Soybean prices

Soybeans are the largest of all the oilseeds, when looking at production volumes. Even though soybeans are called oilseeds, they only produce about 20% oil and they are mainly known for their high protein level. With a protein level of between 45-50% soybeans have increased in popularity in recent years. Soybean prices are very much correlated with the amount of protein they provide. Living standards in emerging economies have risen significantly causing the demand for meat to increase. The increased demand for meat has increased the demand for soybeans and consequently soybean prices have been rising in recent years. China has become the world’s largest importer of soybeans, and the economic prosperity of the country correlates directly with soybean prices. In the USA, soybean prices have been influenced heavily by the increased demand from biodiesel.

The US is the biggest producer and exporter of soybeans, followed by Brazil and Argentina. These three countries are very important on the supply side when it comes to soybean price levels. The biggest exporter of soybean products, such as soybean oil and soybean meal, is Argentina. The country exports almost half of all soybean derivative products in the world. Argentina consequently plays a big role in derivative soybean prices.

In recent years soybean production has gone up significantly. The rise in soybean production has several reasons. First of all: the yields of the planted areas have gone up significantly and part of this increase can be attributed to the rise of GMO. GMO soybean varieties are more resistant to pests, which results in less loss of crop. More than 50% of the soybeans in the world are genetically modified, which is a higher percentage than any other crop in the world.

A more important reason for the increase in soybean production is higher soybean prices. Soybean production has risen to well over 300 million metric tons per year worldwide. The United States is expected to harvest 108 million metric tons in 2014/2015, up from 91 million tons the year before. With this, the United States is the biggest producer of soybeans worldwide and produces around a third of the world total production. Brazil is expected to produce a crop this year of 95mmt, and Argentina of 56mmt, ranking second and third. The USDA reports are leading in the market sentiment of where the prices are going.

Brazil produces slightly less than the US but exports about the same amount. Because the countries are located on different sides of the hemisphere, the export seasons do not overlap. This ensures that there is a steady supply of the beans throughout the year. In Brazil soybean exports normally start late February and gain momentum in March. In Argentina this cycle is normally one or two months later. In the United States soybean harvest starts at the end of September. New crop exports start flowing during October. The quality of the soybeans and soybean prices tend to differ in the two regions. In general, Brazilian soybeans tend to have a higher protein levels, resulting in higher soybean prices. Also, Brazil produces Non-GM soybeans which are significantly higher in price than their GM counterpart. Argentina has been struggling with soybean protein levels the last few years, resulting in lower soybean prices.

Exports in both North and South America have gone up significantly in the last decade. The main driver of the increase in exports has been the demand in China. This factor has been the single biggest determinant of higher soybean prices in recent years. Farmers in Brazil have gotten very inventive with their agriculture practices. Furthermore farmers in Brazil always have the possibility to plan corn instead of soybeans. This normally happens if soybean prices are becoming less favorable than corn prices. Brazilian farmers also have the possibility to plant two crops each season. When a farmer decides to harvest their soybeans early, they can plant a quickly maturing Safrinha corn crop right after the soybean harvest.

China is the largest importer of soybeans in the world followed by the European Union. China is responsible for around 60% of worldwide soybean imports, the European Union around 15%. In China almost all soybeans arrive in the port of Dalian. The commodity exchange of China is also located in Dalian, which makes it by far the most important area for soybean price discovery.

Most of the soybeans arriving in Europe will enter through Rotterdam, followed by Hamburg. The two cities are also the locations of the two largest soybean crush facilities in Europe, owned by Archer Daniels Midland Company.

Uses of Soybeans

Rarely are soybeans used in their uncrushed form. In some cases soybeans are used as food or feed but in general more value can be added to crush the beans. Most soybeans are crushed for the high protein meal and the oil. In almost all cases soybean meal is used for animal feed. The high protein value has been the main driver of soybean demand and higher soybean prices. In a few countries in the world they use soybean meal also for human.

Soybean oil has a variety of uses; the most obvious one being for human consumption in frying oil and sauces. Soybean oil however has also many industrial uses in paint, lubricants or plastics. In recent years the use of soybean oil in biodiesel has also become very popular. In the US, 30% of soybean oil goes into biodiesel, and this number is still growing. Soybean prices have consequently been supported through increased demand for the meal and increased demand for the oil.

Soybean Prices in the United States

The United States remains the leader in the production of soybeans and sets the benchmark for soybean prices. The US Department of Agriculture (USDA) makes monthly estimates about soybean production in the US and the rest of the world. The production figures give guidance to soybean prices around the world. The USDA figures are seen as the most important figures every month and are closely watched by traders.

Soybeans are the second largest crop planted in the United States, after corn. The region in which soybeans grow is similar to the Corn Belt. The states with the largest production of soybeans are Illinois and Iowa.

Illinois is also home to Chicago, which is a very important city for soybean prices, because the largest futures exchange is based there. The Chicago Board of Trade (CBOT) is the largest futures exchange in the world and used by companies worldwide to hedge their soybean prices. In recent years the Dalian stock exchange in China has also won in popularity. This exchange however is used for hedging soybean prices more locally.

Soybeans are mainly exported from ports in the US Gulf. When it comes to the physical market this area is very important for soybean prices. Soybeans are transported from the Corn Belt by rail, truck or by barges down the Mississippi river. Important ports in the south include, Houston, New Orleans, South Louisiana and Beaumont. Exporters furthermore have the possibility to ship soybeans from the Atlantic coast or Pacific North West. Normally they will do this when sea vessel freight prices are very high. Ports on the East coast are located closer to Europe so traders will incur lower freight costs. Because exporters compete with the global market they have to stay competitive. This means decreasing costs and offering low soybean prices. Freight tends to be a large part of total soybean prices, so it is a great tool to create a comparative advantage.

