The Joy of Soy(beans)

By Julian Murdoch

There's no question that May was a good month for soybeans - heck, this whole spring's been good for soybean prices.

Prices increased 12% in May from $10.55 at the beginning of the month, to $11.84 per bushel by the end of the month. And while that is lower than the price this time last year by nearly $2, the trend has been up, for a number of reasons, and may continue to rise.

First Up: Production And Supply

The United States is the No. 1 producer of soybeans, responsible for a third of world production. Brazil comes in second, producing 28% of the world's soybeans and Argentina grows another 21% of global supply. Between the three countries, that is 82% of global soybean production. In 2008, that translated to 6,615 million bushels, or 180.1 million metric tons of the little green beans.

Recent estimates of U.S. old-crop soybeans - those still around in silos as of August 31, 2009 before the new harvest starts - depend on who you talk to. The USDA puts old-crop carryout at 130 million bushels, but other estimates on AgricultureOnline say that number could be as low as 60 million to 80 million bushels.

"An extraordinarily tight number by historical (or any) standards," says Vic Lespinasse, CBOT market analyst and floor trader with GrainAnalyst.com.

Why the big difference? Hard to say, but the USDA relies on reported data and the analysts the media talk to tend to be the frontline traders, so their estimates may be a bit more accurate.

Either way, supplies are tight - 130 million bushels is about one week's global supply.

South America is nearing the end of its harvesting season - but things haven't been going well this year.

Severe drought has been affecting Argentina since February, resulting in lower crop yields. Farmers' strikes have slowed harvesting and the delivery of crops to market and for export. And finally, last week, with most of the harvesting done, the Argentine Rural Confederation lowered harvest estimates to 30.5 million metric tons - 15.7 million metric tons lower than 2008's production levels. That is a full third lower than last year.

Brazil is also estimating lower harvests, down 4 million metric tons to 57 million metric tons for the current market year.

While Brazil and Argentina are harvesting, the United States is planting, or at least it's supposed to be. Soybean plantings, like corn, have been going slowly in many parts of the country. Any movements of soybeans from the U.S. are from the "old crop" - or the beans that were harvested last fall. And there has definitely been some movement, because demand has stayed healthy.

The Chinese demand story has dominated the market for a decade. In 2000, China was responsible for 35% of global trade in soybeans. By last year, that figure had risen to 73%. Usually, at this time of year, China and other buyers turn to Argentina and Brazil for soybeans, but with the past uncertainty, and now, lower harvest, China has been buying up the U.S. old-crop soybeans. According to an article last week on AgricultureOnline:

The Chinese front-run the rest of the world on soybean consumption. They started their soybean stockpiling before anyone realized the lower world soybean production, such as in Argentina and Brazil. As a result, regular U.S. soybean product customers such as Mexico, Japan, Taiwan, and Europe have been scrambling looking for secured supplies. "They don't want to wait for the fall harvest and find out there is nothing to buy, because everything is bought up already," one CBOT floor trader says, choosing to remain anonymous.

Making The Play

So how do you get your soybean exposure beyond trading futures? Many agricultural exchange-traded products hold soybeans, but two with the highest holdings are PowerShares DB Ag Fund ETF (DBA) and iPath DJ-AIG Grains ETN (JJG).

Here's a little comparison of them for the past three months (Feb. 28 to May. 29):

As of May 29, the DBA ETF held 24.20% of the fund in soybeans split between two contracts - 15.72% in the Nov. '09 contract and 8.48% in the Jan. '10 contract. For further soy exposure, the fund also held 2.37% in soybean oil. The other commodities the fund holds are corn (23.19%), wheat (19.84%) and sugar (30.395).

JJG, an ETN, tracks only three commodities. As of May 31, the sectors were weighted as follows: corn (29.87%), wheat (24.84%) and soybeans (45.30%), and that soybean exposure has made for a great three-month comparative advantage. If you like soybean's outlook, and you believe the recent forecast from the International Grains Council that world grain output will fall short of demand, there's little question it's the easiest play. The purest exposure, though, comes from our friends across the pond, ETFS, where their London-listed Soybean ETN (LON: SOYB) slices out just the soybean exposure from Dow Jones-AIG.

In other soybean news, Brazil has been working on an Asian rust-resistant soybean strain and will begin planting certain growing areas with it in September/October, during Brazil's next planting season. While the new strain won't completely eliminate the need to spray fungicides, it is hoped it will reduce the number of applications needed, thereby reducing farming costs. Asian rust is a disease that moves rapidly through soybean crops and can reduce yields by as much as 80%. It looks like Monsanto might have some competition in the genetically altered seed market.

Comments

[RiskReturnOptimizer]

Volume on DBA is 2-3x typical level ... breakout above 200 day EMA is very bullish ... finally, mainstream media is reporting more and more of DBA as inflation hedge ... watch for next target of $30 to be reached soon as money from other reflation trade /weak dollar investments gets re-allocated to DBA to balance out the portfolio ... for example, GLD pulled in a lot more dollar to support the last run-up, perhaps some of this money will get "recycled" to DBA.

2009 Jun 01 04:17 PM