The Ethanol Squeeze

The “magical” ethanol substance that was all the rage for much of the first half of 2006 has become a nuisance to its producers, and is on its way to becoming a nightmare. With large government subsidies helping to fund ethanol refineries in the mid-west, an oversupply of ethanol has started to hit the market. Over the past few months, the price of ethanol on the futures market has declined steadily.

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Ethanol Futures
Yet, with all the refineries being built, their has been an enormous demand for the raw materials to make this “magic” substance. In the United States, corn, which is the primary good used to make ethanol, has seen its price surrender to the enormous demand artificially created by the new ethanol refineries. And while the price of ethanol has declined, the price of corn has skyrocketed to a 10 year high just this past week.
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Corn Futures
The irony of the situation is that with ethanol prices so low and corn prices so high, the refineries can no longer afford the materials necessary to produce their product. While this un-equilibrium could be easily fixed by the free market, it is likely that Washington bureaucrats will continue to stew the pot somehow.
The good news for the consumer is that with ethanol prices declining, there is a possibility for greater adoption as a real energy source. And with so many refineries in the works, the oversupply of ethanol will likely cause prices to continue their downward trend for several more months. As far as corn goes, historical precedence often sees a jump at the end of the November due to the harvest. The next few weeks may see an increase in the price of corn leading up to mid-term peak at the end of the month.
The Commodity Investor

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