RSSSoybeans and Oil: At Odds
By Brad Zigler | October 10, 2008 | 1:23 PM | 0 Comments
Cunard Lines used to entice jet-setters aboard its passenger ships with the tagline "Getting there is half the fun." That line might work for travelers, but it certainly won't for oil refiners. Oil Patch alchemists are now looking with envy at the margins earned by agriculture sector processors. There's been a serious lack of fun at refineries recently.
Oil refiners and soybean processors are middlemen in the supply chains that put fuel in your tank and food on your table.
At the beginning of the year, the gross profit that could be earned from cracking crude oil into products like gasoline and heating oil could be measured in double digits (10% specifically). At last look, though, the margin had shrunk to just 4%. (If you want to know more about how the margin's derived, see "Time For Crack Spreads?".)
Over in the heartland, soybean processors have seen their margins recover to the 7% level, about where the bean crush started the year. Soybeans are processed into meal, which is used primarily as animal feed, and oil, which is used in a wide variety of human foodstuffs and other products.
Profit Margins: Oil Refining Vs. Soybean Processing
For the year, crude oil prices are under water by 6%. Falling crude prices would ordinarily improve the refining margin, all other things being equal. But things ain't equal. End-product prices - the revenue side of the crack-spread equation - have also fallen. Viciously so with respect to wholesale gasoline prices. Motor fuel prices (wholesale prices for December delivery, not at-pump costs) have skidded nearly 15% this year. Gasoline accounts for about 2/3 of the crack value, defining refining profitability more than the other primary distillate, heating oil.
Quite the opposite is true over in the soybean market. There, meal takes the 2/3 share of the crush value. While prices for beans and bean products have all fallen this year, meal prices have been most buoyant, easing 10% while beans and oil have sunk 16% and 23%, respectively.
What you're seeing in the accompanying chart is a study in pricing power. As the economic dial indicator swings toward recession, industry and consumers start to economize, running fewer work shifts and driving less. But everybody still has to eat. Ideas about an abundant bean crop, too, have had an ameliorative effect on processing margins.
So, is the ag sector hot again? Only in a relative sense. Notice the trendlines in the accompanying chart still point downward.
If you want to trade on the soybean complex's relative strength, there's an ever-increasing number of exchange-traded agriculture vehicles available, each with varying degrees of exposure to the bean complex. (A matrix illustrating the more established products is contained in "A Bumper Crop Of Agricultural Products".)
We'll take a look at some of the newer market entrants in an upcoming column.
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