Market Concentration, Supply Chain Resilience, and Producer Welfare: Lessons from The U.S. Ethanol Processing Industry

Economic theory suggests that processor concentration typically harms agricultural producers through buyer monopoly power. However, long-run models indicate that highly concentrated processors may act as a buffer during severe supply chain disruptions. The low water levels on the Mississippi River in the fall of 2022 led to a significant decline in barge capacity, disrupting export channels for inland farms. This provided a natural experiment to test this theoretical trade-off. Using weekly county-level panel data on corn basis differentials across seven U.S. states during harvest weeks from 2018 to 2024, we employ a difference-in-differences approach to isolate the impact of local ethanol processor concentration, represented by the Herfindahl-Hirschman Index (HHI), during the shock period. The model strictly controls for distance from the Mississippi River and local drought severity to ensure that the HHI mechanism operates independently. We find strong evidence of a buffering effect: during the crisis, a 5,000-point increase in the HHI was associated with an increase of approximately $0.04 per bushel in the basis. This effect exhibits significant spatial heterogeneity: it is dominant in states deep inland (Kansas, NorthDakota, SouthDakota, Nebraska); in river in estates (Missouri, Oklahoma, Texas), the basis is primarily influenced by distance from the river. However, tests of the transmission mechanism using farm-level panel data from Kansas indicate that this loca lprice buffer did not translate into higher net farm income. In particular, for corn-dependent farms, drought-induced yield losses ultimately offset the price gains from the basis phase. Ultimately, these findings provide key parameters regarding the benefits of price buffering that are currently missing from the antitrust framework. This suggests that highly concentrated processors in inland regions actually serve as a critical regional buffer. Antitrust policymakers should consider the positive impact of processor concentration on supply chain resilience, especially in the inland states.