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By Stoyan Bojinov

Soybeans originated in Southeast Asia and Chinese farmers were the first to domesticate the plant and reap its rewards. The crop quickly became a staple in China, Japan and Korea, while it wasn’t introduced in Europe until the 18th century. Soybeans quickly gained popularity and spread all over the world, reaching South America in the late 19th century. Today, Brazil and Argentina are top world producers of soybeans, while the United States leads the way in total production. Traditional uses include soy milk, tofu and soy vegetable oil. Soybean meal is also a primary component of animal feed due to its valuable protein content and its relatively low-cost to produce. Interestingly enough, soybeans can produce roughly twice as much protein per acre as any other major vegetable or grain, making it incredibly appealing to producers and health-minded consumers.

The price of soybean futures has been rising since early 2009, while the long-term outlook is favorable as well. Increasing populations and developing economies have contributed to an ongoing increase in food demand, thus broadly raising the prices of most agricultural commodities over the past few years. Developing and emerging economies alike are seeing a rise in incomes which is contributing to an increase in the demand for meat. Likewise, soybeans are seeing greater demand as well given their functionality as both a food item and a necessary component of livestock feed.

Physical Properties and Uses of Soybeans

Soybeans are a species of legume and their high protein and oil content makes them useful in a variety of applications in addition to food items. Soybeans are incredibly beneficial to humans as they provide all the essential amino acids as recommended by the U.S. Food and Drug Administration. The soy protein makes a great substitute for meat products as well. Soybean oil on the other hand is used in cooking and frying foods. Like corn, the main use for soybeans is in livestock feed, while soybean meal is also commonly processed into soy flour. Soybeans' nutritious content makes it a valuable low-cost ingredient for animal feed. The pork and poultry industries are the largest consumers of soybean meal.

Soybean oil is also used in the production of biodiesel. Through a simple process involving heat extraction, soybean oil is transformed into fuel for diesel engines. This biodiesel is cleaner than petroleum-based fuels, and most importantly is a renewable source of energy.

Soybeans can be found in a wide array of home products as well. Soy-based adhesives hold together particle boards and laminate plywood. The valuable oils found in soybeans make this particular bean useful in a range of industrial applications by serving as a lubricant, solvent and cleaner. The bean’s oil also makes for a great hydraulic fluid, while ongoing developments of a soy foam will extend the bean’s use in the refrigeration, automotive and even the footwear industry. Interestingly enough, soybeans are also used for producing soy-ink, which is better than petroleum based inks in many ways because it is not toxic, it is easy to clean, and it is also renewable, which makes it environmentally friendly. Likewise, soybeans are a component in many paints and they are even used to make color crayons.

Soybeans Supply and Demand

Soybeans are grown on every continent except for Antarctica. The United States grows by far more soybeans that any other country. In fact, it accounts for about one third of the world’s production.

The top producers (in million tonnes) are led by the U.S. and Brazil:

Country 2009 Production
United States 80.75
Brazil 57.80
Argentina 32.00
China 15.54
India 9.10

Not surprisingly, the United States and Brazil are among the largest exporters of this commodity as well:

Country 2009 Exports
United States 34.80
Brazil 29.90
Argentina 5.60
Paraguay 2.20
Canada 2.00

China is a major soybean importer, and the EU buys soybeans imported from elsewhere as well:

Country 2009 Imports
China 41.00
European Union 13.20
Japan 3.40
Mexico 3.30
Taiwan 5,400

Soybean Price Drivers

Although the price of soybeans is heavily correlated with the performance of corn and other agricultural commodities in general, the soybean still bears its own unique characteristics that impact its price movement. There are several factors that can impact the price of soybeans. Below we have outlined some potential price drivers:

