Midwest Ethanol Cash Prices, Basis Data and Charts for Selected States
In this report, we review charts and data for cash ethanol prices in major Midwest producing states for the past three years. The tables and charts also include Chicago Board of Trade ethanol futures prices and the ethanol basis under near-by futures contracts for various state average cash markets. Ethanol Futures Prices, Cash Prices and Basis by State and Ethanol, Corn and DDGS Prices at Production Facility by State.
Basis is calculated as the cash (or spot) price minus futures. If cash prices are below (above) the futures market, the basis is negative (positive). In calculating and charting the ethanol basis, we use prices for the near-by contract month. We shift to the next later maturity month when the current contract enters the delivery month. Closing Thursday prices are used for the charts and tables. If the market is closed on a given Thursday, data for the next earliest business day are used.
Basis information is important for hedging ethanol production or purchases on the futures market. With an ethanol production hedge in the futures market, the ethanol producer would sell ethanol futures contracts in the same volume as the future production to be sold in the cash market at a later time. When the ethanol is produced and sold later on, the futures contracts would be purchased to close out the hedge. If ethanol prices had declined from the time the hedge was placed to the time when the ethanol was sold in the cash market, there would be a profit on the futures position to offset the lower cash ethanol price. If ethanol prices rose, a loss in the futures transaction would be expected to be approximately offset by higher cash ethanol prices. Basis information reveals how stable the relationship is between cash and futures prices. It also can be used to determine the approximate net local cash ethanol price that can be anticipated when the hedge is lifted and futures gains or losses are added into or subtracted from the cash market price. If the basis is relatively stable or follows a predictable pattern, the futures market can be used to protect ethanol processing margins.
The ethanol futures market is relatively new and is thinly traded in comparison with other major futures contracts. Lack of liquidity up to this time has limited its use for hedging ethanol production and protecting processing margins. However, over time the trading volume likely will increase and the market will probably become more widely used as a hedging mechanism, as more information on cash prices and the basis becomes available and trading volume increases. This report is an effort to make ethanol price and basis information more widely available to farmers, the ethanol sector and potential investors in new ethanol plants.
A somewhat unique feature of the CBOT ethanol futures market, in contrast to the grain and soybean product markets, is that there is a futures contract for each calendar month of the year. The last trading day for the current month’s contract is the third business day of the month. The delivery period is the first two business days after the contract has ceased trading. For additional details on the ethanol futures contract specifications and delivery processes, see http://www.cbot.com/cbot/docs/74401.pdf.