The United States grows more soybeans than any other country in the world, accounting for 32% of the world’s production. Farmers in the rest of the world are closing the gap, however, enticed by a continued rise in soybean prices. In 1980 the U.S. produced 60 percent of the world’s soybeans, but by 2005 it produced only 39%. Despite increased world supply, the price of soybean futures has increased more than 80% in 2008 because of soybean oil’s use in biodiesel and as feed for fish farming. Another factor in soybeans’ rise is China’s urbanization, as Chinese cities buy large quantities of tofu and other soy products. As soybean prices rise, agricultural companies benefit, while companies that use soybean products and derivatives face higher production costs.
Soybeans, Soybean Meal, and Soybean Oil
Unlike other commodities, derivative components of soybeans are also bought and sold by hedgers and speculators on futures markets. These derivative soybean products are soybean meal and soybean oil. Both are the result of pressing and seperating soybeans into their oil and meal components. Soybean meal can be processed into soy flour or soy protein, but in general the meal is used as livestock feed. Soybean oil is used as an edible oil for cooking and salad dressings, as well as a component of butter substitutes such as margarine.
While the prices of the two derivative commodities are generally strongly correlated with each other and the prices of underlying soybeans, a move of the price of one derivative commodity against the other is indicative of extremely high demand for one resultant product. Note that, as the processing of soybeans necessarily results in the production of both soybean meal and soybean oil, the total supply of each will always remain constant relative to the other. Note also that a consumer of one of the derivative products could acquire meal or oil by beginning with whole soybeans and processing them herself, thus an increase in demand for one of the derivatives will necessarily correlate with an increase in the demand for the underlying beans.
Which Companies Benefit From Higher Soybean Prices?
- Bunge (BG) does much of its business with South America, and is Brazil’s primary supplier of fertilizer. It has established excellent distribution networks between North and South America. As soybean prices increase, South America will increasingly convert unproductive land (including rain forests, unfortunately) into soybean fields. Because American production of corn for ethanol has taken so much arable land, South America will be able to cut into the world soybean market more than it has already. South American fields can yield up to 3 harvests per year, compared to one in North America. More production would necessitate more fertilizer and equipment, which Bunge (BG) is in an excellent position to provide.
- Valmont Industries (VMI) and other agriculture providers stand to benefit from attempted increases in soybean production due to an increase in price. Valmont creates irrigation equipment and sells it internationally. It is well equipped to deal with South America due to its 70% interest in Valmont Services Irrigacao, Ltd., a large Brazilian manufacturer of mechanized irrigation equipment.
- The Archer-Daniels-Midland Company (ADM) and Bunge (BG) grow and sell soybeans. These companies benefit from higher prices. It may be useful to note that most soybean producing companies are not publicly traded. Despite their agricultural forays, Archer-Daniels-Midland Company (ADM) and Bunge (BG) are less soybean farmers than soybean processors. Higher prices have an ambiguous net effect on these companies, because they still buy soybeans to supplement their own crops.
Higher prices for soybeans will raise demand for soybean seeds because it will be more profitable to plant them. Monsanto Company (MON) genetically engineers seeds, and sells them in bulk to farmers. They also create special pesticides to enhance yields. As more soybeans are planted, more of Monsanto’s products will be purchased.
Which Companies Lose From Higher Soybean Prices?
- Del Monte Foods Company (DLM) stands to lose from higher soybean prices because they use soybean oil and meal in their foods, and for animal feed. They try to mitigate this loss by having a portfolio of futures contracts and options. Price increases boost the value of these futures contracts, and therefore alleviate the increased cost of production. ConAgra Foods (CAG) uses similar hedging strategies due to its sensitivity to commodity prices. These companies produce tofu and edamame, which are directly, and wholly made from soybeans. However, soy protein can be found in a vast array of foods in the form of TVP (texturized vegetable protein) acting as a vegetarian meat substitute. Many sweets, preprepared and frozen foods use hydrogenated soybean oil to add fat.
- Companies in the meat industry like Pilgrim’s Pride (PPC) , Tyson Foods (TSN) and other major meat companies now must pay more for both corn and soy feed. Livestock consumes about 47% of the soy and 60% of the corn produced in the US. Different farmers use different feed compositions depending on desired results, and few companies disclose their exact feed mix. However, soybean products can safely provide up to 40% of the calories in the diets of American cows, pigs, and chickens. Soybeans are mixed with grains for the best results. Corn and soybean meal are major production costs in the poultry industry, representing roughly 41% of the cost of growing a chicken in fiscal 2007. When soybean prices increase, chickens become more expensive to produce. Not all costs can be passed down to the consumer without lowering the number of chickens sold. Growing commodity prices are a major strain to companies which raise and slaughter animals.