Soybean prices in South America

South America produces more soybeans than any other continent on the planet. Brazil is the largest producer of soybeans after the United States. In the period 2012-2014 the country was furthermore the largest exporter of soybeans. Argentina is the third largest producer of soybeans in the world, but exports a relatively small amount of whole soybeans. Instead Argentina is by far the biggest exporter of soybean oil and soybean meal. The country is responsible for almost half of the world total exports of oil and meal. Two smaller producing countries in South America are Paraguay and Uruguay. The countries are still relatively small in terms of output but have the potential for rapid growth. Estimates for production and acreage figures are provided by Conab as well as the USDA.

Mato Grosso is the main soybean producing area in the world. The area produces over 25% of the soybeans in Brazil. Weather circumstances in Mato Grosso are scrutinized for giving direction to soybean prices. About 50% of all beans produced in Mato Grosso go to China. In Argentina the main producing state is Buenos Aires, followed by Cordoba and Santa Fe. From there beans are predominantly transported to the Rosario area (up-river) where 80% of the crush capacity of the country is located. Rosario is also the most important area for exports and Argentinean soybean price discovery for exports.

In Argentina, 90% of exports of Soybeans and its derivatives goes through the ports of Rosario and San Lorenzo Puerto san Martin (also known as up-river Argentina). The biggest export port in Brazil is Santos, followed by Paranagua and Sao Francisco do Sul. Soybean prices FOB Up-River and FOB Brazil give direction to global physical soybean markets. Because the markets are so liquid there is furthermore a Paranagua paper market as well as a futures exchange. For traders inside Brazil there are also a few locations inland that function as a benchmark for local soybean prices.

Infrastructural problems are the biggest challenge to Brazilian soybean price competitiveness. Exporting soybeans from Mato Grosso to the ports in the south can cost up to $150 per metric ton. Understandably these high costs heavily influence soybean prices, and more specifically, the profits farmers make. Infrastructural problems have resulted in truck queues of 15 miles and vessel waiting times of 60 days in the past.

The Brazil government and private companies are investing money to improve the infrastructure situation. The most ambitious plan is to improve local transport to to the port of Belem in the north. By making the transport to Belem easier this port could grow to become the main export port to China. Exporting soybeans from Belem makes the journey by sea two days shorter compared to the Atlantic route. Soybean price competitiveness for Brazil will go up and China may become an even more important trading partner for Brazil.

While Argentina doesn’t have the infrastructural problems, the country faces other difficulties. While transport is fairly efficient, inflation in the country is more than 25% per year. Soybean prices in the export market are denominated in dollars and have a much more stable value than local currency. Farmers hoard soybeans as a hedge against domestic inflation. Because the demand for silos is much higher than the supply, farmers have been using silo bags to store their soybeans. Silo bags are long plastic bags that can be used for excess storage of products such as corn and soybeans. It is a very cheap way to store excess supply of agricultural products for up to 24 months. Because they are so cheap, costs of this storage is relatively low and it will not eat away too much margin from the price farmers get for their soybeans. Besides inflation the government taxes soybean exports at 35% (Corn at 20% and wheat at 23%). These policies distort soybean prices in the country and the willingness of farmers to export. The policies also discourage investment in agriculture and it is estimated that production is 10-20% below potential.

Because soybean products are important in the area, Brazil and Argentina have their own futures exchanges for soybean price discovery. The Rosario Futures exchange is the Argentinian exchange for the soybeans, the BM&F Bovespa is the Brazilian futures exchange. Local exchanges can be used for hedging by Brazilian and Argentinian traders. For international soybean prices however, traders tend to look more at the CBOT and Dalian.

Soybean prices in main importing areas

In recent years soybean markets have been very much demand driven. The rapid rise of China on the world stage, has made that the country is responsible for 60% of all soybean imports worldwide. While the country is the largest importer it is responsible for only 4% of worldwide soybean production (or 12.5 million tons). This makes China still the fourth largest producer of the commodity worldwide. Another big importer is the European Union (until 2002 the largest importer). The block of countries is responsible for 15% of world imports. On the demand side, the area that is most important for soybean prices has shifted to the east.

China has invested heavily in crushing facilities in the big ports with the idea to make money out of crushing soybeans. Because of this, the country primarily imports soybeans and less soybean meal and oil. To indicate the importance of soybeans; almost half of all agricultural products imported into China are soybeans.

The European Union used to be the most important importer of soybeans but plays a smaller role on the world stage these days. Most soybeans are imported from North and South America. The EU furthermore buys almost half of all Ukrainian soybeans exported. The largest amount of soybeans arrives in the ports of Rotterdam and Hamburg. These ports are the location of the two largest crushing plants in Europe. These ports function as a benchmark for soybean prices and soybean product prices in Europe. Soybean meal is an important source of protein for animal feed in the EU and has to compete with rapeseed meal and sunflower seed meal. Soybean oil is mainly used for food purposes, for industrial purposes and increasingly for biodiesel.

Soybean prices in China are hedged on the Dalian Commodities Exchange (DCE). The Dalian Commodities exchange is the second largest futures exchange in the world and the second largest soybean futures contract. Increasingly traders around the world are looking at the DCE for soybean prices. In the European market Rotterdam functions as the benchmark for European soybean prices. Rotterdam functions as a transit port for the European hinterland, soybean prices in Europe are normally quoted as a flat price as opposed to a basis price.