Welcome to the Friday edition of FutureSource.com's Fast Break.
Today's author is John Walsh, President of Walsh Trading. John started
his career in the futures industry in 1986 working for well-known trader
Willard Thiesen. From there, John worked in different positions, most
notable at Continental Grain in the futuresand options division. John
will trade all markets, but concentrates his efforts in the agricultural
sector. His trading methodology is based on fundamentals and a
personally designed technical system. [more] |
Complimentary Audio Commentary from Walsh Trading!
Walsh Trading provides intraday audio market comments right over your computer! 27 different times a day Walsh brokers share their insight and market comments in an audio format from the Walsh Trading website. The majority of markets and market sectors are covered, including breaking news. Sign up here for this great service from Walsh Trading!
|
CRUSH RELATIONSHIPS
This article is written as a follow up to the article dated August 25, 2004: Spreads. It is important to understand the soybean crush when trading the soy complex. This relationship is paramount as it is, in my opinion, what ultimately drives the flat price direction of the complex.
THE CRUSH SPREAD
"The spread is defined as buying one futures contract, and selling a different, but related futures contract." Specifically, when trading the crush spread, one will buy soybeans and sell its respective products, the soybean meal and soybean oil. This is what is referred to as being crushed. If one buys the soybean meal or the soybean oil and sells soybeans, that is what is referred to as being reversed crushed. Soybeans alone have relatively little value. The value of soybeans is the fact that when crushed, the products have great value globally. Soybean meal is of value to the farms that raise chicken and hogs. Soybean meal
is rich with protein and is fed to these animals to fatten them up. Soybean oil is of value across an array of industries. Primarily, soybean oil is used in food as one of many available edible oils. Soybean oil is also being used in a mixture to create an alternate source of energy to compete with crude oil. These uses and others of the products give soybeans their value.
WHO TRADES THESE RELATIONSHIPS
Trading the crush offers great opportunities for all. However, those involved besides the speculator, would of course be the large commercials and processors. These processing companies actually crush the physical bean and sell the products soybean meal and soybean oil to make their profits.
The processors are companies such as ADM and Cargill to name a couple. They will buy soybeans from the farmer at a given time and a set price. Their objective is to process or turn these beans into meal and oil. The difference between what the processor pays for the beans and what the products are sold for is referred to as the crush margin.
ESSENTIAL QUESTIONS
When trading the crush, it is important to ask yourself one question, what is the marketplace crushing for? Which product is there the greatest demand for, and why? If one can answer this question and understand the given fundamentals that ultimately move the market, it will then be possible to profit from trading the crush.
|
A
Word From a Fast Break Sponsor
Advertise With Us
FUNDAMENTALS AFFECTING THE CRUSH
There are innumerable scenarios that may cause this relationship to move. The individual products also have their own relationships, such as demand related to: food demand, industrial demand, and feed demand. These changes are dynamic and can be very protracted which therein lies the opportunity. It is important to see a major shift or change occurring and predict which product will become the leader. A great example of this is looking at the global picture for edible oils. The world
as a whole has several choices when determining what edible oil to purchase. Competing oils such as canola oil and palm oil have their own fundamentals at play and will affect each in its own way. Determining where global demand will attract to is a key ingredient in discerning the relationships between the edible oils. Anyone who follows our research may realize that we currently believe there is a major shift underway, and that soybean oil may be on the verge of a significant price appreciation. This thought moves us into individual relationships in the crush, soybean meal and soybean oil as a percentage of the crush. Breaking this relationship down further will lead to a relationship
view rather than two different commodities.
CRUSH CONVERSION
The crush relationship is based specifically on one 60-pound bushel of beans. From the 60-lb bushel, a crusher can extract approximately 48 pounds of soybean meal and 11 pounds of soybean oil with approximately 1 pound of waste. These numbers may vary lightly from year to year, depending on growing conditions. There in lies the opportunity for price fluctuations, and relationship fluctuations.
In order to figure out the gross processing margin, we need to convert the soybean meal and soybean oil into a price per bushel. Here is essentially how and why we do that.
1) Soybean Meal: The soybean meal contract is traded in dollars per ton (100 ton contract). We need to convert this into dollars per bushel.
