Sunday, March 10, 2019

Week 10 - The Crush Spread

THE CRUSH SPREAD

Crush spreads most often gives good signal of the futures price trend of a commodity. The crush is quoted as the difference between the combined sales value of soybean meal and oil and the price of soybeans. When a commodity is the product of refining another raw commodity, the refining spread between two commodities often indicates the direction of demand and supply.

At the start of this week, March contract for Monday (4th March, 2019), the crush spread for turning soybeans into meal and oil was at around 98 cents per bushel and at the end of the week the crush spread was at the 96 cents per bushel. This tells us a lot about the demand for soybeans and soybean products that trade on the CME. First, it tells us that a bumper crop increased inventories of both soybeans and soybean products, thus, causing prices to fall. Second, it tells us that the economics of processing soybeans into soybean products deteriorated over the week. Lastly, since the price difference is very narrow, the narrow spread occurs when the price of Soybean futures rises relative to the combined sales price of Soybean Oil and Meal futures. When this occurs, the spread declines. This means that, if traders anticipate same narrow crush spread for the coming week, they will buy Soybean futures and sell Soybean Meal and Soybean Oil futures.

Even though the price of the overall crush spread fell, processing raw soybeans into soybean oil was profitable on its own while meal processing was not. China, a huge consumer of soybean oil given the nation's massive population supported the price of soybean oil as they consumed and built inventories of the soybean product for the future.



 SOURCES
https://www.cmegroup.com/education/courses/introduction-to-agriculture/grains-oilseeds/understanding-soybean-crush.html



No comments:

Post a Comment