The Hedging Pressure Hypothesis and the Risk Premium in the Soybean Reverse Crush Spread

This article develops a theory of multiproduct hedging which serves to formalize Keynes’s hedging pressure hypothesis that the need to attract speculative capital to match hedgers’ trades creates a difference between the futures and expected maturity price. The authors test the theory empirically in the context of the soybean complex which has speculators and hedgers in soybeans, soybean meal and soybean oil. The focus is on the crush spread because it is unlikely that hedgers will want to make simultaneous trades on the opposite side of soybean crushers in all three markets. The findings reveal that there is a significantly positive return to speculators for providing this liquidity.