MF-2512 Economic Issues with

Kansas State University Agricultural Experiment Station and Cooperative Extension Service

Economic Issues with Soybeans The United States is the largest pro- Figure 1. Planted Acres in Kansas and United States, 1980 to 2000 80 3.5 ducer and exporter of soybeans worldwide. U.S. 70 While Kansas ranks 10th in U.S. soybean 3.0 production, it only accounts for approxi- 60 2.5 mately three percent of the total production Kansas (Kansas Ag Statistics). Although Kansas’ 50 2.0 soybean production has been a relatively 40 small share of total U.S. production, 1.5 30 soybeans are becoming an increasingly U.S. acres (millions) 1.0 Kansas acres (millions) important crop to the state. Soybean 20 acreage has nearly doubled in the last 20 0.5 10 years from 1.55 million acres in 1980 to 0 0.0 2.95 million acres in 2000 (Figure 1). 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 From 1981 to 1985 the annual average Figure 2. Soybean Production in Kansas and United States, 1980 to 2000 acres planted to soybeans in Kansas was 3,000 150 approximately 1.63 million acres, how- U.S. ever, acres planted from 1996 to 2000 to 2,500 125 soybeans increased to 2.56 million annu- ally (an increase of 57 percent). During 2,000 100 this same time period, acres planted to soybeans in the United States increased by only 6.4 percent. Figure 2 illustrates U.S. 1,500 75 and Kansas’ soybean production from Kansas 1,000 50 1980 through 2000. Historically, about 75 U.S. bushels (millions) percent of the production in Kansas has Kansas bushels (millions) come from the eastern third of the state, 500 25 however, soybeans have become increas- ingly more important statewide since the 0 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 1996 Farm Bill (Figure 3). This publica- tion describes new uses for soybeans and Figure 3. Distribution of Soybean Production in Kansas by Region, illustrates differences in value across 1980 to 2000 90% soybean varieties. 80%

Demand for Soybeans 70% Eastern KS Much of the soybean’s popularity is 60% attributed to its versatility. The soybean’s many uses can be categorized into three 50% groups: industrial, human , and 40% Central KS livestock feed. 30% Currently, industrial uses of soybeans Production Total Percent of are a small portion of total soybean use. 20% However, many new products are becom- 10% Western KS ing available as scientists find new uses for 0% soybeans. Many of these products are 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 substitutes for petroleum-based products. active ingredients in performing their task. For example, -based pesticide Soybean oil-based lubricants and cleaners spray adjuvants are widely used by farmers are relatively new, but the demand for and custom applicators. They provide a them as an environmentally friendly safe, cost-effective tank mix that aids the alternatives to petroleum-based products is 1 increasing. Biodiesel includes a partial and Drug Administration. , , blend of a soy-based product that improves and natto are soyfood products common in lubricity and reduces harmful emissions Asia. Soy flour often is mixed with other after combustion. flours to increase the protein content. About 7.4 billion pounds of adhesives Soybeans are also used as a soy analog in are used annually in the United States for meat products. Soybean oil has many uses applications in plywood, particleboard, in the food industry. paper manufacturing, bookbinding, and A large majority of the U.S. soybean packaging and labeling. The various forms production is for livestock feed. Soybeans of wood use represent the largest and most are the most cost effective source of diverse market for adhesives today. protein in many feed rations. Usually the Petroleum-based adhesives for plywood or soybean is crushed, separating the oil from fiber cardboard applications often contain the remaining flake or meal. Soybean meal phenol/urea formaldehyde as a cross typically contains 44 to 50 percent protein. linking agent. These applications cause Figure 4 shows a steady increase in unpleasant environmental effects due to monthly meal and oil production from formaldehyde emission and toxicity 1992 through 2000 (USDA). The lines for problems during product manufacturing soybean oil and soybean meal lie on top of and distribution. The plywood industry is each other because, on average, a bushel of currently seeking new types of wood soybeans yields oil and meal in constant adhesives from renewable resources, proportions. potentially increasing the demand for soybeans. Overview of New Researchers at Kansas State University Soybean Varieties are developing formaldehyde-free adhe- Small, niche markets exist for several sives from soybean proteins, and types of specialty soybeans. Care at evaluating their adhesive performance for harvest is critical to ensure food-grade plywood and particleboard applications soybeans meet quality standards. Many of (Sun). While many new uses for soybeans these specialty or “value-added” soybeans exist, most are cost prohibitive relative to are grown under a production contract (see petroleum-based products based on current MF-2431 Economic Issues with Vertical market conditions. Coordination for a discussion of the Another soybean use is human con- differences between marketing and pro- sumption. Soybeans provide a valuable duction contracts). source of protein and are considered a Tofu or clear hilum food-grade soy- “heart healthy” product by the U.S. Food beans are usually produced for human consumption in the form of soymilk or Figure 4. Monthly Soybean Oil and Soybean Meal Production in the tofu. Soymilk is a milk-like liquid, pro- United States, 1992 to 2000 cessed by the soaking and grinding of 2,000 4,000 Soybean oil whole soybeans with water. Soymilk is a Soybean meal substitute for dairy milk for lactose- 1,750 3,500 intolerant people. Tofu is a soybean curd,

