While the U.S. soybean export program has stalled in 2020, soybean crush remains a positive for the soybean balance sheet and for local basis. Healthy soybean processor margins combined with a growing domestic soybean meal demand structure have helped support the aggressive crush pace and have been a positive component for local cash prices.
On March 17, the National Oilseed Processors Association (NOPA) reported a February crush pace of 166.288 million bushels of soybeans. The 166 million bushel crush pace is down from the all-time record of 177 million crushed in January but is higher than the February 2019 crush of 154.5 million. NOPA members represent 95% of the U.S. crush capacity. While some of February’s record crush volume is attributed to ZFS’s Ithica, Michigan, plant that started operations on Feb. 20, we point to a strong demand structure as being the primary catalyst.
We believe that constant and linear growth of the domestic hog herd and broiler flock have fueled soybean meal demand over the last two years.
Growth of the domestic herd has been linear since 2013 following the recovery from PEDv. Growth of the U.S. herd has been aided by positive forward crush margins, improved sow genetics, increasing sow efficiency and solid packer demand that is supported by robust demand for U.S. pork. Key figures from the USDA’s last Quarterly Hog and Pigs report in December showed inventory levels of all hogs and pigs. The breeding herd, pig crop and market hog categories were at 20 year highs. Both first and second farrowing intentions for 2020 were reported higher than 2019. All of the current and future data in the report support enhanced soybean meal demand during the first half, H-1, 2020. The next report is scheduled for March 26.
Fueled by low cost corn, the domestic broiler flock has been expanding at a record capacity. Since China reopened to U.S. poultry exports in late November 2019, weekly USDA reported egg sets and broiler chick placements have surged and are at levels never before seen. While packer demand has been supportive of animal numbers, the poultry meat demand structure has struggled. We believe the improving Chinese export demand has the ability to help clear some of the chicken stocks in cold storage and should support the record broiler production. We continue to believe that the economic fallout from African swine fever in China will continue to keep its domestic protein prices high and will force the country to increase import volumes. While the U.S. will have to compete with Brazil for poultry export market share in China, we believe that expansion of the flock will continue to be a positive for soybean meal demand.
Soybean oil is subject to a different demand and a more seasonal demand structure than soybean meal. The soy oil demand structure is more about biodiesel demand and less about exports. The USDA estimates that 30% of the estimated 26 billion pounds of soy supplies during the 2019/20 marketing year will go to biodiesel production. In February, monthly NOPA soybean oil stocks declined from a 21-month high of 2.013 billion pounds at the end of January. However, soy oil stocks remain above the 1.752 billion pounds held by NOPA members a year earlier.
While reported biodiesel production figures are published by the Energy Information Administration (EIA) two months in arrears, in December, U.S. biodiesel production rose to 133 million gallons. This is up from 127 million gallons in November. Soybean oil remained the largest biodiesel feedstock, with 541 million pounds used in December, or about 53%, of the total. In November, soy oil used in biodiesel production was 527 million pounds. Using Iowa State University’s estimated biodiesel margin model, we attribute part of the soy oil stocks draw during February to the return to profitability after four months of estimated negative margins.
We have long viewed the U.S. crush pace as a bright spot for the soybean complex. While the soybean complex needs a vibrant export program to help clear stocks, the USDA’s estimated 2.1 billion bushel of crush use in the 2019/20 crop year is a record volume. While the biodiesel program can be subject to the whims of the energy complex, particularly the NYMEX ultra low sulphur diesel futures prices, we feel that at the moment there is little evidence for the U.S. hog and broiler producers to slow production. Currently, the U.S. soybean meal export program is performing at a level to meet the USDA’s export forecast for the 2019/20 crop year. With Argentina raising the export tax on soybean meal marginally to 33%, we believe that the U.S. stands to win some export business in the long run, which is another supportive element to crush.
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