CME launches DDG futures contracts

By Holly Jessen | April 15, 2010
Posted April 26, 2010

CME Group is offering a new Distillers Dried Grain (DDG) agricultural commodity futures contract. Trading began April 26 exclusively on CME Globex, the CME Group electronic trading platform.

"This contract should be a very useful risk management tool for the U.S. and world livestock feeding world and the ethanol processing world, just like the soybeans processing industry has enjoyed for 50 plus years," said Jerry Gidel, an analyst/broker for North America Risk Management Services Inc.

DDG futures are a physically delivered contract that will bring much-needed price discovery and price transparency to the market, according to CME. Particularly, this new product will enable customers to better manage their price risk in the feed, livestock, dairy, biofuels, grains and oilseed industries. In addition, DDG futures can be combined with corn and ethanol futures to establish the corn-for-ethanol crush margin.

Each contract is equivalent to 100 short tons of Distillers Dried Grains. Deliverable grades must include a minimum of 26 percent protein and 8 percent fat as well a maximum of 12 percent fiber content and 11.5 percent moisture content. Buyers can request DDGs with no more than 5 parts per million vomitoxin—however the testing for that is at the buyer's expense, the company said.

The benefits for ethanol producers is the ability for risk management through hedging of both inputs, corn and natural gas, and outputs, ethanol and DDGs—all of which are listed for trading at CME Group Exchanges. It will also be a helpful price risk management tool for livestock feeders, producers, dairy operations and feed manufacturers.

Currently, the U.S. ethanol industry produces more than 33 million short tons of DDGs, with a $4 billion market value and export levels of nearly 20 percent, according to CME. Supply of DDGs varies with the price of energy and corn, as well as the relationship between those two.

Delivery is based on rail junctions and can be made from any Exchange-approved production facility to any location specified by the buyer in the contiguous U.S., the company said. Deliveries will be based off Chicago for facilities east of the Mississippi River and based off Council Bluffs, Iowa, for facilities west of the Mississippi River. The DDGs don't have to be produced in the U.S. as long as the product meets contract specifications.