For ethanol producers worldwide, the one word that continues to describe their business is volatility.

Maize and gasoline, the two commodities with the greatest impact on ethanol producer’s margins, are experiencing unprecedented erratic price changes on virtually a daily basis. Gasoline futures have moved an average of 4.5 cents per gallon daily and corn (maize) futures have moved an average of 7 cents per bushel daily, said Eric Watts, director of business development with ConAgra Trade Group. Ethanol futures have also experienced volatility, averaging a 3.2-cents-per-gallon daily move over the last six months.

"The challenge for producers is what to do in the face of this volatility," Watts said. "Two areas that are being focused on are the speed of transactions in order to lock in the right margin and the flexibility to make decisions that are off preplanned risk management targets."

On the plus side, high gasoline prices have resulted in strong blending with an overall strong demand for ethanol, said Rick Kment, analyst with DTN.

"Ethanol producers have a very marketable product that has been relatively more sought after than in the past," he said. "The challenge is with record corn prices; it really has cut into the margins. Ethanol producers continue to plug along working on relatively narrow margins."

Ethanol is selling at a discount to gasoline, ranging between 20 and 40 cents, Kment said. Ethanol reached a low of $2.08 per gallon in February and a high of $2.56 in mid-April. That compares to the reformulated gasoline futures market that is trading at around $2.95.

"That makes blending ethanol into gasoline very attractive," he said. "The challenge is the price will continue to move higher, especially if corn prices move higher."

Ethanol usage has increased significantly in the southeastern U.S., Watts said. More discretionary blending means there is significant stress on the supply chain. Capacity utilization in February decreased 3.8% to 99.8%, with 1.37 billion liters of new plant capacity coming online in the month. Ethanol stocks declined 209,000 barrels to 39.6 million liters, according to the U.S. Energy Information Administration (EIA).

Last year, the U.S. ethanol industry produced 24.5 billion liters of ethanol, averaging about 423,000 barrels per day. So far this year, production has been averaging 514,000 barrels per day, according to the U.S. Energy Information Administration.

Brazil, the world’s second largest producer of ethanol, is expected to produce a total of 27.3 billion liters this year, an increase of 19% from last year. The Center-South region, which produces 80% of the country’s ethanol, made 20.3 billion liters in 2007 and is expected to make 24.3 billion liters this year. Last year, about 56% of the country’s sugarcane crop was used for ethanol production as compared to 51% in 2006. Ethanol production in the E.U. decreased 2.2% in 2007 because of higher feedstock prices. However, consumption increased 9.1% to 4.5 billion liters. Chinese ethanol production increased less than 1% in 2007, to 1.62 billion liters. Ethanol consumption also increased to 812 million liters. India, which produces ethanol mostly from molasses, saw production increase almost 21% to a total of 2.25 billion liters in 2007. The country consummed 1.8 billion liters of ethanol.

It is likely ethanol trade activity will increase this year given the ongoing demand and solid prices. Because of tariffs, ethanol must be $2.50 a gallon or higher for Brazil’s producers to profit.

Total Brazilian exports are expected to increase from 3.1 billion liters last year to 3.9 billion liters this year. The U.S. will be the primary destination, with imports of about 2.59 billion liters, an increase of about 800 million liters.

Global net trade of ethanol is projected to increase by 9.5 billion liters to a total of 13.6 billion liters by 2017, according to the 2008 Food and Agricultural Policy Research Institute’s agriculture outlook.

While new construction in the U.S. has slowed, Watts said it is understanding that some projects are still getting funding and plants that had started building are pressing on.

"We’ve seen a significant amount of cancellations, but most of these were plants in the planning stages or the very early stages of construction," Kment said. "Once the metal work begins, it really seems that so far there aren’t any cancellations or suspension of projects."

Watts said existing plants are working on optimization strategies for both risk management and logistic models.

A major challenge continues to be corn futures, which are at or near $6 a bushel, Kment said. With planting season underway in the U.S., it’s unlikely the volatile market will quiet down.

"We’re starting from a higher price level leading up to planting than we’ve ever had," Watts said.

A wet spring and cold temperatures has meant a delay in plantings. The U.S. Department of Agriculture (USDA) reported at the beginning of May a planting pace that is the third slowest since 1993.

States in the east and west end of the Corn Belt have been able to plant some, but the central region has been plagued with either reoccurring rains, cold temperatures or both.

The two major corn producing states — Iowa and Illinois — reported 18% and 28% paces, respectively. The last five-year average seeding levels have been 65% and 76%, respectively. Overall, U.S. planting progress was 27%, compared to last year’s 45% and the five-year average of 59% for early May.

There are concerns corn plantings won’t advance to the 70% level by May 15, which in the past has meant a higher likelihood of a below trend national yield.

"If the moisture continues, it’s expected that more acres will be transferred from corn to soybeans," Kment said. "That would tighten the market even more. I would expect to see corn prices to move higher if that happens."

The USDA said in its April World Supply and Demand report that ethanol will use 3.1 billion bushels of corn in the 2007-08 crop year as compared to 2.1 billion bushels in the 2006-07 year. Given building delays and tight margins, this could be shaved by another 100 million bushels, raising old crop stocks to 1.383 billion bushels.

USDA revised usage downward due to a lag in the pace of new plant startups. However, it said rising ethanol prices are supporting producer margins and capacity utilization for existing plants remains strong.

In its first estimate of the 2008-09 corn crop, the USDA projected 86 million acres will be planted this year, of which 78.8 million will be harvested. Yield per acre is estimated at 153.8 bushels for a total production of 12.1 billion bushels, 7% lower than the 2007-08 crop.

On the demand side, USDA projected that feed and residual use will decline to 5.3 billion bushels and exports are also expected to decline. BFB