Cash Soybeans Market (S-099)
Soybean oil futures contracts are the benchmark for the soybean oil market. The bulk of the soybean crop is grown for oil production. Soybean oil, commonly called vegetable oil, is very popular because it is cheap, healthful and has a high smoke point. Soybean oil is not only used in food products. It also used as a natural renewable replacement for petroleum-based products such as: bio diesel, inks, plasticizers, crayons, paints and soy candles.
The two basic products of soybeans are soybean oil and soybean meal. Soybean oil is the most widely used edible oil in the United States. The consumption of soybean oil exceeds that of all other fats and oils combined. More than 90% of the soybean oil is used in edible products such as cooking oil, margarine, mayonnaise, salad dressing, and shortening. The rest is used in industrial products such as paint, varnish, linoleum, and rubber fabrics.
The great majority of the world’s soybeans are processed by the soybean crushing industry to produce crude soy oil (also called “crude soybean oil”) and soybean meal. The value of the soybean lies in the fact that there is a strong demand for both these ingredients. The separation of these two major components has given rise to the soybean crushing industry.
Unlike the seeds of most other legumes (except the peanut), the soybean is rich in oil, and is often called an “oilseed.” After separation, the oil is degummed (to remove the lecithin) and usually refined, bleached, partially hydrogenated, deodorized, and often winterized to make a variety of popular products, such as salad and cooking oils, shortenings, and margarine. Soy oil also finds limited industrial use, as in paints, varnishes, and soaps.
A soybean processing plant can use soybean, soybean oil, and soybean meal futures to hedge its gross processing margin – the difference between the cost of soybeans and the eventual revenue of the finished oil and meal. Buying soybean futures protects against rising inputs costs. Selling soybean oil and soybean meal futures protects against falling prices for the later sales of soybean meal and soybean oil. This risk-management program can help stabilize costs and pricing for the hedger, and can create a profit opportunity for the speculator willing to take a risk.
Fifty-five percent of the world’s soybean production occurs in the Americas. The U.S. exports 37% of the world’s soybeans. Originally considered merely an industrial product before the 1920s, soybeans rose to popularity for human consumption during World War II and have had a significant impact onU.S. farming. In 2007, soybeans brought in a total of $26.8 billion.
The soybean’s price increases have a negative impact on other grains. Farmers only have so much arable land to plant crops. As a substitute good, it pushes corn and wheat aside, adversely affecting their supply and demand chains, which in turn significantly affects our global grain system. Global supplies are interdependent among countries, making all grains negatively interdependent because of the fight for limited resources. All of this leads to extreme fluctuations in the price and volatility of soybeans – the perfect environment in which to trade.