Background of your client:

Glycine Workshop is a small family-owned soybean processing plant that processes soybean into soybean meal and soybean oil. Soybean is one of the most volatile types of grains as a commodity. The yield is highly affected by the weather conditions, either too dry or too wet would not be ideal for crops. Glycine Workshop is expected to yield about 400 million pounds of soybean oil per year. This amounted to almost 1.2 million tonnes (approximately 42.5 million bushels) of soybean as the raw product, which meant roughly a cost of $600 million per year at current prices. The manager of Glycine Workshop- Mr. Glycine, was unaware of the existence of hedging when he started the business in 2010. However, in the last two years, soybean price has increased dramatically, impacting the businesss cash flow to purchase soybeans as a raw product (as seen in figure 1). With the current market condition, Mr. Glycine is worried about the stability of the business. After reviewing the inventory, Mr. Glycine expects to buy 0.4 million (approximately 14.2 million bushels) of soybean in November 2022.

About the business outputs:

Soybean meal can be manufactured by crushing the soybeans, and a by-product of this process is soybean oil. Soybean meal is commonly used for livestock feeding, as it has high protein and low amino acid levels. Therefore, we would expect the prices of soybean, soybean meal, and soybean oil to be highly related, and these three products are usually referred to as the soybean complex. Assume that for Glycine Workshop, based on their equipment and technology, they can process 100 bushels of the soybean into 2.4 short tons of soybean meal and 1100 pounds of soybean oil.

1)

Is there any significant price correlation between the business inputs and outputs in the next few months? Will that affect the business hedging decision? Explain in detail.