Hedging Flashcards
Does biomass hedge?
The biomass market doesn’t really use derivatives nor have hedging tools.
There have been several attempts to launch these tools for risk management purposes, but they haven’t been widely embraced by the market as yet.
Who tried to set up a futures contract for biomass?
EEX Group launched a financially settled wood pellet futures based on Argus wood pellet prices in 2017. But it faced several challenges to be widely adopted.
Why is the fact that its subsidied an issue for derivatives?
The biomass market is still young and heavily subsidised, the Argus biomass report has been around for just 11 years and dependent on government subsidies. as the instruments such as feed-in-tariffs support long term contracts rather than enjoy flexibility in the spot market. And so the biomass market hasn’t yet matured to use derivatives yet
Why does the size of the biomass market make derivatives difficult?
The biomass market is small, there are not many active players on the spot market, which makes it illiquid. It is illiquid on the physical side and difficult to get rid of cargos to few prospective buyers, as well as there being few producers to buy from.
What cultural reasons make biomass difficult to put on derivatives markt?
biomass market deals with mostly forest owners and those in the wood trade who do not come from a trading or business background. Derivatives are not part of their business or day to day as opposed to big utilities that come from coal backgrounds who understand the need for them and the workings of derivatives and their advantages
Where does this all leave the biomass market?
So, for the time being, the biomass market is mostly reliant on producers/utilities being locked into long term contracts or buying small volumes to supplement heating demand on the spot market.
