Hedging Risks with Asian Biodiesel

John Davis

The makers of biodiesel in Asia are taking steps to make sure they aren’t burned by the drop in oil prices. Biodiesel production has been pretty profitable for them when oil has pushed above $70 a barrel, but this Reuters story in the Hong Kong-based The Standard gives some advice on how the operations can stay profitable now that oil has dropped… sometimes below $50 a barrel.

“They should hedge the feedstock components on one side, then as crude prices go up, the margin and cost effectiveness of biodiesel tends to look more attractive,” said Tom James, chair professor at the University of Petroleum and Energy Studies in India.

“They then want to hedge against a sudden and sustained drop in crude prices, probably through some derivatives options on crude oil or gas oil or gasoline prices.”

It looks like biodiesel makers in Asia are facing some of the same issues farmers and biodiesel producers in the U.S. are facing… feedstocks prices rising with rising demand. The Asians have had to get away from some of the palm oil usually used for biodiesel. In this earlier post, we talked about how China had developed a rapeseed (canola) that produced a record 54.7% oil output… producing a feedstock hedge for that country.

Biodiesel, International