What is a Crush Spread

A crush spread is an options trading strategy used in the soybean futures market. The general term for this is a gross processing margin. A soybean crush spread is often used by traders to manage risk by combining separate soybean, soybean oil and soybean meal futures positions into a single position.

The crush spread position is used to hedge the margin between soybean futures and soybean oil and meal futures. A crush spread is similar to a crack spread in the crude oil market in that it is multiple positions in a single category combined into one position.

BREAKING DOWN Crush Spread

A crush spread as a trading strategy involves taking a long position on soybean futures and a short position on soybean oil and meal futures. The strategy may also be a reverse crush spread which consists of taking a short position on soybean futures and a long position 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 the processing of soybeans, which the spread creates. Using the crush spread the trader assumes the processing costs of soybeans are undervalued. If this is true, the spread 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.

Hedging and Speculating Using Crush Spreads

A crush spread position is primarily used only by hedgers and speculators. Hedgers are people involved in the production of soybeans, soybean oil and soybean meal. Trading futures on the very products they are producing is a way of mitigating the risk that the cost of their products will go down. Hedgers balance the risk of taking a loss on the actual product sales by making money on the crush spread of the soybeans and processed soybeans. Since a crush spread strategy exposes overinflated processing costs by increasing the costs of soybean oil and soybean meal futures relative to the costs of soybean futures, hedgers presumably could influence a crush spread by maintaining processing costs.

Speculators are looking for mispricing in the market and will use a crush spread or a reverse crush spread to take advantage of mispricing of soybeans, soybean oil or soybean meal.