Why is Ethanol Investment so Volatile?

Ethanol Investment

Ethanol investment is popular as a way to invest in alternative, non-petroleum-based energy sources. Although these investments are attractive because of their novelty, their volatility is very high due to many factors. Most of the ethanol produced in the United States comes from corn, so the price of ethanol production largely depends on the price of corn. The price of oil will also have an impact on the price of ethanol because ethanol is used as an alternative energy source when oil prices are relatively high. It seems more attractive. 

Ethanol The industry that produces ethanol from US corn is a relatively new industry. An unproven industry that manufactures new products, no matter how attractive, is usually disturbed by the market. VeraSun® is just like that. After they locked the corn futures contract at just under 7 U.S. dollars (USD), the market price of corn fell to less than 5 U.S. dollars per bushel. VeraSun® announced that due to this reason, their operating losses in the quarter will be as high as 103 million US dollars. Although this is a major loss, the market reacted strongly. The stock price of VeraSun® fell by 73% in one day. 

Ethanol investment will be affected by the fluctuation of corn price. The fluctuation of corn price is not the only problem with ethanol investment. Although the future of the ethanol industry needs government Subsidies, this also shows that the future of the ethanol industry does not necessarily require government subsidies. When companies or products are not affected by the usual economic supply and demand laws, the investment market can feel this uncertainty. Then, ethanol investment is affected by this potential uncertainty in the form of volatility. Due to the lack of real data on ethanol demand, ethanol investment may be one of the first investments to be stripped from the financial portfolio during economic difficulties. The price of gasoline and gasoline also experienced unprecedented volatility in the 2000s, most notably in 2008, when oil and natural gas prices rose rapidly, followed by a faster decline. This is an important issue to consider because when oil and gasoline are relatively cheap, ethanol investment is less attractive in comparison. For example, if petroleum-based fuels are cheaper compared to ethanol products, most consumers will choose lower-cost options, thereby reducing ethanol demand and the profitability of ethanol investment. The inevitable result is also correct-high oil prices often bode well for ethanol investment, but rapid price changes have greatly promoted the volatility of such investments.

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