BIOFUELS
biodiesel in Malaysia, while Europe
is looking towards its wheat crops as
Figure 1: Clean Energy Investment ... & Total Value & Number of Deals, 2006
a fuel source, and even forestry
(which through secondary process-
ing can be converted to ethanol).
There is also a growing demand for
43%
Growth
bio-diesel derived from animal or
vegetable oils.
The first ever diesel engine was 81%
Growth
designed to run on peanut oil, so
this form of fuel does not represent
a huge leap into the unknown. On
the other hand, the production level
of cellulosic ethanol derived from,
among other crops, the prairie
grasses cited by Business Week, cur-
rently exists only at ‘pilot’ and
Source: New Energy Finance
‘commercial demonstration’ scale
and is therefore still something of an unknown quantity. allowing traders to manage the rela-
At the beginning of any new technology cycle we are inevitably tionships between agriculture, crude oil
presented with a black and white choice, analogous to the so-called and refined products, for example.
Betamax wars of the 1970s and 1980s. But given the sensitivity of Other attributes of agriculture and
this market it seems unlikely that there will be one, overwhelmingly energy commodity management need
dominant fuel or fuel-source in the future. Instead, there is likely to to be included such as complex pricing,
be a diverse mix, protected by government policy where necessary, unpricing and rollover, volume/mass
to promote a sustainable supply. conversions, qualities, crop year, toler-
ances, foreign exchange exposure, and
Key Trading Technology Requirements repurchase contracts.
Ethanol is already traded on the Chicago Board of Trade, and it can Renewable fuels also mean new sup-
be said with some confidence that the number of exchanges world- ply chain complexities that include
wide trading biofuel derivatives is set to grow. attributes from both agriculture and
The price of biofuels is inevitably linked to the price of traditional energy – the ability to factor in farm
fossil fuels. Should these prices fall then biofuels are far less finan- procurement, transportation modes
cially viable. What’s more, the price of food crops, and hence their including vessel, rail, truck; blending and
derivatives, will be pegged to those of energy equivalents. For exam- processing at the plant; marketing and
ple, palm oil is related to biodiesel, which in turn is calibrated to any additional logistical requirements.
crude oil and refined products. There is also a tight demand and sup- As with any new market, adaptability
ply situation in the energy complex, which means that market is crucial. Any system therefore needs
volatility – already approaching 35% for both corn and wheat – is to have an advanced architecture with
expected to increase. the capacity to accommodate changes
Any system therefore needs to have an advanced
in business strategy quickly and easily.
There is no doubt that the intense
architecture with the capacity to accommodate focus on renewable fuel sources, and
changes in business strategy quickly and easily
the development of a new agriculture-
energy complex, presents exciting
As with any complex and volatile market, managing risk is a key opportunities for energy traders. But
element to successful operations. Obviously, the chosen solution these new opportunities also present
needs to be able to aggregate risk across multiple commodities from new risks, new inputs and outputs, and
both agriculture and energy. The system should have the functional- new market patterns that need to be
ity to provide views of both physical and financial portfolios which managed.
drill-down to the trade level in real-time. It should also give traders There is a little room for patched-up
the ability to calculate, view and analyse option sensitivities, VaR or standard solutions. In this environment,
any other chosen risk measurement technique, as well as conducting maximum returns require an advanced,
stress testing to simulate shocks to the market. sophisticated enterprise system
•
In addition to basic risk management functionality, an enterprise
system should be able to easily and accurately model new complex
Michael Schwartz is Chief Marketing
trade types and structured products with agricultural feedstocks and
Officer with Triple Point Technology.
biofuel outputs. The solution needs energy yield equivalent curves
www.tpt.com
that provide precise hedge quantities for spot and forward markets
COMMODITIES NOW SEPTEMBER 2007 85
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