Before Thanksgiving break we took a short position in the 3:2:1 crack spread (bought 3 CL, and sold 2 RB and 1 HO of the next month). We'll make money on this position if the refining margin on crude oil declines - that is, we use this spread to hedge our refining margin if we are a oil refiner like VLO or TSO.

Today, we'll hedge another refining margin known as the crush spread. This is the margin when processing soybeans into soy meal and soy oil. A good introduction into the crush spread is `The Soybean Complex Spread: An examination of market efficiency from the viewpoint of a production process' by Johnson et al. (Journal of Futures markets, 1991).

** Note in the paper they are testing market efficiency with this trading strategy, but this strategy is often used to hedge and not speculate - though speculation is fine.

The long-term average is that one bushel of soybeans (60 lbs) crushes into 48 lbs of meal and 11 lbs of oil. Given CBOT contract sized this means we will use a 1:1:1 trade (one contract of each soybeans, meal, and oil) even though the exact relationship would be 1 soybeans to 1.2 meal and 0.915 oil.

To calculate the Gross Crushing Margin we'll use Eq 1 of the paper:

GCM = (FM*48)/2000 + (FO*11)/100 - FS

where
FM is the futures price of meal in \$ per ton
FO is the futures price of oil in in \$ per 100 pounds
FS is the futures price of soybeans in \$ per bushel
all futures are at tome t for delivery at time t+n.

Note on the ECBOT symbols for soybeans is ZS, meal is ZM, and oil is ZL.

EDIT: Using the following prices, ZS = (434.1*48)/2000+(50.42*11)/100-\$14.505  = \$1.4596

which is a margin as a percent of the cost of soybeans of \$1.4596/\$14.505 = 10.06%