1,500 3,000 made by mixing soymilk with a coagulat- ing agent. It can be eaten in its original

1,250 2,500 form, fried, baked or used as a meat or dairy substitute.

1,000 2,000 Organic food-grade soybeans have Soybean Oil (million pounds) gained tremendous popularity in the last Soybean meal (thousand tons) 750 1,500 decade. A sizable market has developed demanding organically grown food, 500 1,000 although the supply of organic crops is still 1992 1993 1994 1995 1996 1997 1998 1999 2000 2 less than 0.5 percent of all food produced of all soybeans. Mandatory labeling in in the United States (Greene). The USDA certain countries is in its early stages and it has set certification guidelines for organic is unclear whether a premium exists for products that rely on sustainable produc- non-GMO soybeans. For example, Parcell tion processes without the use of synthetic concluded that the price differential fertilizers and pesticides. between the futures contract for Tokyo High sucrose soybeans decrease Grain Exchange’s new genetically en- abdominal discomfort and improve flavor, hanced soybean (of U.S. origin) and that which are two problems commonly for its existing conventional soybean (of associated with regular soybeans. These U.S. origin), was probably not sufficient to varieties contain higher levels of sucrose recoup the costs of the identity-preserved and lower levels of oligosaccharides, the system for the genetically enhanced indigestible sugars that cause abdominal soybean. Additional information on discomfort. High sucrose soybeans also genetically modified soybeans can be offer improved flavor, enabling larger found in MF-2449 Economic Issues with amounts of health beneficial soy product to Genetically Modified (GM) Food and Feed be present in food products. Grains. High oleic soybeans produce a bean that is high in oleic acid and Soybean Processing monounsaturated fatty acid and low in As of 1997 there were 93 soybean- polyunsaturated fat. This gives the high processing plants in the United States with oleic soybean greater heat resistance and payrolls totaling $237 million and value health benefits than the regular soybean. added by manufacturing worth $1.7 billion The soybean’s makeup also permits it to be (U.S. Department of Commerce). Kansas used for many industrial applications had four processing plants that employed because of its greater stability, lubricity 201 people with a value added by manu- and biodegradability. facturing worth $7 million in 1997. Low saturate soybeans contain half the saturated fat of commodity soybeans, The Crush Process while maintaining flavor. Low saturate Before soybeans are processed, they soybean oil has only 7 to 8 percent satu- first need to be dried to a moisture content rated fats, making it similar to canola oil. of 10 percent. After cooling, the soybeans Salad dressings and sauces made with low are cleaned by removing inert matter. The saturate soybean oil have very little or no soybeans are then weighed before they saturated fat. move to the next step, which is the cracker. Low linolenic soybeans produce During this process, the soybeans move cooking oil that has 50 percent less lino- through a series of rollers that crush the lenic acid than commodity soybean oil. beans into smaller pieces. After crushing, This reduces the need for hydrogenated the hulls (outer skin) are removed before oils that are high in unhealthy transfatty steam heating the soybean pieces. Once acids, thereby lowering LDL “bad” the soybean pieces are brought to 11 cholesterol levels and raising HDL “good” percent moisture content, they go through cholesterol levels. a series of rollers that produce thin flakes. High protein soybeans are mainly After the soybean pieces are rolled targeted for the soy food market. Products into thin flakes, the oil extraction process like soymilk and tofu exhibit improved begins. Hexane, an organic solvent, is qualities due to the increased protein washed with the flakes, dissolving the oils content from high protein soybeans. into a 75 percent oil and 25 percent hexane Non-genetically modified soybeans mixture (Gianessi). The mixture goes (non-GMO) produced in the United States through a solvent recovery system that currently account for less than 50 percent extracts the hexane so it can be reused. The 3 flakes have their solvent removed by a combined prices of the processed soybean desolventizer-toaster that also inactivates oil and meal. The Chicago Board of Trade trypsin inhibitors with heat (Snyder).1 The futures prices are often used to compute the hulls may or may not be mixed back into theoretical “crush” margin, which is more the flakes to bring the protein content commonly referred to as the “board” down to 44 percent. Grinding the flakes to margin. The board margin is based on the correct particle size for feed produces yields of 48 pounds of soybean meal and 11 the finished product, soybean meal. pounds of soybean oil per soybean bushel. The following is an example of a Oil Refining board margin: on March 23, 2001 the Crude soybean oil must go through a futures prices of soybeans, soybean meal, series of processes in order to get a high and soybean oil for January 2002 delivery quality, edible soybean oil. Gums (phos- were $4.49 per bushel, $144.60 per ton, pholipids or ), present in crude and $0.17 per pound, respectively. The soybean oil, are removed because they are revenue from soybean meal and soybean insoluble in oil and precipitate out during oil on a per bushel basis is estimated as storage (Snyder). The gums are removed ($144.60 ÷ 2000 × 48) + ($0.17 × 11) = by adding water to the oil, which attracts $5.34, where 48 and 11 are the expected to the polar phospholipids. The oil and extraction rates (lbs per bushel) for meal water are separated by centrifugation and oil, respectively. The board margin is (Gianessi). Some water may remain in the the difference between the sum of the oil, but it is evaporated during a drying estimated values of soybean meal and process. The gum or lecithin that is re- soybean