CME Globex Defined Spread Between CBOT Brazilian Soybean (SAS) Futures and CBOT Soybean (ZS) Futures

Background

CME Group launched the CBOT FOB Santos Soybeans Financially Settled (Platts) futures contract on September 21, 2020. The FOB Santos contract is a regional price discovery and price risk management tool that is often traded in conjunction with the benchmark CBOT Soybean futures contract. To facilitate trade between the two contracts, CME Group is launching a defined spread on October 2* that allows market participants to easily spread the price differences between the FOB Santos and Soybean futures contracts on the CME Globex electronic trading platform.

*Subject to CFTC approval

The underlying futures contracts

CBOT Soybean futures (ZS) are the global benchmark for pricing and managing risk for soybeans. One ZS futures contract represents 5,000 bushels of US grown soybeans. ZS is priced in cents per bushel with a tick size of ¼ of a cent ($0.0025) per bushel.

ZS price examples – cents per bushel
1400.00
1400.25
1400.50
1400.75
1401.00

In this example, a traded price of 1400.25 represents 1400.25 cents or $14.0025 per bushel.

CBOT FOB Santos Soybeans Financially Settled (Platts) futures (SAS) are a regional product for pricing and managing risk for soybeans exported from South America. One SAS contract represents 136 metric tons of Brazilian origin soybeans. SAS is priced in US dollars per metric ton with a tick size of 20 cents per metric ton.

SAS price examples – dollars and cents per MT
527.00
527.20
527.40
527.60
527.80
528.00

In this example, a traded price of 527.20 represents $527.20 per metric ton.

Converting between bushels and metric tons

A complication for spreading SAS versus ZS is that SAS is quoted in metric tons (weight) while ZS is quoted in bushels (volume). 

One bushel of soybeans weighs 60 lbs. There are 2,204.62 pounds in one metric ton, so there are (2204.62 / 60) = 36.7436667 sixty-pound bushels in one metric ton. Thus, multiply the ZS contract price by 36.74 to convert the price from bushels (price per 60 lbs.) to metric tons (price per 2204.62 lbs). For example, a ZS price of 1400.25 cents per bushel is $14.0025 per bushel. The same price in metric tons is 14.0025 * 36.74 or $514.45185 per metric ton.

Tick per Bushel ($/bu.) Conversion Factor Value per Metric Ton ($/MT)
0.0025 36.74 0.09185
0.0050 36.74 0.18370
0.0075 36.74 0.27555
0.0100 36.74 0.36740
0.0125 36.74 0.45925
0.0150 36.74 0.55110
0.0175 36.74 0.64295
0.0200 36.74 0.73480

Examples of spread values

Export ready soybeans in South America typically trade at a premium to ZS futures. Thus, the cash and paper markets typically quote the spread between SAS and ZS in bushels and define the spread as SAS minus ZS. 

For example, suppose July ZS futures are trading at 1400.25 cents or $14.0025 per bushel and July SAS futures are trading at $527.40 per metric ton. To calculate what this spread represents, first the SAS futures price needs to be converted to bushels since the cash market quotes this spread in bushels. Since 36.74 bushels is equivalent to one metric ton, one metric ton is equivalent to (1 / 36.74) 0.027218 bushels. So multiplying the July SAS futures ($527.40) by 0.027218 results in a per bushel price of $14.3547732 per bushel. Thus, the current outright July SAS minus ZS spread is $14.3547732 minus $14.0025 = $0.3522732 or 35.3522732 cents per bushel.

The CME Globex defined spread

The CME Globex defined spread between SAS and ZS trades in cents per bushel with a tick size of ¼ cent ($0.0025) per bushel and represents SAS minus ZS. 

Spread Quote
35.00
35.25
35.50
35.75
36.00

There will be no implication into or out of the SAS or ZS outright markets. 

SAS has the same expirations as ZS plus a February expiration. Spread months are configured as:

Spread Month Underlying SAS Contract Underlying ZS Contract
Jan Jan Jan
Feb Feb Mar
Mar Mar Mar
May May May
Jul Jul Jul
Aug Aug Aug
Sep Sep Sep
Nov Nov Nov

Since the spread is defined as SAS minus ZS, selling the spread results in short positions in SAS and long positions in ZS while buying the spread results in long positions in SAS and short positions in ZS.

ZS is the benchmark contract, so spread assignments anchor to ZS and the assigned SAS leg is calculated. Given the conversion from bushels to metric tons for the SAS leg, SAS assignment will not be on tick. Since there is no conversion in the ZS price, the assigned ZS leg will always be on tick.

Selling the spread will result in the following assignments:

Sell 1 Jul SAS-ZS spread

Assign 1 LONG position in Jul ZS at the last traded Jul ZS futures price

Assign 1 SHORT position in Jul SAS at:

     ((Traded Spread + Last Traded ZS Price) * 36.74)

The SAS assignment will be rounded to the nearest 0.001. The assigned SAS price will be off-tick from the outright market where the tick size is $0.20.

Example

Following the earlier example where the last ZS traded price is 1400.25 cents or $14.0025 per bushel and SAS is trading at $527.40 per metric ton. The outright spread at these two prices is $0.3522732 or 35.22732 cents per bushel. Since the SAS-ZS spread is quoted in ¼ cent increments, the closest tradeable values will be 35.00 and 35.25 cents per bushel. The outright spread will always lie between two tradeable spread values. 

If the 35.25 cent per bushel SAS-ZS spread trades, the assignments for the seller would be:

1 LONG Jul ZS contract at 1400.25 ($14.0025)

1 SHORT Jul SAS contract at ((0.3525 + 14.0025) * 36.74) = $527.4027 = Rounded to $527.403

Conclusion

Many market participants trade SAS as a spread to ZS. Given that the two products trade in different units, no CME Globex defined spread was available. Thus, the only was to trade the spread on CME Globex was to trade the two outright markets. With the launch of the new SAS-ZS defined spread, market participants will be able to trade the spread outright on CME Globex and receive assigned positions in the two outright markets that closely matches the value of the traded spread.1


References

  1. Assignments can differ from the actual traded spread by at most $0.0005 per metric ton or $0.068 per contract because the SAS assigned leg is rounded to the nearest 0.001.

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