Buying Soybeans Put Options to Profit from a Fall in Soybeans Prices

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China Buys Brazilian Soybeans Before Trade Deal With U.S.

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China is picking up soybean cargoes in Brazil, dashing hopes for big American sales immediately after a partial trade deal is signed with the U.S. next week, according to people familiar with the matter.

Private buyers from China have purchased about 10 cargoes from the South American nation so far this week, said the people, who asked not to be identified because the deals are private. Most of the soybeans are for shipments from January through April, the people said.

The Brazilian purchases, while not unusual for this time of year, come just as the U.S. and China are expected to sign a phase-one trade pact on Jan. 15. They also highlight China’s willingness to buy American supplies only when they are cheaper than elsewhere.

Brazil, the world’s largest soybean exporter, is starting to harvest what is forecast to be a record crop, bringing prices down. Brazilian supplies are cheaper than those from the U.S., attracting private Chinese buyers who only focus on crushing margins, according to Monica Tu, an oilseed analyst at Shanghai JC Intelligence Co.

Cheap Brazil Beans Threaten to Rain on U.S. Farmer Parade: Chart

China has pledged to buy $40 billion a year in American agricultural products, a high target that will require big purchases of soybeans from the U.S. China’s imports of U.S. soybeans rose to the highest in 20 months in November after more American cargoes cleared customs.

China has been issuing regular tariff waivers for domestic firms to buy U.S. soybeans. The exemptions cover the 30% retaliatory duties on the American oilseed, which Chinese buyers process into edible oil and animal feed. The country is reviewing tariff exemption applications for U.S. goods worth $60 billion, according to a government statement.

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How to Invest in Soybeans

Investors can gain direct exposure to soybeans by purchasing futures, options and exchange-traded investments.

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Soybeans are one of the largest agricultural crops produced in the Unites States. According to the EPA, approximately 2.8 billion bushels of soybeans were harvested from almost 73 million acres of cropland in the United States in 2000. This provides an enormous investment opportunity. While investors can participate indirectly by owning fertilizer companies and other agricultural stocks, there are only three investment vehicles that provide direct exposure to soybean prices: futures, futures options and exchange-traded investments. Each of these investment types have distinct features that should be considered.

Individuals can invest in soybeans using futures contracts and other exchange-traded assets.

Understanding Soybean Futures

A futures contract is described by the National Futures Association (NFA) as a legal obligation to buy or sell a commodity or financial instrument at a later date. Soybean futures are traded on the Chicago Board of Trade in either open outcry (trading pit) or electronic format.

One contract represents 5,000 bushels of soybeans, while one mini-sized contract represents 1,000 bushels. Contract holders (buyers) are legally obligated to take physical delivery upon expiration. To avoid physical delivery, contract holders can exit their positions prior to expiration.

Purchasing Soybean Futures Options

Another way to avoid physical delivery is to purchase options on soybean futures. CME Group defines futures options as contracts that give the bearer the right, but not the obligation to buy or sell futures within a specified time period at a predetermined (strike) price. Investors desiring the right to buy soybean futures purchase “calls,” while those wanting the right to sell soybean futures buy “puts.” Options may be traded for gain or used as insurance against loss. If left unexercised, options expire worthless.

Exploring Exchange-traded Investments

Exchange-traded investments in soybeans include ETFs, ETNs and commodity pools. They’re traded on the New York Stock Exchange, can be actively or passively managed and have an internal expense ratio. The PowerShares DB Agriculture Fund (DBA) is a diversified agricultural ETF that invests in soybean, corn, live cattle and many other agricultural futures.

The iPath Grains Total Return Sub-Index (JJG) is an ETN that invests only in soybean, corn and wheat futures. The Teucrium Soybean Fund (SOYB) is a commodity pool that invests solely in soybean futures. Each of these funds offer different levels of diversification. Investors can take long and short positions, allowing them to profit whether prices rise or fall.

Other Valuable Considerations

While soybean futures, options and exchange-traded investments come with their own unique risks, they’re all affected by the same overall market influences that determine supply and demand. Investors should keep a constant eye on acreage intentions, carry costs and expenses, crop yields, international trade, stockpiles and weather. As these dynamic influences continually change, prices respond accordingly.

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