On-Balance Volume Indicator (OBV) – Complete Guide for Traders
Trading guides, webinars and stories
Trading guides, webinars and stories
Soybeans are one of the most popular commodities worldwide due to their rich nutritional value, universal application and relatively cheap production. Understandably, the soybean futures market is one of the most developed ones, not only among agricultural but among all commodities. In fact, according to a report by the World Federation of Exchanges, for 2018, the Soybean Meal futures was the 4th most traded commodity worldwide, ranking right behind steel, crude oil Brent and crude oil futures.
“Soybean crop is undoubtedly of great economic and social importance worldwide.” –
But in order to be able to trade soybean futures successfully, you should, first of all, understand the basics of the commodity, as well as the key factors that influence its price. Demand for bio-diesel, animal feed, the growing need for meat and dairy alternatives, changing weather, macroeconomic and political instabilities – all these and much more can destabilize the price of soybeans futures.
In order to be prepared and navigate the market successfully, make sure to get familiar with the following list of 5 important things to know about trading soybean futures. But before that, we should start with…
In a 2014 letter to Berkshire Hathaway’s shareholders, Warren Buffet says that one should invest only in businesses that he can understand in detail. He adds that judging an asset solely by its price is pure speculation, rather than investing. That is why, before getting further into how to trade soybean futures, we will focus on a few details about the commodity to help you get familiar with the basics.
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The soybean is a species of legume, classified as an oil crop by the UN’s Food and Agriculture Organization (FAO). The first references to soybean crops have were in China more than 3 000 years ago. The soybean is native to East Asia and remained fairly unpopular in other parts of the world until the late 1700s when it was brought to the United States for the first time. A few years later soybean became popular in Europe as well. Farmers quickly started to recognize the benefits of planting soybean as it helped them clear the field for other crops and ensured the natural fixation of the nitrogen levels in the soil.
“There can be no doubt that the soybean is one of the most promising of all agricultural plants for an almost unlimited variety of industrial uses, and that it is going to play a big part in the future economic life of this country.” –
The last few decades marked a significant boom in soybean popularity and firmly established it as one of the most popular crops worldwide.
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Soybean is used as a raw material for the production of soy diesel (bio-diesel). It is also used for producing soy ink, which is an increasingly popular alternative to petrochemical inks. Soybean is also present in other technical and industrial products such as polyesters, textiles, adhesives, cleaning materials and lumber products.
Soybean is used mostly in the production of soybean oil and soybean meal for food and animal feed-stuff. The plant is also used in the production of foods for direct human consumption. Soy-based products such as soy sauce, tofu, some types of beer, noodles, vegetable oils and others are present in kitchens in every corner of the world. Soybean can be found also in salad dressings, margarine, mayonnaise, chocolate (in the form of lecithin) and many other condiments.
Global soybean production today is highly concentrated within three countries. The United States, Brazil and Argentina account for more than 80% of global production. The increasing popularity of soybean has resulted in a massive growth in production – from 268.7 metric tons in 2010 – 2011, to 364.8 metric tons for 2018 – 2019.
In a nutshell – soybean is a widely popular crop with an ever-increasing application within the food, chemical, construction and other industries. This makes it a very interesting long-term investment opportunity.
The most popular way to invest in soybean is through a futures contract. It offers an efficient hedge against unexpected market events, volatile prices and discrepancies in supply and demand. Soybean futures (ZS) are issued in a standard form, popular all around exchanges worldwide.
Soybean Futures Contract Specifications
|Contract size||5,000 bushels (approx. 136 metric tons)|
|Price fluctuation||$12.50 per contract ($0.00025 per bushel)|
|Trading months||January, March, May, July, August, September, November|
|Termination of Trading||One business day prior to the 15th calendar day of the contract month|
|Trading hours||Sunday – Friday, 7:00 p.m. – 7:45 a.m. CT Monday – Friday, 8:30 a.m. – 1:20 p.m. CT|
The leading participants in the soybean futures markets are farmers, processors and traders. By trading soybean futures (ZS), they ensure efficient long-term planning, consistent product quality, stable service and greater profitability to their businesses. The futures contract provides market participants with the flexibility to hedge against price fluctuations due to potential risks such as unpredictable weather, volatile exports and imports and changing global trends.
