Corn Crush Spread

CORN CRUSH SPREAD
CORN AS A
COMMODITY
Corn is among the most versatile and complex grains in the world In many parts of the world, it is known as maize Corns uses ranges from making the feed for livestock, to the corn syrup used in our processed foods and beverages Corn is also being increasingly used to produce ethanol With 270 million metric tons of corn produced annually in the U.S. alone, corn could be considered the most important grain crop on the planet With so much acreage devoted to corn, this adaptable grain has clearly become a staple in the diets of people throughout the world
FACTORS
DETERMINING
PRICE
OF
CORN
Prices are determined by the interaction of the supply and demand functions Historically, corn prices have also been influenced by government agricultural policies Many seasonal, cyclical, and fundamental factors affect the corn price; for example: corn prices are typically lowest at harvest and trend higher during the year as storage, interest, and insurance costs accumulate over time
Supply factors for Corn: 1. Acreage under cultivation: The amount of farmland in which corn is cultivated effects supply 2. Weather & climatic conditions: 3. Government policy: Government policies, like agricultural subsidies etc. effects supply 4. Yeild: Corn yields increased from 74.1 bushels per acre in 1965 to 132.2 bushels per acre in 2007
Demand factors for Corn: 1. Food use 2. Seed use 3. Industrial use
ETHANOL TIMELINE
Ethanol became a popular fuel during world war II. The lead phase out period in the early 80s. Series of laws passed in early 80s. In 1997, US auto manufactures began mass production of flex-fueled vehicles, which could run on gasoline and on blends. The Environmental Protection Agency recommended that MTBE use should be phased out nation-wide. The RFS has been increased to require13.2 billion gallons by 2012 and 15 billion gallons by 2015 from corn based ethanol aloneand to a total of 36 billion gallons by 2022 coming from all renewable fuels
In 2012 approx. 14 billion gallons of ethanol was produced. Ethanol accounted for approx. 25% of all US motor fuel. Refinery capacity utilization
Ethanol production requires just2/3 of each bushel of corn. The remaining 1/3 is fed to livestock in the form of distillers grains. Greenhouse gas reductions between 30 and 49 percent compared to gasoline.
THE
TERM CORN CRUSH
Physical process - the process of converting corn into the byproducts of ethanol and distillers dried grains (DDGs). Calculation process - a dollar value quoted as the difference between the combined sales values of the products (ethanol and DDGs) and the cost of corn.
CALCULATION
OF THE SPREAD
Corn is traded in dollars and cents per bushel Ethanol in dollars per gallon DDGs in dollars per short ton
Differences in units of the above requires conversion of all into (cents per bushel) unit
CALCULATION
OF THE SPREAD
When a bushel of corn weighing 56 pounds is processed for ethanol, the conventional result is 2.8 gallons of ethanol and 17 pounds of DDGs. Therefore, to convert prices into cents per bushel, we need to do the following:-
CONVERSION OF PRICES INTO CENTS

PER BUSHEL Corn: No conversions required Ethanol: 2.8 gallons of Ethanol = 2.8 x price of ethanol DDGs: 17 lbs/2,000 lbs per short ton = .0085 x price of DDGs
EXAMPLE
Calculate the corn crush spread based on the following values: December Corn futures: $3.59 per bushel (5,000 bushels) December Ethanol futures: $1.76 per gallon (29,000 gallons) December DDG futures: $105.00 per short ton (100 short tons)
CALCULATION
Step 1 Convert Prices into dollars per bushel:
Ethanol: $1.76 x 2.8 DDGs: $105 x .0085
= =
$4.928 per bushel $0.893 per bushel
Step 2 Subtract the cost of corn from the combined sales value of the products:
Ethanol + DDGs ($4.928 + $0.893): Corn Corn Crush
$5.821 $3.590 $2.231
CORN CRUSH SPREAD
TRADING STRATEGY IN THE CRUSH SPREAD
THANK
Name Supriya Gunthey Sangini Zaveri Vilojan Daniel Aruttam Biswas Rishabh Bhandari Aditya Doshi Rushabh Shah
YOU
Roll No. 102 135 98 92 89 100 126

Corn Crush Spread

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Corn Crush Spread

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CORN CRUSH SPREAD

TERM CORN CRUSH

CONVERSION OF PRICES INTO CENTS

Step 1 Convert Prices into dollars per bushel:

Ethanol: $1.76 x 2.8 DDGs: $105 x .0085

$4.928 per bushel $0.893 per bushel

Ethanol + DDGs ($4.928 + $0.893): Corn Corn Crush

$5.821 $3.590 $2.231

CORN CRUSH SPREAD

TRADING STRATEGY IN THE CRUSH SPREAD

Roll No. 102 135 98 92 89 100 126

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