Soybean - An Attractive Investment Option

Agricultural commodities hold a predominant space in an Indian context, we being one of the largest producers and consumers for many of these commodities. With commencement of trading in many farm commodities through online Commodities Exchanges in India,  participants in agriculture value chain, be it hedgers, traders or even farmers are now reaping multiple benefits from this platform. An agriculture commodity with its presence in the global as well as domestic markets is much safer for a retail investor to be associated with. Soybean is one such agricultural commodity which is produced and traded globally and is also known for its high protein content and adaptability to various soil conditions.

A look into the basics indicate that a substantial portion of soybean seed goes for crushing while a small portion is retained for direct consumption and for seed purpose. On crushing Soybean, 18 per cent of soy oil is recovered and the rest 82 per cent is soy meal. Apart from being used as edible oil for direct human consumption, soy oil is also used extensively for industrial purposes, while soy meal makes for an excellent nutritive food for livestock and poultry.

Soybean crops throughout the world have their own unique planting and sowing timeframes. Prices of the commodity tend to fluctuate based on the arrival and sowing season in the major producing nations. While US, China and India share a similar planting and harvesting seasons, sowing of the oil seed in Brazil and Argentina takes place from September and continues till December. Harvesting of the same commences in February and runs up to May.

It has been seen in the past decade that the Global consumption of this oilseed have grown phenomenally driven by rising demand from China, which accounts for over 30 per cent share in the total consumption. Production growth has also been stupendous driven by higher Brazilian production, but was intermittent due to erratic weather patterns. Brazil’s contribution in global soybean production has increased considerably from around 15 per cent during 1990s to over 31 per cent in 2013-14. The nation is also in a verge to surpass US as the world’s largest producer. While US, Brazil and Argentina together account for over 80 per cent share in global soybean production, India’s share is miniscule at around 4.5 per cent. 

A glance through Indian Soybean facts

In India, Soybean is grown as a kharif crop and occupies around 40 per cent share in the total Oilseed production. Sowing of the same takes place in June-July while harvesting is done in September-October. Indian production has witnessed a phenomenal growth of 5.3 per cent (CAGR) for over a decade and it is estimated at around 12.23 million tonnes in 2013-14 (as per the estimates of Soybean Processors Association of India). Out of the total Soybean output, more than 80 per cent is crushed for obtaining Soy meal and Soy Oil, while 15 per cent is retained for seed purpose. India produces about 70 lakh tonnes of edible oil, of which soy oil contributes more than 22 per cent. On the other hand, it consumes 163 lakh tonnes of edible oil and thus has to extensively rely on imports, to an extent of 50-55 per cent of its consumption. Out of our imports, palm oil holds 85 per cent share followed by soy oil with a 12 per cent share. Thus, domestic prices of edible oil have a significant correlation with the international Palm Oil prices. The second derivative of Soybean i.e. soy meal, however, helps in reducing some burden of the huge edible oil import bill. With Indian consumption for Soy meal almost half that of the supplies, our country is in a position to export significant quantity of the Soy meal protein to countries like Iran, Japan, China, Vietnam and South Korea, among others.  

Price Performance

On the price front, we have seen a very strong positive correlation between the domestic and global soybean prices in the past few years. However, over the year 2013, prices have witnessed a divergent performance in the domestic and the global markets. While prices in the domestic market registered 19.23 per cent gains yoy, CBOT soybean declined 7.49 per cent during the same period. Although the production - consumption scenario in the domestic markets remained more or less same, what provided direction to the soybean prices during the year was the currency factor. Prolonged excessive rains, yield losses, delay in harvesting were also among the major factor that supported an upside in the prices last year. In the international markets however, the downward trend remained intact throughout the year on account of higher supplies from all the three producing and exporting giants. Also, exceptionally slow growth of around 1 per cent in Chinese demand, as an impact of an outbreak of avian influenza earlier in the season, acted as a negative factor for international soybean prices last year. 

South American weather crucial for directing soybean prices 

In the current context, we have seen that the Soybean prices have jumped up in both the domestic and global markets in the last one month. Supplies in the domestic markets have dwindled significantly while soya meal exports have remained subdued. In Brazil, harvesting has commenced but unusually dry and hot conditions in the past few weeks have resulted in partly irreparable damage in several parts of the country. In Argentina, soybean crop is adversely impacted by erratic weather conditions in the past two months. After passing through very high temperatures with little or no rain in mid-December followed by hot and dry conditions during first half of January, soy crop sensed some relief from rains which started a month back. However, persistent 2-3 weeks of heavy rains in main growing areas of Argentina have again raised concerns over yields. 

Outlook

With Chinese imports set to return, driven by increased consumption and little prospect of an increase in output, international soybean prices will remain strong over the coming months.   Recovery in the international markets and rising concerns over South American soy crop may encourage soy meal exports from India and thus upward trend in Soybean shall continue in the domestic markets too. Currently Soybean prices on the NCDEX are trading around Rs 4157 per qtl level. From the short term perspective we recommend buy in April futures in the range of Rs 4050 – 4100, with a stop loss of Rs 3900 and a target of Rs 4400 and 4500 on the upside.