Soybean is often known as a golden bean. It is an annual legume of the pea family. They are considered an excellent source of protein and are used to make many other food products such as tofu, tempeh, soya milk, shoyu and miso. They are also used in one of the Japanese dishes known as ‘edamame’ in its immature form.
Soybean and its related products have gained immense importance in today’s global marketplace because of its multiple uses. Besides being an ingredient in sushi, soybeans are used to make vegetable oil and feedstock. There are many investors who invest in agriculture commodities like soybean, by the means of futures, options, exchange-traded funds (ETFs) and companies that deal with soybean-containing foods and products.
Before getting into the details of how to invest in soybean let’s have an in-depth knowledge of soybean that where they are found? How are they grown? What are their various uses?
Where are they grown?
Soybean is considered to be domesticated first in central China as early as 7000 BCE. It is an ancient crop, which has been used in China, Japan, and Korea for thousands of years as a food and a component of medicines. Soybeans were introduced into the United States in 1800 and became particularly important in the South and Midwest in the mid-20th century. The United States is now the largest producer of soybean in the world, harvesting more than hundred and eighteen million metric tons a year and exporting approximately 45%. Well more than a hundred and fifty varieties of soybeans are grown in the United States adapting to a range of soil and climate conditions from Mississippi to the Canadian border. Brazil and Argentina are also major producers of soybeans and act as a major competitor of the United States.
How are they cultivated?
Corn and soybeans are cultivated in similar conditions. Soybean is an erect branching plant and can have a height of more than 2 metres (6.5 feet). The self-fertilising flowers are of either white or a shade of purple. They mostly have seeds of yellow, green, brown, black, or bicoloured, though most commercial varieties have brown or tan seeds, with one to four seeds per pod. Planting of soybean takes place from late April through June with harvest beginning in late September and ending in late November. They are often double-cropped with wheat.
Uses of soybean
In Asia mostly soybean is consumed to meet food requirements but only a small fraction of production is used for food items. Majority of soybeans, i.e. 75% of them, are used as animal feed. Some other uses of soybean:
- Oil: soybeans are oil plants and almost have 18% of oil content. Oil is extracted once, and then the leftover soybean meal is used for animal feed. Soybean oil is used for cooking and making different dishes.
- Biofuel: Recently the interest in soybean is growing for this purpose as around 2% of soybean is used for the creation of biofuel.
- Crayons and paint: soybean is chosen as a non toxic alternative to regular crayon which is usually made up with petroleum.
- Other uses: soybean is also used in production of ink, foams, candles, particleboard, bio-composites, lubricants, and sizing for cloth, linoleum backing, fire-extinguisher fluids, and many more.
Why should one invest in Soybeans?
Knowing the uses of soybeans the question that arises is why should you invest in soybeans. Soybean is acommodity, as it is the world’s largest source of animal protein feed and the second-largest source of vegetable oil. Soybean and its by-products are the most traded agricultural commodities comprising more than 10% of the total value of the global agriculture trade.
Developing economies like China are growing not only in population but in wealth as well. People are switching to vegan diets and healthier options; here one can gain advantage through the soybean market. It serves the increasing demand associated with health benefits. In the year 2021 – 2022 approximately one hundred and sixty three million metric tons (163MMT) of soybeans were globally imported in which China is the biggest importer of soybeans.
The reason, why you should invest in soybean, is clear that it is used as staple pantry products and used as animal feed, they will continue to have demand even when the market is struggling, which could make them a good investment to go with.
Ways to invest in Soybean
There are three types of soybean products available to trade on the commodities market: soybeans, soybean oil and soybean meal. The prices for each of these assets can vary greatly because of their different uses. There are basically four ways in which one can invest in soybeans and they are:
- By buying soybean futures
- By purchasing soybean futures options
- By buying soybean exchange-traded funds (ETFs)
- By buying stocks in companies that deal with soybeans
Let’s understand each option in detail.