oil and the price of soybeans. moved is a valuable by-product that can be Thus, in this example the board margin: is used by the food industry as an emulsifier $5.34 per bu Ð $4.49 per bu = $0.84 per bu. and anti-sticking agent. Many processors use a board margin to Free fatty acids are then removed from minimize the financial risks of sudden the oil through a lye washing and centrifu- increases in soybean costs and/or decreas- gation separation. Free fatty acids cause ing values of finished soybean meal and the oil to smoke at a lower temperature and oil (Soy Importer’s Handbook). A proces- increase foaming. Pigments or traces of sor who wants to lock-in the board margin gums, fatty acids, and minerals are usually would buy soybean futures and simulta- removed because it produces a more neously sell soybean oil and meal futures. desirable oil. This is done by bleaching, a This would eliminate price risk, but process of adding clay to the oil to adsorb extraction rates (meal and oil yields) and the unwanted material that is then removed basis risks (cash price versus futures price) through filtration. The flavor of soybean would still exist. oil is considered undesirable, so the oil A cash crush margin is computed undergoes a process called deodorization similarly using soybean prices purchased that is a high temperature steam distillation and soybean oil and meal prices sold at under vacuum to remove the flavor one location. Figure 5 shows an example compounds (Snyder). of the monthly crush margin at Decatur, Illinois, from 1990 to 2000. Like many The “Crush” Margin food and agricultural industries, soybean The “crush” margin is the value of processors expanded capacity in anticipa- processing commodity soybeans into meal tion of stronger export demand in the and oil. It is computed by taking the differ- mid-1990s. When global demand did not ence between the soybean price and the increase as fast as capacity, margins de- creased in 1998, and have since increased as several plants have been shut down. 1Tripson inhibitors prevent the proper use of protein by nonruminants. 4 Study of Soybean Variety Selection Figure 5. Monthly Soybean Crush Margin at Decatur, Illinois, on Estimated Processing Value 1990 to 2000 2.00 Kansas soybean varieties were evalu- ated based on their estimated processing value (EPV), which is the value of output 1.50 through the processing of soybeans into meal and oil. A major soybean processor 1.00 that purchases soybeans from Kansas producers uses a value-based marketing 0.50 program that pays producers, in part, on Margin, $/bushel the percentage of soybean oil in the soybeans. Soybean variety selection 0.00 decisions are important for Kansas’ soybean producers and information on the -0.50 relative value of oil, and protein is impor- 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 tant if marketing under such a program. Figure 6. Estimated Processing Value and Revenue of 52 Different The data for this analysis consisted of Soybean Varieties, Thomas County Irrigated Trial 7.50 425 protein, oil, fiber, and moisture content EPV, $/bu $/acre from Kansas State University irrigated 7.25 375 soybean variety trials in Colby, Kansas (unpublished data). Protein, oil, fiber, and 7.00 325 moisture content of soybean samples were 6.75 275 obtained using a GrainSpec model 211/8284 whole grain NIR instrument. The 6.50 225 samples used in this study represented 52 6.25 175 revenue, $/ac Total Round-up Ready and conventional variet- Processing value, $/bu ies.2 The EPV was calculated using the 6.00 125 Stratsoy EPV Calculator funded by the 5.75 75 United Soybean Board that is available online through the University of Illinois at 5.50 25 www.stratsoy.uiuc.edu/epv/. The estimated Soybean variety/sample processing value was calculated with input 6, indicate there is considerable variability values for meal and oil price, percentage in dollars per bushel value between the protein, oil percentage, moisture percent- different samples (range of $6.31 to $7.16 age, fiber percentage, and other with an average of $6.79). The correlations requirements for 48 percent protein meal. between oil percentage, protein percent- Initially, the EPV was calculated for a age, yield, EPV and revenue per acre sample for each variety by inputting their (yield × EPV) are shown in Table 1.4 respective protein, oil, and moisture Results from the study indicate that percentages while holding soybean meal there is a trade-off between oil percentage and oil prices constant at long-run histori- and yield, and oil percentage and protein cal average prices (1991 to 2000) of percentage (i.e., negative correlation in $191.96 per ton and $0.2231 per lb.3 The Table 1). In other words, for the 52 variet- results of this analysis, displayed in Figure ies examined, varieties with high yields tended to have lower oil contents. Like- 2 While the samples came from 52 different soybean wise, varieties with high oil contents had varieties, it is important to remember that this data only represents one year and one location. Calculated EPV low protein contents and vice versa as values provide evidence as to the variability that exists in would be expected. There was essentially soybeans but it is unknown how consistent these differences will be for specific varieties. Thus, specific varieties are not identified. 4 Correlations range from Ð1 to +1 where high positive (negative) values indicate a strong positive (negative) 3 Soybean hull (fiber) prices were held constant at $75 per relationship between the variables. Values close to zero ton for all EPV analyses. indicate little or no relationship between the two variables. 5 Figure 7. Monthly Differences in Estimated Processing Value between tive, which is attributable to high yields the Top 15 Percent of Samples for Percentage Oil and Protein and the Average Variety, 1991 to 2000 having lower oil contents (i.e., the negative 0.40 correlation between yields and oil content). The correlation between revenue per 0.35 Protein basis acre and EPV was only slightly positive,

