Farming and ranching are among the biggest sectors of the economy still dominated by large numbers of separate enterprises.  Despite five decades of decline (1940 to 1990), there remain well over 2 million farms and ranches in American.1  Moreover, historically, farming has played a central economic and social role in the development of this nation. Currently, America’s farms and ranches received over 241.5 billions of dollars in income.2  Despite (as well as because of) this abundance, these same farmers and ranchers face very substantial economic problems that are driving many off the land and condemning many of those who remain to forms of economic serfdom that leave them with little or no discretion in their working activities.  This has happened despite billions of dollars of government subsidy, and various statutes that seek to empower and protect farmers from abuse.
            Contractual and other strategic market conduct deny equal and open access to public and private markets for the sale of farm products.  These forces have given rise to broadly based concerns about the future of American agriculture.  The idea reiterated by these observers is that the farmers and ranchers are being denied the chance to profit from their productive efforts.  A continuing theme of observers and participants is the failure of contemporary markets in agricultural products to provide fair, efficient, transparent, competitive and accessible opportunities for all producers.
            While the United States Department of Agriculture (USDA) remains generally in denial that any serious problems exist with the functioning of these markets, legislators have brought forth a variety of proposals intended to remedy elements of the problems.  Recently, Congress approved new subsidies for diary farmers as a response to perceived and actual problems in sustaining that aspect of agriculture.3   In the case of livestock, the Senate twice approved legislation that would have banned packer ownership of livestock except immediately prior to slaughter.4  Although the specific provision was not included in the final legislation, the idea of further regulation over the process of buying livestock is being actively pursued by legislators from bothparties.5  Other proposals abound.  There are those who suggest that there should be an agriculture specific antitrust.6  Others have proposed revisions of the law to give the Secretary of Agriculture power to review and block mergers that might harm agriculture.7  Still others have expressed concerns about the abuse of the arbitration and other aspects of contracting.
            Another strand of vocal criticism is focused on the USDA which has authority under various statutes to act as a regulatory of some agricultural markets especially those for livestock.  Legislators, the General Accounting Office, and observers have all been highly critical of apparent failures in the regulatory process both with respect to rule making and enforcement of existing rules.8
             Law can, sometimes, either facilitate or frustrate achieving specific economic goals, but its role is always uncertain and its impact problematic.  From that perspective, the concerns about the failure of the market process in agriculture basically reflect recurring issues that confront any market based system for organizing economic activity.  As ones delves further into the issues confronting agricultural markets, one observes a strikingly consistent set of themes in both existing legislation and proposals for change.  The goals of these interventions are to use law to alter existing market structure and conduct to achieve fairness, transparency, access, and competition.  There is a general assumption that such legal controls will also be consistent with efficient markets.  
            The premise of these proposals is that law can control market conduct and shape the structure of markets in ways that will have actual effect in the market place.  Interestingly, the opponents of change make the same assumption about the effectiveness of law as a force that will shape markets.9  The history of this country suggests that both the optimistic and the pessimistic assumptions lack a strong and consistent basis in the observable legal and economic facts.  The elimination of comprehensive economic controls illustrated by airline, natural gas and telecommunications “deregulation” provide strong arguments that changes in the legal environment can make a major difference in price, output and innovation.  But when one looks more broadly at the longer run of history, including the longer history of some of the deregulated markets, the effect of law becomes less visible.10
            The legislative reform proposals focus on two related but distinct categories of market facilitation policy: traditional antitrust law and market specific regulation. Antitrust is concerned with the overall competitiveness of markets and enforces standards governing merger, conduct by monopolist and collusive or collective conduct.  The objective of these rules is to preserve and promote the overall competitiveness of the market process.  Antitrust does not address the specifics of the allocation of wealth or injury to individual market participants.  Industry specific market regulation, on the other hand, defines some element of the legal framework of a specific market and so can, if effective, either facilitate or frustrate fair, efficient and equitable market behavior.  Indeed, self-conscious, market facilitating and organizing legislation is a vital component in achieving efficient and effective operation of such markets. 
            There is a long history of concern about and legislative intervention into the terms and conditions for selling farm products that reflects a recognition of the persistent problems of access, fairness and appropriate market institutions.  Starting with the Packers and Stockyards Act (PSA),11 the Commodities Exchange Act,12 and the Capper-Volstead Act13 in the early 1920s, Congress has written a number of provisions intended to facilitate and structure agricultural markets.  Contemporary, agricultural markets, however, operate within a legal and regulatory framework that often frustrates competition and facilitates discriminatory and exclusionary conduct.  Statutory ambiguity and misdirection combined with persistent failures of the USDA to develop implementing regulations and to engage in active enforcement has meant that the impact of law on these markets has been less than supporters had hoped or opponents had feared.           A deeper analysis of the problems confronting these markets and a political willingness to recognize and respond to the underlying problems are essential elements for effective reform.  In that context, insights and elements of competition policy could be applied to the regulatory framework to bring about reform that facilitates the fundamental values of a competitive market: fairness, access and information.  The efforts to achieve a fairer, more transparent, efficient and accessible legal framework for the marketing of agricultural products, must recognize that the same forces creating market failure are the ones that produce frustration in the political process.14
            Despite the ultimate potential for frustration, it is useful to explore the role of law and law enforcement both as it exists and as it might be revised in agricultural product markets.  Such an examination can demonstrate where and how law is or can be a binding constraint on the conduct of economic actors.  In addition, an examination of the development of the law actually governing such markets as well as the institutional constraints on its successful enforcement provide useful information about how law can fail in its stated objective. 
