Fermentation Products

This sheet covers five products that are almost never discussed together and should be: citric acid, lysine, monosodium glutamate, xanthan gum, and ascorbic acid, better known as vitamin C. They look unrelated on a shelf. They are the same industry.

All five are made by industrial fermentation. A sugar feedstock, usually glucose from corn wet-milling and sometimes cane molasses or cassava, is fed to a specific micro-organism in a large vat, which excretes the target molecule as it grows. Aspergillus niger makes citric acid, Corynebacterium glutamicum makes lysine and MSG, Xanthomonas campestris makes xanthan gum. The plants look like breweries and are engineered like refineries. That shared process is why the same handful of companies make several of these products at the same sites: China's Fufeng and Meihua both run MSG, lysine and other amino acids off the same corn stream.

All five are also dominated by China to a degree matched almost nowhere else in this book. China is the largest producer of citric acid, with capacity clustered in Shandong; it is more than 60 percent of world lysine; it holds the largest share of a 350,000 to 450,000 tonne xanthan gum market; and it is the overwhelming producer of vitamin C. The reason is not mysterious. Fermentation is capital-intensive, energy-intensive, and margin-thin, it consumes enormous volumes of cheap corn, and it produces a strong waste stream. Those are exactly the economics that migrated to China from the 1990s onward.

And all five have no futures market anywhere. They are sold on assessment and annual contract between a small number of producers and a small number of very large industrial buyers: food and drink companies for citric acid and MSG, feed compounders for lysine, oilfield service and food firms for xanthan, pharmaceutical and supplement makers for vitamin C. There is no screen, no settlement, and no forward curve.

Which brings up the thing that makes this sheet worth reading. These markets have been prosecuted for price-fixing more often than almost any commodity that does have a futures market, and the structure explains why. Take a product that is chemically identical whoever makes it, so buyers choose on price alone. Concentrate production in a handful of plants with high fixed costs, so everyone hurts in a downturn. Then remove the public price. What is left is a market where the only way to learn what your competitor is charging is to ask them, and asking them is the crime.

The record bears it out. The lysine and citric acid conspiracies of the early 1990s produced the largest antitrust fine of their era and put executives in prison. Vitamin C produced something stranger and more revealing: American buyers sued four Chinese producers for fixing export prices, and the Chinese firms defended themselves by arguing that Chinese law had required them to do it. That question went all the way to the US Supreme Court, which held unanimously in Animal Science Products v. Hebei Welcome (2018) that a US court must give a foreign government's account of its own law respectful consideration but is not bound by it. A dispute about a vitamin ended up setting the rule for how American courts read foreign law.

The lesson generalises past these five products. A public price is usually discussed as a convenience, something that helps hedgers and speeds up trading. These markets show its other function. A visible price is the cheapest antitrust enforcement there is, because it removes the reason to call your competitor in the first place.