Question

Assume the following spot prices and that they equal the futures prices for September delivery.

Soybeans            $10.625 per bushel

Soybean Meal    $319.90 per ton

Soybean Oil        $.3798 per pound

a.       Calculate the gross profit margin (GPM) in dollars and percentage from crushing one bushel of soybeans.

b.       Does a bushel of soybean produce a greater amount of soy meal or soy oil? Quantify your answer.

c.       In looking at the prices above, note that the soybeans are substantially higher (about 3 X higher) than the price for a bushel of corn. Why (from a purely economic reason) would a farmer grow corn when soybeans command such a higher price?

d.       Describe the risk of a soybean processor who will be crushing 100,000 bushels in late September, and how they would hedge that risk with a 1-1-1 soybean crush spread. Quantify and describe the hedge in detail, i.e., long or short for each leg.

e.       Quantify the amounts the hedger above may be under or over-hedged with a 1-1-1 crush spread. Explain.

Answer 1

(a) Margin = Soybean Meal x 80% + Soybean Oil x 18.3% - Soybeans = $ 245.3645

Alternatively, use 20% instead of 18.3%, which gives us Margin = $ 245.3710

(b)

Say, The Soybean contract consists of 5,000 bushels, which is equivalent to approximately 136.1 metric tons. The Soybean Meal and Soybean Oil contracts are 10 metric tons each. Using the percentage formulas above, 136.1 mt of soybeans would yield 108.9 mt of soybean meal and 24.9 mt of soybean oil. Therefore, to do the crush on an approximate equivalent volume basis, for each contract of soybeans, we would have to sell 11 contracts of meal (a total of 110 mt) and 2 contracts of oil (20 mt). This would leave the crusher slightly over-hedged on the meal and underhedged on the oil.

Another example, : - Say, A more accurate estimate of the crush margin would be if the trader used 2 contracts of Soybeans (272.2 mt) and 22 contracts of Soybean Meal (220 mt) and 5 contracts of Soybean Oil (50 mt). Physically crushing 272.2 mt of soybeans should produce 217.7 mt of soybean meal and 49.9 mt of soybean oil.