            This paper starts with a brief survey of the conditions that currently exist in two major segments of the market for agricultural products: livestock and dairy.  This survey will explain why the issues of legal control have become even more salient in the last twenty or so years.  The second part evaluates both the existing law governing these markets and the mechanisms in place to enforce those rules.  This part will show that there is a consistency in the legislative efforts to facilitate open, transparent and accessible markets.  But both imprecise drafting and, equally significantly, reluctant or non-existent enforcement have blunted and frequently neutered these efforts.  The third part examines the limited but also important role that antitrust law can play in the process of developing and maintaining fair agricultural markets.  The final part examines the potential for effective legal reform as a matter of substantive options and practical politics.Part I. Contemporary Agricultural Product Markets: The Case of Meat and Dairy
            There are two hallmarks of contemporary markets into which farmers and ranchers sell their produce: high and increasing concentration and new forms of strategic conduct that further frustrate competition and cause harm to producers as well as to consumers.  These phenomenon are not unrelated.  As markets get more concentrated the incentives for dominant firms to engage in strategic conduct increase.  The prospect of gains as well as a desire to avoid foreseeable risks posed by rivals motivate such conduct.   The following survey demonstrates that both concentration and strategic conduct have had increasing impact in agricultural markets.  This survey focuses on two product areas: livestock and diary.  The patterns described for this two fields are comparable to those found in other agricultural product markets.
                       

A. Concentration in Agricultural Markets
            There are a number of uses for agricultural products.  Hence, many markets exist for those products.  As a general matter, there is a pattern of concentration and often increasing concentration on both the immediate buying side and the downstream processing and distribution of agricultural products.  The end result is that with respect to most products there are relatively very few buyers.  This situation is even more dramatic at the farm gate.  The producer of most commodities faces relatively high transportation costs as well as high search and other transaction costs and so must look to a buyer in the immediate vicinity to take the product.  National aggregate figures on buyer concentration, therefore, substantially overstate the number of actual or potential buyers any specific farmer or rancher is likely to have access to in the local market.

1. Diary
            The dairy industry is experiencing a substantial transformation.  A dramatic example is the recent merger between Suiza and Dean to create a new Dean.   Without any divestiture, it would have put nearly one-third of the nations fluid milk supply under a single firm.  The parties negotiated a modest divestiture which still left the merged entity with control over about 30% of the nation’s fluid milk.15
            The divested assets created a second large fluid milk company called National Dairy.16   From the standpoint of dairy farmers through out the country, this means that there are going to be few buyers for their fluid milk.  Further complicating this relationship, Dairy Farmers of America (DFA), a very large dairy cooperative, represents farmers and has a long term contract with new Dean to supply milk to most of its processing plants and has a 50% stock interest in National which in turn means that National will also take its milk from DFA
            Earlier this year, Hood, the third major fluid milk processor, proposed merger with National.  Under this deal, DFA would have retained a substantial ownership stake in the merged entity as well as a supply relationship with it.  Because of objections by a New England based dairy cooperative that its members would loose their only outlet (new Dean and DFA are the only other major milk handlers in the region), the parties abandoned the merger and have proposed a new deal in which each with take a substantial stock ownership position in the other and they will share top management.  Under this deal, DFA will get control of milk supplies to the Virginia plant of Hood, but will not have supply rights in New England.17  Despite the effort to disguise this deal as some kind of a non-merger, it is obvious that the two entities will be in a position to coordinate both buying and selling of fluid milk, thereby substantially further increasing concentration of control over the fluid milk market. In addition in April, the government sued DFA challenging its secret acquisition of control over a diary in Kentucky.18  This diary was, according to the complaint, the sole independent competitor in supplying milk to schools in the region.  DFA has contested the governments claims about the loss of competition.
            For a farmer to have access to the fluid milk market in many parts of the country, the farmer must belong to DFA. Thus, in fluid milk, the result is concentration on both sides of the process of buying milk; however, the barriers to entry and expansion of production of milk remain relatively low.  For this reason, farmers as a group are unlikely to see higher prices on their side of the farm gate.  Indeed, total milk production has grown without significant increase in fluid milk consumption resulting in serious price declines for the dairy farmer.19
            Other elements of the dairy business are similarly concentrated and often becoming more concentrated.  Milk not used for drinking is manufactured into cheese, butter, ice cream, or dried milk.  Based on estimates for the year 2000, only 26% of all milk production is used as fluid milk, 37% is converted to cheese, about 13% becomes butter and another 8% is made into ice cream.20
            Kraft dominates the cheese market with nearly a third of that business. In addition, a couple of other enterprises have a substantial share resulting in a relatively highly concentrated market.   Land O’ Lakes, the second largest dairy cooperative in the country is the leading butter producer in the United States. The current estimate is that it controls about 30% of the butter business.
