International Biofuels Market -Hedging Potential for Finnish Producers and Traders

Market for Bio International B






International Bio-fuels Market -Hedging Potential for Finnish Producers and Traders International market for bio-fuels and, in particular, for ethanol is currently expanding and developing rapidly. The trade volumes are increasing since many industrialized countries have intervened new and extensive policy programs for promoting the utilization of bio-fuels. These policy measures involve compulsory blending requirements, such as the 5.75 % blending requirement in the EU, tax deductions, investment subsidies for processing plants, and direct income subsidies for land allocated to energy crops. The expanding trade volumes have created incentives to establish new marketing boards and hedging tools for increasing transparency and managing risks in the bio-fuels market. An example of the new and emerging hedging tools is the new ethanol futures contract designed and quoted by the Chicago Board of Trade (CBOT). The trade for the new ethanol contract started in July 2005. Thereafter, the trading volumes have been increasing drastically and also the traditionally thought price parity between the fossil fuels and ethanol has broken down. The price of ethanol has continued to increase even if the price of fossil fuels has developed more steadily, though remaining at very high level in the historical perspective. Currently the CBOT ethanol futures prices are around EURO 0.60 per litre of ethanol. So, far European marketing boards, such as the EURONEXT, have not launched new contracts for open trade and quotations for bio-fuels. Therefore, the bio-fuels market is not transparent from the Finnish traders? and ethanol processors? perspective. The reason is that the existing open quotations represent different market regimes and, in addition to the transportation costs, they are separated from the European market by different tariff regimes. Thus, it is not really known, what is the opportunity cost for the domestic, large scale ethanol production, and how competitive the domestic market is in the international context. Further, it is unclear how the bio-fuels markets are linked to the agricultural commodity markets and how the price movements in these markets reflect each others. The goal of this study is to derive the world market prices and price volatility for bio-fuels, such as ethanol using the existing price quotations in certain market regimes. The EU market prices are further derived by imposing the EU tariffs and an estimate of transportation costs to these prices. The co-integration relationship between the grain prices, gasoline prices and ethanol prices are estimated to reflect on how the grain market is expected to change when policy programs promote demand for bio-fuels. Further the possibilities for domestic processing and feed markets are examined. This research belongs to the MTT technology program and is part of the bio-energy programs.