Industry Considers Composition-Based Pricing System
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Can a soybean pricing system more clearly based on the value of protein and oil become the norm for U.S. farmers? Robert Stobaugh, soybean farmer from Atkins, Ark., expects his crop’s composition to be obviously reflected in its price and receive greater profits for top quality.
“I have no doubt a value-based pricing system will work. We can measure what animal nutritionists want with such precision that we can put specific products in the feed trough,” he says. “Eventually we will market soybeans based on quantifiable nutritional advantage.”
Stobaugh farms in partnership with a brother and nephew about 50 miles northwest of Little Rock Ark., in the Arkansas River Valley. The family has been farming since 1951. They raise about 4,000 acres of soybeans, along with rice, winter wheat and some corn.
The Stobaughs are familiar with the nutritional needs of animal agriculture, since much of their soybean crop ends up in local poultry feed rations.
“The poultry industry recognizes soybean meal is a superior feed ingredient, although the buyers we work with do not offer premiums today for higher protein or amino acid content,” says Stobaugh, who also is a member of the United Soybean Board (USB) Meal Action Team. “The industry is getting better at detecting and measuring composition. As buyers become more aware of that information, they will demand certain components and we will be paid based on it.”
Raising Awareness of Composition Value
The truth is protein and oil content already are calculated into the soybean price farmers receive, whether they know it or not. First purchasers quote prices to farmers based on customer demand. The soybean industry is working to make that value more visible to farmers.
“The biggest challenge today is the lack of transparency to farmers about what their protein and oil levels are. Most do not understand the market price is based on protein and oil levels, and that quality and yield are both important to maximize profitability,” says Chris Schroeder, director with Centrec Consulting Group, Savoy, Ill. “Some buyers/processors are paying based on protein and oil, and farmers need to know the value the market places on them.”
Tom Kersting, CEO with South Dakota Soybean Processors LLC, says they have tried programs to recognize and reward farmers for specific protein and oil levels. Operating in a traditionally variable protein quality area, they began experimenting with premiums to be more competitive.
“We tried paying a premium when minimums of 19 percent oil and 35 percent protein were met. But the weather has a say in protein and oil content, and producers lost interest when we were unable to pay premiums in some of those years,” says Kersting.
Now they alter their program annually based on protein and oil levels at harvest. All loads are tested, and farmers are notified where their composition ranked overall. If the top protein in any given year is 34 percent, for example, they pay premiums to the top 25 percent of loads based on that level. The company allocates a fixed premium amount in the 7-14 cent per bushel range.
“We send farmers a separate check for the premium amount so it stands out from their overall sales,” says Kersting. “We are seeing a little higher protein levels, and we would like to think that is due in part to our efforts, but you can’t really know for sure.”
Tom Malecha, vice president of CHS’ processing and food ingredients divisions, serves on the United Soybean Board Value Task Force. CHS has had a premium program since 2003.
“We use NIR (near infrared spectroscopy) machines to test every inbound load, and pay based on oil and protein content,” he says. “NIR technology is becoming more widely approved because of its accuracy. If farmers and the industry decide that component pricing is appropriate, it will be imperative farmers understand NIR machines. I think you’ll begin to see farmers put them on their farms and segregate soybeans coming off the combine based on oil and protein levels.”
Outlining Future Value-Pricing Efforts
Stobaugh does not see that as a problem. He says many farmers have increased on-farm storage capacity in recent years, and can separate varieties as needed.
“We can segregate from the word go. That means more dollars in our pockets,” he says.
Ultimately for the system to succeed, farmers will need to evaluate protein and oil content of the varieties they select. “Farmers are beginning to let composition creep into their thought processes when selecting high-yielding varieties. If you look at two varieties, pick the better protein and oil one,” says Kersting. “Seed companies also are looking at this information. That is good. As we all pay more attention to composition, we can put out a better product.”
Stobaugh is optimistic. “There is no doubt in the future we can increase profitability. There is no golden egg, but small adjustments can make a big difference in meeting market needs and increasing what farmers receive for a bushel of soybeans,” he says.
Reprinted with permission, April 2014, Telvent LLC