Soyabean Crush

There was this very interesting question posted to me by a gentleman who had asked me a question based on one of my earlier posts on EFP.

I had an opportunity to work on a similar problem when I was in Indore,this was my answer,comments as usual welcome.

Dear Srinivasan,

The query is related to Soybeans Hedging.

The scenarios is:

Supplier "A" in Latin America wants to sell 65,000 MT of Soybean seeds. Processor "B" is into Crushing the Soybeans and selling principal by-products such as Soymeal and Soy Oil.

1. Supplier "A" is already short on CBOT with equivalent Future lots (say 475 Lots) at say 13.5 $ per bushel.
2. Procesor "B" negotiates with Supplier "A" to buy the Soybeans at say CBOT + 20 cents
3. Supplier "A" transfers these lots to Processor "B". Thereby, Supplier "A" selling the Soybeans at (13.5$ + 20 cents) per bushel.
4. Processor B, curshes the seeds and sells the Soymeal and Soy Oil at existing market prices.
5. Whenever a physical sale for the Soymeal is made, Processor buy equivalent number of Soybean lots, to close out the long positions.

My query here is to understand, how is the hedge working for the processor "B" when the underlying commodity bought is Soybean seeds, but the sale is of Soymeal and Soy Oil.

It would be of great help, if you could help me understand the above scenario.

Thank you Srinivasan.

Best regards,
Jinendra

Firstly i dont think there can be a 100% hedge,not wanting to sound pompous or philosophical in case of your question in such cases it is better that you track the BCX price rather than the soyabean price.

BCX is synthetic in nature meaning Soybean Crush prices (BCX) are synthetically generated using CBOT soybean, soybean oil and soybean meal futures prices.
The result of the soybean crush calculation is then rounded to the nearest quarter of a cent. This is not a tradable futures contract. It is intended for informational purposes only.
Soybean Crush prices (BCX) are synthetically generated using CBOT soybean, soybean oil and soybean meal futures prices. The result of the soybean crush calculation is then rounded to the nearest quarter of a cent. This is not a tradable futures contract. It is intended for informational purposes only.

The Synthetic Soybean crush is based on CBOT Soybean, Soybean Oil, and Soybean Meal futures prices; in order to calculate the crush, prices of Soybean Oil and Soybean Meal need to be converted into dollars and cents per bushel.

To convert prices:
Soybeans: No conversion required
Soybean Meal: 44 lbs. (48% protein meal) / 2,000 lbs (per ton) = 0.022 x price of meal
Soybean Oil: 11 lbs. (oil per bushel) x price of oil

To calculate the Crush:
[(Price of Soybean Meal ($/short ton) x .022) + Price of Soybean Oil (¢/lb) x 11] – Price of Soybeans ($/bu.)
For example, if August Soybean Meal, Soybean Oil and Soybean futures prices were at $297.20/ton, $.3340/pound and $9.565/bushel, respectively, the Crush would be calculated as (297.20 x .022) + (.3340 x 11) - 9.565 = $.6474/bushel.
The Synthetic Soybean crush values are rounded to the nearest $0.0025/bu and displayed in eighths, the same way as soybean futures quotes. Therefore, the sample crush value of $.6474 would be displayed as 64'6 (64 3/4).

Cheers