A Word about the Ethanol Market

Although Canadians are still playing catch-up, Americans are already convinced that the ethanol market is ripe for the picking.

True, buying ethanol IPOs potentially offers a perfect exit strategy to investors, what with all the government support programs, tax breaks on both sides of the border, and soaring oil prices. In the U.S., the line-up of IPO ethanol producers has become quite long. But in Canada, well, not yet!

There are few things investors should know about the ethanol market. Firstly, it would not even exist if it were not for governments of both countries footing most of the bill. For example, U.S. refiners that use ethanol in their products receive a $0.51 tax break per gallon. At the moment, subsidies and tax breaks deliver billions of dollars in free money to refiners.

As far as Canada’s ethanol policies are concerned, the country has gone a step further, providing ethanol producers with not only endless subsidies, but also with a guaranteed market. Justification for such a move is partly based on ethanol‘s alleged environmental benefits, although any such benefits are dubious at best. And still Canadian ethanol producers are avoiding IPOs.

Why? Perhaps the thought of being responsible to shareholders once they go public does not sit well with producers that are used to being pampered and operate unquestioned. Here is one more crazy idea—it looks to me that everything about ethanol market in North America is artificially created, including demand and supply. And what artificial markets often do? They crash! Perhaps ethanol producers in Canada are simply afraid investors would see right through them!