Streetwise Professor

October 31, 2020

Why ABCD Are Singing A Happier Tune

Filed under: Commodities,Economics — cpirrong @ 11:12 am

In the past, I’ve written about ABCD singing the blues. That is, in recent years the big ag trading firms have struggled to make money. This year, things have turned around.

And the explanation is what it always is: volumes and margins. Period.

In a nutshell, flows to China have picked up substantially, and flows from US competitors have abated due to weather issues:

China agreed to buy $36.5 billion in agricultural commodities from the U.S. in 2020 under the phase-one trade deal, up from $24 billion in 2017, the year before the trade war started. The Asian nation has already bought record amounts of corn, and soybean purchases for the current season are running at their strongest pace in data going back to 1991. U.S. exports of pork are at a record and there’s also been rising sales of beef and sorghum.

drought that’s delaying planting in Brazil is also boosting prices, as it could force Chinese buyers to buy even more from the U.S. In the Black Sea region, dry weather has also hurt Ukraine’s corn crop and is threatening wheat plantings in top grower Russia at a time countries are bringing purchases forward and hoarding food.

The ABCDs have assets worldwide, but their asset base is still US-focused, so they are are seeing bigger flows through their midstream assets in the US, which translates into bigger margins:

The elevation margin, or the price difference between crops loaded onto ships at Gulf ports and the cost of a bargeload delivered to New Orleans, hit the highest level since at least 2016 earlier this year, according to Bloomberg calculations using Commodity3 data.

Bean crush margins are also very high.

And no, contrary to the standard narrative (and to the BBG piece), it has nothing to do with flat prices rebounding. Zero. Zip. Nada. Corn and soybean prices are not markedly different now than when trader profits were languishing:

Nor (contrary to the lead paragraph in the BBG article) are corn and soybean flat price volatilities markedly higher now than when ABCD were singing the blues.

What matters is flows, and where a firm’s assets are relative to those flows. For a variety of reasons, flows out of the US are strong now. This, in turn, increases the demand to utilize assets (such as barge or ship loading facilities) that handle those flows, increasing the prices thereof (i.e., handling margins). When volumes and margins go up, shazam!, profits go up.

That’s the way it has always been, and always will be.

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1 Comment »

  1. An absolutely terrific chart.

    Soybean FOB offer premiums Brazil
    CIF barge NOLA bid vs
    FOB US Gulf in the Offer
    $ per bu.

    Cash is above del. value in the GC.
    It is physical.

    ▪︎Ex: Early in September COFCO cancelled physical cargoes of Brazil to bid in the U.S for in Nov/Dec.
    Another Trader rushed buy single-cars ( certainly not the preferred option but maybe your only option when the freight eats the basis spread).

    Prudent country merchants and crushers who maintain markets in mid-america never want to bid up ahead of a market. Bid-ask become more implied by the decisions in transportation.

    There has been a shift in producers’ expectations after we broke successive price levels. “what I call the hey wait a minute , hold on what’s Going ON ” effect ! High prices haven’t enticed new prompt-selling (This is more important in Brazil than into the U.S).

    The biggest game is in the GC and on the water.

    A corollary is that (FOB offer- CIF barge del. GC bid) 366% bigger than the crush margin in China.
    This intersection has fueled the CBOT price feedback loop.

    If they bid up when Chicago dips, we could see more buying legs after another this has is a market run-up.

    Jacques S. Merchant Trader

    Comment by Jacques S. — October 31, 2020 @ 5:01 pm

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