Classified as an oilseed, soybean is a legume native to East Asia. It is widely grown for its bean, which has a wide variety of uses. It is used as cooking oil, meal for feeding animals and as dairy substitutes. Due to its huge stature in the food industry, soybean has been developed into an investable asset. Therefore, investors who are looking to profit from situations in the soybean market have a number of options available to them. Its futures contracts are traded on the Chicago Mercantile Exchange. Here, we will be looking into factors that affect soybean prices.
This is one of the most prominent short-term price movers of soybean prices. The most notable one is the value of the US dollar. In simple terms, the value of the US dollar has so much effect on soybean prices because soybean is highly traded on the international market. And considering that US is the second-largest producer of soybean, high dollar value weakens export prospects, as importers might have to pay higher prices. This, therefore, leads to weakened soybean prices. On the other hand, declining dollar value usually favors exports prospects, which in turn lead to higher soybean prices.
For instance, Chuck Danehower, University of Tennessee Extension farm management specialist, told Southeast Farm Press, “Going back to 2007, as the dollar weakens, beans will strengthen. When the dollar goes back up, soybeans go down. There is a pretty strong relationship with what the dollar is doing. That affects exports and makes our products cheaper abroad. You also can tell what the other commodity markets are doing based on what the dollar index is doing.”
Crude oil prices can also affect soybean prices. The main reason for this relationship between crude oil and soybean is the growing importance of soybean in the biofuel sector. In general, high crude oil prices are positive for soybean prices, as it means its use in the biofuel sector could be profitable. On the flip side, declining crude oil prices is considered negative for soybean prices – again because of the profitability of biofuel production.
The general state of the world and US economies also has effect on soybean prices. Theoretically, good economic data is positive for soybean prices.
Index commodity fund is another factor that affects soybean prices. For instance, in 2008, commodity and index funds had some position. However, when they liquidated some their positions, soybean prices went down, according to Danehower. Therefore, investors should always watch economic trends when predicting the price of soybean.
For successful cultivation of soybean, a hot summer is required. In general, according to agriculturists, for optimum growth of soybean, the mean temperature requirement ranges between 20 °C and 30 °C. Temperatures below 20 °C or above 40 °C are a prerequisite for stunted soybean growth. Therefore, intense droughts are usually negative for soybean. In January 2009, Argentina, the third largest producer of soybean in the world, had its worst drought in 50 years. This led to a decrease in the country’s soybean production. Such situations only have one end point – increase in soybean prices. Brazil is also dealing with a serious drought, and the same situation as with Argentina should be expected.
The USDA periodically releases information regarding the projected production of soybean in the US. This production forecast is an indication of future soybean inventories. Therefore, a positive soybean production outlook is likely to send prices lower, as it indicates that inventories would be at high levels. On the other hand, if the production outlook as released by USDA is negative, prices are bound to go up, in response to fears over an ‘impending’ decrease in inventories.
The corn effect
Corn and soybean compete on multiple grounds. They compete in the cooking oil industry. They compete in the animal feed industry. They also compete in the biofuel industry. Therefore, the production of one does affect the other. In general, if the production of corn falls, soybean prices are expected to rise.
According to FAO, Brazil is the world’s largest producer of soybean, making production data in Brazil has significant effect on soybean prices. As expected, a dip in production data from Brazil will send prices high, as it will bring fears about a shortage in the soybean market. On the other hand, positive production data from Brazil contributes to sending prices low.
As with most commodities, China accounts for the largest consumption of soybean in the world. Investors want to keep tabs on Chinese soybean import data, which is an indication of demand in the country. For instance, on July 22, 2014, Bloomberg reported that China increased its importation of soybean. This helped reduce the slide that the soybean market had been experiencing as a result of fears of overabundance of soybeans. The point here is that, if China imports more soybeans, chances are soybeans prices will go up.
Global production outlook
Apart from specific production outlook from Brazil, US and Argentina, production outlook from other countries also affect soybean prices. When production outlook in other producing countries is positive, it is not positive for US exports, hence, sending prices low. However, if, for some reason, other countries expect to produce less soybean, the US exports prospects becomes positive, thereby sending prices higher.
GMO soybean effect
GMO is an acronym for genetically modified organisms. The US employed this strategy as a plot to make soybean resistant to herbicide, a plot aimed at maximizing productivity. Between 1997 and 2007, GMO soybeans had increased from about 8% to 89%. Due to the controversial nature of this strategy, decisions about it are sure going to influence soybean prices. Therefore, investors should lookout for trends on this going into the future.