- While there are few publicly traded companies heavily involved in farm fisheries (most are privately held), HQ Sustainable Maritime Industries (HQS) is an exception. The company uses 100,000 tons of fish feed every year, composed of corn and soybeans. Fish need more protein and fat than carbohydrate in their diets, which soy ideally provides. As soybean prices increase, farm fishing will lose some of its cost advantage.
- Companies that produce biodiesel will face increased expenses as the price of soybeans increases. Publicly traded companies involved in Biodiesel production include Archer-Daniels-Midland Company (ADM), Bunge (BG), BP (BP), ConAgra Foods (CAG), and ChevronTexaco (CVX).
World Production of Soybeans In 2007 (Million Bushels // Million Metric Tons)
What Impacts The Price Of Soybeans?
The current short supply of soybeans could be somewhat exasperated by the spread of Soybean Rust in the Americas. Soybean Rust has been identified in 15 states and throughout South America. It is a wind-borne fungal disease that attacks soybeans and other plants. There is a growing body of research aimed at treating Soybean Rust, but no definitive solution exists. During the 2003 growing season, the pathogen was detected in most of the soybean growing regions of Brazil with a conservative yield loss estimate of 2.2 MMT, or approximately 5% of the annual production.
Soybeans are processed by companies like Archer-Daniels-Midland Company (ADM) and Cargill, which use machines to split the soybeans’ proteins from their oils. These oils may be used for cooking, and the creation of biodiesel. Increasing gas prices have made biodiesel far more attractive, thus increasing soybean prices. Because heavy machinery is used in soybean harvesting, increasing gas prices make soybeans more expensive to produce, and thus boost their prices.
Soy as Animal Feed
While the growing need for alternative fuel has boosted corn and soybean prices, the increase in soybean prices can also be attributed to its unique industrial applications. Once the oil is extracted from soybeans, its protein is used to enrich animal feed. Because of its high protein content, the booming farm fishing industry uses soy to replicate the meat which many fish are accustomed to eating. Farm fisheries once used fish meal, which is far more expensive than soy meal even with its recent price shock. Soy is combined with newspapers to create quality building materials which replace wood in furniture, flooring and countertops…
Scientific investigation of soy has now made its use incredibly wide spread. Soy is the main ingredient in many types of particleboard, laminated plywood, commercial carpet, auto upholstery, clean-burning diesel engines, environmentally friendly solvents, industrial lubricants, cleaners, paints, non-toxic crayons, candles, ink cartridges, high-quality lubricants, hydraulic fluids, and foams. As of October 2007, it’s hard to believe but new Ford Mustangs use soy foam in their seats. Soy can usually substitute for petroleum in most senses, and it is often cheaper to do so. As science develops more effective way to use the soybean, its price will increase along with its demand. Increased soy production will mitigate the price increase.
Millions of gallons of soy-based biodiesel are already being produced in the United States every day, and the fuel is used in over 200 US fleets. It is slightly less powerful than petroleum diesel, but burns much cleaner with much higher lubrication. This means fewer engine maintenance expenses and less pollution. Biodiesel is significantly more powerful than ethanol, yielding 120,000 BTUs per gallon versus 80,000 BTUs. Because Biodiesel has higher energy content, and is best produced with soybeans, soybean prices will increase as it becomes more demanded.
While the use of bio-fuels like ethanol and biodiesel has benefits (especially when mixed with normal diesel due to enhanced lubrication), it has garnered world controversy because of its perceived role in the world food crisis. As a growing number of countries approach the brink of mass food shortage, biofuel development will face more significant moral opposition. Any legislation or international move to curtail biofuel development will lower the price of soy-beans, because they would be less valuable as food than as a potentially viable substitute to gasoline.
Potential Health Hazards
Besides moral issues, many scientific reports claim that soy is actually not fit for human consumption. Reputable studies have found that soy products are very dangerous to infant health due to large amounts of the female hormone estrogen. Soy contains significant amounts of genistein and daidzein, which are known to cause genetic damage, and cancer. Soy is often blamed for increasing incidence of breast cancer among other health harms. Soy also contains the “anti-nutrient” phytic acid (blocks the intake of important vitamins and minerals), trypsin inhibitors, toxic lysinoalanine and cancer causing nitrosamines. These supposed health hazards are bitterly disputed by soy producers, but have merited further investigation by the FDA as well as the German Government. If soy is proven to be dangerous to eat, its prices may drop significantly! However, its growing number of industrial applications may cushion this possibility!