0.30 indicating producers should continue to focus on yield and not simply try to 0.25 maximize EPV. This relationship is

0.20 demonstrated in Figure 6 where it can be seen that some of the varieties having the 0.15

Value difference, $/bushel difference, Value highest revenue per acre did not necessar- Oil basis 0.10 ily have the highest EPV. Because these results are based on only one year and one 0.05 location, further research needs to be done

0.00 to determine how stable these results are 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 under various growing conditions (e.g., Figure 8. Ratio of Soybean Oil Price to Soybean Meal Price, 1991 to weather, geographical location, cultural 2000 practices) so producers can identify the 4.5 optimal varieties for their particular

4 marketing opportunities (e.g., participation in an oil premium program). 3.5 The large variation that existed led to 3 further analysis in which the top 15

2.5 percent of oil samples and the top 15 percent of protein samples were compared 2 to the average of the 52 varieties and 1.5 evaluated over 10 years of monthly meal and oil prices (1991 to 2000). Results

Soybean Oil to Meal Price Ratio 1 show that the 15 percent of samples with 0.5 the highest protein percentage had the

0 largest average EPV of $6.99 per bushel. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 The 15 percent of samples with the highest oil percentage had an average EPV of no relationship between the protein content $6.89 per bushel. The average oil, protein, and yield (i.e., the correlation is close to fiber and moisture content of all varieties zero). The estimated processing value produced an average EPV during the 10 (EPV) is positively related to both oil and years of $6.79 per bushel. Figure 7 shows protein content indicating higher oil or the monthly differences in EPVs between protein levels are associated with higher the top oil and top protein samples relative processing values. The relationship to the average of all varieties. between EPV and yield is slightly nega-

