Overview of U.S. Ethanol Market
Hamza Hasan
Food First/Institute for Food & Development Policy
Agro-fuels first rose to national prominence in the aftermath of the second oil crisis in 1980. Seen as a renewable energy source, many policy makers in Washington supported increased production of Agro-fuels as a substitute for imported oil. In the last few years, with increasing political instability in the Middle East, and rising oil prices, Agro-fuels are once again being promoted aggressively. Another factor causing the current boom in Ethanol production– perhaps more important than rising oil prices – is that of the farm crisis. In the wake of the decline of the Midwestern agricultural sector, the ethanol industry is seen a way of revitalizing Midwestern economies. As a result, given the important political interests involved, the ethanol industry has bipartisan political support in the US Senate.
In 2006, when President Bush hinted at reducing the 54 cents /gallon import tariff, Senator Chuck Grassley (R-IA) sent a letter co-signed by 9 other Midwestern Republican Senators criticizing the proposed move. (1) As a result of the need to placate influential members of the Republican Party, any plans for the removal of the import tariff were quickly shelved. In addition to the strong political interests involved, farmers, long dependent on federal farm subsidies, see Agro-fuels as an opportunity to revitalize the struggling agricultural industry and thus, have also jumped onto the ethanol bandwagon.
The increase in ethanol production has lead to an increase in corn prices (prices nearly doubled in the last year) in the United States. However, we must remember that corn-based ethanol is far less efficient than ethanol produced from sugar cane, that is, the type grown in Brazil. Given the technological and production limits of US corn-based ethanol, the increasing production is likely to drive a tremendous growth of agro-fuel production in the tropical regions of the world. Consequently, Production and Consumption patterns in the United States are likely to drive a worldwide expansion in the Ethanol industry.
Corporate Consolidation
In order for agro-fuels to benefit local economies, local ownership of ethanol plants is imperative. However, recent trends show an increased corporate ownership of plants. As of May 2007, the ownership of Agro-fuel (primarily corn-based ethanol) plants and production capacity is divided between corporate interests and local farmer owned plants at a share of 60-40. Out of a total of 119 currently operational plants, 49 are owned and operated by farmer owned associations. (2) Similarly with ethanol production, farmer owned plants account for 34% of total capacity. However, in terms of future trends, there is a definite move towards greater corporate ownership in Ethanol production. Out of a total of 86 plants currently under construction, 88% are owned by large corporations. (3). Thus, when the presently under construction plants will be completed, the farmer owned percentage of total capacity will fall to below 20%.
Existence of Oligopoly: Another disturbing trend is the existence of two major Ethanol producers that control a large amount of production. Archer Daniel Midlands (ADM) and POET, the two largest corporate producers, control 33.7% of all Ethanol production. (4) If the next three largest corporate producers are included, then 5 corporations control roughly 47% of all Ethanol production. At this stage, in order to determine the existence of an oligopoly, if one applies the four firm concentration ratio to determine the existence of a oligopoly, the percentage of production by the top four firms is 43% (above the required 40%), moreover, given the current expansion in corporate production, as noted above, the further concentration of production in the hands of a few producers is a definite possibility. Further, due to overwhelming financial strength of companies such as ADM, the possibilities of mergers and acquisitions of smaller ethanol producers are also likely.
Corporate Profits: In addition to the possible creation of an oligopoly, recently released corporate profits confirm the fear that large agro-industrial corporations are most likely to benefit from agro-fuels boom. In June 2007, Monsanto, a leading biotechnology firm announced that its third quarter profit had jumped 70%, largely as a result of increased demand for ethanol had caused farmers to seek Monsanto produced high yielding corn seeds (5). Similarly, ADM, America’s largest producer of ethanol, announced profit increases of 20% for the quarter ended in February 2007. (6)
Anti-trust laws: The US Department of Justice maintains an anti-trust division that seeks to ensure fair competition within producer markets, and attempts to investigate the existence of any unfair monopolies or oligopolies. Given the possible creation of an oligopoly in the Ethanol production market, it is necessary to investigate whether any of the large agro-industrial corporations have ever come under anti-trust scrutiny. ADM, in the past, has twice been under investigation for breaking anti-trust laws, due to its overwhelming dominance of the agricultural market. In 1996, ADM paid a then-record $ 100 million criminal antitrust fine for price-fixing in lysine and citric acid markets. (7) Given its past record, there is a definite fear of price-fixing in the Ethanol production market as well.
