What does the market hold for soy?

During the past year, prices of commodity soybeans have nearly doubled (1). This increase in price has been brought about by a number of factors, including increased demand from a variety of sectors as well as a below-average 2003 North American crop. Going forward, it is likely that prices will fall back toward historical levels; however, there are a number of factors pointing to long-term sustainable increases in soy demand that have important implications for companies operating at all levels of the value-added food chain.

International Opportunities

Increasing international demand for soy products for food and feed use will be by far the largest growth catalyst. Specifically, continued economic growth combined with a large and growing population base in areas such as China, India, North Africa and the Middle East should translate into dramatic increases in demand for soy-based products. Over the next 25 years, these regions will experience population growth averaging just over 1 percent per year. In comparison, the North American population is projected to grow approximately .8 percent per year. Real economic growth in the regions in question is projected at 4.9 percent per year versus 3.1 percent in North America.

This increasing demand has a number of fat-reaching implications. From the U.S. producers' perspective, the amount of acreage allocated to soy is not likely to see significant increases given the relative economic tradeoffs associated with competing crops (primarily corn). Increasing yields, which are projected to approximate .4 bushels per year, will largely drive resulting output increases in the United States (2). It is likely that much of the increased U.S. production will be consumed domestically, resulting in increased international demand being met by countries such as Brazil, Argentina and China.

The increased importance of international production will favor those companies with the ability to source and process oilseeds across multiple continents. A few companies well positioned to meet this need include Archer Daniels Midland, Cargill Inc. and Bunge Limited.

Equally important to meeting increased international demand will be the ability to adapt soybean genetics to increase yield demands and increasingly diverse production regions. Although there is some consumer resistance to the use of genetically modified organisms (GMOs) in food and feed production in Western Europe and North America, the reality of production demands seems to preclude wholesale curtailment in their usage.

The big six ag biotech giants have dominated much of the initial work in genetic modification of soybeans. The preponderance of this work has focused on input traits such as herbicide resistance and increased yield.

Continued development of "stacked" input traits will further increase production efficiencies. Potential areas of focus include increased stress tolerance and disease resistance. One area for immediate improvement could be addressing Asian soybean rust, which is an aggressive pathogen that spreads easily and can reduce soybean yields by a factor of 10 percent to 80 percent if left untreated. Although not yet present in North America, the disease is prevalent in Asia and has recently been found in increasing quantities in Brazil and Africa where climatic conditions favor its development.

While work on input traits continues to offer much potential value, many believe that the true power of genetic modification will be realized when the focus turns toward output traits. Work in this area has the potential to develop soybean varieties with enhanced protein levels, altered oil content, higher oleic acid content and altered nutrient content.

Putting Soy On Americans' Plates

In addition to the extensive international opportunities for increased soy usage, the U.S. market also offers the potential for significant growth. Spurred on by the American consumer's increasing health consciousness and knowledge of the beneficial aspects of soy consumption, the U.S. soyfoods industry has grown at a rapid clip in recent years.

Long viewed as a niche market reserved for Asian or vegetarian consumers, the market for soy-based products is becoming increasingly mainstream. Recent research indicates that 42 percent of Americans consume soyfoods at least once a month. In comparison, this figure was 27 percent in 2001 and 24 percent in 1999. Within this demographic is a core group of consumers comprising 28 percent of Americans who consume soyfoods or beverages at least once per week.

In 2002, U.S. soyfood sales were estimated at $3.65 billion and have grown at a compound annual growth rate of nearly 20 percent over the past five years (3). Going forward, the category is expected to continue experiencing low double-digit growth for the next five to 10 years. In comparison, traditional retail grocery categories are expected to experience growth in the 2-3 percent range.

Factors contributing to this growth include:

* Well-publicized health claims for soy foods consumption (Heart Healthy);

* Increased variety of better tasting products;

* Growth of meat alternatives;

* Lactose intolerance (increasing as Hispanics constitute a larger portion of the U.S. population);

* Food safety concerns; and

* High-protein, low-carb, low-fat ingredients.

Historically, the competitive landscape of the soyfoods industry was characterized by a large number of relatively small players that operated at a local or regional level.

With the recent growth has come increased competitive pressure from major food companies such as Coca Cola, Dean Foods, General Mills, Kellogg and Kraft that have launched major soyfoods initiatives.

Concurrent with the entry of major food players into the category has been a shift in soyfoods distribution. Traditionally, soyfoods were marketed through small, local natural food grocers and cooperatives or ethnic markets. Over the past decade, a number of "Supernatural" retail food chains such as Whole Foods, Wild Oats and Trader Joes have emerged to capture an increasing share of category sales. In addition, traditional grocers such as Albertsons, Safeway and Wal-Mart have devoted increased interest and shelf space to the category.

Investment Implications

Soy presents a number of attractive prospects for investors looking for growth opportunity in what historically has been viewed as a pure commodity. At the international level, steadily increasing population and rapidly developing third world economies will dramatically increase demand for protein in general and soy in particular. This growth will favor companies that can operate internationally and have access to the technology necessary to adopt their products to unique regional and local demands.

Within the United States, the soyfoods category will probably always maintain vestiges of its natural and organic product origins. However, the future is much more likely to favor those companies with sophisticated sales, marketing, distribution and consumer research skill sets. As companies active in this sector evolve from local, early-stage businesses to large, national concerns, there will be a multitude of investment opportunities for capital providers looking for growth opportunities in the food arena, which is viewed by many as a mature industry.

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THE BIG PLAYERS IN BIOTECH

Company               Total Sales       Est. 2002 Seed Sales
                      billion dollars   million dollars

Syngenta A.G.            6.2                   938
Bayer CropScience        5.4                   250
Monsanto                 4.9                 1,560
DuPont Crop
  Protection & Seeds     3.5                 1,900
BASF Crop Protection     3.1                   200
Dow AgroSciences         3.0                   200
Total                   26.1                 5,048

Source: Cybus

SOY PRODUCTS
CONSUMED REGULARLY

Protein Bars      5%
Nuts              4%
Soymilk          17%
Tofu             12%
Veggie Burgers   12%

Source: United Soybean Beard's
2003-2004 Annual Study

Note: Table made from pie chart.

2002 SOYFOODS
CATEGORY OVERVIEW
Total Sales $3.65 billion

Other                                   15%
Energy Bars & Gels                      23%
Meal Replacement & Supplement Powders   19%
Soymilk                                 16%
Meat Alternatives                       15%
Tofu                                     7%

Source: United Soybean Board's
2003-2004 Annual Study

Note: Table made from pie chart.

(1) CBOT.ORG

(2) USDA; Soybean and Oilcrops: Market Outlook

(3) SpinScan, A.C. Nielsen

Jason Hahn, CFA, is vice president of Cybus Capital Markets LLC, Des Moines, Iowa.