Ethanol joins fuel mainstream with CBOT contract
Wed Mar 23, 2005 05:26 PM ET
CHICAGO, March 23 (Reuters) - Ethanol's role as a viable alternative fuel marched ahead on Wednesday as the Chicago Board of Trade, the No. 2 U.S. futures mart, added corn-based ethanol to its stable of agricultural contracts, helping U.S. producers and users manage market risk.
Ethanol is an alcohol usually made from fermented corn or sugar and blended with gasoline. About 12 percent of the U.S. corn crop is projected to be used for ethanol in the coming year, according to the U.S. Department of Agriculture.
U.S. ethanol production rose to a record 3.4 billion gallons in 2004, a 21-percent increase on the year and up some 145 percent since 2000.
Bernard Dan, CBOT president, said the exchange's corn-based ethanol contract would gain traction with users although one at the New York Board of Trade for sugar-based ethanol had not.
"We will leverage the vast liquidity of the corn trading pit and have a prominent market maker," Dan said. "We were also actively engaged with ethanol consumers and producers to make sure our contract meets the need of the underlying market."
Noble Americas Corp. will serve as a market maker for the new contract, posting bids and offers to generate liquidity.
"The advent of risk management marks a big step forward for the industry," said William Covey, vice president of the clean oil products department at Noble Americas.
Promoted as a home-grown, renewable alternative to imported gasoline, corn-based ethanol output in the United States has accelerated in recent years, with production facilities popping up across the nation's corn belt.
About 30 percent of all U.S. gasoline supplies now contain ethanol, typically the E10 blend or a 90 percent gasoline/10 percent ethanol mix, said Mark Maher, executive director for powertrain and vehicle integration at General Motors Corp.
Ethanol currently accounts for about 3 percent of total U.S. gasoline production.
E85 fuel, made from 85 percent ethyl alcohol and 15 percent gasoline, is available on a limited scale and automakers have added E85-capable vehicles.
Maher said GM, the largest U.S. automaker, will produce about 400,000 vehicles in 2006 that can run on E85 as well as on regular fuel.
GM offers the option for vehicles such as the Chevrolet Avalanche and GMC Yukon and will add an E85 option to the Chevrolet Impala for the 2006 model year.
"There's a potential for ethanol to be a significant component of fuel supplies. It won't happen overnight, but it's something we need to nurture," Maher told Reuters at a CBOT bell-ringing ceremony for the new contract.
A few hundred U.S. gas stations now offer E85 fuel, including more than 20 in Illinois, according to the National Ethanol Vehicle Coalition of Jefferson City, Missouri.
If all E85-capable vehicles produced in the United States ran exclusively on the high-ethanol fuel, the U.S. would save about 45 million gallons of gasoline a year, Maher said. CBOT ACTS FIRST TO TRUMP CROSS-TOWN RIVAL
The CBOT's close associate and sometime rival the Chicago Mercantile Exchange plans to launch ethanol futures trading on March 29. The CBOT brought forward its launch from an originally planned April 8 to get first-mover advantage.
David Lehman, CBOT's managing director for business development said being first to market was important but less so than having "collaboration with the industry" to create a viable hedging tool.
Lehman said a new type of futures strategy could be used by producers to help manage processing margins by locking in their purchase price of corn and their sales price for ethanol.
"The futures contract will provide stability and certainty to the U.S. ethanol market, which will encourage its production," said Congresswoman Judy Biggert, R-Ill., whose district is a big corn producer.
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