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In this guide we explain the main reasons why some traders choose to invest in soybeans, what experts think, and how to get started trading different financial instruments for soybeans.
3 Reasons You Might Invest in Soybeans
Investors purchase agricultural commodities such as soybeans for a variety of reasons, but the following are most common:
- Inflation and Weak US Dollar Hedge
- Bet on Demand Growth
- Portfolio Diversification
Can Soybeans Serve as a Hedge on Inflation and Weak US Dollar?
Soybeans are a way to bet on a weak US dollar and higher inflation.
Since agricultural commodities, such as soybeans, are priced in US dollars, the performance of the world’s largest economy plays a crucial role in their pricing. Easy-money policies from the US Federal Reserve Bank have kept the US dollar weak. Furthermore, US central bankers are likely to continue these policies to support consumer borrowing and spending.
A weak dollar could stoke inflation concerns and bolster soybean prices.
Will the Demand for Soybeans Rise?
Soybeans are likely to be a big beneficiary of strong global growth, especially in emerging market economies. Their demand for livestock feed and in oils will probably grow as the developing world becomes richer. Demand in the developed world may also outstrip supply in the coming years. And factors such as growth in biodiesels could contribute to this demand.
Diversifying Your Investment Portfolio
Most traders have the vast majority of their assets in stocks and bonds. Commodities such as soybeans provide traders another way to diversify and reduce the overall risk of their portfolios.
Should I Invest in Soybeans?
Investors who want exposure to soybeans should consider buying a basket of commodities that includes other agricultural staples such as wheat, corn, barley, and sugar. For true diversification, they should add metals and energy as well.
Purchasing a basket of commodities helps protect traders from the volatility of any individual commodity. It also adds overall diversification to an investment portfolio.
There are two specific trends that could boost soybean prices in the years ahead:
Soybeans and Emerging Market Demand
The development of emerging economies could boost soybean demand. As people in these countries accumulate wealth, they will probably start eating a more varied diet. The demand for livestock feed, soybean oils, and soy food products may grow.
How Will Climate Change Affect Soybean Production?
Global warming trends have the potential to wreak havoc on the production of many different crops including soybeans. If recent weather patterns continue, the world’s supply of food may not be able to meet demand in the years ahead. Investing in agricultural commodities is a way to benefit from this trend.
However, traders should also consider the risks of investing in soybeans:
- A strong US dollar could drive prices lower.
- Overproduction by large suppliers could depress prices. This scenario could unfold, for example, if the United States ends corn subsidies.
- More bad news on the health front could weaken consumer demand for soy products.
What Do the Experts Think About Soybeans?
Experts see both potential risks and rewards from investing in soybeans.
“In general, I think the commodity complex is poised to move higher.”
– Robert Chesler, vice president of the foods group at INTL FCStone
Jim Rogers, who co-founded the Quantum Fund and created the Rogers International Commodity Index, has been a long-time bull on the agricultural commodity sector and believes it will make traders very rich in the coming years.
“You can open a chain of restaurants in the agricultural areas of the world because the farmers are going to be much more successful in the next 30 years than in the last 30 years. “
– Jim Rogers, founder of Quantum Fund
However, the US Department of Agriculture notes some data that should give traders reasons to be cautious.
US farmers have been producing record amounts of corn, soybeans, and wheat in recent harvests. Furthermore, farmers are increasing their allocation of acreage to soybeans at the expense of corn.
How Can I Invest in Soybeans?
Soybean traders have several ways to invest in the commodity:
The Chicago Mercantile Exchange (CME) trades a soybean futures contract. The soybean contract settles into 5,000 bushels, or 136 metric tons, of soybeans.
The CME contract trades globally on the CME Globex electronic trading platform and has expiration months of January, March, May, July, August, September, and November.
Futures are a derivative instrument that allow traders to make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, traders must either accept physical delivery of soybeans or roll their positions forward to the next trading month.
Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.
What Are the Different Types of Soybean Futures Contracts?
The CME offers trading on soybeans, soybean meal and soybean oil. Each of these products has unique specifications associated with it. We assembled this comparison of the three futures contracts:
|Soybeans||Soybean Meal||Soybean Oil|
|Contract Unit||5,000 bushels||100 short tons||6,000 pounds|
|Price Quote||Cents per bushel||Dollars and cents per short ton||Cents per pound|
|Min. Price Fluctuation||1/8 of one cent per bushel ($6.25 per contract)||10 cents per short ton ($10.00 per contract)||1/100 of a cent ($0.0001) per pound ($6.00 per contract)|
|Listed Contracts||Monthly contracts listed for 3 consecutive months and 9 months of January, March, May, July, August, September and November plus next available November.||January (F), March (H), May (K), July (N), August (Q), September (U), October (V) & December (Z)||January (F), March (H), May (K), July (N), August (Q), September (U), October (V) & December (Z)|
How Do You Read Soybean Futures Prices?
In order to understand pricing for soybean and other grain futures markets, you should begin by examining the contract information at the Chicago Mercantile Exchange (CME), which operates the leading marketplace for the commodity. The CME posts the specifications for each product traded on its exchange. The relevant pieces of information for each commodity are its symbol, contract size, minimum tick (trading increment), the dollar value of each tick and the contract months.
