Corn-Crush Hedging – Does Location Matter?

Roger A. Dahlgran and Rajat Gupta

No 309624, 2019 Conference, April 15-16, 2019, Minneapolis, Minnesota from NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management

Abstract: At the end of 2018, 200 ethanol refineries were operating in the U.S. and processing nearly 40 percent of U.S. corn production. These refineries are widely dispersed and the typical ethanol refining firm operates several plants. Hedging is widely used as a price risk management strategy. The dispersion of a given firm’s plants leads us to ask the question posed by the title of this paper – should the plant’s location be considered in constructing a hedging program? We tested this notion by drawing a sample from the plants operated by a multi-state/multi-plant ethanol refiner. We interviewed plant managers to get information about input-output coefficients, inventory turnover, plant efficiency comparisons, and hedging horizons. This information informed our modelling. To test our premise, we sought plant location prices for corn, natural gas, ethanol, dried distiller gran, and distiller corn oil. Local corn prices were obtained but we had to use proxies and state averages for the other prices. Standard hedging methodology was applied as we examined two hedging strategies: (a) hedging the crush margin, and (b) hedging individual commodity transactions then combining these hedges according to the input-output coefficients to hedge the crushing margin. Approach (b) produced better results but the data limitations hindered testing our main hypothesis. In addition to variations in hedge ratios for each location, we also discovered that (a) storage periods for input and output inventories are short (1 to 2 weeks), (b) input-output coefficient variability across plants creates opportunities for location specific hedging strategies, and (c) previous studies that are based on aggregated cash prices likely overstate the effectiveness of local hedging strategies.

Keywords: Crop; Production/Industries (search for similar items in EconPapers)
Pages: 21
Date: 2019
References: Add references at CitEc
Citations:

Downloads: (external link)
https://ageconsearch.umn.edu/record/309624/files/D ... ta_NCCC-134_2019.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ags:n13419:309624

DOI: 10.22004/ag.econ.309624

Access Statistics for this paper

More papers in 2019 Conference, April 15-16, 2019, Minneapolis, Minnesota from NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management
Bibliographic data for series maintained by AgEcon Search ().