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The opinions expressed in this report are those of Jim W. Huang at Haifu Group Inc. and are considered market commentary. They are not intended to act as investment recommendations. Full disclaimers are available at the end of this report.

CBOT Soybean, Soybean Meal, and Soybean Oil are among the most liquid commodities futures and options contracts in the world. In March 2023, the Soybean complex together traded 14 million lots, contributing to 42.6% of CME Group’s Aagricultural futures and options volume, and 2.0% of CME Group’s overall monthly volume.

Soybean is the world’s largest source of animal protein feed and the second largest source of vegetable oil. It is the most-traded agricultural commodities, comprising more than 10% of the total value of global agriculture trade.

According to the World Agricultural Supply and Demand Estimates (WASDE) report, global soybean production for the 2022/2023 crop year is 369.6 million metric tons. Let’s visualize this: If we were to distribute the entire crops to the world population, each person on the planet would get approximately 46 kilograms of soybeans.

The United States, Brazil, and Argentina are the largest soybean producers, accounting for 80% of the global production. As a major soybean producer and export, the U.S. harvests 4.3 billion bushels of soybean a year and exports 47% of it. 

About two-thirds of the total soybean crop is processed, or crushed, into soybean oil and soybean meal. The term “crush” refers to the physical process of converting soybeans into soybean oil, soybean meal, and other byproducts.

When a bushel of soybeans weighing 60 pounds is crushed, the typical results are:

• 11 pounds of soybean oil (18%)
• 44 pounds of soybean meal (73%)
• 4 pounds of hulls (6%)
• 1 pound of waste (2%)

Soybean meal is used by feed manufacturers as a prime ingredient in high-protein animal feed for poultry and livestock. It is further processed into human foods, such as soy grits and flour, and is a key component in meat or dairy substitutes, like soymilk and tofu.

After initial processing, soybean oil is further refined and used in cooking oils, margarines, mayonnaise, salad dressings, and industrial chemicals. Soybean oil may also be left unprocessed and used in the production of biodiesel fuels.

Exports are big business for U.S. soybean farmers. According to the data from U.S. Bureau of Economic Analysis, soybean exports totaled $6.9 billion in the first two months of 2023, contributing to 1.4% of all U.S. exports of goods and services. Soybean exports have increased dramatically since 2000 as the demand for meat and poultry grew in Europe and Asia, but particularly in China.

Prices of soybeans, soybean meal, and soybean oil are impacted by a number of variables, to name a few, crop production cycles, weather, livestock production cycles, and ongoing shifts in global market supply and demand.

The heart of U.S. soybean production is the Midwest. In the main part of the “soybean belt,” soybean planting takes place from late April through June, with harvest beginning in late September and ending in late November. Brazil and Argentina are in the southern hemisphere. Harvest season is from March to May each year.

Planted acreage, planting progress, and weather conditions in soybean producing countries are key factors affecting global soybean supply. The soybean market is very sensitive to any unexpected change in these price drivers.

Soybean meal is prime ingredient in animal feed. Its demand is driven by different production cycles in cattle, hog, broiler, and layer chicken. Soybean traders pay close attention to China’s hog production. In 2022, China produced 700 million pigs, about half of the global hog production. China is the largest soybean consumer and importer.

Livestock production margins influence farmers’ willingness to raise animals. Bird flu and African Swine Fever could disrupt livestock production, reducing future soybean use. Import tariff and dollar exchange rate also affect the price foreign user paid for soybean.

While soybean oil is a leading ingredient for edible oil, oilseeds also include rapeseed, sunflower, sesame, groundnut, mustard, coconut, cotton seeds, and palm oil. Whenever one of them becomes too expensive, food companies would substitute it with a cheaper ingredient. Hence, soybean oil price is highly correlated with the other oilseed products.

The U.S. Department of Agriculture (USDA) closely monitors agricultural market conditions and publishes the monthly WASDE report. 

WASDE, commonly known as the Crop Report, provides a global view of key agricultural products including wheat, rice, coarse grains (corn, barley, sorghum, and oats), oilseeds (soybeans, rapeseed, palm), cotton, sugar, meat, poultry, eggs, and milk. The Crop Report is the most important report followed by agricultural commodities traders. 

What’s the key takeaway from the April 2023 Crop Report on Oilseeds?

