Short-term woes: Wilmar’s soy business hit by import glut and bird flu

Feedstock costs to decline in the next months.

Wilmar International may have to expect a volatile short-term in the middle of an oversupply in soybean imports and and the outbreak flu, after two previous quarters of improvement.

According to a report by Maybank, Wilmar will expect continued weakness in 2Q14, but that soybean crushing margins will bottom out in 2H14 because of a decline in feedstock costs, a recovery in China’s soymeal prices, and the widening of premiums for domestic soybean prices.

International soybean prices will weaken further as supply floods the market. Maybank says that US soybean plantings have exceeded market expectations, at 34.3 million ha this year, 9% higher than last year. The record planting, coupled with excellent weather, should bring down international prices further.

Here’s more from Maybank:

We expect soymeal prices in China to recover in 2H14, which should help crushing margins. An outbreak of bird flu in China early this year had curtailed demand for soymeal from poultry farms. The resulting drop in soymeal prices in 1Q14 was a key reason for Wilmar’s negative crushing margins. With the bird-flu threat receding in recent months, demand for soymeal should increase. So should soybean crushing margins.

In general, China’s domestic soybean oil and soymeal prices are highly correlated with its domestic soybean prices. Theoretically, the bigger the premium for domestic soybean prices over international prices, the better the crushing margins for crushers, who mainly rely on international soybean as feedstock. Since June this year, China’s domestic soybean prices have been holding up very well, despite a sharp decline in international soybean prices, which has widened the premium. If the current big premium persists, we look forward tobetter crushing margins from 3Q14.