Ethanol tends to fall into two different categories: that produced by dry-milling, and that produced by wet-milling. The dry-milling process is considered to be the easier and quicker of the two, while wet-milling is the more effective in terms of producing high price by-products. With respect to the commodity market the end result is the same however, despite the source.
The primary special feature of ethanol as a commodity is that the ethanol industry is currently enjoying a period of major growth and expansion. This is closely tied in to the crude oil market, as higher crude oil prices are forcing consumers and businesses to look for alternative cheap fuel sources, with lower ethanol prices seeming particularly appealing. This leads on to the second main special feature of ethanol: the wide range of primary materials that can be used in its manufacture. Ethanol, as a fuel, can be produced from any feedstock that contains sufficient amounts of sugar or materials such as starch that can be converted into sugar. Sugar cane is thus one of the main components used, but others such as corn, barley and wheat are popular alternatives. This makes for an appealing prospect for manufacturers, and affords them great potential in undercutting the shrinking crude oil market.
Ethanol is one of the big growth areas of the Brazilian economy, and it is traded on that country’s BM&F Bovespa (BOVESPA) exchange. Ethanol is also traded on the Chicago Mercantile Exchange (CME) and since it a variety of contract types exist it has a variety of ticker symbols/contract codes.
The main consumer and business market for ethanol trading is the biofuel industry, with ethanol prices expected to rise over the coming years in line with a high demand. It is expected that fuel usage will continue to increase in the United States, and so ethanol looks set to enjoy a continued surge in popularity, with a predicted 9% of the fuel market in the U.S by 2018.
Another major market for ethanol traders is the market for alcoholic beverages. Ethanol is used in the fermentation and distilling of many alcoholic drinks, such as whiskey, rum, vodka and beer. Furthermore, the beauty industry is also involved in ethanol trading, as a variety of beauty products such as nail polish and nail polish remover require ethanol in their manufacturing.
The main area of production for Ethanol is Brazil, which produces approximately 40% of the global supply. The United States of America takes second place in the production of Ethanol, with China taking third place. Brazil and the USA are also considered to be the two largest consumers of ethanol as well.
When trading in ethanol futures, it is important to consider the price of corn as it is an important component of corn ethanol biofuel. This means that all of the factors that affect corn prices, such as the weather and general demand, also directly affect ethanol prices. This can mean that companies who are speculating on the price of ethanol futures contracts can lose out on a large scale if corn prices are to increase in the interim. The price of oil and gasoline will also be of note to those trading in ethanol futures, as any decrease in gasoline prices will render ethanol based biofuel a less appealing alternative. It is important to note that it is not only ethanol futures prices that can be affected by these factors, but the ethanol spot price also, since short-term factors can be as influential as long term ones.
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