Ethanol serves as an excellent motor fuel in many countries but is not exactly competitive with gasoline. Brazil, for example, has the lowest production costs in the world due to the country’s agricultural and industrial productivity as well as the overall favorable energy balance of the country’s alcohol production. In the U.S, Ethanol is derived from corn and has a much lower energy balance. Besides all this, Ethanol is much less toxic than other major fossil fuels.
In recent times, this bio-fuel has caught the interest of traders. However, before you get into trading, you need to know the different ways this commodity can be traded, as well as which regulated brokers you can trade the commodity with.
Should you invest in ethanol?
Before you jump into investing or trading this commodity, you need to be aware of the nature of its prices. In the simplest terms, Ethanol prices are extremely volatile, requiring you to anticipate large price swings. However, if you trade Ethanol the right way, it can play a crucial role in portfolio diversification as well as mitigating any impending risk.
Three specific trends can boost ethanol prices in the upcoming years:
Mandates. Harmful and toxic carbon emissions are produced by fossil fuels. The United States can increase its ethanol mandate in the future when countries with developing markets begin to implement mandates of their own.
Environmental Concerns. Fossil fuels like crude oil have started to receive intense scrutiny due to the pollution created by them. These concerns are getting more countries attracted to greener energy sources.
If you want to trade ethanol, then you must be aware of the risks implied:
- The demand for energy getting weakened due to a global recession.
- The demand for biofuels getting diminished by persistently lower gasoline and crude oil prices.
- Global economic or political turmoil strengthening the USD and weakening the demand for commodities.
Consider all pros and cons before you decide to invest in ethanol.
How many ways can you trade Ethanol?
Just like any other commodities, there are several trading instruments you can use to trade with Ethanol.
Ethanol can be traded using options in which an ethanol futures contract is the underlying asset. The Chicago Mercantile Exchange has Ethanol options contracts available for trading. They are quoted in dollars and cents per gallon, and the underlying futures are traded in lots of 29,000 gallons each. You have to make sure that you are accurate about the size and timing of the underlying ethanol future if you want to generate profits from your trades.
Ethanol Futures are futures contracts with Ethanol as the underlying asset. It allows you to address the price risk of Ethanol as well as the opportunity for arbitration with the price of corn futures. You can find Ethanol futures at the Chicago Board of Trade (CBOT), where they offer a contract on ethanol futures backed by 29,000 gallons of ethanol.
Shares of Ethanol Companies
You can find stock of Ethanol companies listed under NASDAQ or NYSE exchanges as there are many publicly traded companies with several levels of exposure to the price of ethanol. It provides an appropriate way to trade stocks for gaining exposure to ethanol prices. However, many of these companies have exposure to other fossil fuels and biofuels.
A number of factors can influence the shares of such companies. These include factors such as production costs, market competition, interest rates, and region-specific demand. The company’s internal management, as well as the overall market conditions of the stock market, can also adversely affect Ethanol stocks and thus should be kept in mind while trading them. Examples include Pacific Ethanol (PEIX), Green Plains (GPRE), AEMETIS (AMTX), and Marathon Petroleum (MPC).
Unfortunately, there are no ETFs that focus on a publicly-traded company that is dedicated solely to the Ethanol business. The closest instrument you can choose is the ELEMENTS MLCX Biofuels ETN( Exchange-traded Note). The index that is linked to the ETN consists of various futures contracts on physical commodities consisting of biofuels or feedstock used in the production of biofuels. However, the index does not provide a direct path of investing in ethanol, as it majorly consists of corn, soybean oil, sugar, and soybeans.
What are the benefits of Trading Ethanol?
You should consider trading ethanol because of the following reasons below.
Ethanol-friendly policies in Asian markets
There are several Asian countries that have passed new policies or have updated old ones, which is aimed at creating additional demand for ethanol. The list includes India, which has updated its national biofuels policy to include domestic spent grain and sugarcane juice as feedstocks. Vietnam, which started E5 use in 2018, Japan, which now allows U.S. ethanol to be used as feedstock for ETBE, and the Philippines, which continues to be a consistent buyer of U.S. ethanol. All these developments in the world Ethanol market have contributed to the steady demand for Ethanol, which is favorable for trading.
To diversify your portfolio
Including this commodity in your trading portfolio in combination with other commodities is a good way to achieve some diversification in your portfolio. Nice practice for traders to protect their portfolio from heavy losses is to distribute their holdings among several different classes of commodities.
Demand from emerging markets
Because of increasing environmental consciousness among different nations, especially those with emerging markets, Ethanol trading is in a favorable position. This is mainly due to the fact many countries with emerging markets increase their Ethanol dependence. A good example would be China, which is aiming to use Ethanol in gasoline by the end of this year. Thus, the growing demand from China can act as a catalyst, helping ethanol prices increase further.
Ethanol is an important commodity, and its importance is only increasing. So, is it time for you to start trading it?