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What is a Commodity-Product Spread?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 06 November 2016
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A commodity-product spread involves the purchase of a given commodity and a subsequent sale of products derived from commodities of the same type. Generally, these two transactions take place simultaneously. However, if there is a relatively small amount of time between the execution of the two transactions, the strategy is still considered to be a commodity-product spread.

It is also possible for a commodity-product spread to be conduced in reverse sequence. That is, the purchase of commodities may take place after the sale of products made with the same type of commodity. In both cases, there is generally no more than a thirty-day window in between the two transactions that compose the spread.

Under the broad classification of a commodity-product spread are a number of specialized spreads. One common transaction of this nature is known as the crack spread. Essentially, a crack spread is a commodity-product spread that has to do with commodities such as crude oil. An example of a crack spread would be the purchase of crude oil coupled with the sale of such products as heating oil or gasoline.

Another type of commodity-product spread is the crush spread. Crush spreads usually have to do with foodstuffs, such as corn or soybeans. Like all versions of the commodity-product spread, an investor may choose to purchase soybean futures and then sell any futures associated with soybean oil, meat substitutes made with soybeans, or dairy substitute products such as soy milk.

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The purpose of a commodity-product spread is to allow the investor to ride a commodity market that is currently experiencing an upswing. The purchased component will often be acquired at a good price, with the component sold earning a return that covers the cost of the acquired commodity futures contract. By watching the market and continually rolling over investments within the commodities market, it is possible to earn a substantial return using this strategy. In general, the application of a commodity-product spread is expected to carry a low risk in comparison to other investments.

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