U.S. soybean supply and use forecasts for 2022/2023 are unchanged. However, relative to 2020/2021, planted acreage is higher while export is lower. Global 2022/2023 soybean supply and demand forecasts on lower production, crush, and exports. Global production in current crop year is reduced by 5.5 million tons.

Overall, the April WASDE shows plentiful supply, weakened demand, and higher inventory – the recipe for price trending down.

Commodity Futures Trading Commission (CFTC) publishes the Commitments of Traders (COT) reports and provides a breakdown of open interest for futures and options markets. It categorizes the reportable open interest positions into four classifications:

• Producer/Merchant/Processor/User: An entity that predominantly engages in the production, processing, packing, or handling of a physical commodity and uses the futures markets to manage or hedge risks associated with those activities.
• Swap Dealers: An entity that deals in swaps for a commodity and uses the futures markets to manage or hedge the risk associated with those swap transactions.
• Managed Money: Commodity Trading Advisor (CTA) or Commodity Pool Operator (CPO). They are engaged in organized futures trading on behalf of clients.
• Other Reportable: Every other reportable trader that is not placed above.

What’s the key takeaway from the April 18 COT report on Soybean/Meal/Oil futures?

• Soybean futures (ZS) open interest is 683,161, down -4.9% from previous week.
• Managed Money increased ZS long position by 22.6%, with their long/short ratio at 8.3. This indicates that speculative traders are very bullish on soybeans.
• Soybean Meal (ZM) open interest is 454,299, up +4.1% from previous week;
• Managed Money increased ZM long position by 26.8%; their long/short ratio is 7.9. This indicates that speculative traders are very bullish on soybeans.
• Soybean Oil (ZL) open interest is 479,920, down -0.9% from previous week.
• Managed Money lowered ZL long position by 9.2% but increased short position by 12.9%; their long/short ratio is 0.7, indicating a bearish expectation.

Soybean futures began trading at the Chicago Board of Trade in 1932, followed by futures on its byproducts: Soybean Oil in 1946 and Soybean Meal in 1947.

Soybean (ZS) futures are physically delivered contracts based on No. 2 yellow soybeans. Each contract has a notional value of 5,000 bushels, equivalent to 136 metric tons.

Soybean futures contracts are listed for seven months covering planting and harvesting seasons, with contracts projecting out three and a half3.5 years in the future.

You may have heard of the terms “New Crop” and “Old Crop”. The former refers to crops that have not been harvested. For Ssoybean futures, it is the November contract (ZSX3), which coincides with the harvest season.  Other contract months are soybeans available for sales from the previous crop year, hence the name “Old Crop”.

Soybean Meal (ZM) futures are also physically delivered contracts. Each contract has a notional value of 100 short tons, equivalent to 91 metric tons.

ZM contracts are listed for eight months covering year-long processing time. A total of 25 contracts are listed simultaneously.

Soybean Oil (ZL) futures are physically delivered contracts. Each contract has a notional value of 60,000 pounds, equivalent to 27.2 metric tons.

ZL contracts are listed for eight months covering year-long processing time. A total of 27 contracts are listed simultaneously.

Options on Soybean (OZS), Soybean Meal (OZM), and Soybean Oil (OZL) have a contract unit of one1 futures contract and are deliverable by the corresponding futures contract.

At every stage of the soybean production chain, from planting, growing, and harvesting, to exporting and processing, market participants face the risk of adverse price movements. They are the hedgers in the Soybean futures market.

In addition, there are non-commercial traders in the market. They speculate on commodities prices and provide liquidity for hedgers on the other side.

Let’s take a look at how different market participants could use the CBOT soybeans complex to invest and hedge.

Investors could draw trade ideas from Soybean futures price chart, the Crop Report, and other relevant market information. Below is a hypothetical trade setup* for illustration purpose.

Market information 

1. April WASDE shows plentiful supply, weakened demand, and higher inventory.
2. Following the release of WASDE, soybean price has been trending down.
3. News surfaced that Smithfield, the largest U.S. hog producer, plans to liquidate 10% of its sow. This indicates lower soybean meal demand in the future.

Trade Setup 

On April 28, to express his market view, a trader sells one July 2023 contract (ZSN3) at 1413’0/bushel ($14.13), which gives the contract a notion value of $70,650. He deposits $5,000 margin on his futures account. At 7.1% of the cost, he participates in price exposure for 5,000 bushels of soybeans. The use of leverage, in this case by 12.6 times, is an advantage of cost-effective trading with futures contracts.

