SOURCE: United Bio Energy

May 06, 2008 13:21 ET

Ethanol Producers Should Avoid Trying to Outmaneuver Government Actions When Managing Risk and Volatility, Says Ethanol Market Analyst

United Bio Energy's Risk Management Strategist Puts Senators' Recent Call for Mandate Adjustments Into Perspective

WICHITA, KS--(Marketwire - May 6, 2008) - In an effort to help consumers in the fight against rising food prices, two dozen Republican senators have asked the Environmental Protection Agency to waive or restructure the federal government's existing mandate for increased ethanol production in coming years.

The current mandate calls for 15 billion gallons of corn ethanol to be produced annually by 2015. This group of senators believe eliminating or reducing that mandate will ease demand for corn and encourage farmers to grow other crops, some of which have been scaled back in a rush to capitalize on soaring corn demand.

Some market watchers see another side to significant changes in the current ethanol mandate. Tom Wapp, a market analyst and risk management advisor to ethanol producers from United Bio Energy, suggests a change in ethanol requirements could potentially increase volatility.

"As the market tries to determine how much ethanol and corn demand exists, a change to the ethanol mandates might actually increase the price volatility that we are currently seeing," Wapp said. "Long term, with crude oil trading around $120 per barrel, gasoline blenders will continue to buy and blend ethanol regardless of the mandate because it is profitable for them. If a reduction in the ethanol mandate occurred, corn prices would likely trend lower initially but would likely recover most, if not all, of their losses as the need to ration corn usage would still exist."

Wapp emphasizes that trying to "outguess the market or the actions of the government" is a futile effort and an unwise strategy. Instead, he suggests ethanol producers manage risk and volatility by minimizing the impact of large price swings through appropriate hedging and decision making, as well as locking in profits when those opportunities exist.

"We can not predict the moves that the government might make, but we can watch for the market influences that might increase the need for a change to be made," Wapp said. "This includes global and domestic supply and demand, including the impact on demand in other grain-consuming sectors. Another key factor moving forward is the strength of the U.S. economy as it relates to the value of the U.S. dollar and attractiveness of non-commodity investments."

About United Bio Energy

United Bio Energy provides services to the owners of fuel ethanol plants, including grain origination and commodity price risk management for inputs purchased and outputs produced by the plants. United Bio Energy also provides clients with a full range of distillers' grain marketing services. (www.unitedbioenergy.com)

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