The Soy Game

March 19, 2009

Soybeans are supposed to do great in a recession, just not this one. Is that turning around?
  •  The tragedy of the rearview mirror
  •  Diminishing stocks
  •  The biodiesel future


OK, I'm a day late, but did you know that yesterday was National Biodiesel Day? That's right, the National Biodiesel Board picked March 18, the birthday of Rudolf Diesel (of diesel engine fame), to promote itself. Hey, it makes more sense than International Talk Like a Pirate Day (September 19, if you were wondering).

In honor of such a prestigious holiday, let's take a look at that most unassuming of beans - the soybean.

Biodiesel can be made from a multitude of things, including French fry grease, but since there were 690 billion gallons of soy-based biodiesel produced in 2008, soy, from a pure commodities perspective, is the play. Besides, soybean oil is widely used as food oil in the U.S. and is second behind palm oil globally.

If you read Recessionary Commodities, you'd have noticed that during recessions, soybeans and the oil that comes from them perform differently - with soybean oil posting much higher returns historically.

Here are some more recent numbers:


Soybeans (S), Oil (BO) & Meal (SM)


Of course, from that same article, you'd notice that historically soybean oil posted positive returns during all parts of the business cycles as studied. If only you could count on those positive returns. Pesky statistics - they'd lead you to believe that soybean oil was a sure thing, which of course, investors know there is no such animal.

The interesting thing to note is that soybean meal has performed the best out of all three commodities. Soybean meal is used primarily as animal feed - in combination with other commodities such as corn and other grains. But what about the other two?

Soybeans are sitting around $9 - that's 27% lower than they were at this time last year, and 44% off the recent high of $16.18 on July 3.

Soybean oil has seen similar returns - only a bit worse. Currently, soybean oil is around 29 cents per pound - down 49% since this time last year and more than half (57%) of the high it reached of 66.24 cents a pound in July.

But things may be changing.

Last week, the USDA released the latest World Supply and Demand Estimates, and it contained a few surprises. First of all, the 2008-09 ending stocks estimate for soybeans was reduced to 185 million bushels, a reduction of 25 million bushels. According to resource news international, the ending stocks broke a critical level:


"USDA turned the oilseed outlook for the old crop bullish as they raised the export forecast for the soybean crop and lowered the US 2008-09 soybean ending stocks estimate to 185 mln bushels, from their last forecast of 210 mln tonnes. This is below the critical 200 mln bushel level and suggests we will see the $9.50- $10.00/bu level this spring as the market will need to ration supply."


The reduction in stocks is due to increased exports to China. From the same article:


"China continues to be a strong market and caught traders by surprise this past week as they took almost 1/2 mln tonnes of US soybeans. The pace of Chinese soybean demand has some traders looking for the US soybean ending stocks to drop as low as 165 mln bushels which is very bullish for the old crop."

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