Profit Margins Whittled This Week

Includes: ADM, BG, DBO, USO, VLO
by: Hard Assets Investor
By Brad Zigler

A lot of truckers jammed into the District of Columbia this week to protest high fuel prices. Hundreds of 18-wheelers circled the National Mall.

Strangely, the focus of truckers' outrage - oil refiners - would like to see the crude oil prices decline as well. High input costs have been eroding refiners' profit margins this year (see "Valero: Oil Refiner's Profits Cracking"). When crude oil prices rise rapidly, producers risk consumer and political backlash if they try to pass higher costs on to the refined product side.

There's, in fact, a fairly strong negative correlation (-63%) between crude oil price hikes and refinery margins. That makes input costs more of a liability for refiners than for other kinds of commodity processors, like soybean crushers. The correlation between soybean prices and gross processing margins for outfits like Archer Daniels Midland (NYSE: ADM) and Bunge (NYSE: BG) this year has been -20%.

For the week ending Wednesday, crude oil prices slipped $5 per barrel, or 4.3%, basis the November NYMEX contract. The ameliorative effect on margins, however, was offset by declines in product prices. December contracts for unleaded gasoline and heating dipped 4.6% and 4%, respectively. The net effect was a 51-cent-per-barrel decline in the gross refining margin, or "crack spread." Each barrel of oil costing $110 represents a potential profit of $9.55, or 8.7%. At the top of the year, when crude was $95 a barrel, the refining margin was 10.4%.

NYMEX Crack Spread


On the ag side this week, margins were pinched, too. Soybeans for November delivery through CBOT fell 32 cents per bushel to $12.255, while soy oil eased 5 cents a pound to 53.34 cents, basis December. December soy meal futures were flat at $301.50 a tonne. The "crush" or gross processing margin thus fell 17 cents a bushel to 80 cents, or 6.5%. For the year, however, the crush spread has been squeezed only 15 basis points (0.15%), a lot less than the 1.8% compression in oil refining margins.

CBOT Crush Spread




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