Vertical Integration in the Ethanol Market: There is also scope for vertical integration in the Ethanol market. This collaboration is best exemplified in the existence of a company called Renessen. The Renessen website describes itself as “a joint venture of two global leaders – Cargill and Monsanto. Cargill is an international marketer, processor and distributor of farming, food, financial and industrial products and services. Monsanto is a world leader in the development of high value crops”. The alliance between Cargill, a large agro-industrial corporation and Monsanto, a leading biotech firm, has emerged in order to develop a crop that is genetically modified so that ethanol may be extracted more efficiently. This joint venture combines the biotechnology and agro-production aspect of the Ethanol industry under the umbrella of one corporation. (8)
Import Tariff: In 1980, during the second oil crisis, the Carter (and incoming Reagan) administrations, in an attempt to promote domestic ethanol production imposed a tariff on imported ethanol. Since the domestic ethanol industry was in its nascent stages, such protection was seen as needed in order to jumpstart the industry. This tariff, which currently stands at 54 cents a gallon, is imposed in order to prevent the cheaper Brazilian produced ethanol from driving American producers out of business. (9)
Domestic Subsidies: In addition to protecting domestic ethanol producers through a tariff, the US government also provides domestic producers with subsidies. The federal government has created a federal ethanol tax incentive for domestic production. This tax credit is set at 51 cents per gallon of ethanol. (10) Thus, this incentive results in 51 cents of federal excise tax forgiveness for each gallon of ethanol blended. While this is not a direct payment to the producer, it makes ethanol based fuel more competitive in the market. In addition to federal excise tax forgiveness, another federal income tax credit provides direct support for small ethanol producers. This provision allows ethanol producers with a production capacity of up to 60 million gallons per year (MGY) with an income tax credit of ten cents per gallon for up to 15 MGY of production. Thus, a qualifying small producer can conceivably claim income tax credit of $1.5 million. (11)
The importance of aggregating both State and Federal financial support: Quite often when the national media reports on the level of government support for ethanol production, they only refer to federal subsidies. However, for a more comprehensive analysis of domestic support, we must also include state level subsidies for producers. However, since each state has a different system of support, the real amount of protection provided is difficult to calculate. In 2006, the International Institute for Sustainable Development released a study that aggregated all state and federal support for the Agro-fuels industry. The report estimated, on 2006 levels of production, combined state and federal support for the ethanol industry were between $ 5.1 billion and $6.8 billion. (12)
References:
- Grassley, Chuck. Letter to President Bush. United States Senate Office. May 2006.
http://grassley.senate.gov/ - Renewable Fuels Association. Industry Statistics. May 2007.
http://www.ethanolrfa.org/industry/statistics/ - Ibid. Renewable Fuels Association.
- Renewable Fuels Association. Ethanol Biorefinery Locations. July 2007.
http://www.ethanolrfa.org/industry/locations/ - Kamp, Jon. Monsanto's Profit Jumps On Corn Seed Demand. Wall Street Journal. June 2007. http://online.wsj.com/article
/SB118303879459051483.html?mod=rss_whats_news_us - Businessweek. Ethanol Fuels ADM's Profits. February 2007. http://businessweek.mobi/detail.jsp?key=5711&rc=eu
- Press Release. Former ADM Top Executives, Japanese Executives, indicted in Lysine Price Fixing Conspiracy. Department of Justice. December 1996. http://www.usdoj.gov/atr/public/press_releases/1996/1030.htm
- Renessen website. About Us. Accessed July 12, 2007
http://www.renessen.com/en_about.asp - Associated Press. U.S. mulls ending ethanol import tariffs. MSNBC. May 2006 http://www.msnbc.msn.com/id/12634911
- Global Subsidies Initiative. Biofuels: At What Cost? Government Support for Ethanol and Biodiesel in the United States. International Institute for Sustainable Development October 2006.
- Ibid. Global Subsidies Initiative.
- Ibid.