Table 1. Correlation between Soybean Characteristics for 52 Different Varieties Protein, % Oil, % Yield, bu/a EPV, $/bu Revenue, $/a Protein, % 1.0000 Oil, % -0.2034 1.0000 Yield, bu/a 0.0367 -0.3997 1.0000 EPV, $/bu 0.8423 0.3268 -0.1853 1.0000 Revenue, $/a 0.2684 -0.3210 0.9636 0.0830 1.0000

6 The results shown are specific to the References data analyzed. In this case, protein content Brumm, T.J. and C.R. Hurburgh, Jr. was the limiting factor in producing 48 Estimating the Processed Value of percent protein meal. Thus, the varieties Soybeans. Journal of American Oil with the highest protein percentage had a Chemists Society 67(1980):302-7. higher EPV. A point is reached where there Gianessi, L.P., and J.E. Carpenter. Agricul- is no incentive to increase the protein tural Biotechnology: Benefits of content of soybeans due to the lack of Transgenic Soybeans. Washington DC: premium for protein levels in meal above National Center for Food and Agricul- 48 percent, as shown by Brumm and tural Policy. April 2000. Hurburgh. Also, given higher levels of Greene, C. U.S. Organic Agriculture Gaining protein content than occurred in our data, Ground. Economic Research Service, the relative prices of oil and meal dictate United States Department of Agriculture, whether an increase in oil or protein Agricultural Outlook, April 2000. percentage will lead to a larger EPV. Kansas Agricultural Statistics, Farm Facts, Figure 8 shows the ratio of oil and meal various issues. prices from 1991 to 2000. The spikes on Parcell, J.L. An Initial Look at the Tokyo the graph in 1995 and 1999 correspond to Grain Exchange Non-GMO Soybean the same time periods in Figure 7 when the Contract. Journal of Agribusiness 19 (1, high oil soybean varieties have similar 2001):85-92. EPVs to the high protein varieties. Snyder, H.E. Understanding Soybean Products and Processing. Volunteers in Summary Technical Assistance. 73(1990). New uses are being found for soy- Soy Importers Handbook, American beans. Many of these uses involve Soybean Association. substituting ingredients made from soy- Stratsoy EPV Calculator, found online at beans for those made from petroleum http://www.stratsoy.uiuc.edu/epv/ by-products. However, cost effective Sun, X.S. Adhesives from Modified Soy methods of manufacturing these soybean- Proteins. In Proceedings of Creating based ingredients so they become a Value for Agricultural Resources: New low-cost substitute relative to petroleum- Technologies, New Products, New based products may take several years. Markets, Agricultural Products Utiliza- Two key soybean ingredients are oil tion Forum Annual Meeting, Kansas and protein. These two ingredients have State University, Manhattan, KS, different values and are related to yield in November 13-14, 2000. different ways. In data analyzed here, United States Department of Agriculture, soybean oil percentage was negatively Economic Research Service. Oil Crops related to yield, whereas there was almost Yearbook. Washington DC, October 2000. no relationship between protein (i.e., meal) U.S. Department of Commerce, Bureau of and yield. Using data from a Kansas State the Census. 1997 Economic Census, University irrigated soybean trial in Manufacturing Industry Series. Wash- Thomas County, we found significant ington DC, October 1999. differences in end user value among 52 varieties. While yield remains an important consideration for producers, if the use of value-based marketing programs, such as that being used for soybean oil increases, producers may seek to focus more closely on the trade-off between oil and yield.

7

Erik Dean M.S. Graduate Research Assistant Department of Agricultural Economics

Kevin C. Dhuyvetter Extension Agricultural Economist, Farm Management Department of Agricultural Economics

Michael Boland Assistant Professor Department of Agricultural Economics

This research was supported by a grant from the Kansas Soybean Commission.

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Contents of this publication may be freely reproduced for educational purposes. All other rights reserved. In each case, credit Erik Dean, Kevin Dhuyvetter, and Michael Boland, Economic Issues with Soybeans, Kansas State University, June 2001. Kansas State University Agricultural Experiment Station and Cooperative Extension Service MF-2512 June 2001 It is the policy of Kansas State University Agricultural Experiment Station and Cooperative Extension Service that all persons shall have equal opportunity and access to its educational programs, services, activities, and materials without regard to race, color, religion, national origin, sex, age or disability. Kansas State University is an equal opportunity organization. Issued in furtherance of Cooperative Extension Work, Acts of May 8 and June 30, 1914, as amended. Kansas State University, County Extension Councils, Extension Districts, and United States Department of Agriculture Cooperating, Marc A. Johnson, Director.