The Complexities of the Soybean Complex

Spend Matters welcomes this guest article by Loraine Hudson of Mintec.

Soybean oil (known in the UK as soyabean oil) is the second most consumed vegetable oil on the planet, with only palm oil being used more. The oil is part of the soybean complex:  soybeans, soybean oil and soybean meal, all of which have an influence on one other. Soybeans can be processed for human consumption (tofu, soya milk, miso paste, etc.) but more than 80% is used for animal consumption in the form of meal or oil.

There are many price drivers for the complex and all have a bearing on the price to a greater or lesser degree. I will now give an overview of the common factors to look out for that will influence supply and demand and therefore price.

Price drivers for soybean complex

Price drivers for soybean complex

The most important factor is, of course, the supply of soybeans, driven by weather in the main producers: Brazil and US, as well as planted area competition with grains. If soybean supply falls and the soybean price rises, generally the price of soybean oil and meal will also rise.

In order to produce oil, the soybeans are crushed. The co-product of this is meal, which is used as animal feed. Therefore, the crush level (crushing) is important. If crushings fall, then less oil is produced from the supply of soybeans and the price will rise. The proportion of soybeans crushed depends on many factors, but especially the relative profitability (crush margin) and demand of the bean, oil and meal. Oil is generally the higher value product and so oil demand tends to drive the level of crushings.

The supply and demand of livestock – especially pigs as soybean meal is a favored feedstock – needs to be considered. Greater demand for soybean meal due to higher livestock numbers results in an increase in crushing, which consequently also leads to an increase in oil production. China has a major influence on the global supply of beans, oil and meal, as it is by far the largest importer of soybeans (62% of global trade) due to the country being the largest global producer of pork (accounting for 50% of world production).

The state of the global economy also affects the soybean complex, as a growing economy tends to consume more food. As emerging economies grow, income levels rise and diet changes to both higher meat content and more convenience food, much of which uses more oil than freshly cooked meals. As the consumption of meat increases, so does the demand for animal feeds such as soybean meal.

The wider vegetable oil market is a major influence on the price of soybean oil as it can be replaced in many instances with these other oils. A similar situation is the case for oil meals.

Soybeans are widely used for biofuel production, leading to even more demand influences. The price of crude oil influences the demand for biofuel and consequently that of soybeans. A range of governments have mandates on the amount of biofuel that is required to be blended into transport fuel, and these have a large effect on the level of biofuel demand. Market conditions in the wider energy market also affect the level of biofuel demand, and if the price of crude oil falls, then demand for biofuel will generally fall. In this situation, governments often increase the biofuel mandate to counter this drop in demand.

Other factors that can come into play include relative currency strengths, especially the US dollar and Brazilian real, and competition from other markets in the feed and biofuel industries, such as sugar and grains. Lastly, but by no means least, soybeans, oil and meal are highly commoditized and are widely traded globally as an investment tool. This means that investor trading can have a major, if perhaps short-term, influence on prices.

So, we have 3 intrinsically linked commodities, all with their own supply and demand factors, in competition with other commodities that also have their own supply and demand factors, as well as wider global economic influences, that make the soybean complex exactly what it says on the tin – complex!

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