A crush spread is a

commodity In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a co ...

trading strategy In finance, a trading strategy is a fixed plan that is designed to achieve a profitable return by going long or short in markets. The main reasons that a properly researched trading strategy helps are its verifiability, quantifiability, consisten ...

in which the trader takes a

long position In finance, a long position in a financial instrument means the holder of the position owns a positive amount of the instrument. The holder of the position has the expectation that the financial instrument will increase in value. This is known a ...

soybean The soybean, soy bean, or soya bean (''Glycine max'') is a species of legume native to East Asia, widely grown for its edible bean, which has numerous uses. Traditional unfermented food uses of soybeans include soy milk, from which tofu ...

futures Futures may mean: Finance *Futures contract, a tradable financial derivatives contract *Futures exchange, a financial market where futures contracts are traded * ''Futures'' (magazine), an American finance magazine Music * ''Futures'' (album), a ...

against short positions in

soybean meal Soybean meal is used in food and animal feeds, principally as a protein supplement, but also as a source of metabolizable energy. Typically 1 bushel (i.e. 60 lbs. or 27.2 kg) of soybeans yields 48 lbs. (21.8 kg) of soybean meal. Som ...

futures and

soybean oil Soybean oil (British English: soyabean oil) is a vegetable oil extracted from the seeds of the soybean (''Glycine max''). It is one of the most widely consumed cooking oils and the second most consumed vegetable oil. As a drying oil, processe ...

futures to establish a processing

margin Margin may refer to: Physical or graphical edges * Margin (typography), the white space that surrounds the content of a page *Continental margin, the zone of the ocean floor that separates the thin oceanic crust from thick continental crust *Leaf ...

. Soybeans are processed into two products—meal and oil—through a process called “crushing”, which is where the term stems from. The crush spread is the difference between the combined value of meal and oil and the value of the original soybeans. The crush spread is a gauge of the soybean processor's

profit margin Profit margin is a measure of profitability. It is calculated by finding the profit as a percentage of the revenue. \text = = There are 3 types of profit margins: gross profit margin, operating profit margin and net profit margin. * Gross Pro ...

, or the gross processing margin from crushing soybeans.

Purposes

The soybean processor will be interested in the crush spread as part of its hedging strategy, traders as part of its risk management strategy, speculators will look at the crush spread for trading opportunities. Soybeans processors can use the crush spread in order to lock in a gross profit margin, and cover the risk of adverse price fluctuation: inflation of soybeans inputs and deflation of outputs such as soybean meal and soybean oil. Traders use soybean crush spreads as a risk management strategy by "combining soybean, soybean oil and soybean meal futures positions, into a single position". The spread position is then used to

hedge A hedge or hedgerow is a line of closely spaced shrubs and sometimes trees, planted and trained to form a barrier or to mark the boundary of an area, such as between neighbouring properties. Hedges that are used to separate a road from adjoi ...

the margin between soybean futures, and soybean oil and meal futures".

Calculation

On average, one unit of soybeans produces 80% soybean meal, 18.3% soybean oil, and 1.7% waste, though growing conditions affect oil yields. To calculate the crush margin of one unit of soybeans, take the % value of the soybean meal and oil futures (e.g., in

CNY The renminbi (; symbol: ¥; ISO code: CNY; abbreviation: RMB) is the official currency of the People's Republic of China and one of the world's most traded currencies, ranking as the fifth most traded currency in the world as of April 2022 ...

metric ton The tonne ( or ; symbol: t) is a unit of mass equal to 1000 kilograms. It is a non-SI unit accepted for use with SI. It is also referred to as a metric ton to distinguish it from the non-metric units of the short ton (United States ...

purchased on the

Dalian Commodity Exchange The Dalian Commodity Exchange (DCE) () is a Chinese futures exchange based in Dalian, Liaoning province, China. It is a non-profit, self-regulating and membership legal entity established on February 28, 1993. Dalian Commodity Exchange trades in ...

) and subtract the value of the soybeans (e.g., in

USD The United States dollar (symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...

bushel A bushel (abbreviation: bsh. or bu.) is an imperial and US customary unit of volume based upon an earlier measure of dry capacity. The old bushel is equal to 2 kennings (obsolete), 4 pecks, or 8 dry gallons, and was used mostly for agric ...

purchased on the

Chicago Board of Trade The Chicago Board of Trade (CBOT), established on April 3, 1848, is one of the world's oldest futures and options exchanges. On July 12, 2007, the CBOT merged with the Chicago Mercantile Exchange (CME) to form CME Group. CBOT and three other exch ...

): :Crush Margin = Soybean Meal x 80% + Soybean Oil x 18.3% – Soybeans This requires making two conversions—from bushels to metric tons and from USD to CNY. The unit of the crush margin is CNY/mt.

Similar spreads

The crush spread is similar to other processing or refining spreads such as the

crack spread Crack spread is a term used on the oil industry and futures trading for the differential between the price of crude oil and petroleum products extracted from it. The spread approximates the profit margin that an oil refinery can expect to make by ...

used in the oil industry, the

spark spread The spark spread is the theoretical gross margin of a gas-fired power plant from selling a unit of electricity, having bought the fuel required to produce this unit of electricity. All other costs (operation and maintenance, capital and other financ ...

between natural gas and electricity, or the white sugar versus raw sugar spread in the sugar market.

References

{{DEFAULTSORT:Crush Spread Wikipedia articles incorporating text from the Congressional Research Service Derivatives (finance)