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Case Study - Energy - Cost Rise - Basis Risk - Forecast Fallacy

Biodiesel Feedstock Price Protection Program

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Stable worked with a renewable diesel
producer to protect themselves against tallow price volatility

A risk they had managed with soybean oil futures until the correlation between tallow prices and soybean oil fell apart
The Challenge

Bleachable fancy Tallow is one of many feedstocks like choice white grease, yellow grease and cooking oil that a renewable diesel producer
can use in their production process

In the past, to limit the impact of tallow price volatility on production margins, renewable diesel producers could use soybean oil futures. This was possible because the correlation between soybean oil futures prices and tallow prices was quite high, so the hedge they could get in the futures markets would very closely match their underlying exposures. But in the last 3 years or so, the correlation between soybean oil and tallow prices has fallen apart. Forecasts of tallow prices based on the soybean futures curve have been misleading. Using soybean oil futures now to hedge tallow exposures would be inefficient. Stable’s client wanted a solution that would allow them to protect production margins and minimize the volatility of their P&L statements due to fluctuating input costs, without opening them up to basis risk.

Stable’s Program gave them 6 months
of protection against rising tallow prices

The protection was directly linked to robust and independent price data published by Fastmarkets/The Jacobsen, so when market prices moved against the client, Stable paid them quickly and automatically, without the need for a lengthy claims process. Stable’s solution smoothed the volatility of the cost of tallow, protected the client from a worst-case scenario and gave them peace of mind so they could focus on their business.

Stable’s Program allowed the client to manage exposure to price volatility with an innovative and targeted solution that zeroed in on their precise exposure

  • When tallow prices rose, the client’s settlement was calculated automatically and paid quickly.
  • Stable’s protection contract was linked to a third party, independently published benchmark
price selected by the client.
  • The client was able to choose protection levels which made sense for their business.
  • The protection contract, like all of Stable’s products, was backed by highly rated insurance companies.