The Soybean Processing Decision
by Gerald Plato
Technical Bulletin No. (TB-1897) 43 pp, December 2001
The gross soybean processing margin (the gross return per bushel of soybeans processed) is the main decision variable that processors use in deciding when and if to make binding commitments to process soybeans on future dates. Understanding how processors choose processing margins for future processing dates from among those available on successive days may help to resolve the ongoing concern about the level of competitiveness in processing agricultural commodities. Processing returns are treated as being equivalent to the returns to a call option. This approach provides the opportunity to simulate processor choice of processing margin by evaluating the incentive of waiting for a larger processing margin versus the incentive of locking in the currently available processing margin for a future date. The approach captures the irreversibility of the decision to process soybeans. Once the decision is made to process soybeans it cannot be economically reversed because of the contractual penalties involved. Processing margins selected using evaluations of these incentives explained variation in soybean crush, whereas spot margins for the corresponding processing dates did not.
Keywords: Real option, option exercise, processing decision, processing margins, futures prices
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