Study guide
4.2 Inter-Commodity Spreads, Processing Spreads (Crush, Crack, and Spark)
Series 3 - National Commodity Futures Examination Exam
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1 Chapter 1: Futures Trading Theory & Market Structure
1.1 Commodity Exchanges, Futures Contracts, and Specifications 1.2 Price Discovery, Cash vs. Futures Markets, and Convergence 1.3 Basis Dynamics: Contango, Backwardation, and Carrying Costs 1.4 Exam Structure, Futures vs. Securities, and Market Roles
2 Chapter 2: Margins, Order Execution, and Account Operations
2.1 Initial, Maintenance, and Variation Margin Calculations 2.2 Daily Mark-to-Market, Settlement Procedures, and Price Limits 2.3 Order Types, Fill Priorities, and Floor vs. Electronic Execution 2.4 Customer Account Opening, Discretionary Accounts, and Statements 2.5 Position Limits, Position Accountability, and Bona Fide Hedging Exemptions 2.6 Delivery Notices, EFPs, Exercise, and Assignment
3 Chapter 3: Hedging Principles, Basis Risk, and Calculations
3.1 Short Hedging Principles and Commercial Risk Management 3.2 Long Hedging Principles and Commodity Input Price Locking 3.3 Basis Risk, Strengthening vs. Weakening Basis, and Net Effective Price 3.4 Hedge Ratios, Contract Selection, and Cross-Hedging Dynamics 3.5 Interest-Rate Analysis and Financial Futures Hedges 3.6 Currency, Stock Index, and Municipal Cross-Hedges
4 Chapter 4: Spread Trading Mechanics and Processing Spreads
4.1 Intra-Market (Calendar) and Inter-Market Futures Spreads 4.2 Inter-Commodity Spreads, Processing Spreads (Crush, Crack, and Spark)
5 Chapter 5: Speculative Trading, Technical Analysis, and Risk Control
5.1 Long and Short Speculation Mechanics, Financial Leverage, and Liquidation 5.2 Technical Analysis, Chart Patterns, Trendlines, and Fundamental Supply/Demand 5.3 Risk Control, Stop-Loss Placement, and Position Sizing
6 Chapter 6: Options on Commodity Futures
6.1 Fundamentals of Futures Options: Calls, Puts, Strike Prices, and Exercise Mechanics 6.2 Option Premium Valuation: Intrinsic Value vs. Time Value Dynamics 6.3 Options Payoff Profiles, Breakeven Analysis, and Hedging/Speculative Strategies 6.4 Option Quotations, Delta, and Return on Equity 6.5 Vertical, Calendar, and Arbitrage Option Spreads
7 Chapter 7: Regulatory Authorities, Registration, and Member Firm Requirements
7.1 Legal Framework: Commodity Exchange Act (CEA) and CFTC Oversight 7.2 NFA Self-Regulatory Organization, Membership, and Registration Categories 7.3 Associated Person (AP) Registration, Proficiency Standards, and Branch Office Supervision 7.4 FCM and IB Operations, Order Records, and Reporting
8 Chapter 8: Customer Protection, Segregation, Disclosure, and Compliance Rules
8.1 Customer Protection: Account Approval, Risk Disclosure Document (Rule 1.55), and Know Your Customer 8.2 Segregation of Customer Funds, Part 30 Foreign Futures, and FCM Net Capital Requirements 8.3 NFA Rule 2-29 (Promotional Material & Advertising Requirements) and Performance Disclosure 8.4 CPO/CTA Disclosure Documents, Pool Rules, CFTC Anti-Fraud, AML, and NFA Arbitration Procedures 8.5 NFA Disciplinary Process and CFTC Enforcement
4.2 Inter-Commodity Spreads, Processing Spreads (Crush, Crack, and Spark)
Key Takeaways Explain This Topic AI
Inter-commodity processing spreads reflect commercial conversion margins between raw input commodities and refined end-products.
A common board-crush approximation converts 1 bushel (60 lbs) of soybeans into about 44 lbs of meal, 11 lbs of oil, 4 lbs of hulls, and 1 lb of waste; the standard board ratio is 10:11:9.
The Petroleum Crack Spread benchmark uses a 3:2:1 ratio (3 barrels Crude Oil vs 2 barrels Gasoline + 1 barrel Heating Oil), expressed in dollars per barrel.
Putting on a crush or crack spread involves buying raw inputs and selling refined outputs to lock in processing margins; reverse spreads do the opposite when margins contract.
The Spark Spread calculates gas-fired electric power generation margins as Electricity Price per MWh minus (Heat Rate × Natural Gas Price per MMBtu).
