1 The Commission and the U.S. Department of Justice regularly use the HerfindahlHirschman Index (“HHI”) to measure concentration in a relevant antitrust market for use in

analyzing the likely effects of a merger or acquisition on competition in that market. HHIs are

calculated by summing the squares of the individual market shares of all market participants. 

HHIs provide a snapshot of market concentration and, in the context of merger review, the

difference between the pre-merger HHI and post-merger HHI suggests the merger’s likely effect

on market concentration. While HHIs provide information about market concentration, they are

only the starting point for the competitive analysis undertaken by the Commission and the U.S.

Department of Justice. Both agencies make their enforcement decisions based on several factors

in addition to HHIs, such as ease of entry and competitive effects.

2 See FTC, Report on Ethanol Market Concentration (2005) (“2005 Ethanol

Report”), available at http://www.ftc.gov/reports/ethanol05/20051202ethanolmarket.pdf; Report

on Ethanol Market Concentration (2006) (“2006 Ethanol Report”), available at

http://www.ftc.gov/reports/ethanol/Ethanol_Report_2006.pdf.

2007 Report on Ethanol Market Concentration

I. Introduction

Section 1501(a)(2) of the Energy Policy Act of 2005, as codified at 42 U.S.C. § 7545(o)

(“Energy Policy Act”), imposes an annual requirement on the Federal Trade Commission

(“Commission” or “FTC”) to “perform a market concentration analysis of the ethanol production

industry using the Herfindahl-Hirschman Index to determine whether there is sufficient

competition among industry participants to avoid price-setting and other anticompetitive

behavior.”1

 The statute further requires that the FTC consider all marketing arrangements among

industry participants in preparing its analysis. The FTC must report its findings to Congress and

to the Administrator of the Environmental Protection Agency by December 1 of each year. This

report presents the FTC’s concentration analysis of ethanol production for 2007, building upon

the previous two Commission reports on ethanol market concentration, which contain relevant

background information which is not fully repeated in this report.2
3 See Section IV, infra.

4 In putative markets such as domestic ethanol production, where the HHI level is

below 1000, there is a presumption that the market is unconcentrated, or competitive. HHIs

between 1000 and 1800 indicate moderately concentrated markets, which may or may not raise

competitive concerns. Markets with HHIs over 1800 are highly concentrated and are more likely

to pose competitive concerns. 

5 See Energy Policy Act § 1504.

2

For purposes of this analysis, FTC staff reviewed and analyzed publicly available data

and conducted interviews with ethanol producers and marketers. As in previous reports, FTC

staff used three different methods of calculating HHIs for the ethanol production industry.3

 Most

significantly, staff determined that, if each producer’s market share is attributed to the firm that

markets its ethanol, the HHI for domestic ethanol production (based on production capacity) is

670. If each producer’s market share is not attributed to its marketer, but rather to itself, the HHI

for domestic ethanol production (again based on production capacity) is 292. Assuming U.S.

fuel ethanol production is a relevant market for competition analysis, these figures indicate that

the relevant market is unconcentrated.4

 Moreover, these HHI levels do not justify a presumption

that a single ethanol producer or marketer, or a small group of such firms, could wield sufficient

market power to set prices or coordinate on prices or output. 

II. Recent Industry Developments

Since last year’s report, ethanol production has become less concentrated, and both

production and demand have continued to increase at a strong pace. One reason why both

production and demand increased from 2006 to 2007 is a federal legislative change that

eliminated the oxygen requirement for reformulated gasoline (“RFG”) as of May 8, 2006.5

 The

1990 Clean Air Act required that a substantial portion of U.S. gasoline meet certain emissions
6 See Federal Trade Commission, Report on Spring/Summer 2006 Nationwide

Gasoline Price Increases at 13 (“2006 Gasoline Price Report”), available at

http://www.ftc.gov/reports/gasprices06/P040101Gas06increase.pdf.

