🥛 Your Guide To Investing In Soybeans, More Than Just Livestock Feed, Tofu & Soy Milk
A staple ingredient in Asia, soybeans are processed & crushed into two different products: soybean meal & soybean oil. The oil has a number of uses, from industrial, to biofuels, to food. The meal, however, is mostly used as livestock feed, with a small percentage is used to make food products like soy milk, tofu, etc. Although all three of these are financially traded products, this newsletter will just cover soybeans prior to the crushing process.
What Can It Do For You
🧺 Portfolio Diversification. As always, adding commodities to your portfolio can help diversify and lower risk. Adding soybeans to your portfolio means owning an asset that tends to act differently to other asset classes, and even to other commodities. Furthermore, soybeans can act as a hedge against inflation & a weak US dollar.
💰 Profit. Since soybeans grow in similar conditions to corn, they’re essentially competing against corn for land, which means that there exists a relationship between the two. Furthermore, because soybeans, soybean oil & soybean meals are all financially traded products, any price differences here relative to each other can potentially create arbitrage opportunities for profit.
From a fundamental analysis perspective, in the long term, there are two main trends that suggests a positive outlook for commodities: growing demand from emerging markets (in terms of increased livestock & biofuel consumption), & the potential effects of climate change which can decrease output. However, there is a risk of overproduction when trying to meet growing demand, whether it’s due to government policies & subsidies, or increased output from all soybean-producing countries.
What Affects Soybean Prices
There are several key factors that are involved in moving the price of soybeans:
- 🇺🇸🇧🇷(🇦🇷) US & Brazilian Production. The US & Brazil are two of the largest soybean producers & exporters, responsible for about ~68% of the world’s supply. Add Argentina to the list and the top three produces ~82%. Any major events that can affect production in these countries will certainly affect prices.
- 🏛️Government Policy. Whether it’s changing import tariffs, drafting trade agreements with other countries or providing subsidies, these policies can have an effect on soybean supply, demand & stock levels, which is then reflected through its price.
- 🇨🇳🌍 Emerging Markets. China is the largest soybean importer, accounting for over ~60% of global soybean imports. In addition, other developing countries are not only growing in wealth, they’re also growing by population. Not only are soybeans for human consumption, it’s also a popular feed for livestock. So as population & wealth grows, so might meat consumption, which means more demand for meat. Furthermore, as countries become increasingly environmentally-conscious, there may be growing demand for biofuels made from crops, including soybeans.
- ☀️ Weather. Although soybean plants are quite tolerant, excessive rains & droughts can still affect yield. Since Brazil is a major soybean supplier, extreme weather conditions here can certainly affect output, whether it’s through reduced working conditions, delayed shipments & logistics, or others.
- 🔄 Substitution. Yup, substitution can have an effect on prices here too. For both soybean oil & soybean meal, there are alternative products that can be substituted should prices become too high. For example, other grains (like corn) can replace soybean meal as livestock feed.
- 📈 Stock Levels. Stock/inventory levels can play a part in affecting soybean prices. When a country uses its stock reserves, it suggests that there’s not enough supply to go around, which can then lead to speculation in the market. Alternatively, large stock/inventory levels will point to oversupply, which can depress prices.
- 💵 US Dollar Strength. Like a lot other commodities, the benchmark for the pricing of soybeans is in US dollars. A weak dollar compared to other currencies (i.e. need more USD to buy other currencies) may incentivise foreign buyers to buy (since their currencies are worth more in dollars & so can buy more soybeans) & drive up demand, increasing prices, and vice versa.
What Is It Used For?
Soybeans are crushed and processed into two products: soybean meal & soybean oil. Soybean meal is, as you might expect, used as a food source for both livestock & humans alike:
- 🐔 Livestock Feed. Pretty self-explanatory. Most soybean meal is used to feed livestock.
- 🥛 Human Food Products. A small percentage compared to livestock feed. Used to make food products such as tofu, soy milk, & soy-based meat substitutes.
On the other hand, soybean oil is used in a number of other industries:
- 🍰 Food Products. In the kitchen, soybean oil is pretty versatile, being used as a cooking & baking oil, as well as being an ingredient in other food products like margarine & salad dressing.
