Ethanol Futures and Options Trading

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Historically, the futures World Sugar No. 11 market has produced ICE Futures U.S.'s largest total annual volumes. In 2003, for example, total sugar futures and options accounted for more than 36% of all the contracts traded on the ICE exchanges. In the first quarter of 2004, the ICE world sugar established impressive new all-time daily and monthly total volume records.

The global importance of the sugar trade provides a critical basis for the establishment of the ethanol futures market. The size of the new ethanol contract (7,750 gallons) represents a close approximation of the amount of ethanol that can be produced from 112,000 pounds of raw sugar (the size of the Sugar No. 11 futures contract). The ethanol (anhydrous, undenatured alcohol) deliverable against the contract does not specify sugar-based ethanol. The contract treats all ethanol as ethanol and makes no distinction, very much in the same way that the world Sugar No. 11 contract makes no distinction between sugar produced from beets or cane.

Price volatility, price risk, multiple buyers and sellers, a quantifiable commodity with standardized characteristics, reliable spot market price history are some of the features necessary to build a futures and options market. The price volatility and price risk are apparent in volatility and spot price statistics for ethanol.

The price of ethanol has declined on the world market and stabilized on the domestic front. Realtime and delayed (30-min.) ethanol futures and option prices can be found at ICE Futures U.S. ( www.theice.com).

With so many variables at work in the pricing of ethanol, the presence of a price benchmark is critical to the growth and economic stability of the ethanol industry. ICE Futures U.S. has created a world ethanol futures and options marketplace to bring some order to this unpredictable pricing picture.

The ethanol futures contract calls for Free-on-Board (FOB) vessel delivery of bulk liquid ethanol from any one of 9 countries of origin. The price is quoted in cents/gallon with a minimum price fluctuation of one/tenth cent/gal. (equivalent of $7.75 per contract). Contracts are listed for February, April, June, September and November. The ethanol must be biomass-derived, undenatured, anhydrous ethanol at 60 degrees Fahrenheit. Regular options are listed for each contract month. Option strike prices will be listed in five cent increments.

A growing industry faces a growing price risk and the ICE ethanol futures and options market can serve all levels of the marketing chain in a number of ways. Any of the following market participants, exposed to price risk, could utilize the futures and options market:

Ethanol producers; ethanol processors and dehydrating plants; energy trading companies; ethanol merchandisers; oil refiners, gasoline blending and marketing firms; sugar producers that produce ethanol; and chemical firms that produce synthetic ethanol.

With such a large number of fundamental factors influencing pricing for ethanol, the presence of a price auction is critical. The Exchange represents a regulated and orderly marketplace in which price is the primary commodity being bought and sold. Buyers and Sellers with price risk come together with equal access to the market to negotiate the best price and they are joined by speculators/investors that trade from both the buy and sell side and add important liquidity to the price discovery process.

Ethanol Contract Specifications*