Cross-Hedging Distillers Dried Grains: Exploring Corn and Soybean Meal Futures Contracts

Ethanol mandates and high fuel prices have led to an increase in the number of ethanol plants in the U.S. in recent years. In turn, this has led to an increase in the production of distillers dried grains (DDGs) as a co-product of ethanol production. DDG production in 2006 is estimated to be near 11 million tons. A sharp increase in ethanol production and thus DDGs is expected in 2007 with an increase with the number of ethanol plants. As with most competitive industries, there is some level of price risk in handling DDGs and no futures contract available for this co-product. Ethanol plants, as well as users of DDGs, may find cross-hedging DDGs with corn or soybean meal (SBM) futures as an effective means of managing risk. Traditionally, DDGs are hedged using only corn futures.