- 📄 Industrial Uses. Soybean oil is also used in industrial products. These include paints, plastics, cleaners, lubricants, crayons, and more.
- ⛽ Biofuels. Yup, it’s also used as a biodiesel.
The Case Against Soybeans
Since soybeans are a staple for livestock feed, soybean prices can only go so high until government intervention steps in. This is because rising soybean meal & oil costs will increase the price of many consumer products, from meats, to soy-based foods, to kitchen goods, to many other commercial products. Furthermore, there is a potential risk of overproduction should farmers decide to allocate more land for soybeans to meet increasing demand. Last but not least, it’s also vulnerable to substitution with other grains and oils.
The Case For Soybeans
Similar to wheat, because soybeans are widespread in food production & livestock feed, soybeans are a great way to hedge against inflation. In the long term, a growing & wealthier population in emerging economies (especially China) may mean growing demand for soybeans due to increased meat consumption (& therefore increased need for livestock feed) & biofuel consumption. Furthermore, climate change could certainly have an impact on soybean production in the form of severe weather conditions which could limit supply.
Popular Ways To Invest In Soybeans — Pros/Cons of Each
Like some of the other agricultural commodities, you can’t really invest in physical soybeans. Here are some of the more popular ways instead. If you’re still confused about how any of these work, refer back to our basics newsletter for a refresher.
- Soybean ETFs. You’re quite limited here, but there is currently an ETF that invests in soybean futures contracts. Because of this, on occasion, there may be times when the actual price of soybeans & the price of the ETF share may differ since they invest in futures contracts, a derivative investment. Regardless, they’re traded on stock exchanges, so they’re very easy to buy and sell. Depending on which broker you go with, you may be charged with trading commissions. ETFs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Should you choose an ETF route, be aware of the fine print — the risks and costs.
- Soybean Stocks. Unfortunately, there are no public companies that solely focus on producing soybeans, but there are large public companies that provide general agricultural products to soybean producers, including the seeds. Because of this, you aren’t directly following soybean prices since there are other factors at play. As always, you may want to consider looking at the company’s annual reports (especially operational costs), portfolio of what products they have, what research & development they’re currently conducting, and potential product-line expansion plans.
- Soybean Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell soybeans at a specified time in the future with an agreed-upon price. A standard contract deals with 5,000 bushels of soybeans, or about 136 metric tons! These futures contracts can be settled with physical delivery or with cash after the contracts have expired. Because you are using a significant amount of borrowed money, even small price changes in soybeans can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.
TL;DR — Is It The Right Investment For You?
As always, it depends on what your aims are. As an agricultural commodity that serves as livestock feed for many countries across the world, it can be used as a hedge against inflation & for portfolio diversification. In terms of the long-term outlook, there are two main trends that suggests positive growth for soybeans: increasing demand from emerging economies (especially China) as well as the potential impact of climate change, especially in Brazil. However, it is also competing with other grains & oils, and so substitution can certainly depress prices.
🧺 If you are considering adding soybeans to your existing portfolio or bundling it with a number of others, you may want to consider doing dollar-cost averaging (regular investments over time) to build your soybean position so you can take advantage of any volatility in the market.
💰 If you are considering adding soybeans for speculation and profit, you may want to monitor the factors that affect soybean prices mentioned above. You may also want to keep track of monthly reports of world production, consumption & stock levels released by the USDA, so you can keep track of supply & demand. In addition to monitoring the factors mentioned above, you may also want to consider performing some technical analysis on soybeans’ price chart to help consolidate trends and patterns to help with your decision. That being said, its prices can also swing unexpectedly, so be prepared and have an exit plan in place. Popular tools that soybean traders use to determine its value include the corn-soybean spread (i.e. the number of corn bushels required to buy one soybean bushel), as well as comparing the values of soybeans as well as its processed products, soybean meal & soybean oil. In all cases, these spreads rely on historical performance, and is not necessarily indicative of future performance.
As always, if you are unsure, check in with a professional financial advisor before making any moves.