  • Demand for Biodiesel: Soybeans are processed by machines which split apart the plants’ protein and oil contents. The oils are commonly used for cooking and also play a key role in the production of biodiesel. Increasing oil prices are having a huge impact in pushing soybeans prices higher. Rising gas costs are making biodiesel more attractive as an alternative to fossil fuels. Also, large machinery is used in harvesting and thus increasing gas prices are further raising production costs for the crop.
  • Strength of U.S. Dollar: The United States is a top producer and exporter of soybeans, and likewise the dollar’s strength plays a key role in impacting demand and price of soybeans. When the U.S. dollar depreciates, net exports go up, since it’s cheaper for foreign buyers to purchase U.S. goods.
  • Potential Health Hazards: While many dietitians and vegetarians are huge proponents of soy based products, reputable scientific studies have found that soy products may not be ideal for human consumption. Soy contains a significant amount of estrogen which is dangerous to infant health and potentially linked with increasing incidences of cancer.
  • Emerging Market Demand: Rising fertility rates in Southern Asia, Middle East and Sub-Saharan Africa are contributing to an ever increasing demand for food, simply because our world population is growing as a whole. A second factor that is likely to push soybean prices upward is a rising standard of living in developing nations. As personal income rises, the consumption and demand for meat products increases. The majority of soybeans produced are used for livestock feed, and thus the price of soybeans is likely to appreciate as demand for meat increases.

  • Growing Conditions: The most basic price diver with any commodity is supply, and with soybeans, weather is the underlying variable that impacts production. Extremely wet or dry weather conditions hurt harvest yields, and likewise the price increases due to the tightened supply. Likewise, favorable weather conditions could result in abundant yields, causing supply to increase and prices to fall.

Investing in Soybeans

Soybeans may have appeal as an investable asset for several reasons. As a staple crop across many countries, soybeans play an important role in our everyday lives and are used in everything from food to industrial products. Commodities are an attractive asset class in an inflationary environment, serving as a hedge, while further demand from developed and emerging markets is driving up the price of soybeans.

There are a variety of options for accessing soybeans, including futures, stocks, and ETFs:

Soybean Futures

Soybean futures are traded on the Chicago Mercantile Exchange, with one contract size being 5,000 bushels (about 136 metric tons) priced in cents per bushel. The soybeans futures market is incredibly liquid and tick size (minimum fluctuation) is ¼ of 1 cent.

Soybean futures are available for the months of January, March, May, July, August, September and November, and carry the symbol “ZS” on the CME Globex and “S” on the Open Outcry (trading floor).

Futures contracts are subject to the daily price limits and exchange rules of CBOT.

Soybean Stocks

Gaining exposure to soybeans in the equity market is possible through a number of different companies involved within the agribusiness sector.

  • Bunge Limited (NYSE:BG) and Archer Daniels Midland Company (NYSE:ADM) are global agribusiness companies involved in the production and sale of agricultural commodities. Much like metal mining companies, these corporate farmers have relatively fixed production costs, and their profitability is linked with the prevailing market price of soybeans to an extent. However, keep in mind that these companies have tremendous diversification across international markets and product lines (edibles and industrials), and likewise their performance is not always perfectly correlated with the price of soybeans.
  • Monsanto (NYSE:MON) produces genetically engineered soybean seeds with the purpose of improving the crop harvest yields. The company also sells special pesticides to farmers to further help boost production output.
  • Mosaic Company (NYSE:MOS) and Potash Corporation of Saskatchewan (NYSE:POT) are manufacturers of fertilizer, and if soybean demand increases farmers will require more crop nutrients to improve harvest yields.

Soybean ETFs

There are currently no pure-play ETFs with complete exposure to the price of soybeans.

Investors looking for more broad-based exposure should consider JJG and GRU, as these funds offer diversified exposure within the grains segment of agricultural commodities.

Resources On Soybean Investing:

Disclaimer: ETF Database is not an investment advisor, and any content published by ETF Database does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. From time to time, issuers of exchange-traded products mentioned herein may place paid advertisements with ETF Database. All content on ETF Database is produced independently of any advertising relationships.

Original post on Commodity HQ

Source: Ultimate Guide to Soybean Investing: Details on Futures, Stocks and ETFs