Companies tracking US gasoline futures prices soon will be armed with another set of financial derivatives for a rapidly growing component of the nation's gasoline pool: ethanol.
The Chicago Board of Trade last week approved the development of a corn-based ethanol futures contract. The new contract is expected to begin trading in the fourth quarter.
The CBOT ethanol futures contract thus will join a sugar-based ethanol contract announced last month by the New York Board of Trade (OGJ Online, Mar. 23, 2004). The NYBOT ethanol futures contract is scheduled to launch May 7, and its ethanol options contract on May 10.
US ethanol growth
Growth of ethanol volumes blended into US gasoline is all but guaranteed, as a result of new energy legislation pending in Congress that mandates a minimum percentage of renewable fuels in reformulated gasoline (RFG), in tandem with proliferating state bans on the only other widely available RFG oxygenate, methyl tertiary butyl ether.
Charles P. Carey, CBOT chairman, said, "There is tremendous growth potential in ethanol production. Today, ethanol production capacity in the US is 3 billion gal[/year], with expectations that it will grow into a 5 billion gal[/year] market."
In fact, the renewable fuels standard (RFS) in the energy bill pending in Congress requires 3.1 billion gal/year of renewable fuel use in the US transportation sector in 2005, increasing to 5 billion gal/year by 2012. The RFS has strong bipartisan support in Congress as well as by the White House (OGJ Online, Feb. 25, 2004).
Current global ethanol output is estimated at 10.2 billion gal/year, and output growth is projected at 5-10%/year until 2012, according to commodity expert F.O. Licht.
A CBOT spokesmen acknowledged that while the vast majority of fuel ethanol produced in the US is corn-based, sugar-based ethanol dominates the global market.
More than 60% of the world's ethanol supply is derived from sugar, said NYBOT Chairman Frederick W. Schoenhut.
Contract details
The two commodity exchanges concurred on the market's need for new derivatives to manage the price risk inherent in an increasingly important component of the world's gasoline pools.
CBOT Pres. and CEO Bernard W. Dan said, "The move to develop a corn-based ethanol contract is a direct result of discussions with ethanol producers and consumers who are seeking new alternatives to navigate the price fluctuations and volatility that characterize the ethanol market."
NYBOT said, "There is no clear price correlation between ethanol and other fuel manufacturing components, as ethanol doesn't track well with the octane [gasoline] market. As a consumable commodity with an economic presence in both the agricultural and energy sectors, ethanol needs its own price reference."
The new NYBOT contracts, priced in cents per gallon, call for fob vessel delivery of 7,750 gal of biomass-derived, undenatured, anhydrous ethanol meeting specific quality criteria. The contract also specifies 32 countries of origin and will list for trading the months of March, May, July, October, and December. There are no details yet on the CBOT contract.
