Executive summary

A processing margin is the value a transformation creates: the difference between the products that come out and the raw material that goes in. Refining crude into fuels (the crack spread), crushing soybeans into meal and oil (the crush spread), burning gas to make power (the spark spread) or coal to make power (the dark spread) are all the same idea. Traders hedge these margins and arbitrage when they get out of line.

In plain English

• Crack spread: value of refined products minus the crude they came from. A '3:2:1 crack' models 3 barrels of crude making 2 of gasoline and 1 of distillate.
• Crush spread: value of soybean meal + soybean oil minus the soybeans crushed to make them.
• Spark spread: power price minus the cost of the natural gas needed to generate it (adjusted by the plant's heat rate).
• Dark spread: the same for a coal-fired generator.

Why traders care

For a refiner, crusher or power generator, the margin — not the flat price of any single commodity — is the business. Because the inputs and outputs trade as futures, you can lock the whole margin by simultaneously buying the input and selling the outputs (or vice versa). When the margin is wide, it pays to run the plant and secure feedstock; when it turns negative, it pays to slow down or idle.

Operator connection

Blending and processing operations are the physical side of capturing a processing or quality margin. The biofuel-blending and concentrates examples in the core course are processing-margin trades executed at the cargo level: buy the cheaper input, transform it to spec, sell the dearer output.

Further reading

• CME Group — 'Introduction to Crack Spreads' and the Soybean Crush Reference Guide.
• U.S. EIA — 'An introduction to spark spreads' (power generation margins).
• CME Group — crack and spark conversion calculators.