Below we examine the relationships between corn-based ethanol and the biodiesel complex and their energy counterparts: heating oil (HO) and reformulated gasoline (RBOB) futures contracts. Understanding these relationships can help provide an additional level of clarity and insight about possible price drivers that extend beyond the balance sheets.
Led by West Texas Intermediate (WTI) crude oil commodity futures, the energy complex can possess a healthy amount of influence over the price behavior of the renewal feedstock prices. While the energy and agricultural complexes possess their own fundamentals, the relationships between the underlying feedstock and energy futures contracts have grown increasingly correlated in recent years. While some of the statistical strength can be attributed toward the natural evolution of financial trading, the examination of these relationships warrants some attention.
Reformulated Gasoline Futures (RBOB): A Useful Guide for Corn Prices
Recently, a healthy amount of attention has been directed toward ethanol’s negative fundamentals and the association with corn’s performance. While weekly ethanol producer margins have been soft and the stocks robust, the decline in RBOB futures is an additional variable that helped push corn prices lower.
For most of November and December, RBOB/ethanol ratio materially narrowed, suggesting that the value of using ethanol hastily departed from the spring and summer highs. During this period, the compression of RBOB prices led to a compression of the ratio, which can be attributed toward the decline in corn prices. While corn and the gasoline have their own fundamentals, the statistical relationship between RBOB and corn has strengthened in recent years. As the correlation between RBOB and corn has increased, the predictability power of RBOB for corn futures has strengthened as well.
The Biodiesel Feedstocks: BOHO, BOGO, POGO and ROGO
Cool-sounding acronyms that are used for the biodiesel spreads. Of these spreads, the BOHO and the POGO possess the greatest relevance. BOHO represents the soybean oil (BO) heating oil (HO) spread, and POGO represents the palm oil (PO) gas oil (GO) spread. The POGO spread is an active metric for the Malaysian and Asian biodiesel community. BOGO is the bean oil (BO) gas oil (GO) spread, and perhaps the lesser followed is the European centric ROGO rice oil (RO) gas oil spread (GO).
Regardless of the geography, the importance and usefulness of the energy/vegetable oil (feedstocks) spreads is that the pricing variance measures the pricing distance between biodiesel and diesel fuel. Meaning that the BOHO and other spreads are a key pricing factor that biodiesel producers use to determine margins.
While the global biodiesel industry is more diversified than the corn-based ethanol program, the statistical relationship between the respective energy and the feedstock legs are statistically relevant. In particular, the statistical relationship between soybean oil and heating oil have strengthened in recent years.
While there are additional variables, or components, such as RINs and tax credits that can help influence the underlying agricultural futures price of the renewable fuel trades, the energy complex is proven to possess statistical relevance as a predictive variable. While each commodity leg possesses its own fundamentals, understanding the relationship between the energy complex and the agricultural complex is paramount for helping to managing risk.
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