Last updated: August 2026
4.2 Inter-Commodity Spreads, Processing Spreads (Crush, Crack, and Spark)
Inter-commodity spreads involve simultaneous long and short positions in different, but economically related, commodities traded on the same or different exchanges. When two commodities share a direct production relationship—where one raw commodity is processed into refined end-products—the trade is known as a processing spread .
Series 3 candidates must master three key processing spreads: the Soybean Crush Spread , the Petroleum Crack Spread , and the Spark Spread .
1. Inter-Commodity Spreads (General)
Inter-commodity spreads capitalize on price relationships between substitute products or commodities subject to shared supply/demand drivers.
Classic Examples:
Corn vs. Wheat Spread: Corn and wheat compete as livestock feed inputs. When wheat prices drop close to corn prices, livestock feeders substitute wheat for corn, driving wheat demand up and corn demand down until traditional price ratios restore.
Feeders vs. Live Cattle (Cattle Crush): Buying Feeder Cattle futures and Feed Corn futures while selling Live Cattle futures to lock in cattle feeding margins.
2. The Soybean Crush Spread
The soybean crush spread models the profit margin of commercial soybean processors (crushers) who purchase raw soybeans and process them into two derivative products: soybean meal (used for high-protein livestock feed) and soybean oil (used for cooking oil, food manufacturing, and renewable biodiesel). +-----------------------+
- | Raw Soybeans (BU) |
- +-----------+-----------+
- |
- v
- [ Commercial Crush Facility ]
- |
- +-------------------+-------------------+
- | |
- v v
- +-------------------+ +-------------------+
- | Soybean Meal (44#)| | Soybean Oil (11#) |
- | (Protein Feed) | | (Vegetable Oil) |
- +-------------------+ +-------------------+
- Standard Yield Conversion Factors
One bushel of raw soybeans weighs 60 pounds . When crushed, one bushel yields approximately:
- 44 lbs of Soybean Meal
- 11 lbs of Soybean Oil
- 4 lbs of Soybean Hulls
- 1 lb of waste/moisture loss
- Contract Units & Price Quotations
Futures contracts for the soybean complex trade on the Chicago Board of Trade (CBOT) with distinct pricing units:
- Commodity CBOT Contract Size Pricing Unit
- Soybeans (ZS) 5,000 bushels Cents / Dollars per bushel (e.g., $12.00/bu)
- Soybean Meal (ZM) 100 short tons (200,000 lbs) Dollars per short ton (e.g., $350.00/ton)
- Soybean Oil (ZL) 60,000 pounds Cents per pound (e.g., 50.00 cents/lb)
- Gross Processing Margin (GPM) Calculation
To calculate the processor's Gross Processing Margin (GPM) in cents or dollars per bushel, all product prices must be converted to a per-bushel basis:
- Meal Value ($/bu) = Meal Price per Ton * (44 lbs / 2,000 lbs) = Meal Price * 0.022
- Oil Value ($/bu) = Oil Price in $/lb * 11 lbs
- GPM ($/bu) = [Meal Value ($/bu) + Oil Value ($/bu)] - Soybean Price ($/bu)
Step-by-Step GPM Calculation Example:
- Soybeans: $12.00 / bushel
- Soybean Meal: $350.00 / ton
- Soybean Oil: $0.50 / lb (50.00 cents/lb)
- Calculate Meal Value: $350.00 * 0.022 = $7.70 per bushel
- Calculate Oil Value: $0.50 * 11 = $5.50 per bushel
- Calculate Total Meal-and-Oil Value: $7.70 + $5.50 = $13.20 per bushel
- Calculate GPM: $13.20 - $12.00 = $1.20 per bushel (or 120 cents/bu)
- Board Crush Ratios & Trades
To hedge processing margins on the exchange, commercial crushers trade contracts in precise ratios to match physical yields. The standard CBOT Board Crush ratio is 10:11:9 :
- 10 contracts of Soybeans (50,000 bushels = 3,000,000 lbs)
- 11 contracts of Soybean Meal (1,100 tons = 2,200,000 lbs meal approx. 73.3% yield)
- 9 contracts of Soybean Oil (540,000 lbs oil approx. 18% yield)
- Putting On the Crush vs. Reverse Crush
Processor's margin hedge: Buy Soybean futures and sell Meal and Oil futures in the appropriate ratio. This position offsets a narrowing cash processing margin: higher input prices or lower output prices hurt the physical business but benefit one or more hedge legs.
Long crush spread (speculative widening trade): Sell Soybean futures and buy Meal and Oil futures . It profits when output values rise relative to raw beans and the quoted crush margin widens.
Short or reverse crush spread (speculative narrowing trade): Buy Soybean futures and sell Meal and Oil futures . It profits when the quoted margin narrows. The same futures directions can serve a commercial processor as a hedge, but the economic objective is different: offsetting cash-business risk rather than betting on the quoted spread.
