Ethanol Contracting Basics

New business transactions usually require a letter of credit prior to procurement or vessel loading. As a trading relationship develops through consecutive transactions, buyers with a strong balance sheet may no longer need a letter of credit.

Most traders finalize contracts with a flat price for delivered ethanol. This price is inclusive of product procurement, insurance, chartered vessel and other necessary costs associated with product delivery. Contracts typically indicate ownership changes hands when the product is off-loaded at the destination port.

Transactions should include a certificate of analysis for the ethanol. Buyer and seller equally share the cost of independent laboratory testing.

Buyers should contract ethanol several months in advance, as the majority of U.S. ethanol production is sold quarterly. Ethanol specifications vary among buyers and markets. Therefore, traders have to provide ethanol producers with enough lead-time to meet the exact specifications in the contract.

Source: CHS Global Renewable Fuels, Minnesota