Spreads and Relative Value · Futures Trading Guide
Processing spreads compare the value of outputs with the cost of inputs. They describe a gross relationship, not the processor’s final profit.
Begin with the production process
A crack spread links crude oil to refined products. A crush spread links soybeans to soybean meal and oil. These relationships help describe processing economics, but operating expenses, transport, financing, quality and actual production yields also matter. A positive quoted spread does not prove that a particular plant is profitable.
Work through a refinery example
For a hypothetical three two one crack calculation, assume crude costs $70 per barrel, gasoline $2.00 per gallon and distillate $2.20 per gallon. Convert products using 42 gallons per barrel. Two barrels of gasoline plus one of distillate are worth $260.40. Three barrels of crude cost $210. The gross difference is $50.40 across three input barrels, or $16.80 per barrel, before processing costs.
Keep soybean units explicit
A conventional illustrative crush conversion uses 44 pounds of meal and 11 pounds of oil per bushel of soybeans. At $300 per short ton of meal and 40 cents per pound of oil, output value is $6.60 plus $4.40, or $11 per bushel. If beans cost $10, the gross spread is $1 per bushel. Actual contract ratios and processing yields require separate checks.
Distinguish the hedge from speculation
A processor with exposure to shrinking output margins may sell product futures and buy input futures. A speculator expecting expansion may take the reverse. Confirm quotation signs, maturity alignment, contract quantities and all leg fees. A physical yield assumption does not remove basis risk, and an attractive historical spread may reflect disrupted inventories rather than a temporary mispricing.
Try it yourself
Gasoline is quoted at 250 cents per gallon. What is its value in dollars per barrel using 42 gallons?
Show the worked answer
First convert 250 cents to $2.50. Multiplying by 42 gives $105 per barrel. Multiplying 250 by 42 without converting cents would be wrong.
Further reading
- CME Group: Introduction to crack spreads
- CME Group: Crack spread conversion calculator
- CME Group: Soybean crush spreads
Educational material. Prices, margins and strategy examples are hypothetical unless explicitly identified as contract specifications. They are not trade recommendations. Futures losses can exceed deposited collateral. Product terms and eligibility vary by venue and jurisdiction.
