The Multi-market Effects of Ethanol Policy under Imperfect Competition

The literature on the effects of ethanol policies on agricultural markets is vast and thorough. The overwhelming majority of this literature examines global and national markets. Yet, several studies have documented the fact that corn procurement by ethanol plants is highly geographically localized, suggesting that analyses at the national level may masquerade substantial heterogeneity at the local level. This thesis examines how the structure of local corn markets shape policy pass-through, and its implications on welfare. We do so by combining a partial equilibrium displacement model with a conjectural variations approach, which allows us to accommodate potential market power exertion by ethanol plants when purchasing corn. The goal is to examine the effect of policy interventions on multiple connected markets (corn, soybean, livestock, food, and ethanol) under varying degrees of oligopsony power in the ethanol sector. Results show that buyer power by ethanol plants does not have a large impact on efficiency, but can drastically shift policy-induced rents to the ethanol sector in detriment of corn growers. On the other hand, horizontal spillovers into the livestock and food sectors are limited by the inelasticity of demand for these products with respect to their price. Oligopsony power stems from the size of ethanol plants relative to corn supply within the relevant geographical boundaries in which these plants operate; and it is alleviated by the presence of other plants in the local market. Therefore, this diversion of policy-induced rents is likely to take place in markets with few, geographically isolated plants as it is common towards the edges of the U.S. Corn Belt