The CRUSH spread study is a futures transaction that parallels the process of producing bean oil (BO) and soymeal (SM) from soybeans (S). This study will only work with S, BO, and SM contracts on a daily chart.
The CRUSH study is similar to the CRACK spread used for crude oil. Soybeans are the raw material used to produce bean oil (BO) and soymeal (SM). However, the ratio for this spread is 1:1:1. One bushel of soybeans produces one unit of soymeal and one unit of bean oil. The products soybeans produce are measured in liquid and dry weights. However, the end result from processing soybeans into its chief products is a 1:1:1 ratio.
The basic calculation is a simple one that is made somewhat more complicated because the quantities are given in different units of mass, volume and price. Soybean contracts are quoted in cents per bushel, Bean Oil is quoted in cents per pound and Soymeal is quoted in dollars per short ton. Since the crushing process produces 11 pounds of oil per bushel of soybeans, this price is converted to cents per bushel by multiplying by 11. No price conversion is necessary because both trade in cents.
Soybean meal is quoted in dollars per short ton, a price conversion must be made (dollars to cents), then a mass conversion must be made (short tons to pounds) finally a conversion from mass to volume. First the price is multiplied 100 (dollars to cents,) next a short ton of Soybean meal is converted to pounds by dividing by 2000 (short tons to pounds,) finally, since the crushing process produces 44 pounds of soybean meal per bushel of soybeans, the price is converted to bushels by multiplying by 44. This is equivalent to multiplying by 2.2 (2.2 = 100/2000*44). This results in the following expression:
- %S * 1 + %SM * 2.2 * 1 + %BO * 11 * 1
The soybean crush spread represents the margin soybean processors might capture by using the futures markets to hedge their positions. Analyze this chart much like another spread chart. Do not forget seasonal factors that might influence the price spread.
You are looking for overvalued and undervalued market conditions. Find the predominant market trend. Watch for divergence between the products, soybean oil and soybean meal, and the raw material, soybeans. Processors try to maintain their margins in spite of market conditions and trends.
The same analysis theory for a CRACK spread applies to the CRUSH spread. If the spread for soybeans and its products (bean oil and soymeal) is narrow, the profit potential leans in the direction of the bean oil and soymeal contracts. This is a sign that the cost to process soybeans is too high to produce any appreciable profit.
The opposite is true, however, if a large span appears. The processors push to sell bean oil and soymeal to reap the profits. This aggressive push almost guarantees that the product prices will be forced down to meet the soybean prices.