Corn-Crush Hedging – Does Location Matter?

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.