7 See 2006 Gasoline Price Report at 13.

8 See id. at 14.

9 See id.

10 See id.; see also Figure 1, supra.

11 See id. at 15.

12 See http://www.ethanolmarket.com/20070828EthanolMarket.pdf.

3

goals, in part through the inclusion of oxygenates such as methyl-tertiary butyl-ether (“MTBE”)

and ethanol.6

 Refiners largely used MTBE because it was cheaper than other oxygenates, but

they faced environmental liability in doing so due to leaks from MTBE storage tanks and the

resulting potential for groundwater contamination.7

 When Congress eliminated the oxygen

requirement for RFG, refiners concluded that they could no longer use the federal oxygenate

requirement as a potential defense of their use of MTBE.8

 However, refiners still needed to use

MTBE or ethanol to produce RFG that met other clean air standards.9

 Consequently, refiners

greatly reduced their reliance on MTBE and, at the same time, increased their use of ethanol

around the beginning of May 2006.10

The switch from MTBE to ethanol caused a surge in demand for ethanol, and a resulting

price spike in ethanol, in the early summer of 2006. Chicago spot prices for ethanol climbed

from an average of $2.53 in February, to a peak of $4.23 in late June. However, increased

domestic supplies and imports quickly brought prices back down to $2.33 by late August 2006.11

Ethanol prices dropped to around $1.70 per gallon by August of 2007.12
13 See http://www.ethanolrfa.org/industry/statistics/.

14 Domestic ethanol demand is on pace to reach over 6 billion gallons in 2007. See

http://www.ethanolrfa.org/industry/statistics/.

15 Our prediction that domestic ethanol usage will outpace the minimum

requirements of the Energy Policy Act is based on the significant amount of production capacity

now under construction, which is actually greater than the amount of ethanol production

currently in operation. Thus, if the amount already under construction is completed, domestic

production will be far greater than the 7.5 billion gallons per year of renewable fuels required by

the Energy Act of 2005.

4

The Energy Policy Act provided needed long-term certainty about demand levels that

sparked investment in production capacity, and consequently led to increased production in the

latter half of 2006. Section 1501(a)(2) requires that the gasoline used domestically contain a

minimum amount of renewable fuel. It initially set the minimum amount of renewable fuel

usage at 4.0 billion gallons per year in 2006, with yearly increases until 2012, when the

requirement reaches 7.5 billion gallons per year. In 2006, domestic ethanol production was 4.9

billion gallons, and domestic demand was 5.4 billion gallons,13 both in excess of the required

usage of 4.0 billion gallons of renewable fuel. Likely because it is currently economically

advantageous for oil companies to blend ethanol into gasoline, ethanol demand in 2006 exceeded

the minimum levels established by § 1501(a)(2). Domestic production and demand also are on

pace to easily exceed the Energy Policy Act’s mandated usage of 4.7 billion gallons in 2007,14

and will likely exceed the mandated usage for each year through 2012.15

III. Summary of Market Concentration Trends

Since last year’s report, ethanol production has become less concentrated, and growth has

continued at a rapid pace. From 2005 to 2006, domestic ethanol production increased
16 See Renewable Fuels Association (“RFA”), Building New Horizons: Ethanol

Industry Outlook 2007, at 2 [hereinafter Building New Horizons], available at 

http://www.ethanolrfa.org/objects/pdf/outlook/RFA_Outlook_2007.pdf.

17 See Energy Info. Admin. (“EIA”), U.S. Dep’t of Energy, Petroleum Navigator -

U.S. Oxygenate Production, available at

http://tonto.eia.doe.gov/dnav/pet/pet_pnp_oxy_dc_nus_mbbl_m.htm; EIA, EIA-819 Monthly

Oxygenate Report (December 2004), available at

http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/monthly_oxygenate_report/hist

orical/2005/2005_02/pdf/819mhilt.pdf.

