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Grain Merchant And Processor Consolidation, Concentration, And Competition

May 19, 2015

By Matthew Elliott

A general trend in the last century has been for greater consolidation among Grain Merchants and Oilseed Millers and Processors. The U.S. Census Bureau tracks the number of firms and/or establishments and value of sales (market size) by industry sector every 5 years as a part of the Economic Census. In addition to the number of firms and sales, the Census Bureau publishes concentration ratios for each sector. One concentration ratio they publish is the amount of sales attributed to the four largest firms in that sector. The percentage of sales of the 4 largest firms is a measure that aids in identifying the type of market structure that exists. Highly concentrated sectors, with large percentage of sales attributed to the 4 largest firms, may be associated with Oligopolistic Market behavior. Sectors with lower concentration ratios can be characterized as resembling Perfect Competition behavior. The U.S. Department of Justice Anti-trust Division places heavier scrutiny to proposed mergers and consolidation in an industry sector with high levels of concentration. The fear is that market power can be used by the largest firms to suppress competition that would result in market inefficiency.

Sectors that utilize grain and oilseeds for milling, processing, or wholesaling have seen varying changes in concentration, number of firms or establishments that have entered or exited, and the changes in overall sector size in the last 15 years. For example, Grain and Field Bean Merchants is the sector that includes most country and terminal grain elevators and warehouses that purchase raw grain from Grain Producers to aggregate and re-sell. Since 1997, the Grain Merchant sector has grown from $120 billion dollars to $222 billion in 2012, but the number of establishments has decreased from 6,569 to 4,875. Despite Merchant consolidation, the concentration of Grain and Field Bean Merchants is relatively low, where the 4 largest firms control approximately 25-40% of the sales. This is in contrast to the Soybean Processing and Wet Corn Milling sectors where nearly 80% of the sales in that sector were attributed to the four largest firms (See Table 1).

The Ethyl Alcohol Manufacturing Sector, which includes ethanol producers, has departed from the general trend of increasing consolidation and concentration. Instead there has been a significant increase in market size, number of firms that have entered the market, and a large decrease in concentration since 1997. For example, in 1997, the Ethyl Alcohol Manufacturing Sector was just over $1 billion in size, and grew to nearly $33 billion by 2012. The number of companies in that sector grew from 31 to 171, and the concentration of sales for the 4 largest firms decreased from 63.1% in 1997 to 25.3% by 2007 (See Table 1).

Concentration ratios and their effect on market competition/behavior is very controversial. The problem arises in that “the market” is difficult to define. For example, markets can vary in size given different definitions of product type and/or geographic scope. A highly concentrated market in Soybean Processing Sector can be much less concentrated if the product type was more broadly defined to include all oilseed manufacturing, or to include more edible oils such as Corn oil. Moreover, geography plays a large role in market definition. A market can be increasingly concentrated if one examines a more local region compared to the U.S.

It is in a more localized geographic scope that concern has been raised about market competition among Grain and Field Bean Merchants for South Dakota grain. The concern arises that consolidation and mergers of Cooperatives and other Grain Merchants will impact market competition. The question is if there is sufficient competition on the purchasing side to ensure fair pricing of producer grain? In response to those concerns, we examine the economic theory behind Cooperative entry, and Cooperative mergers and consolidation, and demonstrated theoretically that concentration and competition is of less concern than changes to the marginal efficiencies of the merging Cooperative firms (link here to other article). Future research at SDSU will more closely examine the geographic proximity of Grain Processors and Merchants, their historical grain pricing, the organization type, and the effects on producer decision making and welfare for South Dakota grain production (see Figure 1). We will continue to share results from that research on iGrow in future articles and publications.
 

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