The creation of a futures contract for DDGS offers a new risk management tool that livestock feeders and ethanol producers should evaluate for future use.

The contracts announced in February by CME Group will provide the opportunity for both ethanol and livestock feeding industries to hedge against adverse price moves in distillers grains markets, livestock marketing specialist, Darrell Mark said.

"The creation of the futures contract is exciting for the industry," Mark said. "Now, both ethanol producers and livestock feeders can more effectively hedge their gross profit margins."

Not only can livestock feeders and other buyers protect against future price increases in distillers grains by using such a futures contract, but feeders also can complete a spread or "crush" hedge to protect their feeding margins, Mark said.

For example, now a cattle feeder can lock in fed cattle sales price, feeder cattle input costs, corn prices and distillers grain prices through simultaneously trading these respective futures contracts.

Similarly, the ethanol industry can lock in distillers grain prices by taking short positions in the distillers dried grains futures contract, he said. However, it also could be used to protect profit margins or the spread between ethanol fuel prices and distillers grains as revenue sources and corn and natural gas prices as major inputs.