Soybean is one of the most commonly traded grain futures. But did you know – there are actually 3 types of soybean futures that you can trade?
In this post, let’s look at Soybean (ZS), Soybean Meal (ZM), and Soybean Oil (ZL), and how to trade them!
Overview of Soybean family futures:
Since soybean is edible, it is one of the most important sources of protein for living things, as well as one of the most commonly-traded products in the futures market.
There are 3 types of soybean futures to trade, namely:
#1 Soybean (ZS)
Among all, soybean (ZS) is going to be the most commonly-traded soybean futures.
From trading perspective, soybean (ZS) represents the raw commodity of soybeans where the rest of the soy products – soybean meal and soybean oil are derived.
Soybean is traded under the Chicago Board of Trade (CBOT), with the specs as shown below:
Symbol: ZS
1 contract of soybean is worth 5,000 bushels
Minimum tick size of ZS is $0.0025 per bushel, which translates to a value per tick of $12.50.
#2 Soybean Meal (ZM)
Soybean meal (ZM) is derived from soybeans and it is produced from the grinding of high-quality residues of soybean into a yellowish-green flour.
Thanks to the high protein value of soybean meal, it is primarily used as an important staple in livestock and poultry diets.
Soybean meal futures market is considerably smaller compared to other agricultural commodities, and is traded under the Chicago Board of Trade (CBOT), with the specs as shown below:
Symbol: ZM
Contract multiplier: 100 per short ton
Minimum tick size of ZM is $0.10 unit, which translates to a value per tick of $10.
#3 Soybean Oil (ZL)
Soybean oil (ZL) is extracted from soybeans. It is used as a vegetable oil for cooking thanks to it being a good source of healthy fats, including Omega-3 fatty acids and polyunsaturated fats.
In addition, soybean oil is also used as a form of bio-diesel for cars.
Soybean oil futures are popularly traded as they are very liquid futures product. It is traded under the Chicago Board of Trade (CBOT), with the specs as shown below:
Symbol: ZL
Contract multiplier: 60,000 pounds
Minimum tick size of ZM is $0.0001 unit, which translates to a value per tick of $6.
What moves the price of soybeans?
There are many factors that affect the price of soybeans. Since the US is one of the largest producers (about 1/3 of the world’s supply) and exporters of soybean in the world, it is crucial to be mindful of the:
Seasonality (Planting & Harvesting periods),
Weather (Draught, tornado etc), and
Geopolitical updates (Trade war) which will directly impact the supply & demand of soybean crops.
For a detailed writeup on the factors impacting soybean price, click HERE.
Popular soybean futures trading approaches:
Approach #1: Gain spreads
Due to the close tie between the soybeans and corn market (both are key US key produces, as well as having the same seasonality), the soybean-corn spread is an approach that soybean traders utilize to make trading decisions.
This is done by determining how many bushels of soybean are required in order to buy one bushel of corn - this helps determine if a crop is more profitable than another.
Generally, a higher price ratio indicates that producing soybeans is relatively more profitable than corn, while a lower ratio reflects that producing soybeans is not as profitable as corn.
Why this is important:
Gain spread is a real-time indicator of a farmer’s planting intentions. It tells farmers whether planting, harvesting, and storing one or the other crop might be more advantageous.
That said, gain spreads should be taken as a reference or indication at best, as it is not assured that soybeans will be more or less expensive at any one time.
Approach #2: Crush spreads
A crush spread refers to the process of crushing soybeans to extract their oil. It is used to determine the difference between the price of the raw commodity (Soybean) and the derived or processed commodities (Soybean Meal and Soybean Oil), which tend to be more expensive.
A Soybean Crush involves buying Soybean futures, and selling Soybean Meal and Soybean Oil (and vice versa).
For soybean producers, Soybean Crush spread allows them to hedge their price risk. As for traders, Soybean Crush spread allows them to capitalize on potential profit opportunities.
If there is a disparity between the price of raw soybeans and the by-products (Soybean Meal or Soybean Oil), they can produce (once the cost of production is factored in), some traders will attempt to capitalize on this by going long on one market and short on another. This is done with the anticipation that the markets will adjust over time.
Verdict: Build your trading edge with Soybean family futures!
With soybean being one of the most important agricultural products in the world, it is no doubt that trading soybeans can present a huge opportunity for traders looking to diversify their trading arsenal from the usual bonds or equities.
Are you going to give the Soybean family markets a try? Let me know in the comment section below!
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Disclaimers
Any of the information above is produced with my own best effort and research.
This post is produced purely for sharing purposes and should not be taken as a buy/sell recommendation. Past return is not indicative of future performance. Please seek advice from a licensed financial planner before making any financial decisions.
Leverage is a financial tool that comes with its advantages and risks. Please learn and understand both the upsides and downsides of leverage before using it for trading.
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