What is a Crush Spread?
The crush spread refers to converting soybeans into the by-products of soybean meal and soybean oil.
The spread ratio is buying ten soybeans and selling 11 soybean meals plus nine soybean oil contracts (10:11:9).
This price difference represents the gross profit margin of soybean processors.
BREAKING DOWN Crush Spread
A crush spread is a trading strategy that involves taking a long position on soybean futures and a short position on soybean oil and meal futures. The system may also be a reverse crush spread, which takes a temporary place on soybean futures and a lengthy post on soybean oil and meal futures.
By simultaneously purchasing soybean futures and selling soybean meal futures, the trader is attempting to establish an artificial position in processing soybeans, which the spread creates. Using the crush spread, the trader assumes the processing costs of soybeans are undervalued. If this is true, the space will increase, and the trader will make money by buying soybeans which will go up in price. At the same time, they will sell soybean oil and meal, which will go down in price.
The reverse spread is also accurate. Here, the trader assumes the processing costs of the soybeans were overvalued. Using the reverse crush spread will make money by selling soybean futures which decrease, and buying soybean oil and meal futures, which will increase in value.
Since the spread relationship between the futures will vary over time, traders can gain directional exposure to the movements.