In the world of soft commodities, few assets hold as much importance as soybeans. This article will guide you through the fundamental drivers of the soybean market, from the unique production cycles to the geopolitical forces.
Trading Soybeans via Contracts for Difference (CFDs)
Before diving into the specifics of soybeans, a solid understanding of how CFDs work and how they differ from buying futures contracts is required. These are some of the key features of trading soybeans through a CFD:
- A CFD is a cash-settled derivative. This means you never physically buy, sell, or take delivery of soybeans. You are speculating on a contract that is made to track the prices of soybean futures in major markets. Using CFDs thus allows you to speculate on prices without ever having to worry about rolling over a futures contract or undertaking physical delivery.
- CFDs allow you to use leverage, enabling you to use your capital more effectively. Using leverage wisely allows you to hold multiple positions at a time without tying up all your capital in just one asset. It also allows you to size up positions and potentially make significant profit from intraday swings that would otherwise achieve only a small percentage gain. Leverage is a tool; when used wisely, it can increase potential returns, but if used without understanding, it will amplify the size of losses.
- Unlike a physical investment, holding a CFD position past the daily market close typically incurs an overnight financing charge (or 'swap fee'). This cost makes holding positions for long periods less profitable. Therefore, the strategies discussed below are suited more for short- to medium-term trades instead of longer-term investments.
Understanding Soybean Production
How do Soybeans Grow?
Soybeans thrive in climates with a long, hot summer, with ideal temperatures hovering between 20−30 degrees. They are, however, adaptable and can grow across a range of environments, from temperate to tropical zones. Essential survival conditions include sufficient moisture, the absence of hard frosts, well-drained soils to prevent waterlogging, and a growing season long enough for the crop to reach full maturity.
Soybeans are most sensitive to adverse weather conditions during their mid-summer reproductive phases, which generally occur from July through August in the Northern Hemisphere. During this crucial period, a lack of rainfall or excessively high temperatures can drastically reduce the final yield. When the plant experiences stress, it closes its stomata, which slows down the process of photosynthesis and consequently limits yield creation.
The El Niño-Southern Oscillation (ENSO) Impact
The El Niño and La Niña climate phenomena, collectively known as ENSO, have significant yet geographically dependent impacts on soybean yields. Studies have shown that Argentina exhibits the strongest link between ENSO cycles and yields. This relationship is less pronounced in the U.S., and no statistically significant association has been found in Brazil.
Consequently, Argentinian yields are especially volatile:
- La Niña (colder Pacific waters) tends to lower global soybean yields.
- El Niño (warmer Pacific waters) tends to improve global soybean yields.
The significant disruptive potential of these weather events was clearly demonstrated during the 2022/2023 season in Argentina, where the country’s soybean crop suffered a dramatic 43% collapse following a triple La Niña event.
Geographical Concentration and Structural Dynamics
The global soybean market is defined by a fundamental structural concentration: approximately 80% of global production is located across Argentina, Brazil, and the United States. Adding to this centralized supply framework, the demand side is overwhelmingly dominated by China, which alone absorbs roughly 60% of worldwide imports.
This market structure makes commodity prices exceptionally vulnerable to a few key factors:
- Weather events in South America.
- Logistics disruptions in the U.S.
- Abrupt shifts in Chinese trade policy.
A unique feature of the soybean supply architecture is the existence of two distinct growing seasons in opposite hemispheres. U.S. farmers typically plant in May and early June, with the harvest concentrated in late September and October. In contrast, South America’s harvest usually takes place in the Southern Hemisphere’s autumn, often around May. This dual-hemisphere structure results in an overlap of supply for a large part of the year. The surge of South American supply between April and June actively inhibits major supply shocks during the U.S. winter months.
Soybean Fundamentals
Inter-Crop Competition: The Soybean/Corn Price Ratio
In the U.S., soybeans compete directly with corn for planting acreage. Since they are often grown in the same areas, farmers must choose which crop to sow. To anticipate the supply of both assets, traders keenly observe the Soybean/Corn (S/C) price ratio, which is a crucial early-season metric for predicting planted area.
The S/C ratio is calculated by dividing the new-crop soybean futures price by the new-crop corn futures price. Historically, a ratio below 2.5 has signaled a strong incentive for farmers to devote more acreage to corn, which is generally viewed as the more input-intensive, higher-risk crop.
However, this is not the only factor farmers consider. Profitability is also determined by variable input costs, most notably the cost of fertilizer, which corn production requires in larger quantities. As a result, even when the S/C ratio slightly dips below 2.5, some farmers might still prefer soybean production due to lower input costs.
The S/C ratio should therefore be monitored alongside fertilizer prices and other input-heavy costs related to corn production to effectively predict acreage allocation and potential future supply.
Furthermore, corn and soybeans exhibit a notable correlation due to their link to the livestock feed market. Livestock can be fed a variety of substitutes, including corn, soybeans, and wheat. If corn prices rise significantly, substitution for cheaper foodstuffs like soybeans can create upward pressure on soybean prices.
The World Agricultural Supply and Demand Estimates (WASDE) report
The monthly World Agricultural Supply and Demand Estimates (WASDE) report, published by the U.S. Department of Agriculture (USDA), is arguably the most influential news event for soybeans. It draws on statistical reports and consolidates the U.S. and global supply and demand outlooks, with reports generated through a combination of statistical modeling and objective survey data.
Surprises in the WASDE report, specifically surrounding an acreage cut or change of U.S. ending stocks, lead to immediate volatility, as price tries to price in the new expectations.
Trade Policy
The soybean market is subject to strong geopolitical risks due to the high concentration of both supply (U.S., Brazil, Argentina) and demand (China). The most significant modern example is the U.S.-China trade conflict, which started in 2018 with China imposing a 25% retaliatory tariff on U.S. soybeans. By late 2025, the cumulative duty will have escalated to 34%, which has effectively priced U.S. beans out of the Chinese market. Before the trade war, however, the U.S. shipped 60% of its total exports to China.
Monitoring trade policy between the major players in the soybean market is thus crucial. A softening of the U.S.-China trade policy could lead to U.S. soybean prices rising strongly as demand increases.
Soybean Market Dynamics
Once raw soybeans have been harvested, soybean processors will tend to convert them into two products: soybean oil and soybean meal.
Soybean Oil: A Biofuel
Soybean oil has received a policy-driven demand boost through initiatives like the Renewable Fuel Standard (RFS) and Low Carbon Fuel Standards (LCFS). This has made U.S. soybean oil highly competitive against alternatives such as palm oil. However, the correlation between raw soybean prices and soybean oil prices is often limited. This occurs because soy meal, the other major product from processing raw soybeans, is easily substituted in the feed market.
When raw soybean prices rise due to increased demand for soybean oil, the demand for soybean meal declines as it can easily be substituted for corn or wheat, which then pushes prices back down. Furthermore, soy oil is easily substituted with other vegetable oils like palm oil, which thus also limits significant volatility.
Soybean Meal Market Dynamics
Soybean meal constitutes the largest part of the physical yield from processing raw soybeans, representing roughly 44 pounds of a 60-pound bushel, compared to only 11 pounds of soy oil. Soybean meal is predominantly used as a high-protein feedstuff for the livestock market, making it the most common protein-based foodstuff in this sector.
If you’re interested in how the Soybean and Live Cattle markets work together, we recommend checking out this article, which dives into everything you need to know about Live Cattle: