Crush spread
Also written Crush spreads
An inter-commodity spread specific to the soyabean complex — buying soyabean futures and selling soyabean meal and soyabean oil futures in a set proportion — used to lock in a processor's crushing margin.
In plain language
A soyabean processor buys raw soyabean and "crushes" it into two products: soyabean meal and soyabean oil. Its profit is the gap between the cost of the raw bean and the combined value of the two products it produces.
That gap, too, can be traded in the futures market directly. That trade is the crush spread — soyabean against soyabean meal and soyabean oil.
How it works
The crush spread specifically refers to the soyabean complex: the spread trader buys soyabean futures and sells soyabean meal and soyabean oil futures, in a specific proportion, to lock processing margins. It is an inter-commodity spread, meaning the legs sit on different but economically linked commodities, rather than on different expiry months of the same commodity as in an intra-commodity (calendar) spread.
It shares its economic logic with the crack spread in the energy complex — both are raw-material-versus-output spreads designed to isolate a processing margin from the outright direction of the raw commodity's price.
A worked example
A soyabean crushing plant buys raw soyabean and sells the resulting meal and oil. To protect this quarter's crushing margin in advance, it buys 50 tonnes of soyabean futures at Rs 45,000 per tonne (Rs 22,50,000) and sells the matching soyabean meal and soyabean oil futures, together worth Rs 24,00,000 (all figures illustrative) — locking in today's implied processing margin of Rs 1,50,000.
Over the quarter, soyabean prices rise to Rs 47,000 per tonne, pushing up the plant's physical purchase cost by Rs 1,00,000 (50 tonnes x Rs 2,000). Meal and oil prices rise by less, adding only Rs 50,000 to physical sale revenue — so the plant's actual crushing margin is squeezed by a net Rs 50,000. Its futures position gains exactly that Rs 50,000: the long soyabean leg gains Rs 1,00,000 as soyabean rises, while the short meal-and-oil leg loses Rs 50,000 as those prices also rise, for a net futures gain of Rs 50,000 that offsets the squeeze on the physical business.
Why NISM asks about it
Chapter 5 introduces crush spread immediately alongside crack spread, in the discussion of inter-commodity spread types, right after the workbook's worked guar seed–guar gum inter-commodity spread example. Expect a question naming the commodity family each spread belongs to, and one testing that both are inter-commodity, not intra-commodity, spreads.
Common exam traps
- Crush spread is oilseeds (soyabean, meal, oil); crack spread is energy (crude and refined products). Keep the commodity families straight.
- The trade involves three legs — soyabean, soyabean meal and soyabean oil — not two, unlike a simple two-leg spread such as guar seed versus guar gum.
- It locks a processing margin, not a directional soyabean price bet. A trader expecting soyabean prices to simply rise or fall should use an outright futures position instead.
Check yourself
1.What are "crush spreads" and "crack spreads"?
- a)Crush spreads relate to the soyabean complex (buy soyabean, sell soyabean meal and soyabean oil in a specific proportion) to lock processing margins; crack spreads relate to the energy complex (crude oil versus products extracted from it) to lock refining margins
- b)Crush spreads relate to crude oil refining; crack spreads relate to oilseed processing
- c)Both are intra-commodity calendar spreads in the same underlying
- d)Both are option strategies combining calls and puts on the same commodity
Show the answer
Answer: (a) Crush spreads relate to the soyabean complex (buy soyabean, sell soyabean meal and soyabean oil in a specific proportion) to lock processing margins; crack spreads relate to the energy complex (crude oil versus products extracted from it) to lock refining margins
"CRUSH SPREADS: It specifically refers to SOYABEAN COMPLEX whereas the spread trader BUYS SOYABEAN AND SELL SOYABEAN MEAL AND SOYABEAN OIL IN A SPECIFIC PROPORTION TO LOCKING PROCESSING MARGINS."
"CRACK SPREADS: This strategy specifically refers to the ENERGY COMPLEX, where trading happens BETWEEN CRUDE OIL AND PETROLEUM PRODUCTS extracted from it. It helps LOCK REFINING MARGINS."
Both are types of inter-commodity spread: "a long position in one commodity and a short position in a different but economically related commodity."
Why the other options are wrong:
- (b) swaps the two.
- (c) They are inter-commodity (different but related commodities), not intra-commodity calendar spreads.
- (d) They are futures spreads, not option combinations.
Memory hook: you crush beans and crack crude.
Where this is taught
Free preparation for NISM Series XVIRelated terms
- Buying a spreadAn intra-commodity spread trade — buying the near-month futures contract and simultaneously selling the far-month contract — taken when the near month looks underpriced or the far month overpriced relative to fair value.
- Crack spreadAn inter-commodity spread strategy in the energy complex — trading crude oil futures against futures on the petroleum products refined from it — used to lock in a refiner's margin.
- Inter-commodity spreadA long futures position in one commodity and a short position in a different but economically related commodity for the same month — such as guar seed against guar gum — to trade the gap between them.
- Seasonality effectThe recurring swing in agricultural commodity prices between the sowing season, when spot supply is tight, and the harvest, when it becomes abundant — the main cause of backwardation in agri commodities.
- Spread tradeA paired buy-and-sell trade across two related futures contracts, such as a calendar spread, which exchanges exclude from index price computation as it is not a bonafide single-side trade.
- Naturally longThe position every business holds in its finished goods — it gains when their prices rise and loses when they fall, which is why finished goods are hedged by selling futures.
- Naturally shortThe position every business holds in its raw materials — it must buy them in future, so a price rise hurts it exactly as a short position would, and a long hedge cancels the exposure.