18 See 2006 Ethanol Report at 2.

19 See EIA, EIA-819M Monthly Oxygenate Telephone Report (December 2000),

available at

http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/monthly_oxygenate_report/hist

orical/2001/2001_01/pdf/oxydata.pdf. (The report shows that 38,886 thousand barrels of ethanol

were produced in 2000. Multiplying 38,886 by 1,000, and then by the number of gallons in a

barrel (42), yields approximately 1.6 billion.)

5

approximately 26%, from 3.9 billion gallons to 4.9 billion gallons.16 This increase comes on the

heels of a 15% increase between 2004 and 2005.17 This increased level of production also

exceeds the projected 4.6 billion gallons of production estimated for 2006 in last year’s report

(which was issued before year-end production figures were available).18 Since 2000, when

domestic ethanol production was 1.6 billion gallons,19 production has increased 206%. With all

of the new production continually coming online, domestic production for 2007 likely will be

even higher.

Increases in U.S. ethanol production capacity in 2006 were comparable to the increases in

actual domestic production. Domestic capacity rose from 4.3 billion gallons per year at the end
20 See Renewable Fuels Ass’n, From Niche to Nation: Ethanol Industry Outlook

2006, at 4 [hereinafter From Niche to Nation], available at

http://www.ethanolrfa.org/objects/pdf/outlook/outlook_2006.pdf.

21 See Building New Horizons at 3.

22 See Renewable Fuels Ass’n, Industry Statistics - Ethanol Biorefinery Locations

(estimate as of Aug. 29, 2007), available at http://www.ethanolrfa.org/industry/locations/.

23 See From Niche to Nation at 2.

24 See Building New Horizons at 2.

25 See Renewable Fuels Ass’n, Industry Statistics - Ethanol Biorefinery Locations

(estimate as of Aug. 29, 2007), available at http://www.ethanolrfa.org/industry/locations/.

26 Id.

27 See 2006 Ethanol Report at 3.

6

of 2005,20 to 5.4 billion gallons per year by the end of 2006,21 to 6.8 billion gallons per year by

late September 2007.22 The number of ethanol production facilities operating domestically

similarly increased, from 95 at the end of 2005,23 to 110 at the end of 2006,24 to 129 by late

September 2007.25 These increases in production capacity are likely to increase at even faster

rates in the near term, as there are now approximately 6.6 billion gallons of capacity under

construction, roughly equivalent to the entire amount of existing domestic capacity.26

The number of firms producing ethanol also has increased. As of September 2007, 103

firms produced ethanol in the United States, a one-year increase of 13 firms, and a two-year

increase of roughly 28 firms. The largest ethanol producer’s share of capacity has continued to

fall each year as new firms enter the market. Currently, the largest producer accounts for

approximately 16% of domestic ethanol capacity, down from 21% in 2006, 26% in 2005, and

41% in 2000.27
28 The background information in this section on how HHIs are calculated and their

relevance is virtually identical to the background information in last year’s report on ethanol

market concentration. See 2006 Ethanol Report at 3-5.

29 A relevant antitrust market has both product and geographic aspects. A product

market is a product or group of products such that a hypothetical firm that was the only seller of

those products would find it profitable to impose at least a small but significant and nontransitory

price increase above the competitive level. If such a price increase would not be profitable

because of the loss of sales to other products, the product or group of products would not be a

relevant product market. Similarly, a geographic market is a region such that a hypothetical firm

that was the only present or future producer of the relevant product in that region would find it

profitable to impose at least a small but significant and nontransitory price increase above the

competitive level. If such a price increase would not be profitable because of the loss of sales to

producers outside the region, the region would be too narrowly defined to be a relevant

geographic market. See Horizontal Merger Guidelines §§ 1.1-1.2.

30 This investigation of ethanol market concentration did not require definition of a

relevant product or geographic market for purposes of antitrust analysis. Accordingly, this report

does not conclude or imply that a national market for fuel ethanol exists for antitrust purposes. 