The soybean futures market is one of the most developed commodity markets worldwide. For example, in the 2017 – 2018 period, the world produced more than 12 billion bushels of soybeans. The number of soybean futures contracts (ZS) traded on an exchange for the same period was 21 times higher.
One of the main reasons why soybean futures contracts are so popular among traders and investment managers is the high liquidity of the market. This allows day traders to capture small profit opportunities numerous times per day. The CME Group points out that there are more than 200 000 soybean futures contracts (ZS) on average traded per day on their exchange.
In the last few years, farmers worldwide have been slowly shifting their production plans to soybean instead of corn – the leading agricultural commodity. This has been acknowledged by traders who also started to turn their focus to soybean futures.
If you are considering whether it is a good idea to invest in a commodity like soybean, then there are a few important things that you should know, so that you can efficiently predict price changes and optimize your portfolio performance.
In order to learn to trade soybean futures successfully, you should, first of all understand the basics and find out what drives the price and what risks are associated with the particular commodity.
Soybean markets are dependable on the seasonality factor as they follow a fixed production cycle. The soybean production process follows three steps – planting, podding and harvesting. Each stage affects the crop’s development and can influence the futures contract price in the end.
So here are the soybean production stages and calendar:
Planting is the process of field preparation and planning and is handled in the period of mid-March – May (May – July in the US). If there are no delays during the planting months the prices of soybean futures usually tend to go up. The planting stage is very important also for the fact that it provides initial estimates for the expected supply.
Throughout the second stage, which usually takes place in August, the soybeans start to reproduce. The futures price is impacted by the pace of podding of the soybeans, as well as outside factors that can affect the final harvest, such as pollination.
Soybeans are harvested in the period of October – November. The price of soybean futures can be impacted should there be delays or crop diseases (like the fungal disease Asian rust, which significantly harms the quality of the crops).
A change in the time frame for each of the above-mentioned stages will have a direct result on the time frame for the final supply of the commodity.
There is one more thing regarding soybeans futures prices that you should be aware of – the seasonal effect and how it influences the market. The price of soybean futures can vary widely depending on the season. As a trader, you should be aware that during winter when the demand for soybean meal for the livestock rises, the prices can go up quickly. On the other hand – the harvest period, which usually takes place in the autumn between September and October, results in an increased soybean supply. This results in more competition and lower prices. The period at the end of the winter (February in particular) is in most cases a quiet one with stable prices and fewer market disruptions.
Today, the world population is approximately at 7.7 billion. According to the UN, the figure will continue to increase and will reach 9.8 billion in 2050 and 11.2 billion in 2100. A growing population means a growing need for food and more livestock. And this livestock will need to be fed (most probably with soybean-based food). All this will result in an increased demand for soybean which will drive up futures prices.
“You can open a chain of restaurants in the agricultural areas of the world because the farmers are gingo to be much more successful in the next 30 years than in the last 30 years.” –
The demand for soybean is expected to increase in the next few decades also because of strong global economic growth projections for emerging economies. As emerging market countries get richer, we predict they’ll increase their demand for livestock feed. As a result of this economic boom, the population will be able to diversify their diet, and thus add soy-based and organic foods to their daily meals.
The developed markets will also contribute positively to soybean demand mainly because of the transportation industry. As developed countries are progressively replacing diesel cars with environmental-friendly alternatives such as bio-diesel, the popularity of soybean as the main raw material for its production will increase.
Unstable weather conditions in the last few decades and the growing implications of global warming affect all agricultural crops including soybeans. Should the cycle of major drought and periodical flooding continue, there will be a major disparity in the supply-demand ratio for all types of food.
If we take a look at SPEI’s drought monitoring system, we will see unstable weather throughout the years. It is worth noting that recent drought in the USA, the world’s biggest soybean producer, is becoming more and more acute. Apart from that, in some US regions, there are above-average levels of precipitation which cause flooding and can harm soybean production.
NASA’s visualization of the rising global temperatures is not a source of optimism either. All this puts soybean production at risk and results in volatile prices.
“The fate of the US soybean market going forward depends as much on the weather as anything else.” –
This, alongside with the constantly-growing world population means that soybean production should be growing at a steady rate, year-after-year if we want to ensure sufficient food supplies, as well as more stable prices.