Potential Profit and Loss

1. In June, ZSN3 declines to 1350’0 ($13.50), the trader would gain $3,150 = ($14.13-$13.50) x 5,000. Using the original margin deposit as a cost base, this short futures trade would potentially realize 63% profit, excluding trading fees.
2. If the soybean market rallies to 1480’0 ($14.80), the trader would lose $3,350 or a return of -67%.
3. Our trader could set a stop loss at 1450’0 ($14.50) to cap the loss and avoid margin calls.

When a U.S. soybean farmer plants the crops in April, he is said to have a Long Cash position. The farmer is exposed to the risk of falling soybean prices during the November harvest season. To hedge the price risk, our farmer could enter a Short Futures position now, and buy back the futures when he is ready to sell the crops.

The effective sales price equals spot price in November plus gain/loss in the short futures position. Since the cash market and futures market are highly correlated, loss (gain) in the cash market will be largely offset by the gain (loss) in the futures market.

Market information

1. The farmer planted 1,000 acres of soybeans in his Central Illinois farm.
2. Total production cost per acre is estimated at $859, which includes variable costs (seed, fertilizer, pesticide), overhead (building, storage, machinery), and land.
3. Yield per acre is estimated at 69 bushels. His cost per bushel will be $12.45.

Trade Setup

On April 28, ZSX3 is quoted at 1264’0 ($12.64). The farmer expects to sell 69,000 bushels. Since each ZS contract has a notional of 5,000, he needs to sell 14 lots of ZS contracts. Soybean basis in Greene County, Illinois is estimated at $0.20.

The Hedging Effect

1. The farmer effectively locks in the sales price in April for his November soybean crop at $12.64 (futures) + $0.20 (basis), which equals $12.84.
2. Production hedge helps our farmer to protect a profit margin of 39 cents per bushel, or $26,910 for his entire crops.

The farmer is left with basis risk. In the context of commodity futures trading, basis refers to the difference between the spot price of a commodity and the price of a futures contract for that same commodity. Basis risk is usually smaller than outright price risk.

After the crop is harvested, farmers or merchandisers usually store the soybeans in a grain elevator and wait for the right time and price to sell. Soybeans could be stored for a year but would incur monthly storage costs. The decision to store depends on whether expected future price gains outweigh the storage costs.

A merchandizer is exposed to the risk of falling soybean price, which would cause his soybean inventory (old crop) to decline in value. To hedge the price risk, he could employ a rolling futures strategy.

“Rollover” refers to the process of closing out all positions in soon-to-expire futures contracts and opening contracts in newly formed contracts. The rollover process impacts market volatility, prices, and volume.

Trade Setup

1. Sell 14 lots of July contract ZSN3 at 1413’0 ($14.13) on April 28.
2. At any point before expiration, if we decide to sell soybeans in the spot market, we could exit our futures position by buying 14 lots of ZSN3 at prevailing price.
3. If we plan to hold our inventory for a longer period, we will buy back ZSN3 and simultaneously sell 14 lots of August contract (ZSQ3).

The Hedging Effect: Rolling futures positions allows our merchandizer to extend his hedge beyond original futures expiration. 

One might ask why we don’t use a longer-dated contract to begin with, such as the July 2024 contract. This is because the front month contract is usually more liquid. It is easier to put the hedge on and off quickly. By sticking with liquid nearby contracts, we could avoid the cost of price slippage generally associated with less liquid deferred contracts.

In the soybean industry, “crush spread” is the market value of meal and oil byproducts subtracted by the cost of raw soybeans. In the cash market, the relationship between prices is commonly referred to as the Gross Processing Margin (GPM). 

In the futures market, the crush value is an inter-commodity spread transaction in which Soybean futures are bought (or sold) and Soybean Meal and Soybean Oil futures are sold (or bought). Soybean crush spread is also called the Board Crush.

Trade Setup

1. The November-December Board Crush (buying November Soybean futures and selling December Soybean Meal futures and December Soybean Oil futures) is used to hedge new-crop gross processing margins.
2. CME Group facilitates the board crush that consists of a total of 30 contracts, including 10 soybean, 11 soybean meal, and nine soybean oil.
3. Implied Soybean Crush (SOM: Z3-Z3-X3) is quoted at 179’4 ($1.795) on April 28. Each contract has a notional value of 50,000 bushels and is currently priced at $89,750.
4. If we process 100,000 bushels a month, we would short two board crushes. On April 25, the margin requirement for this spread was $1,650 per contract. 

