SAO PAULO, Brazil (Reuters) – The launch of an ethanol futures contract in New York would promote the development of an international market for the green fuel and boost Brazilian exports, according to producers, analysts and traders. Brazil, the world’s biggest producer of ethanol fuel, would use the contract on the New York Board of Trade to hedge ethanol prices and in arbitrage trades against raw sugar futures which are listed on NYBOT.
“It will open new markets. As well as setting a price benchmark, it offers buyers more security and possible profits for everyone,” said Fernando Moreira Ribeiro, Secretary General of the Sao Paulo Cane Agroindustry Union (Unica).
Producers believe the contract will attract oil companies, refineries and distributors, notably in the United States where demand for ethanol fuel as a substitute for the gasoline additive methyl tertiary butyl ether (MTBE) has risen sharply. Ethanol can be derived from sugar, like in Brazil, and from corn, like in the United States. Asian countries, such as Japan and South Korea, which plan to use ethanol as a fuel blend, are also seen as players.
“Few countries, apart from possibly China, can make fuel blending mandatory and be self-sufficient in ethanol. No importer wants to depend on a single supplier,” said Ribeiro.
A futures market would make it easier for Brazil to supply more sugarcane-based ethanol to the world market. Brazil exported only 750 million liters of ethanol in 2003/04 out of total output of 13 billion. Exports included 300 million liters of fuel ethanol, mainly to the United States via the Caribbean so as to avoid punitive duties. The balance was made up of industrial ethanol.
“The ethanol contract would be similar to New York’s sugar contract, making arbitrage easy,” said a sugar analyst.
Brazilian producers believe that an ethanol futures market will be more liquid in New York than Sao Paulo because NYBOT has more speculators.
“There are many more speculators in the U.S. They are essential to make the contract work,” said a Sao Paulo futures broker.
The BM&F Commodity and Futures Exchange in Sao Paulo launched an ethanol futures contract in March 2000 but less than 10 percent of national output is traded. The launch of an ethanol futures contract in New York, envisaged in the first half of 2004, would meet a long-standing demand of Brazilian cane millers. They see the development of an international ethanol market as a way of letting them increase sugarcane production without depressing prices for the sweetener.
The prospect of another record center-south cane crop this year and huge stocks are weighing on the sugar market. Brazilian ethanol stocks total 1.4 billion liters and sugar stocks 1.4 million tonnes, local analysts Datagro estimated.
Source: Forbes.com (Reuters News Service) vom 2004-03-05.