To trade in soya bean has become more and more popular during recent years since the interest in the bean itself and its end products has increased. The soya bean is one of the most important leguminous plant in the world and one of the biggest sources of plant-based proteins. The soya bean can be used as animal feed, for producing vegetable oil, biofuel, and also tofu and soymilk. In commodity trading you do not only just trade in soya bean, you also trade in:
- Soybean meal
- Soybean oil
When trading in soybean it’s important to know where its produced and grown, top producing soybean countries in the world is the United States who produces ca 1/3 of the worlds production of soybean, on second place we have Brazil and Argentina on the third place.
Top importers of soybean are China, the European Union, Mexico and Japan.
What affect supply and demand of soybean
If you want to trade or invest in soybean you must also know what will affect the price of soybean, hence what will change the demand and supply of soybean. Below we will list some ideas of what can change the supply and demand of soybean and later exemplify them:
- Weather conditions that will affect the harvest
- Health trends
- Demand for vegetable oil both for bio fuel and food
- Emerging markets demand
- The American harvest
- Price on corn
Weather conditions is always important for crops and is something you have to consider if you trade in soybean. Extreme weather can create good trading opportunities both on the long and the short side.
Health trends, has been a driver for demand on soybean the recent years. Some people in prefer vegetarian diet and soybean is full of protein and a good substitute for meat if you are vegetarian, both on the bean itself and tofu. Change in news flow regarding health aspects of vegetarian food can change the demand for soybean and there for also change the price of soybean. This type of news flow does not change over the night so might be
Soybean holds fat, and fat is energy and energy is what you need to produce fuel, several countries and politicians prefer bio fuel before fossil fuel hence subsidies for producing biofuel will encourage farmers to change their crops to suitable crops for biofuel. One of the most common crops for biofuel is corn, and soybean and corn grows during similar conditions making it easy for farmers to choose one year to grow corn instead of soybean if its more profitable, so this aspect is important to have in mind when you trade in soybean.
Emerging markets demand is important for the price of soybean, as we mentioned above, China is one of the biggest importers of soybean in the world even though they are one of the world’s biggest producers too hence they consume more soybean than they produce. And when the economy grows their demand for food will also grow and increase the demand for soybean. Soybean is also commonly used as animal feed, and when the population gets richer they often tend to demand more meat, which will increase the demand for soybean. This is also an effect that will take longer to evolve than a binary event like a change in subsidiary of a crop which you should have in mind when you trade soybean. The effect of your case can take longer than you think.
The American harvest, as we said in the beginning, the USA is the largest producer of soybean in the world. The weather in the USA will have an effect on the supply of soybean if the harvest is good or not. This will also affect prices and what the American farmers decide to grow next year.
The price of corn, as we mentioned under the “bio fuel” section corn and soybean grows in the same type of conditions and it’s not uncommon that a farmer will grow both soybean and corn, and it’s easy to change the size of the crop each year, depending on where the farmer thinks he’ll get the biggest profit. In May and July, the farmers decide what crop to grow, if farmers choose to grow more of one crop this will affect the size of the harvest, hence the supply of that crop and also the prices of that crop. When trading in soybean its always important to have an eye on the price ratio of soybean and corn, lower price on corn can increase the supply of soybean and affect your result later when trading in soybean.
Reasons to invest in soybean
- Portfolio diversification
- Long term trends, speculate on changes in demand and supply due to emerging markets or health trends
- Inflation hedge
Several investors looking at investing in commodities for diversification purpose. Most investors who looks at trading in soybean already has stock related investment or bond portfolios and since the correlation between commodities and other asset classes is low, soybean and other commodities can be a good asset to decrease your average risk in your portfolio.
Long-term trends can be a reason for investors to look at soybean as an investment. We have touch upon some of the more long-term aspects that can change the demand for soybean and create a good opportunity to trade in soybean both on the long and the short side. Long term trends can be the health aspect of eating more vegetarian food and also the increasing demand from the ermine markets that may affect the demand for soybean.
Commodities is seen as a good hedge against inflation since commodity prices tend to go up when the inflation increases and vice versa when the inflation goes down. Recent years loose monitary policies with quantitative easing has increased the interest from some investors in commodities and is an aspect you should consider and have an opinion on when you trade soybean.
USD is important for the price of soybean as it is no exception when it comes to which currency it trades in, it is the USD as the most commodities hence a weak or a strong USD can affect demand for soybean as buyers in other currencies than the USD will think of soybean as cheap or expensive. So if you have a view on the USD, trade in soybean can be a way to play it either short or long.