Conversion Factor: 2000 lbs (per ton) = 0.022 x price of soybean meal
2) Soybean Oil: The soybean oil contract is traded in cents per pound (60,000 pound contract). We are again going to convert this into dollars per bushel.
Conversion Factor: 11 lbs (oil per bushel) x price of soybean oil
3) Soybeans: No conversion is required
|
A
Word From a Fast Break Sponsor
Advertise With Us
CALCULATION
Price of Soybean Meal (SM) * 0.022 + Price of Soybean Oil (BO) *11 - Price Of Soybeans
This equation gives us the gross processing margins. Upon this, profitability or a lack of profitability a processor will expand or contract his operation in a given year.
EXAMPLE
Soybean Meal: $175.00 x 0.022 = 3.850
Soybean Oil: $ 0.185 x 11 = 2.035
Soybean Meal + Soybean Oil = 5.885
Now, subtract the price of Beans: 5.68
Crush Margin: 0.2050 Twenty & Half cents per bushel profit
In order to make a positive assessment of where prices are going and why, I will look at what area I feel will push the markets in the coming months. That is the soybean oil.
|
A
Word From a Fast Break Sponsor
Advertise With UsNow You Can Learn Swing Trading Techniques in Just Days with Personal Help from a Trading Pro
Here's your chance to discover swing trading strategies and methods with free personal training from swing trading instructor Scott Hoffman, a commodity trading advisor with 17 years of experience in the futures industry. You will also receive a complimentary trial subscription to "Swing Trader's Insight". For immediate acceptance and instant access to your complimentary swing trading course and trial subscription - including all the tools, information, education and daily e-mail reports to assist you in improving your trading skills and make you more aware of market opportunities, please go here. |
KEY FUNDAMENTALS TO WATCH
A key factor coming down the pipe is the ever-growing idea of having an alternate source of energy in America. Governmental agencies will grow ever weary of relying on foreign sources of energy. Biodiesel, which has been used in Europe for nearly 40 years, will become a source of energy that potentially replaces the need for petroleum (may take a decade). Biodiesel is a blend between processed, raw, soybean oil and petroleum. This will become a feature conversation in the coming
year(s).
Asian Rust Fungus: This is a disease that will effect soybeans and cause the plant to either die or dramatically decrease the potential yield of the bean. As you may or may not know, according to Oster Dow Jones News, USDA investigations this past winter have shown that the Asian Rust Fungus (Previously unheard of in the United States) has been found in test fields across the delta area (Southeastern states) of the U.S. So far, there is no panacea or "cure-all" for this virus. If a soybean plant becomes infected with the virus, yields will be affected. There are treatments for this virus in the form of spraying chemicals on the plants to try and
stunt the spread and strength of the virus. Three to four sprays for each crop are required to effectively do the job and will add approximately 30 to 40 cents per bushel of beans. Increasing the cost to grow the soybean plant will in effect increase the price of the products that are made from crushing the soybean.
|
About
the Author
Background: John Walsh started his career in the futures industry in
1986 at Barnes and Company working for well-known trader Willard
Thiesen. From there, John worked in different positions, most notable at
Continental Grain in the futures and options division.
Trading Approach: John will trade all markets, but concentrates his
efforts in the agricultural sector, more specifically in the relationships revolving around the soybean crush. His trading methodology is based on fundamentals and a personally designed technical system.
|
For
Our Fast Break Readers
Complimentary Audio Commentary from Walsh Trading!
Walsh Trading provides intraday audio market comments right over your computer! 27 different times a day Walsh brokers share their insight and market comments in an audio format from the Walsh Trading website. The majority of markets and market sectors are covered, including breaking news. Sign up here for this great service from Walsh Trading!
|
Disclaimer
The Commodity Futures Trading Commission has asked us to also advise you that trading futures is not without risk. While there is opportunity for incredible wealth building, there is also the risk of losing even more than you invested. Of course, that's not unlike most other businesses. But informed traders are the best traders! Opinions expressed by Fast Break authors are not those of FutureSource.
|
Look to identify protracted opportunities in the market and become consumed with attempting to catch a percentage of the overall move. Please refer to your Walsh Trading broker for specific daily insights.
-John Walsh
|
Looking For a Broker?
Did you know that FutureSource has a Broker Search Page, designed to connect you to the broker that best suits your needs?
Check it out!
|
|
|
