A beginner’s guide to ethanol: Price, uses & market overview

From household products to fuel, ethanol’s versatility has made it an increasingly popular commodity. Find out how to invest in ethanol in this beginner friendly guide.
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Updated: Dec 4, 2023
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On this page, we explore everything you need to know about ethanol. Gain insights into ethanol market trends, pricing mechanisms, and the environmental impact of ethanol. 

Read on to learn more about this popular commodity and find links to beginner friendly guides explaining how you can get involved in ethanol. 

What is ethanol?

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Ethanol is a fuel made by fermenting and distilling sugars from crops like corn and grains. Ethanol is considered a more environmentally friendly fuel as emissions are lowered if its blended with gasoline. Ethanol also reduces crude oil dependence and boosts octane ratings. 

Production of ethanol has been growing rapidly in recent decades, with around 125 billion litres being produced in 2022. First created by Arab scientists, ethanol was originally used to power automobile prototypes. However, when greener energy sources grew in demand, so did ethanol. 

Today the United States and Brazil lead global ethanol production, accounting for over 85% combined. Most output gets blended into vehicle fuel or consumed as pure ethanol in flex-fuel vehicles.

Ethanol market overview

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Ethanol is a relatively new commodity that has only been trading since the early 2000s. After decades of government subsidies and mandates, the modern ethanol industry was born when financial investors helped establish the first significant renewables fuels futures contract.  

The Chicago Board of Trade (CBOT) and New York Mercantile Exchange (NYMEX) introduced ethanol contracts which allowed producers, blenders, and traders to hedge price risks as production expanded.

Today, worldwide ethanol exports exceed 4 billion gallons annually, with the United States, Brazil, Europe and Asia forming the biggest marketplace. Many experts suggest demand continuing to grow as technology enhances productivity and more jurisdictions activate low carbon mandates. 

Is ethanol valuable? 

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Yes, ethanol is a valuable commodity and there are numerous reasons why investors are attracted to the market. We have highlighted some of these key fundamentals below, explaining what they are and why they matter.

  • Portfolio diversification. It is common practice for many investors to include a selection of stocks and bonds in their portfolios. However, a diverse portfolio can provide protection against wild fluctuations as you are able to spread your money across a range of investments. Ethanol investing offers an easy way to diversify. 
  • Speculate on demand. Ethanol is a renewable energy and more environmentally friendly than other fuels like crude oil. Due to this, demand for ethanol continues to rise. Most notably in countries like China, which is experiencing a shift towards biofuels. Speculating on demand for ethanol is a key driver for investing in it. 
  • Rising grain prices. The production of ethanol usually involves one or many agricultural grains such as corn. Tracking the price of the components needed to produce ethanol is a good reason to invest in it. For example, if the price of corn is on the rise, it’s likely the price of ethanol will also increase. 
  • Hedge against inflation. One of the top reasons many investors put their money into commodities is to hedge against inflation. Inflation is when money loses value over time and if inflation rates are on the rise, it’s more than likely some commodity prices, like ethanol will also rise. 

How to invest in ethanol

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You can invest in ethanol by using a commodity trading platform. These platforms offer a range of commodities and are very easy to use. There are different platforms suitable for specific requirements. 

Some let you buy ethanol, others let you trade ethanol, and many are designed for investing in the grain. Visit our dedicated guide to discover how to invest in ethanol.

Ethanol in your investment portfolio

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A diverse investment portfolio can help protect you during market uncertainty, and the inclusion of ethanol can add value while allowing you to spread your money across various markets. 

Ethanol often moves independently to traditional investments like stocks and bonds. You can include ethanol in your portfolio as a hedge against potential losses. During times of economic uncertainty, investors view commodity grains such as ethanol as attractive options. 

Ethanol’s history and the fact it is an essential component in the energy and automotive industry, makes it a good long term play.

Ethanol vs other commodities

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Ethanol is part of the energy family of commodities, including oil, natural gas, and coal. Each commodity is unique in its own way and offers different features for investors and traders. You can learn more about specific commodities using our dedicated guides below. 

  • Oil. Oil is an essential commodity used globally for energy production. 
  • Natural gas. Natural gas is an energy commodity used to power nations across the world. 
  • Coal. Coal is another energy source used for various purposes including heating. 

FAQs

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What is the current size of the global ethanol market?
What are the major feedstocks used to produce ethanol?
Which nations lead worldwide ethanol production?
How much ethanol is used for fuel blending?
Which vehicle segment uses the most ethanol globally?

Risk disclaimer
Prash Raval
Financial Writer
Prash is a financial writer for Invezz covering FX, the stock market and investing. For over a decade he has traded spot FX full time while... read more.