Ethanol to be "highly visible" trade in 5 years

By K.T. Arasu

CHICAGO (Reuters) - Ethanol has the potential to become a "highly visible" traded commodity in a few years as the thirst for clean and cheaper alternative fuels drives consumption, industry executives said on Tuesday.

The use of ethanol futures as a price discovery mechanism and risk management tool has been lackluster even as the sector grows by leaps and bounds in the United States, the world's biggest consumer of energy.

"Within five years, ethanol is going to be right up there," said Chris Standlee, executive vice president of U.S. operations for Abengoa Bioenergy, speaking at the Reuters Global Biofuel Summit.

"I think it's likely ethanol will be a highly visible commodity traded in its own right," he added.

Abengoa Bioenergy operates traditional starch-based ethanol distilleries in the United States and Europe and has been investing in cellulosic ethanol technologies since the late 1990s to use biomass as feedstock for energy production.

The Chicago Board of Trade BOT.N, the world's top grains exchange, launched ethanol futures in March 2005 and although there has been a gradual increase in traded volume since then, the amount is small compared to activity in corn futures.

The ethanol contract listed on the Chicago Mercantile Exchange CME.N barely trades, and there has been speculation that the two contracts could be merged when the CBOT and CME become a single entity in an $8 billion deal later this year.

David Lehman, CBOT chief economist and managing director for business development, was also optimistic.

"It has the potential to trade a decent volume, if the ethanol market were to reach a multiple of its underlying production, say it reached a multiple of 4 times," he said.

By comparison, he said CBOT corn futures -- which hit fresh 10-year highs on Tuesday amid continued speculative buying fueled by demand from the ethanol sector -- traded at 8 to 10 times the underlying production.

"A multiplier of four (for ethanol) would be 5,000 contracts per day," Lehman said. "That's still small compared to corn or wheat."

Estimated volume in CBOT ethanol futures was a mere 7 contracts on Tuesday, compared with 456,877 contracts for corn futures and 89,974 contracts for wheat futures.

The U.S. Department of Energy has set a goal of boosting ethanol production from the current output of about 5 billion gallons per year (19 billion liters) to 60 million gpy (227 billion liters) by 2030.

VeraSun Energy Corp. VSE.N, the second largest ethanol producer in the United States, said on Tuesday it was planning to boost its annual ethanol production capacity to about 700 million gallons by the end of 2008.

VeraSun Chief Executive Don Endres said one reason for the lack of interest in ethanol futures currently was that historically the industry transacted business through private contracts between buyers and sellers.

"It's a contract-based industry. We (ethanol) are only 4 percent of the overall fuel stream," he said. "As our industry grows, that (trades in futures) will grow."