Who Benefits from Ethanol?

The blog at the Small Planet Institute wonder who is winning from higher food prices, and names one usual suspect: big agricultural processors.

My adviser (Rich Sexton) and two co-authors have a paper (forthcoming in the Journal of Agricultural and Resource Economics) that

develops an analytical model for determining the production and price impacts and the distribution of benefits from the U.S. ethanol subsidy when upstream sellers in the seed sector and downstream buyers in the processing sector may exercise market power... Seed producers and corn processors with market power are able to capture relatively large shares of the benefits of the subsidy.

They use the model to understand how market concentration affects the distribution of gains from increased corn prices among farmers, seed sellers, corn buyers and "downstream users" (us).

Market concentration leads to market power, and market power leads to a bigger share of the gains from trade, i.e., a monopoly can charge you more than a firm facing competitors.

Concentrations are significant: DuPont, Monsanto, Novartis and Dow sell 69 percent of seeds; ADM, Cargill and two others companies control 74 percent of buying side of the corn market. This level of market share means that these industries are "highly concentrated oligopolies." (Walmart has 20 percent market share in US food sales.)

They use a simulation to calculate the distribution of benefits with market power and find -- assuming "moderate levels of market power" -- that 25 percent of the gains go to farmers, 30 percent to seed sellers and buyers, and 40 percent to downstream users.

Bottom Line: The ethanol subsidy and other manipulations of the corn market are not helping farmers as much as defenders claim. Much of the "gains" are going into the hands of big companies. End the ethanol program.