            Overall, then, the markets in which milk is used are becoming ever more concentrated.  This leaves dairy farmers with fewer and fewer options for their product.  In the past in areas with many dairy farms, farmers could look to four or five potential buyers.  This meant that a diary farmer unhappy with a particular handler, could with relative ease switch to another buyer; moreover, given the nature of milk pricing, to be discussed later, the farmer’s basic revenue stream would not be altered significantly.  But when the total number of buyers falls to three or less, then the farmer’s freedom of action is very much impaired because such buyers will be much more self-conscious about engaging in bidding wars to obtain additional supplies.  This is likely to lead a system of de facto allocation of producers among the handful of buyers. Something that already exists in livestock and poultry production.  It also means that consumers have fewer sources of supply.

2. Livestock Beef, Pork and Poultry
            The livestock slaughter industry is highly concentrated and that concentration has substantially increased over the last 20 years.  In 1980, nationally the four largest firms in steers and heifers did 36% of the total slaughter while the four largest in hogs had a 34% share.21  In 2000, the four largest firms in steer and heifer slaughter did more than 80% of that business nationally; moreover, one firm, IBP alone did more than 32%.22  In hogs the concentration is lower with the four largest firms account for 56% of that business nationally in 2000.23  However, Smithfield the largest pork processor is proposing to purchase Farmland, the sixth largest processor.  In combination these firms would have about 27% of all processing and the top four firms would increase their combined share to 63% of the business.
            This data understates concentration from the perspective of livestock raisers.  Regionally, it is rarely the case that more than two or three of these firms compete as buyers and in many areas effectively only one major firm is buying.  Thus, concentration in the regional buying markets is much higher.
            A significant factor in creating this structural change was a series of mergers starting in the mid and late 1980s.  At that time, the prevailing theory was that if the downstream, consumer markets remained competitive that competition would protect the upstream producers from discriminatory and exploitative pricing by the meat packers.  This prediction has proven false.  A dominant buyer can force down the prices it pays below a long-run competitive price and so extract monopoly rents even though it sells its products into a competitive market.
            In the last few years another merger trend has emerged: consolidation among leading firms dealing with different types of livestock.  Tyson, the largest poultry processor, acquired IBP which is the largest beef and second largest pork processor.  Meanwhile, Smithfield, the largest pork processor and the only leading pork processor not previously engaged in beef processing,has acquired a substantial beef processors in Pennsylvania and Wisconsin.  In combination, those acquisitions will make Smithfield the fifth largest beef processor in the country and increase the level of concentration among the largest firms in the industry.
            In a slight reversal, ConAgra has sold a control position in its beef and pork operations to an independent group.24 Nevertheless, it retains a substantial stake in that business as well as its poultry processing operations where it remains a market leader.
            Some have argued that high concentration is necessary for significant efficiency gains. The fact is that high concentration is not related to efficiency.  The optimal scale plants for hog or beef processing require only 2 to 4% of the total national volume.  Even if some further, significant efficiency arose from multi-plant operation, the market could easily sustain 7 to 10 separate processors in both pork and beef.  Each such operator could have 2 or 3 plants but such a dispersion of ownership would create a much more competitive buying structure for cattle and hogs.25
            In the area of poultry, there are again a handful of very large firms.  The overall selling market, depending on its geographic scope,26 may be less concentrated than in beef or pork, but on the production side, the pattern is very clear–one or two firms lead by Tyson dominate any region.  Those farmers who would engage in this business have little or no choice about the buyer with whom they deal.

3. Downstream Concentration in Retailing
            Farm products must pass through a number of stages before emerging as finished products whether for use or consumption.  As a result even relatively remote elements of the process affect the costs of bringing goods to the final consumer and so directly effect the potential income for the initial producer.  Food processing and  retailing have experienced substantial, indeed, in some contexts, dramatic increases in concentration.
            Nationally, the largest grocers have an increasing and large share of all sales.  Currently, the top five chains control 40% of sales nationally.  In specific metropolitan areas, the concentration is often much higher.  This dramatic increase in national and regional concentration is a direct consequence of the merger mania that has afflicted this industry.  Size confers bargaining power even though it does not produce any meaningful efficiency gain.  This creates capacity to exploit consumers as well as buying power that can distort the market processes supplying grocery stores–all the way back to the farm.
