CME creates DDGs futures contract

Feb 19, 2010
by DTN

CME Group Inc. will launch futures contracts for distillers dried grains (DDGs), a byproduct of corn ethanol production that can be used to feed animals, the exchange operator said last week. Trading in the DDGs con- tracts will start on April 26. “This product will enable our feed customers to di- rectly manage price risk of feed inputs that they haven’t been able to be- fore,” Tim Andriesen, CME Group managing director for commodities, said in a statement.

Traders were skeptical that the new contract would attract significant volumes, pointing to CME’s ethanol futures contract as an example of the difficulty of attracting interest to a new market.

“I am always a little apprehensive about any new products being launched, simply because so many of them have failed,” said Frank Cholly, senior market strategist at brokerage Lind-Waldock in Chicago, IL. “If it gets off to a slow start, and they usually do, then it is very difficult for it to become viable.”

DDGs contracts could attract interest from hedgers looking to use them in combination with corn and ethanol futures to lock in margins.

“These contracts look good on paper, and they do serve a purpose,” said Shawn McCambridge, analyst at Prudential Bache Commodities in Chicago. “It just depends on whether or not the producer or the industry in general wants to participate.”

Production of DDGs has been on the rise during the past few months as falling corn prices improved the profit margins at ethanol plants.

Global economic weakness also has boosted demand for DDGs, which typically cost about 22 percent less than corn.

The export market also was heating up as China was expected to step up purchases as part of its plan to stockpile grains. Exports of DDGs rose to a record 5.64 million metric tons in 2009, worth nearly $1 billion, according to the Renewable Fuels Association.

A contract will be equivalent to 100 short tons of DDGs, CME said. 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. — DTN