Soybeans: A Buying Opportunity in the Works?

By Matt McCall

Although rallies in other ags, such as corn and cotton, have often overshadowed the rise in soybean prices, investors in the humble bean have had a little extra something to celebrate this year. During the last day of trading before the Christmas holiday, the January 2011 soybean futures contract rallied to a new 28-month high, due to weather concerns.

The rally heading into the Christmas holiday was fueled by reports out of Argentina, the world’s number three producer of soybeans, that the unusually hot and dry weather that has plagued the country for weeks would continue. Not only will the drought likely lower crop yields, lowering future supplies of soybeans, but it also forces farmers to delay planting. One recent report estimates Argentina’s 2011 soybean harvest could fall as much as 21 percent.

Meanwhile, Brazil, the number two soybean producer in the world, has also suffered its fair share of weather problems. One forecaster believes Brazil’s soybean output in its southern growing region could be up to 20 percent lower than last year, due to La Niña-driven dry weather patterns, even as other parts of Brazil struggle with too much rainfall.

So once again, an ag’s supply story defers to the whims of Mother Nature, and lower supplies result in higher prices. Overall soybean production in the five major South American growers could decline as much as 8 million to 10 million tons, according to Oil World, in the coming year.

Higher Chinese Demand, Biofuels

China, the world’s largest food consumer, tends to drive soybean demand, and recently, the country has been hoarding all ags with the belief prices will rise higher in the future. In late December, China’s Minister of Commerce said the country will increase its imports of grains and cotton to boost domestic food reserves – that means soybeans as well.

Consider that the growing Chinese middle class (as well as that in other emerging markets) means millions of new consumers demanding better food. That raises demand for soybeans not only as a dietary staple but also as a feedstock, as farmers increase their soybean usage to feed their animals and meet higher demand for meat.

But soybean demand isn’t entirely appetite-driven. In the US, soybeans are the main crop used to create biodiesel, a cleaner-burning (if not particularly cheap) energy source. One bushel of soybeans produces about 1.5 gallons of biodiesel.

Considering one bushel of soybeans currently trades near $13.44, the “green” fuel is not exactly inexpensive to produce, and production costs could hamper demand growth from this sector. But even if the biodiesel market doesn’t expand at quite the meteoric rate environmentalists may hope, the bottom line is that higher demand is higher demand, and that will help support higher prices long-term.

Taking the Technical View

After flat lining for all of 2009 and trading within a narrow trading range, soybean futures broke out in September; the rally has continued through the end of 2010. But with futures sitting at their highest level in over two years, investors must realize that a pullback in the short-term is likely in the coming weeks. Savvy investors will use this weakness as a buying opportunity.

But what to buy? Unlike corn or many softs, a pure-play soybean ETF or ETN is not currently available to investors. However, there are some ETNs that allocate a portion of their portfolio to soybean futures.

The PowerShares DB Agriculture ETF (DBA), which invests in 11 different agricultural commodities, puts12.5 percent of its weight into soybeans. Likewise, the ELEMENTS Linked to the Rogers Agriculture Index ETF (RJA) has a 9.6 percent soybean exposure.

But the ETN with the highest exposure to soybeans is the iPath Dow Jones-UBS Grains ETN (JJG), with 39 percent in the crop; another 37 percent is allocated to corn, and the final 24 percent to wheat futures.

Disclosure: No positions