1.By buying Soybean Futures
Before getting into the soybean future, it’s important to primarily understand what a futures contract is. A Futures contract is described by the National Futures Association (NFA) as a legally binding agreement to buy or sell an asset at a predetermined price on a specific expiry date. In simple words Futures contracts allow players to secure a specific price and protect against the possibility of wild price swings (up or down) ahead.
It can be understood with an example of chips factory:
A potato chips company wanting to lock in farm potato prices to avoid an unexpected increase can buy a futures contract agreeing to buy a set amount of potatoes for delivery in the future at a specific price.
A potato distributor may sell a futures contract to ensure that it has a steady market for potatoes and to protect against an unexpected decline in prices.
Both sides agree on specific terms: To buy (or sell) 10 kg of potato, delivering it in 40 days, at a price of $2.5 per kg.
The same goes with the soybean futures contract as it is an easy, liquid tool for speculation or hedging against price movements for one of the world’s most widely grown crops. Soybean futures are completely electronic, exchange-traded contracts on the Chicago Board of Trade (CBOT). One contract represents 5,000 bushels of soybeans, while one mini-sized contract represents 1,000 bushels. Contract holders (buyers) are legally obligated to take physical delivery upon the expiration of the contract. To avoid physical delivery, contract holders can exit their positions prior to the expiration of the contract. Soybean futures give traders a highly liquid tool to manage their risk and diversify their portfolios with this popular agricultural commodity.
A futures contract is considered to be highly leveraged, which enables traders to control a large value contract with a minimal amount of money. Soybean futures are traded electronically on the Globex® platform from 8:00 p.m. U.S. ET to 2:20 p.m. U.S. ET on the following day. Principal trading months for soybean futures are January, March, May, July, August, September, and November. Another option can be soybean futures options.
2.By Purchasing Soybean Futures Options
Unlike the soybean futures contract, the soybean future option is considered more suitable as it acts as another way to avoid the physical delivery of commodities. According to the CME group futures option is a contract that gives the bearer the right, but not the obligation to buy or sell futures within a specified time period at a predetermined (strike) price and they become worthless if they aren’t used.
There are two types of options, puts and calls, and both of them give traders the right but not the obligation to buy or sell an underlying asset before certain expiry date. If an investor wants the right to buy soybean futures, they purchase “calls”, while those investors who are interested in the rights of selling soybean futures buy “puts”. Once the soybean futures option contract is purchased there are few things that can be done between buying it and the time of expiration. One can:
- Exercise the option, meaning the person will buy or sell shares of the stock at the strike price.
- Sell the contract to another investor.
- Let the contract expire and walk away with no further financial obligation.
There are some pros and cons of the soybean futures option:
|Taking control of more shares than if you bought the stock outright with the same amount of money.||One can lose your entire investment in a relatively short period.|
|An option is a form of leverage, offering magnified returns.||It can become a lot more complicated than buying stocks.|
|An option gives an investor time to see how things turn out to be.||In certain cases it’s possible to lose more than your initial investment.|
|Protects investors from downside risk by fixing in the price without the obligation to buy.|
The soybean futures option can reap great benefits when it is used with a fully organised strategy. There is another very popular investment choice to make when one thinks of investing in commodities and i.e. Exchange Traded Funds (ETF’s).
3.By buying soybean exchange-traded funds (ETFs)
Exchange-traded funds are aimed for tracking the performance of an asset and in this case it is for soybeans. An ETF is a collection of securities or funds which can include stocks. There are multiple choices when it comes to ETFs including soybean, wheat, oil, petroleum etc. Just like stocks, it can be exchanged too, that’s the reason it’s called an Exchange Traded Fund.
Soybean exchange-traded funds are totally related to soybeans. The Teucrium Soybean Fund (SOYB) is a commodity pool that solely invests in soybean without futures contracts. This can be purchased on the NYSE Arca. The Invesco DB Agriculture Fund is an ETF that isn’t solely focused on soybeans but also provides some exposure to the crop. The PowerShares DB Agriculture Fund (DBA) is a diversified agricultural ETF that invests in soybean, live cattle, corn and many other agricultural futures.