In the case of soybeans, the contract symbol is ZS and the contract size is 5,000 bushels. Soybeans and other grains trade in cents per bushel, and the minimum tick (trading increment) is $0.00125 (one-eighth of a cent) per contract. Each tick is equivalent to $6.25, so each one cent move in soybean prices equates to $50 per contract. As for the contract months, the CME assigns a code to each month. In the example below, the product is the July 2018 soybean future (ZS is the symbol for soybeans, N is the symbol for July and the 8 indicates the year 2018).
The “LAST” in the chart above shows the most recent price of soybeans in cents per bushel. The amount after the (‘) mark indicates one-eighths of a cent. Therefore, 1048'6 is read as 1,048 and 6/8 of a cent, or, in other words, $10.48 and ¾ of a cent.
The “CHANGE” in the chart above shows the change in price for the trading session. Again, the amount after the (‘) mark indicates one-eighths of a cent. Therefore, -4'4 means a decline of 4 and 4/8 cents or 4 and ½ cents.
The “GLOBEX VOL” shows the number of contracts traded for the session. Traders should pay attention to the sessions where commodities trade because different times of the day can lead to variations in the amount of liquidity present.
Soybean Options on Futures
The CME also offers an options contract on the soybean futures contract.
Options are also a derivative instrument that employs leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.
Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of soybean futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in soybean futures to profit from their trades.
These financial instruments trade as shares on exchanges in the same way that stocks do. Currently, only one ETF –Teucrium Soybean Fund (NYSEARCA: SOYB) – offers a pure play on soybean investing. The fund invests in soybean futures contracts.
Shares of Soybeans Companies
There are no pure-play public companies engaged exclusively in the production and sale of soybeans. However, there are many large agribusinesses that provide products such as fertilizers, pesticides and seeds to soybean producers:
One of the ways to invest in soybeans is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of soybeans. The value of a CFD is the difference between the price of soybeans at the time of purchase and the current price.
CFD traders open an account with a regulated broker and deposit funds. The funds serve as a margin against the change in the value of the CFD. Many regulated brokers worldwide offer CFDs on soybeans. The advantage of CFDs is that a trader can have exposure to soybean prices without having to purchase shares, ETFs, futures or options.
Investing in CFDs does not require the trader to pay for soybean storage or roll futures contracts forward every month. Traders also don’t have to worry about getting the timing and size of markets move correct in order to profit on their trades.
CFDs are still high-risk financial instruments, however, and your capital is at risk. Therefore, you should be an experienced trader or should seek out a broker that offers a demo account which allows you to develop your knowledge before risking real money.
Where Can You Trade Soybeans?
If you are looking to start trading soybeans and other agricultural commodities, here's a list of regulated brokers available in to consider.
Top Brokers Available in
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73.0%-89.0% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Soybean Trading FAQs
What Information Should Soybean Traders Follow?
The United States Department of Agriculture (USDA) produces its grain stocks report four times each year. This report, which details the capacity of on- and off-farm storage for all grains, is arguably the most important information for soybean traders.
The report contains the following information that market participants watch closely:
- Stocks: The report details the year-over-year change in the stocks of soybeans stored in all positions (on-farm as well as off-farm). Larger than expected increases in stocks could put downward pressure on prices, while larger than expected depletions of stocks could cause prices to rise.
- Grain Stocks by Position: This chart shows the year-over-year change in stocks broken down by positions (on- or off-farm). The chart looks as follows:
- Soybean Stocks by State: a state by state breakdown of soybean stocks broken down by on- and off-farm positioning
*The report breaks out on-farm and off-farm storage because it uses different survey methods for gathering storage data from farms and off-farm locations. On-farm storage is subject to sampling variability since not all operations holding on-farm stocks are included in the USDA sample. As a result, the report includes a sampling error percentage.
The bottom line, however, is that this quarterly report often plays a crucial role in moving soybean markets.
What Are Some Soybean Trading Strategies?
Soybean traders don’t have to have an absolute opinion on the direction of soybeans in order to trade the commodity. Rather, there are a variety of ways to bet on soybeans relative to the price of other commodities or instruments. These are called spread trades and they involve simultaneously buying and selling two different soybean contracts.
Here are three ways you can execute popular spread trades used by soybean traders:
- Crush Spread: Soybeans are processed into soybean oil and soybean meal in a process known as crushing. The crush spread is the difference between the price of soybeans and its byproducts (soybean oil or soybean meal). Traders who go long with the crush spread will buy soybeans and sell soybean oil or soybean meal.
Many producers of soybean oil or soybean meal use the crush spread as a means to hedge the risk that the prices they receive for their final products will fall in value.
- Reverse Crush Spread: In the reverse crush spread, traders buy the final products (soybean oil or soybean meal) and sell soybeans. In essence, these traders benefit if supply and demand factors lead to a rise in the price of the finished products relative to the input costs (soybeans).
- Grain Spreads: Other popular spread trades involve trading soybeans against other grain crops, such as corn or wheat. Since these commodities often move in tandem with one another, this allows traders to capture divergences in the price of one relative to another.
Since soybean prices are correlated with the price of other grains and with finished soy products, spread trades are generally much less volatile than buying soybeans outright.