Soybeans, the most popular oilseed on the planet in terms of production volume, have also become one of the world’s most widely traded commodities due to liquidity, versatility, and widespread value across many industries. If you’re looking beyond simply crushing these valuable beans, soybean trading can be a useful tool to manage the wild price swings that impact your bottom line—and can even open the door to new profit opportunities.
As crop prices fluctuate throughout the growing season (and even day to day), these shifts offer traders chances to capitalize on pricing trends by locking in prices or speculating on where they’re headed next. Although some traders will never touch a physical soybean, trading this material has become a lucrative venture, with more than 200,000 contracts traded daily, ranking only behind crude oil, corn, and natural gas.
Unlike crude oil, natural gas, and other “hard commodities” mined or extracted from the ground, soybeans and other agricultural products grown or raised above-ground are referred to in the trading world as “soft commodities.” Because soft commodity prices are vulnerable to many uncontrollable factors—from extreme weather to supply reports and global demand—soybeans can be more challenging to trade than hard commodities.
As with any trade, soybean investors should keenly understand the market they’re investing in and the implications of potential trades before putting any money on the line. This blog will break down the basics of soybean trading to give you a competitive edge in managing your soy supply chain.
How are soybeans traded?
Like many other soft commodities, soybeans are mainly traded through futures contracts on exchanges like the Chicago Board of Trade (CBOT), part of the Chicago Mercantile Exchange (CME) Group. A futures contract is an agreement to buy or sell a certain amount of soybeans at a set price on a future date. Most traders sell their contracts or settle in cash before delivery instead of receiving shipments of physical beans, although processors who engage in trading obviously do it for the beans.
While there are other methods of soybean trading—such as options, which give traders a choice to buy or sell later, or ETFs, like the Teucrium Soybean Fund (SOYB)—futures are the most traditional and popular trading platform for soybeans, so that’s what we’ll focus on.
A standard soybean futures contract comprises 5,000 bushels of soybeans, although a mini contract of 1,000 bushels is also available so new traders can start small. The initial margin, or deposit, is typically $4,725, and the smallest price move—known as the “tick” size—is a quarter of a cent per bushel, or $12.50 per standard contract. Prices can only move $1 per bushel per day, and trading will pause once these daily limits are hit.
- For example, if the charts show that soybean futures are trading at 1050, it means they’re valued at $10.50 per bushel (at the time of writing), making a 5,000-bushel contract worth $52,500 ($10.50 x 5,000 bushels). If prices rise just one quarter to $10.75, your contract increases in value to $53,750—a gain of $1,250. But if prices drop to $10.25, you lose $1,250—and if you’re not careful, your losses can quickly eclipse your margin.
Soybean futures trade for the months of January, March, May, July, August, September, and November. November is a popular month for soybean trading, as it follows the end of U.S. harvests.
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Why trade soybeans?
Futures trading can shield soybean farmers and processors from unpredictable price swings that could squeeze profits, locking in prices in case a drought or flood spikes soybean costs later in the season. With more than 200,000 soybean futures contracts traded daily, this market is highly liquid, making it relatively easy to enter and exit trades.
There are two primary strategies behind soybean trading:
- Hedging: Lock in current soybean prices to protect against future fluctuations that could hurt your margins.
- Speculating: Forecast price shifts to gain a profit, although this approach carries much more risk.
As volatile as the soybean market can be, the leverage and liquidity offered by soybean trading lure many investors, whether they’re just in it for the profits or trying to manage material costs to maintain a profitable oilseed operation.
Factors that impact soybean pricing
To understand fluctuations in soybean market pricing, it helps to dissect the key drivers of soybean supply and demand that can move the prices. These factors include:
- Planting: The volume of soybeans planted in spring often provides a fair prediction of the year’s supply. The USDA publishes a Prospective Planting Report every year, and if the actual planting numbers meet their expectations, the price of soybean futures typically increases. But if the planting numbers are lower than expected, prices may drop.
- Podding: When soybean crops begin to sprout around August, the percentage of plants that pod provides an even more accurate prediction of the year’s final crop volume. As with planting, the podding numbers will influence futures prices.
- Harvesting: Harvest volumes provide the ultimate measure of annual soybean supply. The number of bushels harvested each fall directly determines the price of soybean futures, as harvesting delays, crop disease, and smaller-than-expected yields all play a factor.
- Climate: Throughout the growing season, climate volatility can impact soybean production and, subsequently, influence the pricing of futures contracts. Extreme drought, flooding, temperature swings, and natural disasters can decrease supply, driving up prices.
- Global turmoil: The U.S., Brazil, Argentina, China, and India produce 90% of the world’s soybean supply, and China accounts for about half of all soybean imports—which means that geopolitical turmoil, tariffs, and trade wars in any of these regions can drastically upset pricing and demand.
- Competing products: Soybeans are also impacted by corn supply, since farmers often rotate their fields from one crop to the other, based on the pricing of each. Similarly, if meat prices drop, the demand for soy-based livestock feed may follow.
By following soybean market reports year-round, traders can stay tuned to the factors that impact prices. Monthly USDA reports like Grain Stocks, Crop Production, and the World Agricultural Supply and Demand Estimate (WASDE) Report are must-reads for soybean traders. Also, keep a close eye on fluctuating prices by checking charts on sites like CME Group, Barchart, TradingView, and individual broker platforms.
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Capitalizing on soybean trading
Oilseed processors rely on steady supplies of raw material to keep their presses crushing, but rising soybean costs could quickly shrink your margins on oil or meal. Conversely, sharp price drops in beans could lower your expenses but may indicate oversupply, ultimately affecting oil and meal prices down the road.
Soybean trading helps processors manage these risks by offering:
- Cost stability, locking in current prices through soybean futures to ensure predictable costs for your crushing operation.
- Market insights, helping you anticipate price trends coming down the pike to strengthen negotiations with customers and suppliers.
- Profit protection, hedging your material costs to keep your margins intact despite uncontrollable market fluctuations.
You may even strike it rich through strategic soybean trading—but then again, you might lose your life savings if you’re not smart about it. The better you understand the trends and factors that affect soybean pricing, the better your chance of successfully hedging your bets to control your supply chain. Of course, as leading experts in soybean processing and not finance, we urge you to consult an investment advisor for professional guidance and advice.
Aside from speculating on the price of soybean futures, investing in equipment from Anderson International is always a wise decision. Contact us today to see how we can improve your oilseed processing operation.