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Cash Ethanol Cross-Hedging Opportunities

Author

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  • Franken, Jason R.V.
  • Parcell, Joseph L.

Abstract

Increased use of alternative fuels and low commodity prices have contributed to the recent expansion of the U.S. ethanol industry. As with any competitive industry, some level of output price risk exists in the form of volatility; yet, no actively traded ethanol futures market exists to mitigate output price risk. This study reports estimated minimum variance cross-hedge ratios between Detroit spot cash ethanol and the New York Mercantile Exchange unleaded gasoline futures for 1-, 4-, 8-, 12-, 16-, 20-, 24-, and 28-week hedge horizons. The research suggests that a one-to-one cross-hedge ratio is not appropriate for some horizons.

Suggested Citation

  • Franken, Jason R.V. & Parcell, Joseph L., 2003. "Cash Ethanol Cross-Hedging Opportunities," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 35(3), pages 1-8, December.
    • Handle: RePEc:ags:joaaec:43152
    DOI: 10.22004/ag.econ.43152
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    Cited by:

    1. Chang, Chia-Lin & Chen, Li-Hsueh & Hammoudeh, Shawkat & McAleer, Michael, 2012. "Asymmetric adjustments in the ethanol and grains markets," Energy Economics, Elsevier, vol. 34(6), pages 1990-2002.
    2. Hammoudeh, S.M. & Sarafrazi, S. & Chang, C-L. & McAleer, M.J., 2011. "The Dynamics of Energy-Grain Prices with Open Interest," Econometric Institute Research Papers EI 2011-19, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    3. Dahlgran, Roger A. & Souza, Waldemar Antônio da Rocha de & Liu, Jingyu, 2014. "The Performance of U.S. Ethanol Futures Markets on the World Stage," 2014 Conference, April 21-22, 2014, St. Louis, Missouri 285818, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    4. Sari, Ramazan & Hammoudeh, Shawkat & Chang, Chia-Lin & McAleer, Michael, 2012. "Causality between market liquidity and depth for energy and grains," Energy Economics, Elsevier, vol. 34(5), pages 1683-1692.
    5. Franken, Jason R.V. & Irwin, Scott H. & Garcia, Phil, 2020. "Biodiesel Cross-Hedging Opportunities," 2020 Conference, St. Louis, Missouri 309640, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    6. Brinker, Adam J. & Parcell, Joseph L. & Dhuyvetter, Kevin C., 2007. "Cross-Hedging Distillers Dried Grains: Exploring Corn and Soybean Meal Futures Contracts," 2007 Conference, April 16-17, 2007, Chicago, Illinois 37567, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    7. Parcell, Joseph L. & Boessen, Christian R. & Altman, Ira J. & Sanders, Dwight R., 2008. "Cross-Hedging Fishmeal: Exploring Corn and Soybean Meal Futures Contracts," 2008 Annual Meeting, February 2-6, 2008, Dallas, Texas 6763, Southern Agricultural Economics Association.
    8. Spencer, Simon & Bredin, Don & Conlon, Thomas, 2018. "Energy and agricultural commodities revealed through hedging characteristics: Evidence from developing and mature markets," Journal of Commodity Markets, Elsevier, vol. 9(C), pages 1-20.
    9. Białkowski, Jędrzej & Bohl, Martin T. & Perera, Devmali, 2023. "Commodity futures hedge ratios: A meta-analysis," Journal of Commodity Markets, Elsevier, vol. 30(C).
    10. Gustavo Carvalho Santos & Flavio Barboza & Antônio Cláudio Paschoarelli Veiga & Mateus Ferreira Silva, 2021. "Forecasting Brazilian Ethanol Spot Prices Using LSTM," Energies, MDPI, vol. 14(23), pages 1-15, November.
    11. Dahlgran, Roger A., 2007. "Inventory and Transformation Hedging Effectiveness in Corn Crushing," 2007 Conference, April 16-17, 2007, Chicago, Illinois 37557, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    12. Shylaja P & Anver Sadath C, 2016. "Futures Trading: Informational Content of Open Interest and Trading Volume on Futures Price," Asian Journal of Economics and Empirical Research, Asian Online Journal Publishing Group, vol. 3(2), pages 156-162.
    13. Dahlgran, Roger A. & Gupta, Rajat, 2019. "Corn-Crush Hedging – Does Location Matter?," 2019 Conference, April 15-16, 2019, Minneapolis, Minnesota 309624, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    14. Dahlgran, Roger A., 2011. "Hedging and Cash Flow Risk in Ethanol Refining," 2011 Conference, April 18-19, 2011, St. Louis, Missouri 285337, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    15. Bolandifar, Ehsan & Chen, Zhong, 2020. "Hedging through index-based price contracts in commodity-based supply chains," Omega, Elsevier, vol. 90(C).
    16. Jędrzej Białkowski & Martin T. Bohl & Devmali Perera, 2022. "Commodity Futures Hedge Ratios: A Meta-Analysis," Working Papers in Economics 22/12, University of Canterbury, Department of Economics and Finance.
    17. Galinato, Suzette P. & Young, Douglas L. & Frear, Craig S. & Yoder, Jonathan K., 2011. "Will Washington Provide Its Own Crop Feedstocks for Biofuels?," Western Economics Forum, Western Agricultural Economics Association, vol. 10(01), pages 1-11.
    18. Franken, Jason R.V. & Irwin, Scott H. & Garcia, Philip, 2021. "Biodiesel hedging under binding renewable fuel standard mandates," Energy Economics, Elsevier, vol. 96(C).
    19. Dahlgran, Roger A., 2017. "Automation in the Hedge-Ratio Estimation Cottage Industry," 2017 Conference, April 24-25, 2017, St. Louis, Missouri 285867, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    20. Zhao, Jieyuan & Goodwin, Barry K., 2012. "Dynamic Cross-Hedge Ratios: An Application of Copula Models," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124610, Agricultural and Applied Economics Association.
    21. Chris Brooks & Ryan J. Davies & Sang Soo Kim, 2005. "Cross Hedging with Single Stock Futures," ICMA Centre Discussion Papers in Finance icma-dp2004-15, Henley Business School, University of Reading.

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