            Food processors  have responded to the growth of concentration in grocery retailing with mergers among themselves.  The common explanation is the “need” to be larger, not to achieve productive efficiency, but to have the size to bargain effectively with the grocery chains.  Thus,  Kraft and Nabisco have combined as have Pepsi and Quaker Oats, Nestle and Ralston-Purina, etc..  Some of these combinations, arguably, did not eliminate substantial direct competition in grocery products, but even then they will further reduce the number of firms considering alternative products and capable of competing with each other if that is economically attractive.
            An  important impact of processor mergers is on demand for particular farm products.  That demand can involve very different market shares from the downstream grocery market.  For example, Nestle’s acquisition of Ralston-Purina combined the two largest buyers of beef and poultry meal products–in combination they may well have near monopsonistic buying power substantially greater than their shares in the downstream, broad pet food market.27  Since the “mad-cow” experience, the use of animal meal for feed to livestock intended for human consumption has been prohibited.  Hence, use in pet food is an increasingly important outlet for this byproduct of the livestock industry.  Farmer income is very directly related to the total value of the livestock they sell including all the byproducts.  On the other hand, a dominant buyer can refuse to pay the full market value of the product and still obtain the supplies it desires because the seller has few, if any, other outlets.  Thus, concentration in production can create specific buying power issues even when the downstream market is not substantially affected.

B. Strategic Conduct in Concentrated Markets
            Concentration creates incentives to exercise the resulting market power.  In surveying these issues, four categories are helpful: (1) the manipulation of public market prices to ensure lower costs to the buyer on the contractual side of the market; (2) direct manipulation of producer prices often manifest in the increasing spread between the farm price and the wholesale or retail price of the product involved and in contracting practices that avoid the open, public market as well as imposing inequitable burdens on the producers; (3) the increased capacity to exploit downstream consumer markets and (4) the inability of cooperatives to assure farmers of fair prices.

1. Manipulation of Market Prices
            The basic idea is to manipulate the public price of a commodity where relatively low volumes are traded in order to affect the off-exchange prices where such prices are set in relation to the public market price.  The impact on the integrity of the market process is the same whether the manipulation comes from the buyer or seller side.  False signals are being sent. 
            The strategy is in fact a very old and common one that recurs in both agricultural and non-agricultural markets.  The central institutional feature is a public market that has very low volume but which provides the basis for pricing many transactions that do not go through that market.  In addition for it to be economically rational to manipulate the market price, the manipulator(s) need to be major buyers or sellers of the product in off-exchange transactions.  In the past, buyers of cheese, eggs and butter manipulated the pre-World War I exchanges to create artificially low prices that then governed many off-exchange supply contracts.28  The major gas refiners used the same strategy to manipulate the wholesale price of gasoline in the 1930s.29
            In the cheese business, Kraft and others manipulated their purchases of cheese on the old Green Bay cheese exchange to drive down the price of cheese.30  This in turn depressed the amount farmers got for their milk.  The National Cheese Exchange in Green Bay, Wisconsin held a weekly public sale for a 30 minutes or so every Friday at which very little cheese was actually sold.  But this public market provided the basis for a vast volume of cheese sales based on contracts.  Hence, Kraft and other major buyers had a strong incentive to be sellers in that market to drive down the price of the products they were buying.  According to Mueller and Marion, the effect of this manipulation was to dampen down price increases and drive prices lower in periods of price decline because of increased supply relative to demand.
            The counter story is that DFA and Land O’ Lakes, the two largest dairy cooperatives,  manipulated the price of butter to drive up the price of milk.31  The butter contract, traded for only a few minutes each week on the Chicago Mercantile Exchange, provides both the base price for many off-exchange sales of butter, but also plays a substantial role in setting the price for milk.  Hence, by buying a small quantity of butter on the exchange, those controlling milk supplies can increase the price of milk over all the production they control.  Here, the putative gain goes to the farmer or at least the farmer’s cooperative.  To be successful over time, the cooperatives must then limit the production of their members and foreclose new members from joining.  Otherwise, the increased price will induce increased overall supply until the market price collapses and revenues decline for all.   In fact this is what has happened with milk prices.  Thus, price manipulation is less likely to be productive for producers than for buyers.
            The price for milk paid to the farmer is an average of the premium price paid for fluid milk and a more market driven price paid for milk used in manufacturing.  In any milk marketing area (defined by law through a milk marketing order) the base price for milk is the weighted average of milk used for both purposes.32  In addition to the base price, farmers can also receive various premiums based on volume, quality (butter fat content) and purity.  Hence, basic prices to farmers are less diverse than in livestock because of system of blended pricing which eliminates much of the incentive for a particular farm to have its milk used for a high value purpose.  Moreover, the price differences are more likely to rest on the merits of the product which reinforces competition based on the quality and cost of production. Such price consistency should reduce the costs of switching among handlers (the intermediaries who collect milk for sale to the various types of milk users).  But if there is high concentration among users or handlers in the region then this advantage is lost.  For reasons discussed further with respect to the problems with cooperatives, the dairy farmer is unlikely to gain as a result of concentration in either handling or processing even if the farmer is nominally the owner of those stages.
