Training: Agri – Soybean Crush Spread (information)

Short description

Master the dynamics of the gross processing margin of soybean crusher capacity.

Objective

The aim of this simulation is manifold, namely to master the hedging process of soybean crushing capacity, as well as to understand that there are different standard conversion ratios for traded crush spread futures contracts. This way, you’ll learn that the gross margin is dynamic and you’ll experience that hedging requires swift action in all legs.

Capacity

You act in the role of a (beans and products) trader at a commodity trading firm.
You act in the capacity of aggressor.

Task

Your task is to sell a crush spread to hedge your facility and to calculate the gross processing margin you have realised for your employer. Do this as follows:

Buy a futures contract concerning the input commodity (beans), and (simultaneously)
Sell short the futures contracts for the output commodity

This implies the following:

The long beans position implies an obligation to take delivery in time at the contract price.
The short oil and meal positions imply obligations to make delivery in time at the contract price.

You can also analyse three different facilities on the side, facing three different efficiency ratios, indicating the conversion ratios (standard conventions):

The 1 : 1 : 1 crush spread
The 1 : 1.1 : 0.9 crush spread
The 1 : 0.9 : 1.1 crush spread

Conclusion

At the end of the simulation, analyse your performance. See what you have done and when you have done this and whether it could have been optimised. This way, you learn and optimise your competences.