Crush Spread

Soybeans are processed into meal used mainly in feed and oil used in food, fuel and other products. A processor buys beans and sells outputs, so its gross revenue depends on both product prices while its raw-material cost depends on the beans.

The CME Group reference guide defines the crush value as combined sales value of the products less raw-soybean cost and notes that cash and futures markets both use the value, which supports the margin concept without proving the economics of any particular plant. A processor worried about a lower margin can hedge by taking positions designed to lock or stabilise the relationship between output and input prices.

The direction of the futures trades depends on whether it is hedging a planned physical crush or expressing a view on a spread, so always map each leg to the underlying purchase or sale. A trader with no physical beans can speculate on the spread: a position resembling a crush may gain if product prices rise relative to bean cost, but it can lose if the relationship moves the other way, and leverage and margin calls add cash risk.

A physical calculation starts with expected output quantities from one bushel of beans, multiplies meal pounds by the meal price per pound and oil pounds by the oil price per pound, then subtracts bean cost per bushel. The yield assumptions and measurement units must be explicit.

Futures contracts do not all use the same unit, since soybeans may be quoted per bushel, meal per short ton and oil per pound, so a naive subtraction of the three displayed prices produces a meaningless number. The spread varies with harvest conditions, demand for animal feed and vegetable oil, biofuel policy, logistics and processing capacity.

A plant with high maintenance costs can lose money even when the market spread looks attractive, because the gross value is only one line in a fuller operating budget. Crushing yields can also differ by bean quality and equipment, and a standard product-output assumption may not match a facility's actual extraction, so use historical plant yields to test the hedge ratio.

Basis risk arises when local physical prices differ from the futures benchmark, as a plant may buy beans at a regional premium or sell oil under a specific supply contract. The exchange spread may therefore move differently from the plant's realised margin.

Timing must align too, since beans may be purchased this month and meal and oil delivered later, and a futures spread with mismatched contract months can respond to storage and seasonal factors instead of the intended processing margin. Cash settlement and margin requirements can precede physical sale proceeds.

Treasury must reserve liquidity for variation margin even if the hedge is designed to protect eventual earnings, because a profitable expected physical trade does not pay today's clearing call.