            In beef and hogs, similar problems of public price manipulation exist.  For hogs, the majority of which are now sold under various production contracts, the price set in the upper Midwest still provides the basis for pricing many production contracts.  By staying out of the public market at crucial times of the day or bidding low, the handful of packers that buy hogs can strongly influence the contract prices that they will pay for the bulk of their production.  Indeed, contract purchases have totally replaced open market sales in many regions, especially the southeast.  But the remaining public markets in hogs despite their very thin volume still provide the essential benchmarks for contract prices.  The incentive to engage in strategic conduct with respect to the public market prices is palpable.  Moreover, if Smithfield succeeds in acquiring Farmland this will reduce the number of potentiallycompeting buyers in the price setting market from 6 to 5.  In the context of auction markets, reduction in the number of bidders when the initial number is small can have very significant impact on the viability of the bidding process.
            In beef, there is less dominance of production contracts, but they are increasingly important.33  Such contractual commitments are called “captive supplies.” Here again, the tradeoff between public market prices and the price to be paid for contract cattle invites manipulation.  By lowering the market price, the packer can save substantially on its contract supplies.  In some production contracts, the price paid is based on the price paid that day by the packer for its public market purchases at the slaughter house were the contract cattle are delivered.  Because contract deliveries are scheduled a week or more in advance (the putative benefit of captive supply) a packer has the capacity to manipulate the amount it pays for captive livestock by managing its open market purchases.
            Price manipulation in these examples is feasible, given the small volumes involved, even to small players in the market, but the expected gain to an individual dairy farmer or cheese factory operator would be very slight indeed.  The same goes for livestock producers.  Hence, it is only when the participant has a major stake in an market directly linked to the thinly traded market, that it has a strong economic incentive to manipulate the public prices in this manner.  Other incentives to distort the exchange process can and do exist even for low volume players, but those incentives are much more directly related to gaining from on exchange transactions through deception or misleading others with respect to the market context.

2. General Buying Power
            Many commodities, especially as they move along the food processing chain, cease to have any public market.  This does not eliminate the incentives to manage prices by use of economic power.  The strategies are, however, different.  Basically, a volume buyer dealing with a number of small suppliers has substantial leverage to set a price within some range and stick with it.  The sellers have to deal with the buyer eventually. 
            The Ralston-Nestle merger created a firm that will buy over half of the animal meal sold in the United States.  There are many producers of such meal.  Here the downstream buyer has a great incentive to exploit its position to lower the price it pays for this input because it is such an important buyer of a product whose volume is largely determined by demand for meat.        
            Beef and hog operations have faced highly concentrated buying power for a longer time.  That experience shows that the slaughter houses pursue two compatible goals.  First, they can use the power to drive down the cost of inputs as discussed earlier.  If the farmer has any substantial sunk investment in the business, he or she will continue to produce for a considerable period of time even though the return is substantially below an acceptable level.  Moreover, even in periods of short supply when prices rise, the use of buying power can limit the impact of that increase and deny to the producer the full benefit of the increased demand relative to supply.  Second, to avoid the risk of disruption from other producers making inroads into their sources of supply and to deter new entrants, powerful buyers have an interest in creating barriers by tying up supplies through contractual arrangements.  This makes it much more difficult to obtain the supplies necessary to enter or expand a processing business.
            Recent data on margins in meat packing show that the margin retained by the slaughter houses has increased substantially.  This suggests that the slaughter houses are exploiting more vigorously their buying power to depress farm prices relative to the prices they are getting from the grocery stores.  This is an illustration of how buying power gets reflected back toward the level of the market least able to resist.
            The power of dominant buyers has another deleterious impact on the market–they have the power to engage in discriminatory buying practices.  As a result, there are significant differences in the prices paid for like grade and quality livestock favoring the farmers, feedlot operators and ranchers who have received long run beef supply contracts (captive supply) in comparison to those operators who sell in the spot market.34  There is no legitimate business justification for such differential prices.  The primary effect is to disfavor the public market.  Given the option, feeders will prefer contract sales.  But contract livestock are withdrawn from the spot market, and this results in an increasingly thin public market.  Yet this same spot market directly and indirectly influences livestock futures prices, the prices for calves and feeder stock, as well as the price for captive sales.  As the public market signals become more unreliable, this makes it more and more difficult for farmers and ranchers to operate their businesses effectively.  Thus, the impact of this price differential is to manipulate the entire price structure for beef and hogs. 
            A further problem is that only chosen operators are given access to captive supply contracts.  This imposes negative price differentials on many of the small and middle sized cattle producers in the country.  Even if the average price for cattle combining captive and spot market sales are reasonable, this systematic differentiation among sellers creates serious equity problems and threatens the viability of our traditional farming system.
            The same problems only worse exist in hogs.  In poultry there is no longer a spot or public market for generalproduction.  All supplies are captive under contracts that impose a wide variety of unfair conditions on the growers.