When it comes to soybean ETFs they are fairly easy to learn about for future investments, since the use of soybeans and their production is so prevalent.
4.By buying stocks in companies that deals with soybeans
There are some soybean companies which worth investment:
- SunOpta Inc. (TSX:SOY)
- Bunge Limited (NYSE: BG)
- Bayer Aktiengesellschaft (XETRA: BAYN.DE)
- Burcon NutraScience Corporation (TSX: BU)
- China Foods Limited (HKSE: 0506.HK)
- Archer Daniels Midlands Company (ADM)
- Cargill, incorporated
- Wilmar International Limited
These are some most famous and profitable forms of investment that one can opt for when they are investing in soybean. Now, the question that arises is “Are there any factors that make the investment in soybeans difficult”? So let’s have a look at these factors that affects investments.
Factors that can make an investment in soybean difficult and affect the prices
Primarily we observe changes in prices of commodities because of demand and supply. Some of the key driver that are responsible for change in demand and supply of soybean are:
Strength of US dollar:
Similar to other commodities, Soybeans price is also quoted in US dollars. Therefore, the price is related to the strength of the dollar. This means that a Soybean producer will receive lower rates when the dollar is stronger and will receive higher rates when dollar is weaker.
US is the world’s largest producer and exporter of soybeans. Therefore environmental factors such as hurricanes or drought can impact production and thus limit the number of soybeans available to the global market. Political factors are also significantly important.
Soybean oil has a list of competitor oils such as castor oil, cottonseed oil, rapeseed oil, linseed oil. Changes in the pricing and availability of these alternative oils can influence the demand of soybean oil.
Emerging Market Demands:
Emerging market economies such as India, China and South Africa need to import increasingly larger amounts of soybeans to satisfy the demands of their growing populations. The rise in demand of soybean and its by- products can cause rise in prices too.
Because of ethanol production, the US government is providing subsidies to corn farmers. If these subsidies are removed then the farmer might choose to grow soybean, which will increase supply and this could bring the prices of soybean down.
Information related to health can affect the demand of soybeans. According to various researches, we all know how potent soybean is for our health. Any health news related to soybean can change the curve of demand and supply of soybean products.
This report indicates whether planted acres will go to corn versus soybeans in the Midwest.
Soybeans have a highly volatile market due to the effect that weather conditions or diseases can have on crop yields year on year. Keeping this in mind, it is important for traders to keep an eye on factors that could affect the supply of soybeans.
Some popular Soybean Trading Strategies
Majorly there are two popular soybean trading strategies:
1. Crush spread:
The crush spread is a process in which crushing of soybeans is done to extract their oil. The crush spread is used to determine the difference between the price of the raw soybeans and its by-products such as soybean oil and soybean meal, which are comparatively more expensive. If there is a difference between the price of raw soybeans and the by-products they can produce (once the cost of production is factored in), some traders will attempt to take advantage of this by going long on one market and short on another. This is done in anticipation of the markets that are adjusting over time.
2. Gain spread
As corn crop prices and soybean crop prices have close ties, the corn-soybean spread is a favoured method of soybean traders to estimate a profit amount. This includes the calculation of how many Bushels of corn are required in order to buy one bushel of soybean. If the ratio of corn to soybeans is above average levels then soybeans would generally be considered overvalued, whereas if the ratio is below average levels then they may be considered undervalued.
The bottom Line
Soybean market is rising and will expand in the coming years too. Soybean as a commodity is a great option to invest as this market will experience tremendous growth. There are easy ways of investment mentioned in this article that one should definitely opt for. There are some soybean contract specifications that need to be kept in mind like:
Ticker Symbol: ZS
Contract Size: 5,000 bushels
Contract Months: F, N, U,Q, H, K, X