China’s High Demand for Soybeans Fuels Asian Hours Futures Trading

  • 12 Jan 2021
  • By Paul Wightman and Cameron Liao
  • Topics: Agriculture

Soybeans are one of the world’s most important agricultural products and nowhere more so than in China. Annual imports in China have doubled over the past 10 years and were close to 100 million tonnes in marketing year 2019/2020 (source: US Department of Agriculture or USDA), accounting for 87% of total Asian soybean imports of 115 million tonnes. Asian soybean imports account for about 70% of the global soybean trade.

A growing number of Asia-based clients are turning to the CBOT Soybean futures contract to manage price risk. According to CME Group data, around 10% of total clients originated out of Asia-Pacific in 2020, compared to around 6% in 2018. Volatility in Soybean futures is relatively high by comparison to other commodity products. Chart 1 shows the 30-day historical annualized volatility for the front month Soybean futures settlement price. The data showed that the 30-day historical annualized volatility in Soybean futures was about 20% during the fourth quarter of 2020 compared to around 10%, six months earlier.

Chart 1: Annualized 30-day historical volatility – Soybean futures

Much of this trading and hedging activity (by Asia-based clients) is occurring during Asian trading hours. This article looks at how liquidity in Soybean futures is evolving during Asian trading hours and how this liquidity has reduced the cost of trading.

The price of soybeans has been rising sharply over recent months. In the futures market, the prompt contract month reached a peak of nearly 1,200 cents per bushel, up from around 900 cents per bushel at the beginning of 2020. Demand in Asia coupled with other factors such as La Niña, which led to lower production volumes, are cited as possible reasons for the higher prices.

Chart 2: Soybean futures prices trade close to 1,200 cents/bushel on rising demand

Source: CME Group

 

Futures trading volumes in Asian hours, defined as 8 a.m. to 8 p.m. Singapore time, are increasing year on year (Chart 2). Based on the latest data for January to November 2020, the total volume of Soybean futures in Asian hours represented about 16 percent of total daily volume, an increase from less than nine percent of total volume in 2011. The rise in volumes during Asian hours appears to coincide with the rise in Chinese soybean imports and the increase in price volatility.

CBOT Soybean futures average daily volume during Asian hours doubled from about 16,000 lots in 2011 to 41,000 lots in the first 11 months of 2020, whilst annual global Chinese imports increased from 52.3 million tonnes (2010/2011) to 98.5 million tonnes (2019/2020) during the same time frame.

Chart 3: Soybean futures liquidity during Asian hours

Tighter bid/offer spreads attract Asia clients

The difference between the best bid in the market and the best offer (i.e. the bid/offer spread) is one well-used measure of liquidity in a futures contract. The average bid/offer spread during Asia trading hours now compares favorably to the average bid/offer spreads observed during the core US trading hours, CME Group data shows.1

The bid/offer spread reflects the minimum price fluctuation on a contract.2 It is measured in the number of ticks (increments) and shows market participants the size of the order volume (see table 2) needed to move the price of the future. Put simply, it has a direct impact on the cost of trading as the volume required to move the price increases so does the cost of trading to do it.

Table 1 below shows the average bid/offer spread observed in the exchange orderbook. The bid/offer spreads are ranked by best bid and best offer as shown by levels one, two, and three. The level one bid/offer spread represents the best bid and best offer, the level two bid/offer spread represents the second-best bid and the second-best offer, and the level three bid/offer spread represents the third-best bid and the third-best offer. The tightest bid/offer spreads are seen during U.S.  trading hours, however, the spreads seen during Asia trading hours are aligning closer to what is typically seen during U.S.  trading hours. 

Exchange data shows that the spread between the best bid and best offer in Asia specific hours ranged from 1.03 ticks to 1.08 ticks with an average of 1.06 ticks, just shy of the whole day average bid/offer spread, which includes US hours (1.04 ticks).

