The Crush Margin Squeeze
Commodity-based processing industries are feeling the pressure of ever-tighter margins. The soybean/oilseeds crushing Industry, in particular is experiencing narrow margins. The management of Positions, Risks and the “Dynamic” margin is essential to maximize the crushing margin and to take timely action to improve profitability.
Management has to have the ability to smartly and quickly assess current strategies and risks, optimize inputs and outputs, hedge or unwind hedges, synchronize business initiatives and while always knowing and understanding the impact on results. This is what progressive organizations work to establish. Tradesparent BV refers to it as their “Dynamic Margin Management” ™ (DMM) concept. Actively using the data to drive better decisions and performance: regularly, weekly and even daily
Managing your yields and margins starts with awareness and confidence of where you stand. Without insight into your actual exposures and commitments (i.e. physical and financial positions), it will always be a challenge to manage your company’s crush or refining margin.
Core data should be current and include a.o. Bill of Material (BOM), yields, physical, financial/hedging and open positions, planning profiles and prices. This data needs to be current and correct in order to control and oversee the whole process from soybeans crushing and processing until the production and sale of the finished goods.
TRADESPARENT's BOM & Yield engines combines and uses all these data points to automatically provide profiles on the information needed by senior management: from straight forward positions to forward margins, sales margins and other contributing factors. And it is in use today, helping top global processors to protect and enhance their margins.
TRADESPARENT recognized this issue at the outset and provides the necessary platform. For example, raw material data/yield conversions provide a great insight on the processing landscape of your plant or business. And now all the data is in ONE aggregated spot to reveal what managers need to see – without waiting for a re-run of the annual budget process. You now have: 1) clear position overviews (2) the planning and plant capabilities and (3) BOM/Yield per raw material and sales products.
In short, the TRADESPARENT BOM & Yield engine creates one comprehensive model of the full processing activity.
Raw Material requirement
The process maps summarize how the Yield/BOM engine of TRADESPARENT functions. Both Crushing and Refining processes are addressed in these visualizations. If we look at Figure 1, we can see the forward exposures (long or short) of Meal Sales against Soybean purchases. This information is gathered out of the BOM data of this particular product. This principle continues all the way throughout the process down to the level of raw material/energy input. If we look at the process from a procurement point of view, we have a specific amount/value of raw material. With the yield conversion data, we can calculate specific output in particular processes. For example, the crush process requires both Soybeans/Oilseeds and Energy as raw materials and provides yields in Meal, Oil and By-products. This also can be done from a value perspective whereby the raw material and energy input is considered as a cost of sales.
Figure 1 shows the forward exposures (long or short) of Meal Sales against Soybean purchases, in other words the crushing process.
In Figure 2 the degree of complexity is increased, and a refining process is added into scope. The Gross Margin is shown as “open”, “partially” covered and “closed” or locked. The engine works similarly to that shown in Figure 1, but now adds a financial dimension to show how it can be adapted for more extensive analysis.
Sales Margin Calculation
By having full insight on the planning, position, price and market price of both the sales product and all the individual components for this sales product, the sales margin can be calculated.
The TRADESPARENT DMM engine works with 2 steps:
1 Variable Cost Calculation
First, all cost components are calculated/imported (BOM). The cost of an individual product is considered as the committed volume * contract price and/or planning volume * market price
Total BOM cost (Sum of all individual costs) is the variable cost for Sales Products
2 Sales Product Position and Planning
By adding planning and contractual positions of the Sales product you calculate your historical margin and also see the forward sales margin.
Depending on the data available the sales margin can be shown by plant, market segment, country, region or any other dimension through the different dashboards and homepages available as standard.
Why Work Differently?
TRADESPARENT's Crush Module, with its unique BOM & Yield engine, provides processing companies the total overview and insight into their processes. The module enables complete transparency by bringing all components together in one comprehensive margin forecast model to unite and optimize sales and procurement decisions at a global scale.
In summary, TRADESPARENT is providing the necessary tools to support the crushing industry in the daily management of the company through the following actions:
Whatever operational system you have TRADESPARENT collect your data in real time or EoD without interfering with your daily operations and reporting the data in an intuitive and simple format that can allow the management to take timely and concrete decision.
TRADESPARENT is reporting your daily position for whatever type of oilseeds you process and for meals and oils produced comparing it with your purchase and sale program and calculating in real time your daily P&L for closed and open MtM prices.
TRADESPARENT can elaborate your daily position in beans, meal and oil and in bean-equivalent to calculating your yields for the different origins in order to calculate your actual crushing margin and the deviation in respect to the budget.
TRADESPARENT can calculate your yields in Lopro and Hipro meal and your oil refining margins.
TRADESPARENT can calculate your Dynamic Forward margin projecting the purchase of beans and sales of products for closed and open prices margin calculated MtM with the daily market price obtained by major brokers and reported in a pivot table adjustable according to customers need.
TRADESPARENT compares your CBOT futures close, the opening and your board crush in real time getting your close and open positions and reporting the MtM with the CBOT close.
With the projection of Dynamic Margin Forwards, the Management of the company can decide in real time how to lock in the margin or push purchase of beans and sales of the products according to the projected margin.