Soybean Crush-1 - Lecture notes 20 PDF

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COMMODITY FUTURES AGEC 420 Elizabeth A. Yeager, Ph.D. Associate Professor

Department of Agricultural Economics

Agenda Topics Soybean Crush Readings  CBOT  Notes

- An Explanation of the Soybean Crush Spread on Soybean Crush

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Soybean Processing Soybean Oil

Soybeans

Processor

Video: From Pod to Plate

Soybean Meal

Soybean contract Soybeans: 5,000 bu. contract; Quoted as $/bu May 2019 @ 907’2  $9.07 ¼ /bu (min tick = ¼ c)

One bushel (60 lbs) of beans yields approximately:  11

lbs Soybean Oil  44 lbs Soybean Meal  3 lbs hulls, 1lb waste,

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Soybean Oil and Meal Contracts Soybean Oil 60,000 lb contract; Priced in c/lb e.g., May 2019 @ 30.26  30.26c/lb (min tick is .01c)

daily price limit of 2.5c/lb (=$1500/contract)

Soybean Meal 100 ton contract [1 ton = 2000 lb]; Priced as $/ton e.g., May @ 315.2  $315.20/ton (min tick is 10c) daily price limit of $20/ton ($2000/contract)

Gross Processing Margin (per bu.) Example (not “today’s” prices) Gross Processing Margin (GPM) = Revenue – Cost Oil Revenue Per Bushel of Beans (11lbs per bu.) = Price of Oil * 11 (divide by 100 to convert from cents to $)

With Oil @ 50.97.  oil revenue/bu = 50.97*0.11 = $5.61

Meal Revenue Per Bushel of Beans (44 lbs per bu) (44lbs/bu and 2000lbs/ton  1 bu produces 0.022 tons meal. (44/2000)

With Meal @ 454.80  meal revenue/bu = 454.80*0.022 = $10.01 With beans at 15.05/ bu  GPM = 5.61 + 10.01 – 15.05 = $0.57/bu

Formula: GPM/bu = Poil*0.11 + Pmeal*0.022 - Pbeans

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Exercise 

Calculate the crush using current CME prices

http://www.cmegroup.com/ Approximate

May



prices:

beans @ 9.0725; May oil @ 30.26; May meal @ 315.20

*CME (used to) quote a price on the crush spread price CME > View another product > Soybean crush (Not a tradeable contract. Provides data on settlements, specs, and margin, but no quotes.) 

Soybean processor’s risk 



 

Gross margin will fall if the price of beans rises and/or prices of oil and meal decline. But, using futures, the processor can lock in (hedge) their gross margin using a “crush spread”

Crush Spread (or “short the crush”) Buy soybean futures, simultaneously sell oil & meal futures

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Crush Spread – number of contracts 

 

Does a 1:1:1 combination of Bean, Oil, Meal contracts provide an adequate hedge? NO!

Why not? Because contract amounts don’t match each other Oil: 5,000bu beans  55,000lbs oil 



 Selling 1 oil contract (60,000lbs) per soybean contract purchased leaves the position net short oil (sold too much oil)

Meal: 5,000bu beans  220,000lbs meal 

 Selling 1 meal contract (200,000lbs) per soybean contract purchased leaves the position net long meal (sold too little meal)



1-1-1 spread would be net short oil, and net long meal.

Relative price moves – oil vs meal If oil and meal prices always move in he same direction – gains on one would tend to offset losses on the other BUT they don’t always move the same way. Example: lower demand for meal (e.g., avian influenza)  price of meal falls, price of oil increases. (Bad news if your hedge left you net short oil, net long meal). Similarly, higher demand for oil  Pmeal falls . Why? Illustrate.

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Crush Spread – number of contracts 

So, 1:1:1 beans:oil:meal has too much oil and too little meal 







Need fewer oil contracts, more meal contracts

Finding the correct ratio? In terms of oil: 1 bean contract “equivalent to“ 55/60 of an oil contract. Thus 60 bean contracts == 55 oil contracts. Similarly, 1 bean contract is equivalent to 22/20 of a meal contract. Thus 60 bean contracts == 66 meal contracts Correct ratio Approx.

Beans 60 10

Oil 55 9

Meal 66 11

Margin requirements 

 

Soybean Oil  $600 currently, going to $575 May 2019 Soybean Meal  $1,650 Soybeans  $2,350 currently, going to $2,240 March 2019



Margin for 10 bean, 9 oil, 11 meal would be $47,050



Traded as a spread – margin is $11,154

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Speculation & The Crush Spread 

Crush Spread (short the crush):  Buy

soybean futures, sell meal and oil

 to

lock in the processing margin (a hedge)  or, to bet on a reduction in margin (spec) 

Reverse Crush (long the crush)  Sell A

beans, buy oil and meal bet on a widening margin

Readings  Soybean

Crush

 CBOT,

An Explanation of the Soybean Crush Spread  Notes on Soybean Crush  Other

Spreads

 CME:

Intro to Cattle Feeding Spreads  CME Corn for Ethanol Crush  CME: Introduction to Crack Spreads

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Soybean crush calculation example beans @ 8.80; oil @ 31.00; meal @ 270.00 

Soybean Oil – 31.00 c/lb  oil



revenue per bushel = 0.11*(31.00) = $3.41

Soybean Meal – 270.00 $/ton  meal

revenue = .022*(270.00) = $5.94



Soybeans -- $8.80



Margin = $3.41 + $5.94 - $8.80 = $0.55/bu

Another example beans @ 4.50; oil @ 19.88; meal @ 136.20 

Soybean Oil -- 19.88 c/lb  oil



revenue per bushel = 0.11*(19.88) = $2.19

Soybean Meal -- 136.20 $/ton  meal

revenue = .022*(136.20) = $3.00



Soybeans -- $4.50



Margin = $2.19 + $3.00 - $4.50 = $0.69/bu

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