What is soybean crush?

Soybean crush is the process of converting whole soybeans into two primary products: soybean meal and soybean oil. The crushing process involves:

• Cracking soybeans open to remove their hulls
• Rolling the de-hulled beans into thin flakes
• Soaking the flakes in a solvent to extract crude soybean oil, which is then refined
• Drying, toasting, and grinding the remaining flakes into soybean meal, a key ingredient in animal feed.

On average, crushing one ton of soybeans yields approximately 780 kg of soybean meal and 190 kg of soybean oil, a ratio of 78/19.

The role of soybean crush spread in the markets

The soybean crush spread, also known as the crush margin, is a concept used to define the processing revenue. It’s calculated as the difference between the combined value of the byproducts (soybean meal and soybean oil) and the cost of soybeans as a raw material. The crush margin is used as a measure of profitability for processors, helping them determine whether it’s financially advantageous to crush soybeans at any given time.

For example, if the prices of soybean meal and soybean oil are high relative to the cost of soybeans, the crush margin increases, which can encourage more soybean processing. When crush margins are low, on the other hand, processors may choose to scale back operations.

The soybean crush also plays a role in the agricultural and commodity markets:

• Soybean meal is a major component of livestock feed, so fluctuations in crush margins can influence feed availability and prices, which in turn, affects meat and dairy costs.
• Soybean oil is commonly used in cooking and food production, as well as manufacturing biodiesel, making it important in both food and energy markets.
• The crush margin is often considered by traders and speculators when trading commodity futures for hedging and risk management.

How to calculate the crush spread

The crush spread is calculated by adding the value of soybean meal and soybean oil, and subtracting the cost of raw soybeans from that result. Since these oilseeds commodities all trade in different units, they first need to be converted into a common unit before the crush can be calculated.

• Soybeans trade in bushels (1 bushel = 60 pounds)
• Soybean meal trades in tons (1 ton = 2,000 pounds)
• Soybean oil trades in pounds.

A single bushel of soybeans typically yields about:

• 44 pounds of soybean meal
• 11 pounds of soybean oil.

To calculate the crush spread:

• Convert soybean meal price: Soybean meal futures are priced per ton. To find the price per 44 pounds (the amount produced by one bushel of soybeans), multiply the meal price by 0.022.
• Convert soybean oil price: Soybean oil futures are priced per pound. To find the price for 11 pounds (the amount produced by one bushel of soybeans), multiply the oil price by 0.11.
• Combine meal and oil value: Add the converted meal price and oil price together to find the total revenue generated per bushel of soybeans.
• Subtract soybean price: Subtract the cost of one bushel of soybeans from the total revenue to determine the crush margin or spread.

Example calculation of crush spread

Consider that soybean futures are currently trading at the following prices:

• Soybeans: $11.85 per bushel
• Soybean meal: $321.5 per ton
• oybean oil: $38.7 per pound

To calculate the spread:

1. Convert the soybean meal price: $321.5 x 0.022 = $7.07
2. Convert the soybean oil price: $38.7 x 0.11 = $4.25
3. Add meal and oil values: $7.07 + $4.25 = $11.32
4. Subtract soybean price: $11.85 - $11.32 = $0.53.

In this example, the crush margin is 53 cents per bushel, representing the potential profit a processor could earn from crushing soybeans at these prices.

How do soybean meal and soybean oil contribute to the value of the crush?

Soybean meal and soybean oil are the byproducts of the crushing process. Their combined value determines the crush spread, or potential profitability of processing soybeans into these byproducts.

Soybean meal contributes the largest share to the crush spread. Because of its rich protein content, soybean meal is an essential component of animal feed, making it a high-demand product in the global livestock and poultry industry. Soybean oil is a versatile byproduct that’s used in cooking and biodiesel production, amongst other industrial applications.

Fluctuations in demand or prices for either of these byproducts can directly influence the crush margin. For example, increased demand for biodiesel may raise soybean oil prices, which can potentially increase the margin and make it more profitable to process soybeans. On the other hand, reduced demand for animal feed can lower the value of soybean meal and reduce profitability.

What are soybean futures, and how are they tied to the crush?

Soybean, soybean meal, and soybean oil futures, are financial contracts that allow buyers and sellers to agree on a future price of these commodities. Processors and traders use these futures to manage risks, such as rising soybean prices or declining prices for soybean oil and meal. This risk management is important in the soybean crush process as it can potentially help protect against financial losses.

In futures markets, the crush spread is a trading strategy that involves taking opposing positions in these futures to simulate the profit or cost of processing soybeans.

For example:

• Selling the crush involves selling soybean oil and soybean meal futures while buying soybean futures. This strategy is often used by processors to hedge against price volatility and secure a gross profit margin.
• Buying the crush, also known as the reverse crush, involves buying soybean oil and soybean meal futures and selling soybean futures. This strategy is typically used by traders when expecting the value of these byproducts to increase relative to raw soybeans.

By combining futures for soybeans, soybean oil, and soybean meal into a single position, the crush spread provides a way to hedge or speculate on the profitability of soybean processing.

What drives demand for soybean oil and soybean meal in international markets?

Most of the demand for soybean oil comes from the food and energy industries. Soybean oil is widely used in cooking, baking, and processed foods (where it’s often labeled ‘vegetable oil’. It’s also a key ingredient in biodiesel production. As more countries adopt renewable energy policies, global consumption and demand for soybean oil may also increase.

Soybean meal is an essential ingredient in livestock and poultry feed due to its high protein content. Demand for soybean meal increases with population growth and increased meat consumption. For example, when diets shift in certain countries to embrace more meat, demand for animal feed will also naturally increase.

How does soy crush affect hedging strategies for businesses?

The soy crush plays an important role in hedging strategies by allowing businesses to manage price risks associated with soybean production and processing. Trading futures and options on soybeans, soymeal, and soybean oil provides a way for these businesses to lock in prices for raw materials or processed products, which can potentially protect their profit margins from market volatility.

For example, a soybean processor can use a crush spread strategy to hedge against rising soybean prices or falling soybean meal and soybean oil prices. This involves taking offsetting positions in futures contracts to stabilize their costs and revenues. In another example, farmers and exports can use soy crush hedging to protect against potential losses from price fluctuations, providing greater financial stability and predictability in their operations.

How do crush margins influence commodity pricing strategies?

Crush margins can influence commodity pricing strategies by providing insight into the current profitability of processing soybeans into soybean meal and soybean oil. When crush margins are high, it suggests that processing soybeans into these byproducts is profitable, which can encourage processors to increase production.

More production of soybean meal and soybean oil could eventually lead to a higher supply of these byproducts in the market, which could potentially put downward pressure on prices. Traders may consider these price movements when adjusting their strategies to either hedge against potential price decreases or take advantage of market movements.

At StoneX, our agricultural market intelligence provides comprehensive coverage of soybean crush. Explore our agriculture market intelligence offerings.

The relationship between soy crush and risk management in trading

The relationship between soy crush and soybean risk management lies in using the crush spread as a strategy to protect against price fluctuations in the soybean market. Traders and processors combine futures positions in soybeans, soybean oil, and soybean meal to hedge against the risks of rising raw material costs of soybeans or declining prices for soy byproducts. This provides a way to potentially secure profit margins and protect against market volatility.

This material is for informational purposes only and should not be considered as an investment recommendation or a personal recommendation.