            The implication of captive supply for efficient market operation is threefold.  First, the favored operator has an incentive to serve its economic master because its next best option involves a substantial loss of revenue.  Such an operator is not well positioned to bargain effectively on the terms of the transaction.  Second, buyers are under no obligation to deal with all comers on equal terms, and so they can refuse to deal with any producer for any reason or no reason.  The fact of high concentration on the packers’ side means that such refusals will often deny access to the more lucrative contract market.  Indeed, by refusing even to bid for livestock for immediate sale, the packer can eliminate a disfavored operator from the business entirely. Third, captive supply contracts are “secret” because the packers claim the terms are confidential business information.  Hence, feedlot operators lack the information necessary to evaluate the reasonableness of the terms that they are being offered.  The capacity for this concentrated buying power to disrupt the market and contribute to inefficiency and market failure is a product not only of the concentration of these markets, but also the legal and institutional structure of the markets within which livestock are sold.
            The most extreme example of what can happen is found in poultry.  Once there was an open market in which growers could sell their chickens and turkeys. Today, there is no longer a spot or public market for general production.  All supplies are captive under contracts that impose a wide variety of conditions on the growers that essentially transform them into contractors providing certain services for the integrated poultry processor. In fact, the Attorney General of Oklahoma has offered the opinion that many contracts for production of crops and livestock are now contracts of adhesion which may in fact reduce independent farmers to the position of employees.35
            With greatly increased concentration on the buying side, the risk is that the public markets will either disappear entirely or that they will become very vulnerable to manipulation.  Firms with large markets shares have significantly greater incentives to limit the scope of the public market and seek the strategic advantages that come from contractual integration.  Conversely, in a market with many buyers the incentives to manipulate and frustrate the market process are more fully balanced by the advantages over time for all buyers of having a reliable public market process.
            In the case of brand name or differentiated retail products, a producer must get its products into a substantial number of grocery stores if it is going to achieve the necessary volume of sales required for efficient operation.  In such cases, the producer needs to have many or even most large retail chains as customers.  This confers on each chain substantial power to negotiate the terms of access to its retail space.  Interestingly, as producers increase their scale, they become more rather than less dependent on having wide spread access to retail outlets.  Concentration in production thus tends to increase the retailer’s buyer power.
            The chains demand for slotting allowances is another example of how they use their buying power to distort competition and foreclose small firms that can not afford to make such payments from the market. A slotting allowance is a payment to the retailer for access to the stores in the chain.  In essence it is a type of price discount by the seller to get the buyer to stock the good.  But it is a lump sum payment for access which means that it has differential implications depending on the size of the food processor.  Large retail chains operate many stores, and they expect substantial payments for access to those stores.  Such payments are often beyond the means of smaller producers with the result that one impact of such practices is make entry and growth by new or small processors much more difficult. 
            The processors who can afford to make such payments are powerful enough buyers in their own right not to have to absorb most of the costs of slotting fees.   These processors pass back to the farmer and rancher the burden of these price cuts and fees in the form of still lower prices. Such buying power ultimately results in further reductions of farm income because the farmers and ranchers of America are so atomistic in structure that they can not resist effectively the reduction in prices inflicted on them.  Thus, when processors urge that merger will give them greater “bargaining power,” they are announcing that they plan to use their buying power to reduce the prices paid to farmers while trying to keep their prices to retailers up.

3. Exploiting Downstream Markets
            When concentration exists in selling markets, then the sellers also have the potential to raise prices to downstream buyers.  The rapid consolidation of the grocery business has resulted in many local and regional markets having substantially higher concentration. The same is true in some categories of food processing.  The consequences of these increases are reflected in price increases to consumers.  For example, a study of milk pricing practices in New England demonstrated that the spread between farm and consumer increased as the milk processing market became more concentrated.36  The Wall Street Journal reported that consumers in Chicago were paying $1 more per gallon for milk in Chicago compared to Milwaukee even though both cities are getting milk from the same upper Midwest farms.37  Moreover, the price of milk in Chicago continued to rise despite a 26% decline in the price of milk at the farm gate. The difference between the two cities is that two-thirds of Chicago groceries are sold by two large chains.  The same Wall Street Journal article reports that in New England retails prices did not decline when the price of milk declined.  As a result, New England consumers were paying at least 10 cents a gallon beyond the extra charges imposed by the New England Dairy Compact.

4. Strategic Conduct by Cooperatives–Voice and Exit
            Another implication of increased concentration is the loss of individual autonomy and discretion.  It is already the case in beef, pork, and poultry that any specific farmer or rancher has very few choices–if there is any choice at all–of buyer.  Similarly, dairy farmers are becoming more and more dependent on access to a limited number of major handlers.  Serious access and equity issues are developing as the concentration of control over access to fluid milk increases. For example, DFA’s exclusive milk supplier contracts with new Dean and National mean that for diary farmers in many regions of the country membership in DFA is now essential.  They have no alternative outlets for their milk.  This gives DFA substantial control over the dairy farmer because it can exclude a farmer’s milk from the market.