7

IV. Analysis28

For purposes of calculating the HHIs required by § 1501(a)(2), we must assume that U.S.

fuel ethanol production is a relevant antitrust market.29 This assumption precludes consideration

of potentially smaller relevant geographic markets within the United States which could provide

further insight into the extent of competition among ethanol producers. It also precludes a larger,

world ethanol market. With the large increase in ethanol imports, it is possible that the market is

broader than the United States, and therefore, that the HHIs reported here overstate concentration

in the ethanol industry. Furthermore, the assumption precludes consideration of a broader

relevant product market, which includes other gasoline blending components that could be used

as an economically viable and environmentally acceptable substitute for ethanol. It is likely that

ethanol does compete with other blending components, in which case the HHIs in this analysis

could overstate concentration in the ethanol production market.30
31 See Horizontal Merger Guidelines § 1.41. An ethanol producer’s capacity is

likely the best measure of its competitiveness, because ethanol is an undifferentiated product

(i.e., producers manufacture chemically identical ethanol).

8

As in the previous reports, FTC staff used three different methods of calculating HHIs for

the ethanol production industry. Specifically, staff calculated HHIs based on the production

capacity of each individual producer and on the production capacity of each producer when

attributing each producer’s capacity to the firm responsible for marketing the producer’s ethanol.

Staff then confirmed these results using the actual production rather than capacity.

A. Concentration Based on Capacity, Attributing Market Shares to Producers

Staff first calculated market shares of producers based on their fuel ethanol production

capacity. Production capacity provides a useful and easily confirmable indicator of a producer’s

competitive significance.31

Staff relied on publicly available information and interviews with producers, marketers,

and other industry participants to determine the production capacity of each ethanol plant (as well

as other information presented herein). On its website, the RFA provides current data on ethanol

plant capacity and announced capacity expansions. Other publicly available information is

available from the websites of producers, many of which provide information regarding existing

plant capacities and construction plans. Some marketers also publicly announce new agreements

with producers.

In determining the capacity of individual producers, staff included the capacity of new

plants under construction and expansions of existing plants under construction. Staff considered

plants or expansions to be under construction only if the firm had finished its construction plans,

received necessary financing for the construction, and begun physical construction or expansion.
32 See Horizontal Merger Guidelines § 1.32. The Horizontal Merger Guidelines

specifically discuss “uncommitted entrants” as being in the relevant market. Uncommitted

entrants are those firms that are not currently producing or selling, but would do so within one

year without the expenditure of significant sunk costs of entry and exit, in response to a “small

but significant and nontransitory” price increase. While firms with plants under construction are

not technically uncommitted entrants, they pose similar constraints on the ability of current

producers or sellers to raise prices.

33 This number suggests an analytic precision that does not reflect the rate of change

in this industry, particularly as producers announce capacity additions, new plants, and

cancellations of plans to build new capacity on a seemingly frequent basis. Staff’s HHI

calculations represent staff’s best estimate of the industry’s concentration as of September 2007,

the cut-off date for our analysis unless otherwise indicated. This approach therefore excludes

more recent information publicly available from RFA.

34 See 2006 Ethanol Report at 7.

35 See 2005 Ethanol Report at 9.

9

Once a new plant or expansion project has reached this stage, completion is likely within twelve

to eighteen months. Including the capacity from such projects in the current market is consistent

with the approach adopted in the Horizontal Merger Guidelines.32 Although firms may plan on

further expanding capacity substantially over the next few years, staff deemed these plans to be

too speculative for this analysis until the producer has secured financing and begun actual

construction.

Under this approach, if each U.S. ethanol-producing firm is allocated market share based

on its capacity, the HHI would be 292, which is deemed an unconcentrated market under the

Horizontal Merger Guidelines.33 This represents a decrease from the HHI of 326 which staff

calculated in last year’s report,34 which was already a decrease from the HHI of 499 calculated in

the 2005 report.35 Thus, there has been a reduction in concentration in ethanol production for

each of the last two years.
10

B. Concentration Based on Capacity, Attributing Market Shares to Marketers

The second measure of concentration staff determined is also based on production

capacity, but attributes each producer’s capacity to the firm marketing its ethanol rather than to

the producer itself. Many producers, but not all, enter into marketing agreements under which

marketers make the arrangements with oil companies, blenders, and brokers. Other producers

market their own ethanol directly to the oil companies, blenders, or brokers. Staff attributed the

market share of these producers to themselves.

