Soybeans do not garner the same attention as some of their commodity counterparts, but their futures contracts are among the most traded in the hard asset world. One of the most popular methods for utilizing soybeans trades is through a “crush spread.”
What Are Crush Spreads?
A crush spread is a trade where a long position is take in soybean futures while simultaneous short positions are taken in soybean meal and soybean oil, the products that are derived from soybeans. This is sometimes known as a “processing margin,” as the trader is making a play on soybeans themselves and the byproducts that come from processing the commodity.
Generally, the spread is established when a trader feels that there is a mispricing. The crush spread will be positive, or profitable, if the spread between soybean futures and soybean meal and oil widens. Of course, if the spread between these commodities narrows, the trade will be negative and not profitable. Traders can also employ a reverse crush spread by shorting soybean futures and going long in soybean meal and oil futures.
Who Uses Crush Spreads?
Similar to crack spreads, crush spreads are utilized by hedgers and speculators. Hedgers are producers of the actual commodity, and use the trades to limit any losses that might occur from price volatility in the commodities. For example, if a producer employs a crush spread and the price of soybean meal and oil drop relative to soybeans, the losses that would be incurred by lower prices for the byproducts are softened by a profitable trade.
Speculators are those who look for what they believe is a mispricing in the market. Either utilizing a standard crush spread or a reverse spread, a speculator’s goal is to take advantage of the temporary mispricing in either commodity by turning a profit [see also Ultimate Guide to Soybean Investing].
The Bottom Line
A crush spread is a little more complex than a standard trade, and will likely not be utilized by the general public. It can be a powerful trade for those that understand its ins and outs, but should not be used by everyone.
Disclosure: No positions at time of writing.