Mergers and Market Power in the US Nitrogen Fertilizer Industry

Abstract

Nitrogenous fertilizer prices spiked in early 2010 despite the fact that natural gas prices, nitrogen fertilizer’s main production cost, have dramatically fallen during this time period. We hypothesize that a merger which occurred between CF and Terra industries in 2010 exacerbated market power in an already concentrated industry, causing nitrogen fertilizer prices to increase. To test this hypothesis, we propose a structural vector autoregressive (SVAR) model. By including corn futures, natural gas and nitrogen fertilizer prices within an SVAR model we control for demand and supply shocks which affect the nitrogen fertilizer market. The remaining variation in fertilizer prices at 2010 not explained by the model is attributed to the merger. If we set this residual to zero, we can then use the SVAR model to forecast a counterfactual fertilizer price series which represents the price of nitrogen fertilizer in the absencebsence of the merger. Applying this technique to the data suggests that the merger raised prices by roughly 75%. This approach presents a middle-ground between the current methodologies used in the retrospective merger analysis literature. It is more transparent than structural approaches such as Nevo (2000) which make strong assumptions on demand and market conduct. Conversely, this time series approach is more applicable than the reduced form approaches such as Hastings (2004) that employ a difference in difference method and consequently rely on the existence of a credible control group.