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Overview
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
Solution
Solution
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.
Conclusion
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.