Energy Producer

A renewable diesel producer worked with Stable 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 prices and tallow prices was high, so the hedge available in the futures market would correlate well with tallow exposures.

But recently, the correlation between soybean oil and tallow prices broke down. Forecasts of tallow prices based on the soybean futures curve are misleading. Using soybean oil futures to hedge tallow exposures now would be inefficient.

A member wanted a solution that would allow them to create a buffer to protect production margins and minimize the impact fluctuating input costs could have on their P&L statements, without opening them up to basis risk or the expense of an inefficient hedge.

The Challenge

Pork trim is a key ingredient for many of the menu items sold by Stable’s quick service restaurant (QSR) client. But pork trim price volatility was 64% over the past year, making it difficult to forecast prices and complicated to set budgets and plan for the future.

Stable’s Solution

The member was able to select from over a thousand commodity benchmark prices on the Club platform to find the one that best matched their tallow exposure. They then used the platform to stress test their budgets and forecasts for tallow, so they could understand the impact potential future tallow price scenarios could have on their bottom line. Using this information, the Club then calculated the premium required to protect the member.

At the end of the contract, the tallow price had dropped and the member was not due a payout from their protection contract. However, because they were self-insuring with the Club, the premiums they had paid into the Club account (less Club fees) were made available to them again. Stable’s solution gave the member an efficient buffer against volatility in the cost of tallow, enabling them to have protection in place without having to pay futures brokerage for hedge that might not work out and without them having to face the potential cash flow drain of uncertain margin calls.

Key Takeaways

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

Stable’s sophisticated data-science platform allowed the client to identify, track and assess their risks.

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.

While the tallow price fell, the client was able to access the full amount of the premiums they had paid into their Club account (less Club fees). If the tallow price had risen, the client’s settlement would have been calculated automatically and paid quickly. The premiums paid earned compounding interest while in the Club account.

Premiums were held in a segregated account for peace of mind.

Club fees were 100% transparent, and the Club was fully aligned with the member’s success.