Ethanol Derivatives

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The rise in global production of renewable fuels derived from sugar cane, corn and other feedstocks has been accompanied by the launch of derivatives products in the US and Brazil – the two largest producers of ethanol - aimed at providing hedging tools, improved price discovery and arbitrage opportunities.

The surge in demand accompanied buoyant growth in derivatives contracts based on ethanol's primary feedstocks. However, market acceptance of the products now marketed by four exchanges has been patchy, in part because of the absence of a liquid global market in the commodity and the history of bilateral cash-settled trades, prompting a series of changes to existing contracts.

Ethanol futures, options and swaps have been introduced by the Brazilian Mercantile & Futures Exchange, the Chicago Board of Trade, Chicago Mercantile Exchange, the New York Board of Trade, the New York Mercantile Exchange and the Intercontinental Exchange (ICE). ICE delisted its contract on Dec. 18, 2007, however.


The Brazilian Mercantile & Futures Exchange launched the first ethanol futures contract on March 31 2000 but, after suffering a 50 per cent drop in volumes in the first half of 2007[1], revamped the complex in April, with sugar-based ethanol contracts quoted in US dollars rather than the real. The delivery point was also shifted from Paulinia to the main Port of Santos[2]. Volumes more than trebled from May-August, peaking at 2,515, while open interest rose above 1,300 in September.

The New York Board of Trade's pre-eminence in sugar futures saw it launch the its first ethanol futures contract on May 7, 2004, modeled closely on its benchmark “Sugar 11” contract, but trading proved extremely thin. The Intercontinental Exchange, which acquired the NYBOT in late 2006, revived the ethanol complex with the acquisition of ChemConnect, which offers over-the-counter ethanol contracts[3].

The Chicago Board of Trade launched corn-based ethanol contracts on March 23 2005 with foor-based trading, and launched electronic trading on April 2006. Average volume crossed 100-contract mark in late 2005, and peaked at 180 in mid-2007, though slipped below 40 in the third quarter of 2007. Open interest has climbed above 1,300 contracts[4]. A cash-settled swap contract launched in December 2006 has enjoyed faster growth, with open interest closing in on 9,000 contracts. The CBOT launched options on its ethanol futures in September 2007 on its own electronic platform, with trading due to switch to the CME’s Globex platform in January 2008. CME delisted its own ethanol futures contract, launched on March 29 2005, in October 2007 – there was no open interest in any contract month.

The New York Mercantile Exchange launched two new ethanol swaps in July 2007 on its ClearPort platform, avoiding a conflict in its alliance with the CME[5].

After it acquired both the CBOT and NYMEX, CME Group made the legacy Chicago Board of Trade ethanol swaps contracts available on the renamed CME ClearPort, starting January 25.[6]


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