 2019 if more typical Argentine soybean production volumes return. The second, a global trade war that recently saw the implementiation of an additional 25% duty on US soybeans traded into China, might remain in place for a long time, but could disappear at the speed of a tweet. The duty on US soybeans has already disrupted global soybean market dynamics. If it remains in place for long it has the potential to drive long-term changes in the global oilseed processing industry.

The impact of both events has been positive for US soybean crushers. Elevated soymeal prices, largely due to the shortage of the Argentine 2018 crop, compared to low US soybean prices, driven by China’s introduction of a duty on US soybeans, have supported US soybean crushing margins, driving the US soybean crush to a record high.

Will the US process more soybeans for exports?

US soybean exports are at risk from soybean tariffs to China, the largest importer of US soybeans, giving South American soybeans a strong competitive advantage. In response, US soybean prices moved lower to counteract the tariff and regain export market share. The depressed US price environment will remain amid tariffs and in the absence of major supply shocks in South America.

The trade war will not only affect US soybean exports, but also impacts the global pricing of soymeal. The growing future global demand centers for soymeal besides the US and China will review if they’d rather import South American soymeal, soybeans from the US for processing, or US soymeal. In recent years, the US accounted for 18% to 19% of global soymeal production and for 15% to 20% of global soymeal exports, mainly to markets in the Americas, raising the question whether US soymeal exports will rise further to supply a higher share of the global import needs.

soybean-crush_Fig1

There is potential for future US soy crush growth

The utilisation rate of the US soybean processing capacity is already at very high levels, as US soymeal production has jumped 21% in the past five years, driven by both a rising US domestic demand and growing export volumes. Rabobank forecasts that the US livestock sector will grow at slower rates in the next decade, which will in turn slow the rise of US soymeal consumption. Over the course of 2019, several soybean crush plants will come online in the Dakotas and Michigan, in addition to the recently commenced plant in Pennsylvania, which will allow for at least an extra 3m tonnes of soymeal supplies p.a. on top of the 44m tonnes produced in 2017/18. The decision to build those plants was taken well before recent trade war events and the plants will take advantage of the expansion of US soybean production seen over the last five years, outside of the traditional US soy and corn belt. Rabobank does not expect this trend to strengthen further.

Will US crushers follow the Argentine model?

In the last five years, the US exported 25% to 30% of its soymeal production, with exports recently exceeding 12m tonnes p.a. Almost 30% of these exports moved to Mexico and Canada, largely by train or truck. The remaining approximate 70% is exported by vessel, with the overwhelming majority coming out of ports or transshipments in the New Orleans area.

To benefit from the growing future global demand for soymeal, which as per FAO-OECD is forecast to rise 23% in the next decade to about 285m tonnes, the US soybean processing industry will have to place greater emphasis on those river and port export channels. Several US soybean processing plants are already located along key waterways, allowing for easier transport of the produced soymeal via the inland river system to deep sea ports and transhipment facilities in the US Gulf.

However, the US soybean industry is still very different from the one in Argentina, where the overwhelming majority of the soybean processing capacity has port access to the Parana river, which facilitates that 90% to 95% of Argentina’s soymeal production can efficiently be moved into the export channel. Future US soybean processing capacity plans should take the more favourable export conditions for US soybean meal into account when developing new or expanding existing soybean processing plants. That said, trade uncertainty will continue to prevail, and in case of a relaxation of the US-China trade tensions and a resulting removal of China’s 25% duties on imports of US soybeans, the described improved US position for soymeal exports can quickly diminish again.

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  • Stefan Vogel

    Global Strategist - Grains & Oilseeds; Head of Agri Commodity Markets
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