Table 1: Bid/offer spread (in ticks) in Asia hours* – Soybean futures

Hour Starting** Bid/Ask tick
Spread Level 1
Bid/Ask tick
Spread Level 2
Bid/Ask tick
Spread Level 3
00 1.00 3.10 5.25
01 1.00 3.10 5.25
02 1.01 3.11 5.27
08 1.03 3.09 5.22
09 1.04 3.17 5.33
10 1.05 3.15 5.33
11 1.05 3.20 5.35
12 1.06 3.18 5.36
13 1.05 3.15 5.35
14 1.07 3.17 5.37
15 1.07 3.17 5.37
16 1.08 3.18 5.38
17 1.05 3.15 5.35
18 1.07 3.17 5.37
19 1.06 3.16 5.36
20 1.05 3.15 5.35
21 1.03 3.15 5.28
22 1.00 3.10 5.25
23 1.03 3.14 5.29
Asian Hours Avg* 1.06 3.16 5.35
All Hours Avg 1.04 3.15 5.32
Difference 0.02 0.01 0.03

*Asian hours = 8 a.m. to 8 p.m. Singapore time
**Hours reflects are throughout the trading day – grey shaded hours are Asian hours
CME Group data

The average bid/ask order volume is also robust. Table 2 shows average order volume ranked by level: level one represents the average volume underlying the best bid and best offer, level two represents the average volume underlying the second-best bid and second-best offer, and level three represents the average volume underlying the third-best bid and third-best offer. Although order volume tends to be slightly higher during US hours, the average during Asian hours is at very healthy levels. For the best bid and ask, order volume ranged from about 17.81 lots to 21.62 lots with an average of 19.81 lots. This is compared to the whole day average of 26.32 lots.

Table 2: Average bid and offer order volume of Soybean futures – Asian hours*

Hour Starting** Bid/Ask Volume Level 1 Bid/Ask Volume Level 2 Bid/Ask Volume Level 3
00 41.09 84.26 67.51
01 41.49 83.12 65.79
02 40.57 82.36 64.56
08 17.81 37.40 39.20
09 20.38 38.71 40.95
10 20.62 37.85 40.27
11 21.12 35.18 35.95
12 19.23 36.86 36.22
13 18.11 39.05 39.19
14 18.30 39.12 39.87
15 20.72 41.52 39.81
16 17.85 37.33 37.11
17 21.62 43.02 43.36
18 21.27 42.43 42.00
19 20.70 43.96 42.99
20 19.59 44.38 42.03
21 33.59 69.79 60.25
22 38.06 80.95 66.74
23 48.04 96.67 80.32
Asian Hours Avg* 19.81 39.37 39.74
All Hours Avg 26.32 53.37 48.64
Difference 6.51 14.00 8.89

*Asian hours = 8 a.m. to 8 p.m. Singapore time
**Hours reflects are throughout the trading day – grey shaded hours are Asian hours
CME Group data

Brazil export flows increase sharply to Asia

Brazilian soybean exports have continued to rise, and the level of growth has been greater than in the U.S., which has seen a small decline in exports the past few years, according to the latest USDA report.3

Chart 4: Brazil tops the soybean export league

Source: USDA

Brazil4 exported around 93.5 million tonnes of soybeans during the 2019/2020 crop year, which was double the volume exported from the US during the same timeframe. Combined exports from both Brazil and the US accounted for about 84 percent of total soybean exports during the 2019/2020 marketing year. Asian markets, and most notably China, have been the largest recipients of higher Brazilian trade flows. Asian clients can hedge exposure to Brazil soybeans using the FOB Santos Soybeans Financially Settled (Platts) futures.5

Conclusion

CME Group Soybean futures’ liquidity and trading volumes are improving during Asian trading hours as Asia-based clients increasingly embrace managing price risk during Asia hours in the trading day. This aligns with developments in the physical flows of the commodity where volumes have risen sharply. Deepening liquidity in the CBOT Soybean futures contract as well as increased trading in Brazil soybeans has increased trading opportunities during Asian hours and enhanced market execution possibilities for Asian clients, which is bringing significant benefits as Asian clients look to manage price risk or seek investment opportunities in this growing agriculture market.

References

  1. Average bid/ask spread and order volume of the January 2021 contract month during November 2020. The figures are the average of minute-level bid/ask price spread and order volume calculated as time weighted average.
  2. CBOT Soybean futures are priced in US cents per bushel and the tick size is 1/4 of one cent (0.0025) per bushel.
  3. USDA Report – https://apps.fas.usda.gov/psdonline/circulars/oilseeds.pdf
  4. More about Brazilian soybean market at https://openmarkets.cmegroup.com/16436/why-brazil-has-grown-as-a-soybean-producer
  5. CME FOB Santos Soybeans https://www.cmegroup.com/trading/agricultural/grain-and-oilseed/fob-santos-soybeans-financially-settled-platts_contract_specifications.html

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