            Although it is tempting to look at DFA and Land O’ Lakes as bringing bargaining power to the process of supplying milk, it is not clear that either has acted in ways that consistently serve the interests of its members.   On the one hand, DFA resisted efforts by farmers in Wisconsin to sue the cheese industry when data showed that Kraft had manipulated the price of the cheese it purchased in a way that directly lowered the price of milk.  On the other hand, DFA together with Land o Lakes and others has been accused of participating in a scheme to manipulate the price of butter on the Chicago Mercantile Exchange in order to raise the price of all milk being purchased in the United States.38  Despite any such manipulation of the price paid to DFA or Land O’ Lakes for milk, this has not in fact increased the price of milk to farmers.  In fact, recent price levels have been at historic lows.
             If DFA and other dairy cooperatives remain open to all who want to join, then the end result will be that little capacity to aid farmer members because production will increase with increased fluid milk prices, but that will result in lower prices for milk used in manufacturing dairy products.  But to the extent that DFA has discretion to determine who will get the extra payments based on quality, volume or other characteristics, it can direct some portion of the total payment for milk to favored members.  Thus, how DFA and other cooperatives allocate these extra rewards can have great economic significance to farmers as well as creating an additional source of discretionary power.
            A realistic apprisal shows that the cooperative managers are far removed from the local situation and may no longer be effectively accountable to their “members.”  The separation of ownership and control–long a haul mark of large corporate enterprise–is an increasingly common feature of large cooperatives as well.39  In fact, federal law requires, in effect, that cooperatives like DFA and Land O’ Lakes disperse voting power among members on a one vote per member basis.  When the membership is vast and dispersed, this makes it extremely difficult, if not impossible, for members to challenge the incumbent administration which in turn selects directors.  This is an example of the separation of ownership from control.  Because it is impossible to have a tender offer or hostile takeover of a cooperative, those modest means that exist in the ordinary corporate world to bring about some alignment between the interests of stake holders and managers do not apply in the case of cooperatives.  
            On the other hand, there is some indication of stronger membership involvement than in the ordinary corporate ownership situation.  Recently the national diary cooperative federation sought membership approval of a plan that would have taxed member sales to create a fund to buy out dairy producers.  The goal was to reduce production of milk sufficiently to raise prices to the remaining dairy farmers.  The first proposal required an 80% acceptance and failed to get that.  In response, the cooperative’s managers modified the proposal to call for a lower tax on sales and sought only a 70% acceptance level.  This proposal was approved.  It remains to be seen whether the idea of reducing existing production without creating effective barriers to new entry into dairy farming will have its intended effect.

C. Conclusions about Market Structure and Conduct
            The structural and conduct data concerning the markets for agricultural products shows that there is increasing disparity between producers on one side and buyers on the other.  Concentration is high and getting higher.  This has led to the predictable consequence of increased strategic conduct by buyers to exploit their buying power in a variety of ways to reduce income and autonomy of producers as well as increase the prices paid by consumers where the processors or retailers have substantial seller power as well.  Further, the structure of the large cooperatives created in the diary industry to protect the interests of farmers makes it increasingly unlikely that they can or will provide effective protection for producers.  Overall, then this is a picture of pervasive market failure.  The end results serve poorly the interests of both producers and consumers.  The next two sections examine how well the existing legal system, intended to facilitate the market process as well as protect the interests of farmers and ranchers, functions. Part II. Agricultural Market Specific Regulation and Its (Non-)Enforcement: Description and Evaluation
 
            There is a long history of government regulation of markets for agricultural products.  The stated goals of this regulation include facilitating efficient, fair, informed and equitable markets to which all producers have reasonable access.  Significant gaps in the coverage of these statutes, lack of essential implementing regulations, and a serious failure in enforcement have combined to create a context in which the problems discussed in Part I of this paper have festered and grown.

