Slow start to distillers grains futures contract

By Holly Jessen | June 10, 2010
In the first month CME Group offered distillers dried grains (DDG) agricultural commodity futures contracts, things moved very slowly. Trading began April 26 exclusively on CME Globex, the CME Group electronic trading platform, and by May 19 there were only 11 contracts.

Jerry Gidel, an analyst/broker for North America Risk Management Services Inc., considered that disappointing and an "outrageously small" trading volume. To put that number in perspective, Gidel pointed out that on May 18, CME's total volume of corn contracts was 163,255 and total volume of ethanol contracts was 9,809. Even agriculture commodities like mini wheat had a total volume of 75 on that single day.

Jacquie Voeks, a senior market advisor for Stewart Peterson Group, said many, including her and her clients, are taking a wait-and-see approach. "Anytime you have an emerging market, you are going to have people that are going to sit back and watch, because they know the liquidity isn't there," she said.

Another reason for the slow star might be that prices just don't match up with current market prices. To establish a price for DDG, it will take bids and offers. "I sincerely hope the contract does gain momentum," Voeks said. "It offers an opportunity for the ethanol plants to do scenario planning, having the DDG contracts to protect them from a drop in price and the corn contracts to protect them from a rise in price. The DDG contract is the piece that was missing in the ethanol producers' risk management puzzle."

In addition, it's such a new offering that many are not yet aware of it. A call to Leonard M. Martin, owner of NutraAg LLC, a feed mill that frequently uses DDG, revealed that he wasn't even aware DDG were trading on CME. Provided the commodity is fluid in trading and has prices reflective of the market, Martin said the company will probably utilize the service.

DDG futures contracts are physically-delivered contracts equivalent to 100 short tons, according to the CME. 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. 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. 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.

Currently, the U.S. ethanol industry produces more than 33 million short tons of DDGs worth about $4 billion with nearly 20 percent being exported, according to the CME. The supply of DDGs varies with the price of energy and corn, as well as the relationship between those two. "This product will enable our feed customers to directly manage price risk of feed inputs that they haven't been able to before," said Tim Andriesen, CME Group managing director for commodities. "Using the distillers dried grain futures, along with our corn, natural gas and ethanol contracts, also allows real margin management for participants in the fast-growing ethanol sector."