Estimate of Gross Processor Margin 2010

The combined value of the products produced from a bushel of soybeans is directly related to the composition of the soybeans in that bushel. As presented within the “Average Protein and Oil” web page, levels of these two soybean components can vary considerably. Understanding the economic implications associated with differences in soybean protein and oil level is complicated by the nature of the relationship between these two components and ever changing markets for each.

When trying to better understand complex, multi-faceted situations, the use of mathematical models can be helpful. The Estimate of Gross Processor Margin (EGPM) model utilized here is intended to serve such a purpose.

The Estimate of Gross Processor Margin (EGPM) is the difference, for a defined set of prices, between the estimated value of the products (i.e. meal + oil + hulls) from a bushel of soybeans and the cost for that bushel of soybeans. This gross difference represents the amount of value that is available for the processor to pay all expenses, in addition to that of the soybeans themselves, and provide a profit. The EGPM model can be used to evaluate different soybean composition and/or market pricing scenarios.

For this presentation, one pricing scenario has been applied to the multiple composition scenarios represented by the soybeans in the USDA-NASS 2010 sample set. To allow for an “apples-to-apples” comparison, the same set of assumptions was applied to all samples. The objective here is to gain a better understanding of the economic implications associated with soybean protein and oil variation.

The following tables and data maps present EGPM information calculated from the protein and oil values obtained for the USDA-NASS 2010 sample set. Prices and other assumptions were held constant so differences in EGPM are reflective of observed differences in protein and oil. A review of this information indicates that a considerable range in EGPM exists for the pricing scenario presented. This is the case not only as one moves across broad geographic regions, but within multi-county districts as well. This composition-based variation in economic-value has significant implications for how prices are established for the U.S. soybean crop, both nationally and locally.

Summary of Results:

Note: For a table with individual district values used to calculate the above table and the data map presented below, use this link: EGPM_Table_2010:

Average EGPM values for 69 multi-county districts are presented in the following map. Each district is identified by a numeric code which is a combination of the respective state and district codes. As an example, district 1710 is District 10 in Illinois. The same code is used in the table of individual district values which can be accessed via the “EGPM Table 2010” link above.

Each district’s average EGPM, $/bu, is represented by its background color using the following color gradient.

$0.94/bu

- $0.31/bu

Trading rules allow for a meal low-protein penalty which is two times the market price per unit of protein which is applied to the difference between the allowed lower protein threshold (47.5% for 48% protein meal) and the actual crude protein in the meal.  The market price per unit of protein is calculated using the actual price paid for the given shipment of soybean meal.  This penalty was applied to samples with estimated meal protein lower than 47.5% and is reflected in the above data map and associated values for EGPM in the associated Excel table.

No premium is currently provided for in the trading rules when soybean meal exceeds 48% crude protein.

The following data map presents results from a model which estimates meal crude protein level based on soybean composition.  Each district’s average value for the estimated meal crude protein level, based on soybean composition, are presented below using the following color gradient.

49% Meal Protein

43% Meal Protein

As one would anticipate, districts with the lowest EGPM’s also had some of the lowest estimated meal protein levels.  This, to a large extent, is exacerbated by the two times protein penalty.

A commodity market is based on the concept of uniformity.  To function effectively, participants must be able to trust the system to deliver what they believe they are buying.  Where measurements are not typically made, a severe penalty, such as the two time protein penalty, serves to help insure compliance.

In a component based market, purchasers would know what they are purchasing and paying for.  As an example, in the case of protein, the market could establish a price per unit of protein and pay on the basis of the actual pounds of protein traded irrespective of the pounds of other non-protein materials that came along with it in the meal.  In this case, the need for a below-threshold protein penalty would no longer exist since the need for uniformity enforcing thresholds would no longer exist.
Disclaimer:
All information provided on the U.S. Soy Measurements (USSM) Web pages is provided “as is” and is intended for illustrative purposes only. No warranty, expressed or implied, is provided regarding any information provided on USSM pages. All information is provided on the condition that users must make their own determinations regarding any use of this information and must assume all risk associated with any and all use.