Biofuels: how the market works and the importance of risk management in the chain

Understand what biofuels are, how they’re produced, and how this market works.

May 15, 2023

hEDGEpoint Global Markets

In recent years, interest in biofuels has grown around the world, mainly due to concerns about climate change, and the search for cleaner and more sustainable energy sources.

In this context, biofuels have emerged as a viable alternative to fossil fuels, especially for the transport sector. The differential of biofuels allows the use of biomass taken from agricultural products, such as sugarcane bagasse (the residue left after crushing), for example, as raw material.

Despite the strong attraction of clean energy, competing with petroleum-based fuels is still a major challenge. The gasoline and diesel market are already consolidated and has a massive structure working in its favor. On the other hand, some countries have goals for blending gasoline and ethanol (anhydrous) as a basis for sustainable policies. Thus, biofuel has started to gain space. In Brazil, the largest producer of ethanol, where the mixture percentage has reached 27%. European countries, such as England and the Netherlands, are still limited to 10%.

In this article, we’ll explain what biofuels are, how they’re produced, what the advantages and disadvantages are, the main types available, and how this market works.

How are biofuels produced?

Biofuels are produced from organic matter, such as sugar, starch, vegetable, and animal oils, among others. There are two principal ways of producing biofuels: through the fermentation of sugars and starches, or the “transesterification” processes of vegetable oils and animal fats.

Fermentation of sugars and starches is used to produce ethanol, which can be added to gasoline or used as pure fuel in flex-fuel engines. Transesterification is used to produce biodiesel, which can replace diesel made from fossil materials. Other biofuels, such as biomethane and biokerosene, are also made from fermentation or transesterification processes.

What are the advantages and disadvantages of biofuels?

One of the main advantages of biofuels is that they’re renewable and can be produced from local sources, reducing dependence on imported fossil fuels. Since Brazil is rich in commodities that enable their production, such as sugar and corn, it’s a great domestic opportunity.

In addition, the burning of biofuels emits less greenhouse gas than fossil fuels, contributing to the reduction of emissions, and thus, to the mitigation of climate change. Hence, it’s also a desirable alternative for companies that need to reduce their carbon footprints.

However, biofuel production generates competitiveness with food security, as it competes directly with food production. The same resources are typically used for one or the Other, and normally what guides decisions is the law of supply and demand. That is, the market which is more valued at a given moment is prioritized.

What are the main types of biofuels?

Currently, there are many types of biofuels, and markets and research efforts have given special attention to the improvement and creation of new alternatives. Here’s a list of the main types currently sold:

  • Ethanol: produced mainly from sugarcane and corn; It’s used industrially, as an additive in gasoline, or as pure fuel in flex-fuel engines.
  • Biodiesel: produced from vegetable oils, such as soy oil and palm oil, and animal fats; It can replace fossil diesel in diesel engines.
  • Biomethane: produced from the decomposition of organic waste, such as food waste; It can be used as fuel in vehicles powered by natural gas.
  • Biokerosene: produced from vegetable oils or animal fats; It can replace fossil aviation kerosene in airplanes.

What makes the biofuel market unstable?

The biofuel market is influenced by several factors and consequently can be very volatile. One of the main influences is the fluctuation of agricultural commodity prices, which directly affect the production costs of biofuels.

In addition, demand for biofuels is subject to changes in government policies and consumer preferences. These in turn lead to fluctuations in demand and prices.

In addition, as it’s the fruit of agricultural commodities, it’s subject to all the factors that can affect its production, from the climate to the producer’s decision to maximize profit.

How can you protect yourself from risk in this market?

The best way to manage your business’s financial risks, at any stage of the production or commercial chain of biofuels, is through hedging operations.

In the midst of so many variations, it’s vital to have a plan that offers more predictability and security for the future of your business. Relying on a specialist partner, such as hEDGEpoint, is the best strategy.

hEDGEpoint brings together the knowledge of experts in the most diverse commodities with risk management products, through technology, artificial intelligence, and data analysis, to always offer you the best experience.

Get in touch with one of our team of specialists soon to learn more about how to use this instrument to favor your business. Click here and talk to a hEDGEpoint specialist.

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