insights -- June 2015 - (Page 1)

insights Mastering Ethanol Publication of Sosland Publishing Co. and DDG Markets Sponsored by INTL FCStone Inc. Maximize opportunity, minimize risk; getting to know ethanol and DDG markets K KANSAS CITY - Markets are complicated, influenced by any number of micro and macro factors from the weather in Iowa to the economy of China. Trading physical commodities and/or financial instruments isn't for the wary or uninformed. There is high risk, but there also is great opportunity. The more that's known, the more control there is in reducing risk and determining reward. Ethanol and its major co-product - distillers dried grains (DDGs) - are prime examples of products affected by a wide range of other markets, most far larger and seemingly more significant. Knowing the fundamentals and what influences them is critical to minimizing risk and maximizing opportunity in the ethanol market. While ethanol can't be discussed in a vacuum without also dissecting DDGs, starting with ethanol makes sense. Unlike any other product, ethanol brings together the largest U.S. agricultural market in terms of acreage and production - corn - and the massive, global petroleum complex (especially reformulated gasoline blendstock). But it's not limited to those two markets, because by its nature ethanol also may be affected by other feeds, oilseeds, livestock, ethanol and DDG exports, the value of the U.S. dollar, political policy, geo-political unrest, sugar, and the list could go on and on. The Economic Research Service of the U.S. Department of Agriculture noted the link between corn and gasoline markets "strengthened significantly after March 2008 and continue to be highly correlated." "From March 2008 to March 2011, ethanol supply and demand accounted for about 23% of the variation in the price of corn, while corn market conditions accounted for about 27% of ethanol's price variation," the E.R.S. said. "At the same time, about 16% and 17% of gasoline price variation can be attributed to shocks to ethanol and corn markets, respectively. The impacts of corn and ethanol prices on gasoline price volatility are surprisingly large given that ethanol is only a small portion of the overall energy market." The E.R.S. went on to say, "Energy markets are notoriously volatile and this effect can now more easily pass on to agricultural commodity markets." While any number of factors affect ethanol prices, to successfully master the ethanol market, a trader needs to start with just three critical components - the price of corn, the price of DDGs and, of course, the price of ethanol. Ethanol production takes off The Energy Policy Act of 2005 provided the impetus for an infant ethanol industry and laid the groundwork for much 1

Table of Contents for the Digital Edition of insights -- June 2015

insights -- June 2015