Swaps seen key as biofuels expand

By Nigel Hunt

LONDON (Reuters) - The evolving biofuels industry needs more derivatives to hedge risk, with the sector likely to favor swaps rather than futures contracts, Greenergy Chief Executive Andrew Owens said on Wednesday.

"The whole industry needs more derivatives," Owens, who heads Britain's leading biofuels supplier, told the Reuters Global Biofuel Summit.

Euronext.liffe plans to launch in the next few weeks contracts for major biofuel feedstocks rapeseed oil and raw sugar, but Owens said the greatest need was for derivatives for the biofuels themselves.

A Chicago Board of Trade BOT.N official said on Tuesday that biodiesel might require its own futures contract in three to five years as business expanded.

Biofuels can be substituted for fossil fuels and are seen as a way to reduce the emission of greenhouse gases believed to contribute to global warming.

Biodiesel can be made from vegetable oils as well as used cooking oil and tallow.

"It (biodiesel) is a world commodity and it needs all the (financial) tools that other commodities have," Owens said.

He saw swaps as offering the most potential due to their flexibility at a time when the industry was changing rapidly.

Swaps, which are widely used in the oil industry, involve the exchange of a floating price for a fixed one over a specified period. The arrangement involves no transfer of physical commodities.

"I think there is less chance a futures market can survive than a swap. If you've got an evolutionary industry we can do a swap today in one form and next week in another form," he said.

Owens said it was important that banks and hedge funds started trading biofuel derivatives to take on the price risk.

"That is where the liquidity has got to come from as the industry will tend to be all on the same side," he said.

Owens said his company would be trading the euronext.liffe rapeseed oil contract that will be launched on January 22.

Greenergy's first biodiesel plant, in northeast England, is due to enter commercial operation next month and Owens said its most important feedstock would be rapeseed oil.