News late last year of the merger of the third (VeraSun) and fourth (US Bioenergy) largest U.S. ethanol producers is not surprising, but it should serve as a warning to farmer and community-owned facilities.
Matt McKinney, of the Star Tribune, quotes an analyst from Wells Fargo Securities as stating, "The market will get brutal next year. The ones I worry about are the one- and two-facility guys. They're just, in my humble view, going to get crushed."
An article by DTN's Todd Neeley reports that the big ethanol players, like Archer Daniels Midland, are expected to take advantage of the downturn in the ethanol market to buy up smaller players. Neeley quotes Purdue agriculture economist Christopher Hurt as saying, "ADM has already made it known that they are in the market for more ethanol capacity at a reasonable price. . .Traditionally ADM has been a buyer of distressed assets and I would guess that would be the case for ethanol plants as well."
Neeley also quotes ethanol analyst James Eiler as stating that ADM and Poet "have publicly stated that they will consider expanding their asset base through acquisition, versus their practice to date of building their own proprietary plants."
The rapid consolidation in the ethanol sector is familiar to those who have followed agriculture markets over the years. University of Missouri economists Mary Hendrickson and William Heffernan have documented consolidation in other agriculture sectors over the last several decades. In their analysis earlier this year, ethanol was the only sector where consolidation had actually declined over the last 20 years. Now that is changing as corn prices rise and the margins for ethanol production narrow.
Why does it matter who owns the ethanol industry? As IATP's Jim Kleinschmit has written, "ownership of the refineries by local farmers and community members is seen as the key aspect to sustainable rural development. Local ownership assures that the facility is based to some extent on local resources and needs, and that much of the money generated remains in the local economy."
A study last year by the National Corn Growers Association found a much greater economic benefit for rural communities and rural households when ethanol plants are locally-owned.
Both the Farm Bill and Energy Bill have the opportunity to set policies that encourage farmer and community ownership of biofuel plants in the U.S., following the lead set in Minnesota which offered incentives and loans for farmer-owned plants.
Other sectors of the agricultural economy have become so consolidated that farmers are simply over-matched in the marketplace. They are price-takers, forced to accept whatever is offered from a few companies for what they produce, often at below their cost of production. Over the last several decades, a handful of big companies have extracted both the natural resources and profits out of many rural communities. As the biofuel sector shakes out, we should take care not to repeat the same mistakes and prioritize local ownership.
