SOYBEAN MEAL FUTURES

Soybean meal is the dominant protein supplement used in U.S. livestock and poultry feeds. Technical uses include adhesives, cleansing materials, polyesters, and other textiles. But soybeans have many other uses, too. Most importantly, of course, they serve as a central ingredient in baby food, diet-food products, beer, ale, noodles, cooking oil, margarine, mayonnaise, salad dressing, shortening, etc. Lecithin is a natural emulsifier derived from soybeans. Several important, low-fat sources of protein, such as tofu, miso, and soymilk also use soybeans as a major ingredient.

Here are several examples of how soybean oil futures can be used by those seeking to mitigate price risk, as well as by speculators who hope to earn an attractive return on their investments:

* Risk Management for Processors -- 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 input costs. And selling soybean oil and meal futures protects against falling prices for the later sales of meal and oil.

* Cost Management for Livestock Producers -- A large cattle feedlot, recognizing that the price of soybean meal plays has a significant impact on its bottom line, buys futures or call options to establish a cost ceiling for eventual feed procurement. In the highly competitive livestock business, where operating margins are often very thin, such risk-management strategies can mean the difference between a profit and loss.

* Profit Opportunities for Traders -- In hopes of realizing a profit, a California software developer decides to trade soybean meal futures. Based on fundamental news and technical analysis, he expects bean meal prices will rise, so he purchases soybean meal futures. Two weeks later, weather conditions reduce the soybean harvest forecast and soybean meal prices rise. The speculator sells his futures contracts at higher prices and profits from the transaction. This participation in the futures market did not require the trader to have any direct link to farming or food production.

CBOT Dow Futures Specifications
Name and Symbol: Soybean Meal futures, Chicago Board of Trade, SM.

Trading Hours (Chicago time): Open-outcry trading in soybean meal is conducted from 9:30 AM until 1:15 PM. Soybean meal futures also trade after-hours, on the eCBOT system, from 7:30 PM straight through to 6:00 AM the following morning.
Available Trading Months: Principal trading months for soybean meal futures include January, March, May, July, August, September, October, and December.

Soybean meal is produced through processing and separating soybeans into oil and meal components. By weight, soybean meal accounts for about 35% of the weight of raw soybeans (at 13% moisture). If the soybeans are of particularly good quality, then the processor can get more meal weight by including more hulls in the meal while still meeting the 48% protein minimum. Soybean meal can be further processed into soy flour and isolated soy protein, but the bulk of soybean meal is used as animal feed for poultry, hogs and cattle. Soybean meal accounts for about two-thirds of the world's high-protein animal feed, followed by cottonseed and rapeseed meal, which together account for less than 20%. Soybean meal futures and options are traded on the Chicago Board of Trade (CBOT). The CBOT soybean meal futures contract calls for the delivery of 100 tons of soybean meal produced by conditioning ground soybeans and reducing the oil content of the conditioned product and having a minimum of 48.0% protein, minimum of 0.5% fat, maximum of 3.5% fiber, and maximum of 12.0% moisture.

Soybean crush – The term soybean “crush” refers to both the physical processing of soybeans and also to the dollar-value premium received for processing soybeans into their component products of meal and oil. The conventional model says that processing 60 pounds (one bushel) of soybeans produces 11 pounds of soybean oil, 44 pounds of 48% protein soybean meal, 3 pounds of hulls, and 1 pound of waste. The Gross Processing Margin (GPM) or crush equals (0.22 times Soybean Meal Prices in dollars per ton) + (11 times Soybean Oil prices in cents/pound) – Soybean prices in bushel. A higher crush value will occur when the price of the meal and oil products are strong relative to soybeans, e.g., because of supply disruptions or because of an increase in demand for the products. When the crush value is high, companies will have a strong incentive to buy raw soybeans and boost the output of the products. That supply increase will eventually bring the crush value back into line with the long-term equilibrium.

Prices – Soybean meal prices in 2003 rallied sharply by 38% to new 6-year highs, adding to the 15% rally seen in 2002. Despite that rally, the 2003 yearly close near per ton was still well below the 15-year high of .5 posted in 1997 and the record high of .5 posted in 1988. Bullish factors centered on heavy Chinese buying and tight supplies. In addition, the emergence of mad cow disease in North America in 2003 (Canada in May and the US in December) seems destined to boost demand for soybean meal. Rendered beef was already banned from the feed of cattle due to mad cow disease. Then as 2003 ended, it appeared that widespread concern about mad cow disease might cause officials to also ban rendered beef from the feed of other animals including hogs, poultry and pets. That would sharply boost demand for soybean meal due to its high protein content and its ability to quickly fatten up animals.

Supply – World soybean meal production in 2002/3 rose to a record 130.140 million metric tons, up 4.1% from the previous year’s 125.030 million tons. The world’s largest producers of soybean meal in 2002/03 were the US with 35.489 million tons of production (27%), Brazil with 20.909 million tons (16%), and the European Union with 17.880 million tons (14%). US soybean meal production in 2003/04 was forecasted at 35.340 million short tons, down 7.5% from the preliminary figure of 38.213 million in 2002/03 and down from the record high of 40.292 million short tons in 2001/02.

Demand – World soybean meal consumption in 2002/03 of a record high 129.6 million tons compares with 124.2 million in 2001/02 and less than 100 million as recently as 1997/98. The US is the largest single consumer with about 30 million tons of annual consumption recent years, but collectively the European Union and especially Asia have closed the gap with 29 million and 36 million tons, respectively. Asia's increasing use reflects the expansion in the region's poultry production.

Trade – US exports of soybean meal are forecasted at 4.08 million metric tons in 2003/4, down from 5.47 million metric tons in 2002/3. US exports of soybean meal in 2003/4 were down sharply by 42% from the recent peak of 6.99 million metric tons in 2000/01. The countries that import the largest volume of soybean meal from the US are Canada (17%), Philippines (11%), and Mexico (8%).

*Articles from the Commodity Research Bureau (CRB) Commodity Yearbook. The single most comprehensive source of commodity and futures market information available, the Yearbook is the book of record of the Commodity Research Bureau, which is, in turn, the organization of record for the commodity industry itself. Its sources—reports from governments, private industries, and trade and industrial associations—are authoritative, and its historical scope is second to none.

On January 12, 2006, the USDA increased its 2005-2006 U.S. ending stocks estimate from 405 to 505 million bushels. Production was estimated at 3.086 billion bushels with total use of 2.841 billion bushels. The resulting ending stocks to use ratio is 18%, matching the most in fifteen years. Worldwide, the USDA estimated 2005-2006 ending stocks at 53 million tons or 25% of annual use, up from 45 million tons in the previous year. Brazil and Argentina harvested 3.4 billion bushels in 2004-2005 and are expected to increase production 8% in 2005-2006.

In 2005-2006, the USDA is expecting exports to fall 14% and so far, they are down 27%.

Soybean exports are reduced 55 million bushels to 1,020 million bushels as competition from South American soybean exports continues to limit U.S. trade prospects, especially to EU-25 and China.
USDA's World Ag Supply & Demand Estimates. December 9, 2005.

"Improved seed genetics and better farming practices were a definite benefit to crop development, as 10 years ago, this summer's weather would have wiped out crops in areas affected," says Shawn McCambridge, senior grains analyst with Prudential Financial in Chicago. Improved farm income in the last few years allowed for better land-management strategies, with minimum or no tillage, better hybrids and fertilizer, and insecticide use that give crops the best production potential, adds McCambridge.
Barron's. September 26, 2005.