Individual marketers may represent, and make limited decisions for, numerous producers.

Such marketers likely concentrate the capacity of numerous producers under a single entity for

purposes of competition. Therefore, attributing market share to marketers in measuring

concentration, rather than attributing market share to producers, provides a different, although

perhaps as meaningful, measure of concentration of the ethanol industry.

Some marketers utilize pooling arrangements, under which they make more significant

decisions for their producer clients. Under these agreements, they treat all of their producers’

volumes in common, make sales to accounts, and decide which plant is best situated to serve the

account. Each producer is then allocated a prorated share from the common revenue pool, based

on the volume it contributes, and receives an identical netback (e.g., the sale price less the cost of

transportation from the ethanol plant), regardless of where the plant is located or where its

ethanol is sold. These producers receive offers from only one source – their marketer, who

represents numerous other producers. On the other hand, under a non-pool marketing

arrangement, a marketer sells its producers’ volumes on a plant-specific basis, and can present

each producer with offers from multiple buyers. In the non-pool marketing agreements, a
36 See 2006 Ethanol Report at 9.

37 Id.

11

producer will have a different netback for each sale based on the transportation cost to the buyers

it chooses to supply.

Because buyers do not make offers to individual producers within a pooling arrangement,

but deal only with the single marketer, it may make sense to attribute production capacity to

marketers for those producers in pooling arrangements. In attributing market shares to marketers

when they have pooling arrangements with their producers, and attributing market shares to

producers not in pooling arrangements to themselves, staff determined the HHI to be 453. This

HHI also indicates an unconcentrated market, and represents a decrease from last year’s HHI of

635 using the same methodology.36

As each marketing agreement is unique, staff cannot determine with certainty the effect of

each marketing agreement on competition in the industry. It is possible that marketing

agreements that do not contain pooling arrangements may nonetheless assign decision-making

rights such that it is more appropriate to treat the marketer as the key competitive entity for

purposes of measuring concentration. Therefore, staff also calculated an HHI which attributes all

producers’ shares to their marketers, regardless of whether the marketing agreement involves

pooling volumes. This approach yields an HHI of 670, again indicating an unconcentrated

market under the Horizontal Merger Guidelines, and again down from last year’s HHI of 995

using the same allocation method.37
38 See 2006 Ethanol Report at 9; see also 2005 Ethanol Report at 12.

12

C. Concentration Based on Production, Using EIA Data

Staff also measured concentration in the ethanol industry by using production data,

instead of capacity data. Analysis of production data is instructive because there are certain

limitations associated with using capacity data. Ethanol plants often can produce more than the

stated capacity guaranteed by the builder or designer, and tend to do so as their owners and

operators improve the production process and gain expertise in operating their plants. Ethanol

plants may run as much as 10 to 15% higher than their stated capacities.38

The EIA provided the production concentration data contained in this report. EIA

collects confidential information from firms that produce oxygenates such as ethanol and MTBE. 

Firms that produce over 8 million gallons of oxygenates per year must report to EIA their

monthly production volumes by product. Because the production data is confidential, EIA

provided only the final HHI numbers, and did not disclose the volumes of ethanol attributed to

each producer or marketer. The EIA concentration numbers are based on production from July

2006 through July 2007.

The HHI based on the actual production of ethanol is 465 if market shares are attributed

to the individual producers. If market shares of each producer are attributed to the firm that

markets for them only when the marketing is done pursuant to a pooling agreement, the HHI is

736. Finally, if market shares of each producer are attributed to the firm that markets for each

producer, the HHI is 1155. These HHIs based on actual production are all lower than the HHIs

based on actual production in last year’s report. Last year, the HHI based on actual production

was 663 when market shares were attributed to each producer, 982 when market shares were
39 See Id. at 11.

