It’s the most important crop in the world. Its price per bushel has skyrocketed over the past five years due to the evolving appetites of emerging nations, and limited acreage has only exacerbated the situation. Many investors have declared its recent action the formation of a bubble unfounded by fundamentals and merely the result of market speculation and low inventories depleted by government-sponsored energy mandates. I am not talking about corn- soybeans are the protagonist of this tumultuous agricultural commodities drama.
Soybeans are primarily crushed into soybean meal or processed further for soybean oil. Soybeans account for over 90% of oilseed production in the U.S., 65% of world supplies used in livestock feed, and two-thirds of all vegetable oils and animals fats. The impact this crop has on the world is undeniable, and as commodities prices fluctuate a new leader is emerging at the forefront of this bull market.
Overview
As mentioned before, soybeans are crushed into meal or processed into oil. In the U.S. they are planted between May and June and harvested in late September and early October. Nearly 80% of soybean acreage is concentrated in the upper Midwest and grown in crop rotation with corn. One unique feature of soybeans is their ability to retrieve nitrogen from the air, resulting in less than 40% of the crop using commercial fertilizer, a stark contrast to most other crops. Soybean meal is the most valuable component of protein feed of which 98% is purchased by livestock farmers. Soybeans have long competed with corn for acreage and are currently suffering due to market dynamics in the U.S.
In the U.S., plantings peaked in 2004 at 75.1M acres, due to higher yields and lower production costs, an obvious incentive for farmers. As the largest producer and exporter, the market for soybeans has grown to $18B. As massive as this may seem, the U.S.’s years as number one producer are numbered as their share of global exports have diminished from 70% in the 1970’s to less than 50% now. The phenomenal growth of Brazil and Argentina is the reason for this shift, as their combined share of global exports has risen to 50% from a mere 15% in 1980.
The Brazilian farming industry has benefited from drastic increases in infrastructure spending and favorable growing conditions. Earlier this year, Merrill Lynch raised their estimates from $100B to $225B for Brazilian infrastructure spending over the next three years, which significantly decreases farmer’s transportation costs.
