CBOT says biodiesel contract years away

By Christine Stebbins

CHICAGO (Reuters) - The biodiesel industry is likely three to five years away from seeing its first futures contract as it waits for business to expand, a Chicago Board of Trade BOT.N official said on Tuesday.

Dave Lehman, CBOT chief economist and managing director of business development speaking in Chicago at the Reuters Global Biofuel Summit said the biodiesel market was still too small to offer a viable hedging tool.

The biodiesel market is roughly 1/40 the size of the $8 billion U.S. corn-based ethanol market, Lehman said.

"It needs to grow by a factor of four or five just to get to our minimum" to support a futures contract, Lehman said.

He expected the distiller's dried grain market to be ready for a futures contract before biodiesel, joining the exchange's corn-based ethanol contract that debuted in March 2005.

DDG, a byproduct of processing corn into ethanol, is used for livestock feed. The DDG market is growing by leaps and bounds as the ethanol industry explodes.

The CBOT's ethanol contract has yet to take hold as a price-risk management tool, as ethanol producers continue to price the green fuel through forward cash contracts.

Typically, five to 10 CBOT ethanol contracts trade per day. That compares to tens of thousands of contracts traded in wheat or soybean oil futures daily.

The exchange remains hopeful its contract will catch on as the U.S. ethanol industry produced 5 billion gallons in 2006, more than tripling in six years. That number is only seen growing once the U.S. renewable fuels standard of 7.5 billion gallons is met by 2012.

Additionally, there is new legislation that has been introduced into Congress that would require the United States to use 60 billion gallons of ethanol and biodiesel a year by 2030.

"If the ethanol market were to reach a multiple of its underlying production using that 7.5 billion gallon level ... at least a multiple of four times -- that equates to 5,000 contracts a day," Lehman said.

The CBOT's corn contract trades 8 to 10 times U.S. annual production, he added.