40 The time it takes to build a new ethanol production facility appears to have

increased slightly over the past year, due to tightness in the supply of both labor and equipment

necessary to build such facilities. Expectations in the industry are that this tightness is easing as

13

attributed to marketers utilizing pooling agreements and otherwise attributed to the individual

producers, and 1345 when market shares were attributed to marketers of each producer. Thus,

regardless of whether the measure of concentration is based on capacity or actual production, it is

evident that the production of ethanol is continuing to deconcentrate.

There are some limitations to the accuracy of HHI numbers based on actual production,

just as there are limitations to HHIs calculated based on capacity. These numbers provide a

snapshot of concentration levels at a fixed point in time, and do not capture projected and

ongoing changes in production. Specifically, HHIs based on production understate the

deconcentrating impact of new facilities that began production during the period measured by

EIA, as such facilities only will have produced a fraction of what they would likely produce in a

full year. Furthermore, such HHIs only reflect actual production, and cannot take into account

the price constraining effect of expansions and new facilities that are under construction but not

yet operational.39

D. Ease of Entry and Imports

Other market factors, such as ease of entry and imports, reinforce the presumption that the

domestic ethanol production market is competitive. For example, numerous new ethanol

production facilities began operation in the past year, and numerous additional facilities are

scheduled to begin operating in the coming year. Anecdotal evidence suggests that it takes 12-18

months to build a new ethanol production facility.40 Additional ethanol supplies from foreign
the demand for constructing ethanol production facilities is decreasing due to reduced ethanol

margins.

41 See Building New Horizons at 19. While RFA is the source for these import

statistics, RFA also provides slightly different import volumes of 653 million gallons in 2006,

135 million gallons in 2005, and 161 million gallons in 2004, at

http://www.ethanolrfa.org/industry/statistics/.

42 See 2006 Ethanol Report at 5.

14

sources are also analytically significant. In 2006, the U.S. imported approximately 672 million

gallons of ethanol,41 a sharp increase from the 136 million gallons imported in 2005 and the 149

million gallons imported in 2004.42 The ability for new firms to enter the market quickly, and to

import ethanol in response to increases in demand, demonstrates that firms are unlikely to have

the ability to engage in anticompetitive behavior, even if the domestic ethanol production market

were more concentrated than it is at the present. In other words, the threat of entry by domestic

producers and the presence of imports corroborate what the HHIs reveal - that this market is

competitive.

V. Conclusion

The ethanol production industry is not concentrated, and has become even more

unconcentrated over the last year. There is a very large amount of ethanol production capacity

now under construction that will further deconcentrate the industry over the next 12 to 18

months. Furthermore, the ease of entry by new firms, and the availability of ethanol imports,

provide additional constraints on current market participants. These dynamics make it very

unlikely that a single ethanol producer or marketer, or a small group of such firms, could wield

sufficient market power to set prices or coordinate on prices or output.
15
16

Figure 2: Domestic Fuel Ethanol Concentration

Concentration Based on Capacity 2006 HHI 2007 HHI

Shares attributed to each producer 326 292

Shares attributed to marketers only for pooling agreements 635 453

Shares attributed to marketers for all marketing agreements 995 670

Concentration Based on Production 2006 HHI 2007 HHI

Shares attributed to each producer 683 465

Shares attributed to marketers only for pooling agreements 982 736

Shares attributed to marketers for all marketing agreements 1345 1155

Source: RFA, EIA

Note: Capacity for 2006 includes new capacity additions that, as of July 2006, were expected to

be completed by the end of 2007. Capacity for 2007 includes new capacity additions that were

under construction as of September 2007, and expected to be completed within 12-18 months of

that time. Production data for 2006 are from July 2005 to June 2006, and production data for

2007 are from July 2006 through June 2007.
17