The soybean crush spread calculates how much profit a soybean processing plant can generate by crushing a bushel of soybeans into soybean meal and oil. The profit margin is that profit number divided by the revenue which is the price of the meal and oil outputs. I prefer to look at profit margin as opposed to just profit as it adjusts for large market fluctuations over time and is more meaningful from a business and analysis perspective.
I was not able to come up with any tradable theories based on this analysis. I added live cattle and lean hogs to try and figure out what’s going on with soybean meal reaching multi-year highs this week. It appears that move is correlated with live cattle reaching new highs. Soybean meal is rising while soybean oil is falling. Soybeans are pretty flat although slowly rising. I will continue to monitor this spread for clues about future soybean, soybean meal, and soybean oil movements. If anyone has any insights on crush spreads, please share.
Damn.. I have never thought of this kind of analysis... It kinda shows that price made a clear shift of balance.
Skipper86
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@akikostas, Yes, when the crush margins broke out, the input costs (soybeans) started going up to try and bring margins back down to historical norms. The same thing happens with the crude oil crack spread. When diesel and gasoline go up, crude tends to go up to bring the margins back down to normal range. My reason for analyzing profit margin spreads is to help come up with theories on the direction of the underlying contracts, primarily the soybean and crude inputs which are very liquid. I'm either setting myself up to make a lot of money or waste a lot of time lol
akikostas
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@Skipper86, I couldn't explain this chart I calculated a few days ago and what to infer from it... So best guess from what you say is that Crude will increase, and not Diesel will drop.
Skipper86
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@akikostas, only thing you can really infer from it is that crude will outperform diesel, that could mean a lot of different things but I think the likely 2 scenarios are that crude goes up and diesel goes down or that both go up but crude goes up a lot faster
Skipper86
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Note: adding a 100* multiplier to the beginning of the formula corrects the vertical axis.