Gross Processing Margin (GPM)
What Is Gross Processing Margin (GPM)?
The gross processing margin (GPM) is the difference between the cost of a raw commodity and the income it creates once sold as a completed product. The gross processing margin is impacted by supply and demand. The prices for raw commodities vacillate, making an always showing signs of change spread between the raw inputs and the handled products.
Investors, traders, and examiners are able to trade futures in view of the price difference between a raw commodity and the end result it produces. For instance, a trader can go long on the commodity and short on the completed product of it.
Grasping Gross Processing Margin (GPM)
The gross processing margin can go from liberal to thin on a seasonal basis, as well as from unforeseen climate occasions or regional turmoil in an area that is a huge producer of a commodity. At the point when the spread for the gross processing margin enlarges, implying that the pricing of the outputs is surpassing the cost of the inputs, that is generally viewed as a signal for production capacity expansion.
The gross processing margin generally increments for one of two reasons. One, the input commodity sees an overabundance, conceivably due to overproduction or essentially karma, and hence the price debilitates fundamentally. Two, the price for the handled products rises due to expanding demand. For the wellbeing of the whole value chain, investors generally need to see the GPM expanding for the last option reason as it addresses more sustainable industry growth.
Gross Processing Margin (GPM) and the Type of Processor
The gross processing margin for two businesses utilizing a similar raw commodity can be totally different relying upon the final result mix. This applies to everything from soybeans to crude, yet understanding in terms of animals and meat is most straightforward. Two pork processors are working with a similar raw commodity, however on the off chance that one basically sells whole cuts frozen and different sells a scope of value-added products including bacon, frankfurters, and marinated flanks, then their gross processing margins will probably mirror that product variance.
The frozen wholesaler has lower costs of production yet comparative procurement costs. The value-add centered processor puts more cost and time into the meat yet ought to see a lot higher premium upon sale.
Commodity Specific Names for Gross Processing Margin (GPM)
The gross processing margin might go by an alternate name contingent upon the commodity it is depicting. For instance, the GPM for oil is called the crack spread in a reference to the refining system of cracking hydrocarbons into petroleum products.
Basically, the crack spread is the price difference between a barrel of crude oil and the subsequent petroleum products. The crack is the industry term for breaking up crude oil into its parts products which incorporate propane, heating fuel, gas, and distillates like rocket fuel and oil.
For soybeans and canola, it's called the crush spread on the grounds that soybeans are crushed to create oil and dinner. This is frequently utilized by traders to oversee risk by consolidating soybean, soybean oil, and soybean dinner futures into a single position. Joining separate positions into one is likewise finished with crack spreads.
Trading Gross Processing Margin (GPM)
We should utilize the case of crack spreads to make sense of trading GPM. crack spreads are covering the oil refinement margins and as such are intensely impacted by international issues. If there somehow managed to be a reduction in oil supply due to regional hazards, the price of crude oil would rise. This would influence the crack spread by restricting the spread, or margin.
A trader would determine that the price of the refined product, in this case, petroleum, is higher than the crude price, the margin is viewed as positive. In any case, traders expect that crude prices will fall whenever stability is recovered in the region, so they will place their trades accepting the price of crude will fall, and the spread will augment.
The Bottom Line
Gross processing margin (GPM) is the margin coming about because of the subtraction of the raw product's cost from the completed product's sale price. This margin is in a consistent state of transition due to the economic tensions of supply and demand. This price action causes GPM an appealing play for certain traders who to comprehend the commodities they are trading, and how to benefit from the spread.
Highlights
- GPM is utilized by traders to exploit price inconsistencies between the raw form of a commodity and the completed great.
- A genuine illustration of GPM is the cost of oil compared to the income earned from selling fuel.
- The gross processing margin (GPM) is the difference between the cost of a raw commodity and the income created once the commodity has been sold as a completed product.
- Every commodity has its own terminology for GPM; for example crack spread, crush spread, and spark spread.
FAQ
What Is the Difference Between Gross Processing Margin and Gross Profit Margin?
Gross processing margin is the difference between a raw commodity and the price of its done product when sold. Gross profit margin is the amount of money left over from product sales in the wake of deducting the cost of goods sold (COGS). COGS can likewise be alluded to as "cost of sales" and incorporates the entirety of the costs and expenses straightforwardly connected with the production of goods.
Will Gross Processing Margin Be Too High?
Albeit gross processing margins change ceaselessly, a high GPM can be dangerous for both the business dealing with the commodity itself and the trader. Nonetheless, large swings in GPM can be advantageous for strategic positioning, particularly while hedging long-term positions.