Since Trump’s cabinet started the trade war with China, soybean exports have been one of the main victims. The number of soybeans sitting in storage in December 2018 equaled 80% of the total US harvest last year. The good thing here is that soybeans don’t spoil quickly and can be kept in storage for about a year. However, the inability to export such a large quantity of soybeans is a consequence of the trade tariffs against China, the biggest export market for the USA. Figures by the U.S. Department of Agriculture point out that for the period October 2017 – May 2018, American soybean exports were 24.7 metric tons.
The figure for the same period but a year later is 6.9 metric tons. This is a decrease of 72.06%. The trend for the overall Chinese demand for soybeans is expected to continue moving in a similar direction in the next year as well. But the drop in exports is not only because of the tariffs. Chinese farmers, for example, started using less protein in the foods they feed their livestock with. Adding to that the African swine fever that hurt the local industry and we have the main prerequisites for the expected lower short-term future exports.
Meanwhile, American exports to other markets such as Japan, South Korea, Egypt and Argentina grew significantly over the same period. A look at exports to the EU shows a jump of 84.85%. The result of the trade war with China is a surplus of soybean. This negatively affects the price of futures contracts and destabilizes production and the agricultural industry in general.
The value of the US dollar also influences the price of soybean futures (ZS). Soybean futures contracts are priced in US dollars. This means that the performance of the US economy will affect the pricing of soybean futures. The Federal Reserve policy of capital stimulus in recent years has kept the dollar weak. There are no signs that the policy will end anytime soon, which means that soybean prices will be bolstered.
If you want to find out more about the factors determining soybean futures’ prices, you can dive deeper into research papers like this one.
The successful trader is the informed trader. Now that you’ve become aware of the key factors driving the price of soybean futures, it is time to focus on some industry journals and periodical reports that can help you gather important data to keep track of the commodity.
This monthly report of the US Department of Agriculture is a valuable asset for every commodity futures trader. It contains forecasts about US and global production and trade in wheat, oils, rice, cotton, and of course – soybean. The analysis is very insightful and collects data from various sources which makes the report traders’ best informational resource.
WASDE often affects traders’ expectations and influences their market intentions. This sometimes results in unexpected market moves right after the release of the issue.
Another valuable issue of the US Department of Agriculture that provides information about the expected plantings and the previous year’s harvest. The report is based on a survey with farmers around the US, conducted by the USDA. The results provide market participants with a solid expectation of the size of each crop for the coming year. The information includes crops such as corn, wheat, oats, flax seed, rice and soybean among others and divides them by states.
The Prospective Plantings report is issued once a year at the end of March. You can download previous reports from here and subscribe for the next issues.
The Grain Stocks report is a seasonal issue from the National Agricultural Statistics Service that offers updates on soybeans and other crops by state. It is issued 4 times per year and contains data, obtained by on-farm (a probability survey of farm operators) and off-farm (relates to the volume of grain in all commercial storage facilities) surveys.
You can download the previous versions of the report, as well as subscribe for the upcoming issue on September 30, 2019, 12:00 PM from here.
Make sure to check the Crop Production report as well. Issued each month, the report contains valuable information about key factors, related to soybean trade and production, such as area harvested, real acreage, yield, etc.
Traders find the analysis valuable because it contains a monthly agricultural and weather summary (precipitation details and deviations from the normal precipitation map for the month). The Crop Production reports also keep traders informed about fluctuations in supply which helps them prepare for price volatility.
You can download the reports and subscribe for the upcoming issue from here.
Soybeans have come a long way to becoming one of the world’s most dominant commodities. Today, the interest in soybean is continuously growing which results in more people getting into the soybean futures (ZS) markets. The increased competition and the recent price volatility makes the trading process more complex for all types of market participants.
If you want to be a successful soybean futures trader, make sure to stay ahead of the competition. Keep educating yourself and learning new, valuable information. Global news, developments on the political stage, economic updates, industry analysis, government agencies’ reports. There is a rich informational base that you can start with in order to set the stage for your future trading career.
If you already have a grasp on the technical side of trading and are ready to navigate the futures market, sign up for The Gauntlet Mini™ here and take your first step to becoming a professional trader.