Investing In The Concern Over Domestic Soybean Shortages

Includes: BG, MON, MOS, NM, NTR, SOYB, TSN
by: Bradley Sugarman

There is concern about a lack of soybeans in July and August in the US - Oil World

Tractors are replacing golfers across the Midwest as land becomes more valuable as a soy crop than as a golf course - The Detroit News

US soybean supplies are so tight that they could run out in the eastern part of the Farm Belt before this fall's harvest, forcing some companies to import supplies - Wall Street Journal

Soybean is a crucial and often overlooked commodity. Soybean ranks as the second most valuable export in the US, right behind corn. Analysts are now expecting that this is the year Brazil and Argentina dethrone the United States as the top soybean producers and exporters. The USDA projects that US soybean stockpiles will total 125 million bushels prior to this fall's harvest - the smallest total for the end of a crop marketing year since 2004.

US companies rarely need to import soybeans or soybean meal, but such cases do occur roughly once a decade. US soybean stockpiles are at historic lows, thanks to severe droughts in 2012 and strong demand. CHS, a farmer-owned co-op with about $41 billion in annual sales, expects to turn to imports from South America this summer so that it can meet demand from customers for soybean meal to use in animal feed. Soymeal is a key source of protein for chickens and hogs - creating shortages on the eastern side of the Farm Belt where there is a heavy concentration of poultry producers.

But it doesn't stop there. Adding to the pressures on global soybean demand, China is expected to increase their soybean imports by 17% to rebuild their own soybean stockpiles. China leads the world in soybean imports and will "start increasing sizeably" purchases starting this month onwards, says Hamburg-based researcher Oil World. China's soybean harvest is at the lowest it's been in at least 5 years and increased importing is expected to carry on into next season's harvest as well.

At this point it's all eyes on South America. Soybean exports from the region are accelerating and global soybean output is up 11% from the year prior. Brazil has even recently passed new regulations to extend the working hours at major ports.

So what is an investor to do?

There's an ETF for that. The Teucrium Soybean Fund (NYSEARCA:SOYB) is the only pure play ETF for soybean futures. At a solid 1% expense ratio, SOYB spreads its exposure across 3 separate maturities: second-to-expire contracts (35%), third-to-expire contracts (30%) and the November following the third-to-expire contracts (35%). This shouldn't be used as a buy-and-hold investment as spot prices can be significantly affected by weather. For an investor seeking more diversity, there are several agriculture ETFs that contain very minimal soybean exposure.

Soybean processors like Bunge (NYSE:BG) are bracing for tight supplies. It is expected that some processors will idle processing plants until margins improve. Waiting for when cheaper supplies become available from the next harvest may be more cost effective than importing. Most costs are fixed so spot prices weigh heavily on the costs of this type of soybean investment. Another option with spot prices as costs in mind is Tyson Foods (NYSE:TSN). Pork and poultry industries are the largest consumers of soybean meal and would benefit the most from a decline in soybean prices as they cannot idle demand.

If your hippie friends will forgive you, considering an investment in Monsanto (NYSE:MON) can be a profitable guilty pleasure. Monsanto produces genetically modified soybean seeds with the purpose of improving crop yields. Monsanto has a seasonality to its stock price, but with domestic farmers increasing the square footage of their farms and resurrecting vacant crops, Monsanto seed company is well positioned to gain from replenishing US soybean stockpiles. The development of land for farming is a growing trend in the US. From repurposing land to knocking down dilapidated buildings and extending farm sizes - sounds like you'll need a lot of dirt for those seeds. Fertilizer manufacturers likes Potash Corp (POT) or Mosaic Co (NYSE:MOS) should see a healthy boost in sales if these trends continue.

Shipping is another soybean activity worth investigating. Diversified shipping play Navios Maritime Holdings (NYSE:NM) deals directly with the shipping of soybeans from South America in a small position amongst its shipping subunits. NM owns 63.8% of Navios South American Logistics, operating in a region that accounts for 55% of the global soybean production. Not only do they own the vessels and barges but also the ports. As far as competition in the ports, Navios is the largest dry port in Hidrovia, the largest liquid port in Paraguay, the second-largest barge in Hidrovia, and the largest cabotage off the Argentinean coast.

See, now who thought soybeans could be so interesting?

Disclosure: I am long NM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.