June 15, 2010

In the first month CME Group offered DDGS 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 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 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 start might be that prices just do not match up with current market prices. To establish a price for DDGS, 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 DDGS contracts to protect them from a drop in price and the corn contracts to protect them from a rise in price. The DDGS contract is the piece that was missing in the ethanol producers' risk management puzzle."

Currently, the US ethanol industry produces more than 33 million short tonnes of DDGS worth about US$4 billion with nearly 20% 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."