An Investment Opportunity in Grains? Soybeans May Be Poised To Lead The Way | Blog

A greater number of investors are uncovering opportunities in commodity markets and turning to Teucrium funds for their agriculture exposure. In fact, investor demand for our Soybean Fund (SOYB) has increased shares outstanding by 150% year to date.

Based on conversations with investors and our observation of the markets, we believe there is both a macro and a micro investment case that can be made for grains, soybeans in particular. 

Macros: The Big Picture For Grains

At a macro level, the weakening US Dollar is perhaps one of the more significant trends leading investors to commodities. The dollar/grain commodity relationship is relatively straightforward. Globally, commodities are often priced in dollars. A weakening US dollar means that US exports become more competitive. For example, if the US Dollar depreciates against the EURO, then it will take fewer EURO’s to purchase the same amount of goods priced in dollars. All else being equal, the increase in demand for US goods due to dollar weakness theoretically would support US commodity prices, including grains.

Additionally, global grain demand is increasingly fueled by the unwavering demographic trends of population growth and middle-class expansion. Increasing demand puts pressure on producers to continually grow greater and greater volumes of grains. Higher food prices are a likely outcome if grain production does not keep pace with demand.   

There is also a case to be made for grains when considering a diversified investment portfolio. Note, over the last 20 years, grains have exhibited low correlations to equities. In fact, he GSCI Grains Index has outperformed the S&P 500 in 10 of the last 11 stock market downturns of 10% or more.

Index investors can, and often do, invest according to the big picture. All the reasons mentioned above might be enough for an index investor or Financial Advisor to consider allocating to grains.

With just a little bit of effort, an investor can learn to spot unique opportunities among individual grains. Let’s take a closer look at soybeans.

Micros: China and the Soybean Balance Sheet

It is no surprise that the US Soybean market has been receiving a lot of investor attention.

Soybeans continue to be one of the grains at the center of the US / China trade negotiation. In 2018, China placed a much larger tariff on US Soybeans that sent the domestic price plummeting. US farmers responded by planting far fewer soybeans in the 2019-2020 crop year. The US soybean harvest in the fall of 2019 was the smallest since 2013. 

Fast forward to the present crop year, where the USDA is projecting not only record global soybean production, but also record usage; China is back purchasing US soybeans and global demand is expected to outpace production. Heading into 2021, if current estimates hold, the US soybean balance sheet will be the tightest it’s been since 2016. 

Investors may reference the Stocks/Use Ratio as an indication of balance sheet tightness. The Stocks/Use Ratio takes inventory and divides it by total “usage;” a lower number indicates a tighter balance sheet, meaning there are less supplies in relation to the demand for those supplies.  

Another way for investors to measure tightness would be to reference the “Carry-out” expressed as days supply. This figure is determined by taking inventory and dividing it by the amount used per day. Here too, a lower number reflects a tighter balance sheet. 

Let us apply this understanding to the soybean balance sheet. Please reference the WASDE Summary found under the documents tab on our website https://teucrium.com/documents. The information can also be obtained through the USDA https://www.usda.gov/oce/commodity/wasde.  

For the current crop year (2020-2021) the USDA is projecting a soybean stocks/use ratio of 9.8% and a carry-out day’s supply of 35.7. For comparison, we see similar figures on the 2017-18 balance sheet. In that year the stocks/use ratio was 10.2 and the carry-out day’s supply was 37.2. Note too that demand per day for 2020-21 is estimated at 11.9 million bushels, versus 2017-18 demand per day of 11.8 million bushels. These figures tell us that there is a slightly higher demand per day but a lower relative supply. 

In the 2017-18 crop year, the farm price ($/Bushel) for soybeans was $9.33. The current front month futures price is $8.81. This, despite USDA estimates showing this crop year’s demand for soybeans to be higher and day’s supply to be lower than 2017-18.

Are prices headed higher?

Given the reasons above, soybean prices have the potential to move higher. At the macro level, a weaker dollar has historically been supportive for soybeans. At the micro level the soybean balance sheet is as tight as it has been since 2017. Furthermore, the Chinese, after a trade war hiatus, are once again buying US soybeans.  

To be certain, it is possible for prices to head lower. The US Dollar may reverse course and begin trending higher, which could put pressure on prices. Additionally, rising tensions between the US and China have the potential to spook the market. Finally, production could come in higher than estimated, adding to supply and putting pressure on prices. 

The Teucrium Soybean Fund (SOYB) was designed to be the easiest way to access soybean futures prices through a brokerage account. Note, options are also available on SOYB, please speak with your broker, or financial advisor.