Soybean is one of the most important agricultural products that acts as a crucial food source for mankind and live stocks alike.
But did you know? You can actually trade soybean via the futures market as a trader!
In this post, let’s explore about Soybean Futures (ZS) and what it takes to be a soybean trader!
Let’s learn about Soybean!
When it comes to soybean, the US is one of the largest producers and exporters of soybean in the world, alongside countries like Brazil and Argentina, where it produces about 1/3 of the world’s soybean supply.
There are many usages for soybeans. Of all, more than 3 quarters of soy production is used to produce food for livestock, while the rest are used for human consumption and industrial production.
Trading soybean with Soybean futures (ZS)
The best way to gain exposure to soybean is via Soybean futures (ZS).
Soybean futures is an agriculture product traded under the Chicago Board of Trade (CBOT), with the specs as shown below:
1 contract of soybean is worth 5,000 bushels
Minimum tick size of ZS is $0.0025 per bushel, which translates to $12.50/contract
Let’s do a simple calculation to illustrate a trade with ZS:
eg. Let’s say we bought 1 soybean contract that is trading at $15/bushel and it makes a $0.50 move up. How much would we make?
Calculation: $0.50 x 5000 bushels = $2500 in profit
Why trade Soybean Futures
#1 Access to leverage
Soybean futures allow traders access to leverage while trading. This means traders can gain leveraged exposure to the notional value of a soybean futures contract with a relatively small amount of capital.
As an example, let’s say soybean is trading at $15/bushel, a contract of soybean would be worth $75,000 ($15 x 5000 bushels).
That said, a trader would not need to fork out the full $75,000 to trade 1 contract of soybean.
Instead, CBOT’s margin requirement for a contract of soybean is around $3300 (at the time of writing), which translates to about 22.7x leverage.
#2 Ample liquidity
Soybean is one of the most actively traded agriculture futures. As such, it is a reliable product to trade on due to its ample liquidity.
With an average of 180,000 – 200,000 contracts traded daily, this ensures minimal slippage issues while trading soybean futures.
#3 Extended trading
The futures market can be traded overnight, and soybean futures is no exception.
This allows traders to respond to news events related to soybean with great flexibility.
#4 Regulated trading
Soybean futures is CFTC-regulated and is traded on a central exchange (CBOT). As such, counterparty risk is extremely minimal compared to loosely regulated instruments like CFD or FX.
Tips to trade soybean futures
#1 Seasonality of soybean
Seasonality is a huge factor that plays into how soybean price fluctuates.
There are 3 phases in soybean production:
- Planting phase (Mid-March to May):
The planting phase provides an estimate for the initial supply of soybean. This is a phase where soybean price tends to be more volatile and uncertain due to external factors such as weather risk.
If there are no delays or unexpected incidents, soybean price tends to go up and reaches its peak in May or June.
- Podding phase (August):
Podding is a phase where soybeans start to reproduce. The pace of podding will impact soybean price in the futures market. Outside factors such as pollination can also influence the final harvest of soybean.
- Harvest phase (Oct - Nov):
The harvest phase is the time of the year when soybean is harvested. This means an increase in the supply of soybean, translating to a usual low in soybean price in October or November. That said, any delay or crop-related diseases such as Asian Rust could impact the final supply of soybean as well.
Meanwhile, the winter season would also increase the demand for soybean due to an increase in consumption, which causes soybean price to rise.
#2 Weather risk
Weather is a huge thing in the agriculture industry, and soybean is no exception too.
As such, it is crucial for soybean traders to be aware of weather-related news and events.
As an example, a drought or weather disaster in soybean-producing states like Iowa, Illinois, and Minnesota can impact the supply of soybean negatively (hence causing price to rise).
#3 Production-related news
Soybean traders should also be mindful of news that are related to crop production in the US, which can also bring extensive volatility to soybean price.
3 of the key news to pay attention to are:
- World Agriculture Supply and Demand Estimates (WASDE) Report that is released monthly by the US Department of Agriculture (USDA). This shows traders the expected numbers from both the supply and demand sides of the soybean market. Any deviation from this would cause the price of soybean to fluctuate.
- US Grain Stock Report that is released quarterly by the National Agricultural Statistics Service. This report provides updates on the stock of soybeans and other crops by state in the US based on on-farm and off-farm surveys.
- World Agricultural Production report that is released monthly by the USDA. This report shows traders the acreage of crops such as soybean, and its yield and production in major countries worldwide
#4 Currency risk
Traders should also pay attention to the strength of USD while trading soybean. Since the US is one of the largest soybean exporters in the world, USD’s strength is a crucial influence on soybean prices.
In this case, when USD goes strong, exports tend to become relatively more expensive to other countries, hence impacting the exports of soybean.
#5 Political risk
While trading soybean, it is crucial that traders understand the underlying political risk for products like soybean.
With China being the largest importer of US soybean at USD 17.87 billion in 2022, any trade tension between China and US would affect the demand of soybean, impacting the price.
Just look at how US soybean export to China dropped drastically in 2018 when there is a trade war going on between the Trump administration and China:
Other factors to know while trading soybean futures:
- Human population – A growing human population is expected to increase the demand for soybeans as a source of food for humans and livestock alike.
- The economic boom in emerging markets – A growing market in emerging countries would also increase demand for soybean thanks to growing consumption.
- Global warming – Global warming leads to increasing uncertainty for crop production and soybean is no exception. Traders will need to have a good sense of how changes in weather would impact the production of crops.
Verdict – Soybean provides plenty of trading opportunities to traders
Soybean is a great choice for traders looking to diversify from more commonly-traded instruments like equities and bonds.
Its seasonality nature provides a great foundation for traders to build strategies with edge around soybean.
So, I hope this post gives you a solid understanding of soybean and convinced you to see the potential of trading soybean futures!
If you have any questions on futures trading, feel free to leave them at 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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