Posted: Thursday, November 29, 2012 12:00 PM
'Industry remains unconcentrated,' agency says
By MATEUSZ PERKOWSKI
Ethanol production was controlled by fewer companies in 2012 but the shift hasn't imbued them with significant market power, according to a federal antitrust regulator.
The number of ethanol producers shrank by 6.5 percent, to 154 companies, since last year but the "industry remains unconcentrated," according to the U.S. Federal Trade Commission.
The industry's "dynamics make it extremely unlikely that a single ethanol producer, marketer or a group of such firms could exercise market power to set prices or coordinate on price or output levels," the FTC's report said.
Ethanol is primarily produced from corn grown in the Midwest, but it has impacts on other crops and livestock because demand for alternative feeds rises and falls depending on the price of corn. Livestock producers also rely on byproducts from ethanol plants for feed.
The FTC is required to monitor the ethanol industry's concentration "to avoid price-setting and other anti-competitive behavior," according to federal law. The agency used six methods to calculate market concentration among ethanol producers, depending on how production and market size is defined.
Four of those measures indicated concentration increased, two indicated concentration decreased, but all six methods found the industry met the parameters of being unconcentrated.
Wallace Tyner, an agricultural economist at Purdue University in Indiana, said the ethanol industry's structure isn't conducive to price manipulation -- either of corn or ethanol.
"Because its product is a close substitute for gasoline, there is little prospect of monopoly pricing," he said in an email. "Same on the input side. There are many buyers of corn, so concentration is not an issue."
Apart from the fact that ethanol producers compete on the world market, they aren't in a position to gain market power because the barriers to entry are so low, said Randy Fortenbery, agricultural economist at Washington State University.
"Any moonshiner can become an ethanol producer," he said.
When consolidation does occur in the industry, it's largely the result of economic turbulence, he said. Rising corn prices have prompted some producers to go bankrupt, allowing others to take them over.
Small ethanol facilities may also go out of production because they're not as economical to operate as larger ones, said Fortenbery. If the industry's profitability were to increase, it would simply attract more producers.
Even if ethanol producers had more market power, they wouldn't be able to assert much control to lower input prices because corn producers would sell into other markets, like exports or livestock, he said.
"Ethanol does influence the price but it's not the only demand center," Fortenbery said.