Biodiesel Makers Could Get New Hedging Tool

John Davis

CMEBiodiesel producers could get a new trading instrument that will help them hedge against fluctuations in the price of feedstocks and the actual fuel.

Biodiesel Magazine reports
that if a new trading instrument proposed by the Chicago Mercantile Exchange gets approved by the U.S. Commodity Futures Trading Commission, green fuel makers could hedge both feedstocks and biodiesel production in a more liquid market with a single swap contract that ties a soybean oil futures contract with a heating oil futures contract:

John Stotts, director of agricultural trading for Infinium Capital Management LLC, explained that while a biodiesel swap does exist, “the volume and open interest are next to nothing. It looks like the ethanol market did five or six years ago.” Infinium has become more active in the ethanol markets in the last few months, he added, and is closely watching the development of the new tools for biodiesel.

With biodiesel futures nonexistent and the available swaps thinly traded, many producers have turned to hedging their biodiesel production through the heating oil market, which is used globally as a proxy for biodiesel because of the very high correlation in the two markets. While not quite as large as the soybean or corn markets, the heating oil futures market is more liquid than soybean oil futures. “You have a lot of participants in the heating oil market,” Stotts explained. “From the crude side, there are distillers and big oil that have a lot of participation—it’s definitely more robust in open interest and traded volume.”

Swaps give producers a cleaner hedge because they tie soybean oil futures contracts to heating oil futures contracts. In addition, swap contracts are listed monthly, as opposed to eight contracts for soybean oil or seven months listed for soybeans.