Risk Warning: Your Capital is at Risk.
If you have learned about ethanol as a commodity, you may be interested in trading it.
We conclude by summarizing a few trends that may indicate ethanol price movements in the near future and risks to be aware of when speculating on ethanol prices.
Read on to find out more.
3 Reasons You Might Trade Ethanol
Traders may consider buying ethanol for the following reasons:
- Clean Fuel Demand
- Emerging Market Demand
- Portfolio Diversification
Clean Fuel Demand
Notwithstanding evidence of pollution related to corn farming, ethanol-blended gasoline has a reputation as a more environmentally friendly fuel source.
This reputation has led to increases in biofuel mandates in the United States and other countries.
Furthermore, advances in cellulosic ethanol technology could lead to even greener forms of ethanol production.
Ultimately, positive trends in biofuel usage bode well for ethanol in the future.
Emerging Market Demand
One important catalyst that could boost ethanol prices in the years ahead is growing demand from China.
Poor air quality in Beijing and other cities has led the Chinese government to focus on greener sources of energy.
Recently, state media reported that China intends to roll out ethanol use in gasoline by 2020. The report cited the desire of the government to clean up smog and support corn farming.
It is likely that India and other emerging economies will also intensify green energy initiatives.
These trends should bode well for ethanol prices.
Trading ethanol along with other commodities is a way to diversify a trading portfolio.
Traders seeking true asset class diversification should consider putting a portion of their tradable assets into a basket of commodities including ethanol, other energy commodities, metals and agriculture.
Where to Trade Ethanol in
If you’re familiar with ways to trade ethanol and why it may be the commodity for you to speculate on, the next step is to find a suitable broker.
Regulated Ethanol Brokers In
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73.90%-89.00% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Ways To Trade Ethanol
Traders have several ways to trade ethanol:
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The Chicago Board of Trade (CBOT), a division of the Chicago Mercantile Exchange (CME), offers a contract on ethanol futures. The contract settles into 29,000 gallons of ethanol, which is approximately one railcar.
The contract trades globally on the CME Globex electronic trading platform and has a variety of expiration months.
How Do Futures Work?
Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions.
At expiration, the contracts are physically settled by the delivery of ethanol.
Trading futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.
Ethanol Options on Futures
The CBOT also offers an options contract on ethanol futures.
Options are also a derivative instrument that employs leverage to trade commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.
Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of ethanol futures rises above the strike price by an amount greater than the premium paid for the contract.
Therefore, options traders must be right about the size and timing of the move in ethanol futures to profit from their trades.
These financial instruments trade as shares on exchanges in the same way that stocks do.
There are no ETFs that are pure-play trades in ethanol. However, the ELEMENTS MLCX Biofuels ETN (NYSEARCA: FUE) is an exchange-traded note linked to an index that consists of futures contracts on physical commodities that are biofuels themselves or feedstocks used to create biofuels.
However, the index is heavily weighted in soybeans, corn, soybean oil and sugar. Therefore, it is not a direct proxy for an investment in ethanol.
Shares of Ethanol Companies
There are many publicly traded companies that have various levels of exposure to ethanol prices.
While trading stocks can be a leveraged way to gain exposure to ethanol prices, many of these companies have some exposure to fossil fuels and other biofuels.
In addition, these shares can react to factors such as regional demand for their products, competition, production costs, and interest rates.
Finally, factors such as company management and the overall stock market can also affect these trades:
One way to trade in ethanol is through the use of a contract for difference (CFD) derivative instrument. CFDs allow trades to speculate on the price of ethanol and ethanol shares.
The value of a CFD is the difference between the price of ethanol (or shares) at the time of purchase and its current price.
Many regulated brokers worldwide offer CFDs on ethanol and ethanol shares. Customers deposit funds with the broker, which serve as margin.
Should I Trade in Ethanol?
Ethanol prices have historically been very volatile, so traders should expect large price swings.
However, trading ethanol can be part of a sensible plan to mitigate risk and diversify the composition of assets in a portfolio.
Trading in a basket of commodities that includes ethanol, other energy commodities such as natural gas, gasoline, and crude oil, agricultural commodities, and metals can protect against inflation.
It can also protect a trader from the volatility of movements in individual commodities.
Trends That May Boost Ethanol Prices
There are three specific trends that could boost ethanol prices in the years ahead:
- Emerging Market Demand: Concerns about pollution in emerging economies could drive demand for greener forms of energy such as ethanol. Similarly, further advancements in cellulosic ethanol technology have the potential to drive more demand in countries without major agricultural economies.
- Environmental Concerns: Fossil fuels such as crude oil are receiving intense scrutiny because of the pollution they create. These concerns make greener energy sources such as ethanol more attractive.
- Mandates: Fossil fuels produce harmful and toxic carbon emissions. The United States could increase its ethanol mandate in the future while emerging market countries begin implementing mandates of their own.
Risks Of Trading Ethanol
However, traders should also consider the risks of trading ethanol:
- A global recession could weaken energy demand.
- Persistently lower crude oil and gasoline prices could diminish demand for biofuels.
- Global economic or political turmoil could strengthen the US dollar and weaken demand for commodities.
If you want to learn more about ethanol as a commodity, see our guide on how it’s produced, blended, and what it’s main price drivers are.
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