Tofu lovers should rejoice. Prices of soybeans, the key ingredient in tofu, look set to drop this year as supply increases and demand declines. Investors should also benefit from the move.
“We’re set up for potential record yields along with record acreage,” says Shawn Hackett, president of Hackett Financial Advisors. He sees soybean prices fetching as little as $12 a bushel in this fall, 27% lower than the recent price of $16.37.
Savvy traders who don’t mind a bit of risk should consider selling short November-dated soybean futures on the CME exchange in the hope of buying them back for a profit at a lower price.
Alternatively, try the Teucrium Soybean exchange-traded fund (ticker: SOYB), which holds a basket of soybean futures with different expiration dates. The ETF’s multiple futures structure means it has historically been less volatile than front-month contracts alone.
In May 2021, soybean prices were around where they were recently, fetching $16.37 a bushel. However, in the interim they have been on a wild ride. They fell to less than $12 in November, according to TradingEconomics.com, which collated the data. And prices hit highs of above $17.50 in late April, before retreating.
Prices of agricultural products, including soybeans, usually move in three stages, says Jake Hanley, senior portfolio strategist at ETF provider Teucrium. First, prices hover around their cost of production. Second, prices change in response to economic shocks—in this case, the Russia-Ukraine war pushed prices higher. Third, supply and demand change in response to elevated prices.
“Higher prices incentivize farmers to plant as much as possible,” increasing supply and pushing down prices, Hanley says.
“It’s our base case that prices are on their way toward the new cost of production,” Hanley says.
Soybean supplies are already set to increase this year, on top of steady growth over the past three years. The US produced 121 million metric tons of soybeans in the 2021-22 season, up from 97 million two years earlier in the 2019-20 season, according to US Department of Agriculture data.
The coming season could be even better. Farmers intend to plant 91 million acres of soybeans this year, a record high, government data show. That’s up 4% from last year’s plantings. That could even head toward 93 million acres by the time the plantings take place, Hackett says.
The extra acreage is only part of the issue. Yields are likely to be higher, too, due to better weather, Hackett says. He forecasts optimal soybean growing conditions: cool, wet weather in the late summer.
At the same time, the elevated price of soybeans is causing a problem for livestock farmers who use the beans as feedstock. Hog farmers are finding that the cost of feed is so high that they lose money on every animal.
As a result, hog farmers are slaughtering their animals at lower weights than previously. The poor economics of raising pigs is also shrinking the herd, which is down 3% since December to 72.2 million hogs, according to a US Department of Agriculture report. In turn, that reduces demand for soybeans as a feedstock.
The outbreak of avian flu in the US is having a similar impact on soybean demand. Since February, more than 36 million chickens, or about 7% of the flock, have been slaughtered in an effort to contain the spread of the virus. “I keep asking myself, where is the demand going to come from?” Hackett says.
The major risk in this trade is that another economic shock occurs to interrupt supply. That could include an expansion of the Russia-Ukraine war into neighboring countries. However, on balance, the possible rewards seem worth the risk.
Credit: www.marketwatch.com /