How to trade soybeans
Soybeans are a staple food for people all over the world, so demand tends to be high. Find out how to trade soybean markets, the factors that affect pricing, and some strategies you can use to trade these popular commodities.
Soybean trading basics
There are three types of soybean products available to trade on the commodities market: soyabeans, soyabean oil and soyabean meal. The prices for each of these assets can vary greatly because of their different uses. Soybean meal is largely used in animal feed, while soybeans are used for human consumption in foods like tofu, soy milk, soy sauce and miso paste. Soybean oil is a vegetable oil, which is primarily used in food products and as a cooking oil.
With the expanding and continued development of many emerging market economies, it is likely that demand for soybeans will increase in the coming years, both for human consumption and for animal feed.
Historically, the price of soybeans has been tied to the supply and demand of other crops such as corn in the world markets. Corn grows in very similar conditions to soybeans, so farmers, particularly those in America, will often decide at the start of the growing season which crop they are going to plant for that year, depending on government subsidies.
What moves the price of soybeans?
As with most commodities, the prices of soybean products are affected by supply and demand. Some of the key drivers behind supply and demand for soybeans are:
Essentially, if more people want to buy soybeans than sell them, the price will rise because they are more sought-after (the 'demand' outstrips the 'supply'). On the other hand, if supply is greater than demand, their price will fall.
The US is the biggest producer and exporter of soybeans, with 4.6 billion bushels of soybeans being harvested in 2017-2018.1 As a result, supply shocks such as adverse weather conditions, including hurricanes or drought in key American soybean-producing states, can impact production and thus limit the amount of soybeans available to the global market.
Strength of the US dollar
Similar to many other commodities, soybean prices are quoted in US dollars. This means that soybean producers receive lower pay-outs (nominally) for their produce when the US dollar is strong, and more money when the dollar is weak.
Emerging market demand
Emerging market economies such as India and South Africa need to import increasingly larger amounts of soybeans to satisfy the demands of their already large or growing populations. This increased demand may cause the price of soybean products to rise if supply remains the same in the coming years.
Soybean oil has to compete with a lot of other popular oils on the market including rapeseed, linseed and cottonseed. Demand for these other oils can have an effect on the price and demand for soybean oil.
In order to boost ethanol production, the US government subsidises corn farmers. If the subsidies for corn were to end, more farmers might choose to grow soybeans which would increase supply, and this could bring the price of soybeans down.
Ways to trade soybeans
The most common way that traders take a position in soybean markets is with a futures contract. Futures contracts enable traders to agree to the delivery of a certain amount of soybeans, soybean oil or soybean meal at a set date in the future for an agreed upon price. However, with a futures contract a trader may have to eventually take delivery of the soybeans. Unless they have adequate storage facilities, this could be problematic.
With IG, you can speculate on the price of a futures contract – without taking ownership of the underlying asset – with a CFD trading or spread betting account.
Aside from futures, traders can use options to speculate on the price of soybeans. There are two types of options, puts and calls, and both give traders the right but not the obligation to buy or sell an underlying asset before a certain expiry date.
Contracts for difference
CFDs enable you to make predictions on the price movements of soybean markets without taking ownership of the physical assets themselves. CFDs can act as an effective hedge for your other active positions as they enable you to go short or long to benefit from market declines as well as increases.
When you trade CFDs on soybean markets with IG, you can decide whether to speculate on a spot price, which has no fixed expiry, or a futures contract. This gives you the flexibility to take a short or long-term view of your chosen market and to hedge your other active positions.
Spread bets, much in the same way as CFDs, enable you to speculate on price movements in soybean markets without ever taking physical ownership of any products. Instead, you make a prediction on the direction in which the price of a soybean market will move and the extent to which your prediction is correct determines your profit or loss. With IG, you can spread bet on a spot price or futures contract for all soybean markets.
Due to the close ties between the price movements of corn and soybean crops, the corn-soybean spread is a favoured method of soybean traders to realise a profit. This involves determining how many bushels of corn are required in order to buy one bushel of soybeans. If the ratio of corn to soybeans is above historical levels then soybeans would generally be considered overvalued, whereas if the ratio is below historical levels then they may be undervalued.
However, gain spreads are thought to be indicative at best, and are not a set assurance that soybeans will be more or less expensive at any one time.
The crush spread refers to the process of crushing soybeans to extract their oil. The crush spread is used to determine the difference between the price of the raw soybeans and its by-products such as soybean oil and soybean meal, which tend to be more expensive.
If there is a disparity between the price of raw soybeans and the by-products they can produce (once the cost of production is factored in), some traders will attempt to capitalise on this by going long on one market and short on another. This is done in anticipation of the markets adjusting over time.
Soybean trading hours
|Chicago||19:00 - 07:45 and 18:30 - 13:20 (Central time)|
|London||01:00 - 13:45 and 14:30 - 19:20 (UK time)|
|Singapore||09:00 - 21:45 and 22:30 - 03:30 (Singapore time)|
*Hours are set by CBOT (CME Group) and may vary. Hours will shift between March and November as the UK and US change to and from daylight savings on different days, while Singapore remains on Singapore Standard Time (UTC+8) all year round.
Additional tips for soybean trading
Soybeans are a highly volatile market due to the effect that weather conditions or diseases can have on crop yields year on year. With this in mind, it is important for traders to keep an eye on factors that could affect the supply of soybeans.
This includes factors such as if other crops like corn are cheaper for a particular year, which would mean that soybeans would be in less demand for animal feed. Equally, if meat prices were to fall, then the demand for soy-based alternatives like tofu might experience a decline as well.
Traders can keep up to date with commodities market news with IG’s news and events page.
Five steps to trading soybeans
- Decide whether you want to trade soybeans, soybean oil or soybean meal
- Create an account and deposit funds
- Choose whether you want to trade CFDs or spread bet
- Choose a trading strategy
- Open, monitor and close your first position
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.