The Hedging Effect: Board Crush enables processors to lock in his operating profit.

Livestock farmers buy corn, soybean meal, and other ingredients to produce animal feed. For example, hog farmers’ gross profit is represented by gross feeding margin, also known as the hog feeding spread, which is the value of lean hog less the cost of weaned pig, corn, and soybean meal. Therefore, hog farmers are exposed to the risk of rising ingredient costs. To manage price risks, they could trade the hog feeding spread, which is a long hedge by selling CME Group Lean Hog futures (HE) and buying CBOT Corn (ZC) and Soybean Meal (ZM) futures.

A typical hog feeding spread is expressed as: 

Hog Feeding Spread = 7 x HE – 3 x ZC – 1 x ZM

Lean Hog futures rebounded after news of Smithfield sow liquidation surfaced. Our farmer expects hog prices to rise faster than corn and soybean meal prices in the next few months. To capture an expanding margin, he plans to long the hog spread. 

Trade Setup: For every 280,000 pounds of lean hogs (approximately 1,120 pigs)

• Long seven Lean Hogs futures HEM3 at 87.150 ($0.8715)/lb., giving a total notional value of $244,020, as each HE contract has 40,000 pounds (lb.).
• Short three Corn futures ZCK3 at 646’4 ($6.465)/bushel. Each ZC contract has 5,000 bushels of corn, leaving this leg of trade at $96,975.
• Short one Soybean Meal futures ZMK3 at $435.0/short ton. Each ZM contract has 100 short tons of soybean meal, leaving this leg of trade at $43,500.
• The combined total, $103,545, represents the gross margin of raising 1,120 hogs, or about $92.5 per pig.

The Hedging Effect: It takes five months to grow a piglet to marketable weight. Factoring in breeding sows, the full production cycle for hog farmers could last one to one and a half years. Pork prices and feed costs could vary significantly during this period. Hog Feeding Spread enables hog producers to lock in their operating profit.

Vegetable oils are the most crucial cooking ingredients in the world. Soybean oil and palm oil dominate the global edible oil marketplace with two-thirds of market share. Soybean oil and palm oil are considered substitute goods because food processors often switch between the two as the prices fluctuate. 

Soybean oil and palm oil are driven by different market fundamentals. World soybean production is centered mostly in the U.S., Brazil, and Argentina, and most palm oil comes from Indonesia and Malaysia. A drought in the U.S. or in South America could drastically alter soybean oil supply one year, while disease in Southeast Asia could affect palm oil supply the next year. This can create tremendous volatility in the spread relationship.

The CBOT Soybean Oil (ZL) futures consists of 60,000 pounds, equivalent to 27.22 metric tons. The BMD Crude Palm Oil (FCPO) futures contract is 25 metric tons (mt).

Observation: Soybean oil and palm oil markets have been in decline since July 2022. In the past two months, soybean oil drops by a faster rate compared to palm oil. 

There could be plausible cause for the abnormal trend. However, if the relationship were to reverse back to normal, the spread will be enlarged. 

If an investor holds this view, he could long the spread by buying CBOT soybean oil and selling BMD crude palm oil.

Trade Setup

• Provided ZL at $0.5245/lb. and FCPO at MYR 3570/mt with prevailing USD/MYR exchange rate at 4.46, the ZL/FCPO spread could be derived at:
  • ZL = $0.5245 (per lb.) x 2204.622 (lbs. per mt) = $1,156/mt
  • FCPO = MYR 3570 / 4.46 /mt= $800/mt
  • ZL/ FCPO spread = $1,156/mt -$800/mt=$356/mt

Potential Profit and Loss

1. For an investor, a profit could be realized if the spread gets bigger. He would incur a loss if the spread narrows instead. The USD/MYR exchange rate could affect the trading result.
2. For commercial hedgers, such as edible oil processors, hedging would allow them to maintain stable production formulas even though oilseed spot prices change unexpectedly.

*Trade ideas and setups cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.

This content has been produced by Jim W. Huang at Haifu Group Inc. CME Group has not had any input into the content, and neither CME Group nor its affiliates shall be responsible or liable for the same. 

CME Group does not represent that any material or information contained herein is appropriate for use or permitted in any jurisdiction or country where such use or distribution would be contrary to any applicable law or regulation.