3. The Petroleum Crack Spread (3:2:1 Ratio)
The petroleum crack spread reflects the refining margin of commercial oil refineries that purchase crude oil and "crack" it into refined petroleum products—primarily gasoline and distillate fuel (heating oil / diesel).
The Standard 3:2:1 Ratio
The industry standard benchmark tested on the Series 3 is the 3:2:1 Crack Spread :
3 Barrels of Crude Oil (CL) yield 2 Barrels of RBOB Gasoline (RB) and 1 Barrel of Heating Oil (HO) .
Contract Units
NYMEX futures contracts are standardized so that 1 futures contract equals 1,000 barrels (or 42,000 gallons, since 1 barrel = 42 gallons):
- 3 contracts NYMEX Crude Oil (3,000 barrels)
- 2 contracts NYMEX RBOB Gasoline (84,000 gallons = 2,000 barrels)
- 1 contract NYMEX Heating Oil (42,000 gallons = 1,000 barrels)
- Crack Margin Formula
Because gasoline and heating oil futures trade in dollars/cents per gallon, prices must be multiplied by 42 to convert to dollars per barrel:
- Gasoline Price ($/bbl) = Gasoline Price ($/gal) * 42
- Heating Oil Price ($/bbl) = Heating Oil Price ($/gal) * 42
- Crack Margin ($/bbl) = [(2 * Gasoline Price/bbl) + (1 * Heating Oil Price/bbl) - (3 * Crude Price/bbl)] / 3
Step-by-Step Crack Calculation Example:
- Crude Oil: $75.00 / barrel
- Gasoline: $2.30 / gallon
- Heating Oil: $2.60 / gallon
Convert Refined Products to $/bbl:
- Gasoline: $2.30 * 42 = $96.60 / bbl
- Heating Oil: $2.60 * 42 = $109.20 / bbl
Calculate Total Refined Product Output (3 bbls):
(2 * $96.60) + (1 * $109.20) = $193.20 + $109.20 = $302.40
Calculate Total Raw Crude Input (3 bbls):
3 * $75.00 = $225.00
Calculate Net Margin for 3 Barrels:
$302.40 - $225.00 = $77.40
Calculate Crack Spread per Barrel:
- $77.40 / 3 = $25.90 / barrel
- Standard Crack vs. Reverse Crack Trades
Refiner's 3:2:1 margin hedge: Buy 3 Crude Oil futures , sell 2 Gasoline futures , and sell 1 Heating Oil futures . This offsets deterioration in the cash refining margin.
Long 3:2:1 crack spread: Sell 3 Crude Oil futures and buy 2 Gasoline plus 1 Heating Oil futures to speculate on a widening product-over-input margin. The opposite position is a short crack spread and benefits from narrowing.
4. The Spark Spread
The spark spread measures the theoretical gross margin of a gas-fired electric power generation plant. It represents the difference between the wholesale price of electricity (output) and the cost of the natural gas fuel required to generate that electricity (input).
Heat Rate and Efficiency
The key efficiency factor in calculating spark spreads is the plant's Heat Rate —the amount of heat energy (measured in British Thermal Units, Btu) required to generate one kilowatt-hour (kWh) or megawatt-hour (MWh) of electricity.
Natural Gas futures (NYMEX) trade in $/MMBtu (million Btu).
Electricity futures trade in $/MWh (megawatt-hour = 1,000 kWh).
A heat rate such as 7.0 to 8.0 MMBtu per MWh is an illustrative range, not a universal contract constant; use the plant heat rate supplied in the question.
- Spark Spread Formula
- Spark Spread ($/MWh) = Electricity Price ($/MWh) - [Heat Rate (MMBtu/MWh) * Natural Gas Price ($/MMBtu)]
Example Calculation:
- Electricity Price: $65.00 / MWh
- Natural Gas Price: $4.00 / MMBtu
- Plant Heat Rate: 7.5 MMBtu / MWh
- Spark Spread = $65.00 - (7.5 * $4.00) = $65.00 - $30.00 = $35.00 / MWh
To lock in this generation margin, the power plant operator buys Natural Gas futures (input) and sells Electricity futures (output).
Processing Spreads Comparison Table
Processing Spread Raw Input Derivative End-Products Standard Trading Ratio Pricing Metric
Soybean Crush Soybeans (ZS) Soybean Meal (ZM) & Soybean Oil (ZL) 10 : 11 : 9 (Beans : Meal : Oil) Cents / Dollars per bushel (GPM)
Petroleum Crack Crude Oil (CL) RBOB Gasoline (RB) & Heating Oil (HO) 3 : 2 : 1 (Crude : Gas : Heat Oil) Dollars per barrel