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Crush spreads are strategies that make use of a dual transaction model associated with a particular commodity in order to maximize the opportunity for the establishment of a favorable position. Generally, the structure of a crush spread will involve the purchase of a futures position, while also arranging for the sale of products that can be produced with the use of those commodities. The idea is to create some artificial interest that in turn helps to increase the value of the purchased futures and yield a larger return on the investment.
One of the best examples of how a crush spread can work is illustrated by the use of the strategy with soybean futures. As the first step in the process, the investor will purchase these futures as part of a long-term investment strategy. At the same time, he or she will engage in the sale of futures options that have to do with products that can be made from soybeans. For instance, the investor would sell off futures that had to do with soybean oil, or vegetarian food products made with soybeans. Soybean meal futures are another possible type of futures that the investor would place on the open market for sale as part of creating the crush spread.
What this combination of the purchase of soybean futures while selling off futures that involve specific types of products made with soybeans is that it can create a spread in the value between the raw products and the finished products. Because the process can stimulate interest in the finished products and their associated futures options, the value of the raw product futures is likely to increase. Thus, the investor can help to correct which may be viewed as a disparity between the prices of the different futures options and still generate additional revenue at the same time.
It is important to note that investors will not necessarily seek to create a crush spread at random. The relative prices of the futures themselves is often a factor in determining if some degree of mispricing is currently present in the market. If there is a perception of mispricing on the various futures of either the raw products or the finished products, implementing a crush spread is often seen as correcting the pricing situation while still stimulating interest and trading activity that ultimately benefits everyone involved.
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