Soybean Crush - Agrosoft is crushing it

 

 

In recent years there has been an explosion in the construction of soybean crush facilities, with dozens of plant extensions or new plants announced throughout the midwest and southeast.  

A large part of this demand is driven by the demand for soybean diesel.  Among its many advantages, soybean diesel is:

• Totally Renewable
• Reduces greenhouse gasses
• Lubricates and reduces engine wear
• Is safer to store and transport.  (When was the last time you heard of a soybean exploding?)

Soybean oil can also be used in salad dressing, hair care, ink, margarine, insect repellant, moisturizers.  An insect repellent salad dressing hair gel would be the ultimate soybean oil product.  

As an additional benefit, soybeans are domestically produced and consume and store carbon dioxide.  The soybean crush process also produces soybean meal, which is a key component in animal feed.  Soybean meal is a high quality ingredient that can be used to feed poultry, cattle, fish, and even dog & cat food.  It’s easy to digest, and high in amino acids and protein. 

The primary driver for the increased demand for soybean crush facilities is soybean oil, an essential ingredient in creating renewable diesel.  

The many uses of soybean oil are not exclusive.  Soybean oil that is used in cooking can later be turned into fuel.  A friend who once drove a Mercedes converted to run on soybean oil said her car always smelled like a delicious bag of french fries.  Perhaps someday “french fry smell” will replace “new car smell” as an owner preference.

More Soybean Diesel =  More Soybean Crush

The increased demand for soybean oil and other soybean crush related products has led to an increase in demand for soybean crush facilities.  This in turn has led to an interesting question for users of agribusiness accounting software -- how do you account for soybean crush costs in a way that supports your organization’s decision making while maximizing your profits?  Also, how do you properly account for the price of the soybean oil and meal you have created, when the price of the underlying ingredient (soybeans) is constantly fluctuating?

Agrosoft, a robust CTRM (commodity trade risk management) software that supports grain procurement, manufacturing, and the sale of finished products such as soybean oil, soybean meal, feed, and other products, offers several different options. The flexibility Agrosoft offers reflects the fact that there is no single “correct” answer, only answers that may be correct for your business.

1) Soybean Crush - Perpetual Cost, Standard Costing

How does your soybean crush operation fit into your overall agribusiness strategy?  Is your primary business grain procurement, with soybean crush being an additional profit center?  Or is soybean crushing your primary business?

If soybean crush is your primary business,  then the need to revalue soybeans based on market conditions is less crucial.  Market fluctuations matter less if the soybeans have been priced, purchased, and are their way to crush, as the gain or loss will be recognized in the sale of the finished products. This is particularly true if the majority of your grain merchandising contracts are fully priced. 

In Agrosoft, we can track soybean costs perpetually, with unpriced beans being priced using a standard cost (typically basis + the futures price at time of purchase).  The cost of the finished products will be the cost of the ingredient, with the main product (soybean oil) being derived as the cost of the ingredients less the standard costs allocated to any of the byproducts (such as soybean meal).  

The standard cost model can also be useful when you are running soybean crush as a separate division, as the grain elevator can transfer grain to the crush operation at a standard market price, with any gain or loss as a result in the fluctuation of the basis being absorbed by the grain elevator, and any profit on the soybean oil being realized by the soybean crush facility.  This clear separation of the profits from grain merchandising / risk hedging  and the soybean crush process allows you to better understand - and thus maximize - the profits from both. 

2)  Soybean Crush - Periodic, Bring to Market Costing

One of the unique aspects of soybean crush processing is that there are numerous stages that create numerous products and byproducts.   Various stages can produce soybean flakes, soybean hulls, oleochemicals, soybean meal, and various stages of refined soybean oil.  Note that each of these products can be sold, or processed further.  Soybean hulls can be sold, or ground, or turned into pellets, or processed further to extract additional soybean oil.  How do you handle costing for each of these steps?

Agrosoft’s grain management software gives you the option of allocating the costs to the products based on the current market price at each step of the process, in effect bringing the finished goods to market every step of the way.   So if the soybean crush of a  load of soybean produces a certain quantity of unrefined soybean oil and soybean meal, the Agrosoft CTRM software will recognize the value of the finished products less the cost of the raw ingredients as a gain for that step of the process.  

The advantage of this approach is you are able to measure the relative costs and profitability of each stage of the refinement process.  Agrosoft’s ability to track both the value of what you’re producing and the costs associated with the production (such as labor, solvents, equipment overhead) at every step of the process gives you an insight into your profit margins that a single bottom line number cannot.  The fluctuations in the cost of your ingredients will inherently be accounted for as you bring the products you created from the soybeans “to market” price as part of the manufacturing process.  This will allow you to streamline your soybean crush operations and concentrate on the most profitable products to produce, or better yet, figure out how to lower your expenses in a way that will make the entire process more profitable.  

Hedging Your Bets - And Your Soybeans

If you are running an active commodity trading operation, you may decide to sell your soybeans rather than crush them, if the price is right.  Similarly, buying futures or options may enable you to protect yourself from price swings or take advantage of market opportunities.  The key question is whether you view your soybeans as merely an ingredient or a profit center wholly independent of the soybean crush operation.  If it is the former,  Agrosoft’s trade risk management tools will provide you with the risk hedging features necessary to maintain a risk position that will allow you to take full advantage of quickly changing markets.  

Similarly, soybean oil and soybean meal can also be hedged, as well as sold.  In Agrosoft’s CTRM software, any of these products can be setup as tradable commodities, and can be brought to market, hedged, or sold as part of a position, thus giving you yet another opportunity to maximize profits.

 Conclusion - Soybean Crush 

The exploding growth in demand for soybean related products and the resulting growth in the number of soybean crush facilities presents unparalleled opportunities and challenges.  An accounting cost model for your soybean crush facility is about more than accurately representing information.  Proper cost accounting decisions will enable your organization to make the right decisions and maximize growth and profitability now, and for years to come.