I'm following closely how ethanol and gasoline prices have been moving lately.

Throughout last summer and fall, ethanol prices didn't rise nearly as quickly as gasoline. This was partially due to the quick correction after a severe rise in the price of ethanol. What's happening now is that gasoline and ethanol are moving in a tighter correlation.

This chart won't show you that ethanol has been trading at a discount to gas (when you include that $0.51 subsidy). In fact, ethanol's been trading at a “discount” for the past nine months.

On April 4, 2006, the price difference was 38 cents. At ethanol's high on June 28, the price difference was 53 cents - just two cents over the subsidy. On January 18, 2007, gasoline was trading at $1.37/gallon and ethanol was trading at $1.85/gallon, or a difference of 48 cents.

Currently the difference is 46 cents.

What does this mean? It means a little breathing room for ethanol producers. They are getting almost the maximum amount of profits they can while keeping the subsidized price of ethanol lower than the price of gasoline.

As we edge out of winter, expect both prices to rise. We'll return to our favorite ethanol producer, Archer-Daniels-Midland (ADM:NYSE), when we inch into spring.

We'll also be taking a look at some other producers that have just hit the stage in my next Material Profits issue due out in March. Ann will be writing an in-depth article about one in particular.

You won't want to miss it…