Soybean prices: The top 10 most important drivers

1) Weather

The weather has a significant impact on crop yields and thus overall agricultural production. The wrong type of weather at the wrong time in the planting cycle, even if not prolonged or extreme, can also adversely affect the production of soybeans. The weather can also affect the shipment and logistics of transporting crops to market.

Heavy rain in the north and west-central regions of Brazil (where most of the worlds crop is grown) makes working conditions in the field more difficult and reduces the planting pace, in turn hurting the soybean output. Meanwhile, adverse weather conditions in the south of the country (where most of the crop is shipped from) could affect the supply of soybeans out of Brazil while delays could also increase wastage, further reducing supply.

2) Protein demand

The importance of China and other markets in Asia as a market for soybeans has been driven by an explosion in demand for meat as consumers switch from a diet dominated by rice to one where pork, poultry and beef play an important part. Soybean meal (a product of soybeans) is the most important protein source used to feed animals and represents about two-thirds of the total world output of protein feed-stuffs.

3) Chinese demand

China imports around 60% of global soybean imports, around 90% of its requirements. Chinese production of meat surged 250% between 1986 to 2012. However, China is unable to produce enough animal feed itself, hence the need to import soybeans from the United States and Brazil.

4) The US Dollar

Like most internationally traded commodities soybeans are priced in US dollars. At its most basic a decrease in the value of the US dollar relative to a commodity buyer’s currency means that the purchaser will need to spend less of their own currency to buy a given amount of the commodity. As the commodity becomes less expensive demand for the commodity rises, resulting in an increase in the price and vice versa.

A weaker dollar can also act as a disincentive to producers to increase output. For example, a depreciation of the US dollar against the Brazilian real can reduce profit margins for a soybean farmer in Brazil. All of the farmer’s revenues will be received in US dollars, which will now buy less real, but some proportion of the costs will be denominated in real and will remain constant (at least in the short term). Therefore, the prospect of a lower profit margin acts as an incentive to decrease the supply of soybeans.

5) Tariffs

Given soybeans position as one of the most important sources of food governments may use this as a key element of trade policy with other countries. In 2018 for example China announced that it would increase tariffs on imports of soybeans from the US. The impact of such a tariff would be to increase the price of soybeans in China, but for the price to fall in the US.

6) The price of other crops

Corn and soybean compete on multiple grounds. They compete in the cooking oil industry. They compete in the animal feed industry. They also compete in the biofuel industry. Therefore, the production of one does affect the other. In general, if the production of corn falls, soybean prices are expected to rise.

7) Stock levels

Stocks (otherwise known as inventories) act as form of buffer for both producers and consumers of soybeans. Typically, falling stock levels occur if demand increases faster than supply, resulting in higher soybean prices. Falling stock levels may, however, make the soybean market more vulnerable to an unanticipated disruption to supply or a sudden increase in demand.

8) Speculation

Hedge funds operating in agricultural markets including soybeans may result in prices moving faster than they otherwise would in the event that there is deficit or surplus in the market. Speculators play a vital role then in signalling to farmers how much they should be planting while also allowing the transfer of risk.

9) Energy costs

Higher energy costs imply higher costs of production for soybeans and higher costs of transporting soybeans to market. Energy makes up a significant part of operating costs for most crops. This is especially true when considering indirect energy expenditure on fertiliser because the production of fertiliser is extremely energy intensive, requiring large amounts of natural gas.

10) Speculation by funds

Over the short term at least the positions held by large commodity funds can have a significant impact on soybean prices. If positions in the soybean futures market become extremely overbought or oversold then, as in other commodity markets news that counters this view can result in a sharp upswing in price volatility in the market.

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