FTC finds deconcentration trend continues
SOURCE: U.S. FEDERAL TRADE COMMISSION
December 28, 2010
BY Susanne Retka Schill
In its sixth annual report on concentration in the ethanol industry, the Federal Trade Commission found the industry is continuing a trend towards deconcentration. The FTC reports that as of September, there were 160 U.S. firms producing ethanol, the same number as 2009.
The largest ethanol producer's share of capacity increased slightly to 12 percent of domestic ethanol production capacity, above the 11 percent share in 2008 and 2009, but still below the largest producer's capacity share between 2000 and 2007, which ranged from 16 percent in 2007 to 41 percent in 2000. The annual reports are required by the Energy Policy Act of 2005 which charges the FTC with performing a market concentration analysis of the ethanol production industry using the Herfindahl-Hirschman Index to determine whether there is sufficient competition to avoid price setting and other anticompetitive behavior. Marketing arrangements are included as well.
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The report requirement reflects concerns from a decade ago that the industry could potentially become overly concentrated, with HHIs in 1998 and 2000 just under 2,000. A market with an HHI below 1,500 is considered unconcentrated. Markets with HHIs over 2,500 are highly concentrated and more likely to pose competitive concerns. Based on production capacity, the HHIs for the domestic ethanol production industry range from 288 to 606 in 2010, depending on the method of market share allocation. All of the 2010 HHIs are below those presented in the 2008 ethanol report. The analysis also considers the impact on competition when producers participate in marketing agreements. Attributing the market share of each producer to the firm that markets for that producer results in an HHI of 671. Attributing a producer's market shares to its marketing firm only when the marketing is pursuant to a pooling agreement yields an HHI of 304. These two HHIs are slightly lower than the comparable figures in last year's report (722 and 305, respectively). That compares with the 2006 report where the HHI values were between 326 and 995 for the three methods used to calculate market share and with 2005 HHI indices between 499 and 1,259, a drop of 21 percent to 35 percent.
The 2006 analysis of the impact of marketing agreements found an HHI of 1,345 compared to 1,613 in 2005, indicating those agreements created a market with moderate levels of concentration. The FTC also provides an overview of the ethanol market in its annual report. Ethanol production and production capacity have both increased this year, the report says.
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Domestic ethanol production increased approximately 23 percent between 2009 and 2010, from 10 billion gallons to 12.3 billion gallons. Production has increased over 750 percent since 2000, when domestic ethanol production was 1.6 billion gallons. Domestic ethanol production capacity, including capacity under construction, also rose from 14.5 billion annualized gallons as of October 2009 to 15.2 billion gallons per year as of October 2010.
In concluding there is little concern regarding ethanol industry concentration, the FTC report notes the U.S. industry currently lacks significant barriers to entry. "Potential entrants can purchase existing production facilities, some of which are currently idle due to recent economic conditions and past bankruptcies," the report says. "In addition, construction and expansion projects continue in the industry today, suggesting that entry into the ethanol marketplace by means of new capacity is not currently cost-prohibitive. An increase in supply resulting from new entry likely would make any exercise of market power unsustainable. The probable influx of ethanol imports also would likely restrain any potential exercise of market power by a domestic firm."
To read the entire report on the FTC website visit: http://www.ftc.gov/os/2010/12/101203ethanolreport.pdf
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