A. Legal Framework of Agricultural Market Specific Regulation    
             Starting at the beginning of the last century, Congress has adopted a series of statutes intended to provide a legal framework for agricultural product markets.  An important element was provision of government grading and inspection to ensure both the safety of the products and guarantee that the producers got appropriate grades and weights for their produce.40  For livestock markets, first, there was government grading and inspection of meat which both improved quality assurance and reduced some of the barriers to entry into meat processing.  Grading livestock made it much easier for buyers to have assurance of the quality of meat that they were getting.  However, the packers have continued to develop standards for meat that go beyond those cataloged in the current government grades.  Hence, packers now justify resort to contracts and captive supply agreements as necessary to achieve the goal of improved quality and consistency in the livestock they buy.  This claim, to the extent that it is valid, points toward the need for a dynamic regulatory process that will recognize and codify new standards as the market develops them.  This is an essential element of maintaining a workable public market process.41 
            Grading standards did not and do not resolve other problems inherent in the markets for livestock–in particular the risks of opportunistic behavior by buyers. In 1920 Congress adopted the PSA that provided for direct regulatory oversight of business practices including payment obligations of buyers of livestock and prohibited unfair and discriminatory practices by slaughter houses, buyers and stockyards.42
            With respect to other business conduct, the PSA has, in part, an antitrust type of focus concerned with overall competition; but it also expressly authorizes the USDA to adopt regulations that ensure a fair, open and accessible market for livestock.  In this, the PSA was the precursor of a number of statutes at both the national and state levels that seek to redress the balance between small business operators and their large customers or suppliers.  Thus, section 192(a) of the PSA forbids packers from using “any unfair, unjustly discriminatory, or deceptive practice or device” without requiring that such practice or device also have an anticompetitive effect or intention.  Similarly, section 192(e) condemns “any course of business” which has “the purpose” or “effect of manipulating or controlling prices” as well as such acts when they cause monopoly or restrain competition in the market.  Other provisions, e.g., sec. 192(c), explicitly require adverse competitive effect before there is a violation.   Thus, the PSA is a blend of provisions controlling conduct based on considerations of fairness and equity and ones focused on avoiding broader anticompetitive effects.
            The PSA has a clear point of view–it instructs the Secretary to regulate the conduct of packers and stockyards to protect producers and consumers from unfair and discriminatory conduct.  PSA 192(a) and 192(e) are clear that equity and fairness concerns in addition to overall competitive analysis are relevant to evaluating such conduct.  Moreover, the PSA recognizes that harmful results can be either intended or the consequences of the decisions made by packers.  Thus, that the packer did not “intend” to discriminate or be “unfair” and indeed did not gain by its conduct is no defense.  If the effect of particular market conduct is to discriminate, then there is a violation.  This aspect of the PSA necessarily includes a concern for the equitable distribution of wealth as between the various participants in the process of production.  This is an important theme in public regulation of market activity.43 
            The PSA does not confer price regulatory power on the Secretary.  Rather the
Secretary’s role is to ensure equal and fair treatment of those who supply and buy from meat packers as well as to enforce competitive market requirements on the conduct of the packers.  Legal regulation is essential to the credibility of any public market because of the incentives of powerful firms engaged in the market to exploit their strategic advantage to the detriment of the public users of the market.  The PSA also confers on the Secretary of Agriculture expansive rule making authority to implement this mandate.
            Overtime, the PSA was expanded in several ways responsive to the changed context of livestock production.  First, the coverage of poultry processors was expanded to include within the PSA’s coverage the current organization of the business.44  Second, certain classes of livestock producers were given the right to sue for both damages and injunctive relief directly for violations of the PSA.45  Prior to that change the PSA was strictly a basis for federal regulation of the conduct of meat packers.  The most recent farm bill revised the statute to ensure that current hog production contracts were included with its coverage.46
            Currently, a group of cattle feeders is pursuing a major class action against IBP for its practices with respect to the use of “captive” (i.e., packer owned or controlled) cattle to manipulate the price for open market cattle purchases.47  In very general terms, the claim is that IBP used its control over captive supplies of beef cattle to manipulate public market prices to the detriment of both sellers in the open market and contract producers.
            Two points about the PSA deserve special emphasis.  First, despite the broad authority given the Secretary to adopt regulations implementing the general terms of this statute, the USDA has never used this power.  It has sought to develop some law on a case by case basis.  The results in recent litigation have been negative.48  Second, the PSA only covers transactions involving livestock.  In sum, despite its clearly articulated goals, the PSA has not provided a basis for controlling discriminatory, exclusionary, or other undesirable conduct in agricultural product markets generally, and except with respect to the specific problem of ensuring payment for livestock and poultry it has to date provided little constraint over buyer conduct in the markets where it does apply.
            In dairy, milk marketing orders created a different approach to the problem of equitable access to the market.  If dairy farmers in a region agree to the establishment of an order, then the sale of all milk from that region is subject to the order.  As described earlier, the price paid for fluid milk is substantially greater than that paid for milk used for other purposes.  Hence, absent some system for pooling revenue, the opportunity for strategic conduct by buyers would be great and the likely effect would be that the extra value of fluid milk to consumers would be captured entirely by processors.  The center piece of the milk marketing order is that regardless of the use made of the milk from a specific farm, all farms producing Grade A milk (the quality necessary for consumption in fluid form) in the order area are assured of the same base price derived from a price formula that attempts to average out prices paid for all milk in the area.  In effect all farmers with grade A milk share in the extra price paid for that milk when used in fluid form.  This eliminates the incentive to engage in certain kinds of strategic conduct.  
            However, the system also imposed strong disincentives to move milk from one region to another and employed different prices for milk from region to region.  In regions were milk production approximates the fluid consumption with a modest excess for butter, cheese or ice cream, this system encouraged farmers to produce more milk to increase the proportion of the premium that they could get.  So long as the costs of increasing production did not exceed the gain from the shared premium, this made economic sense to farmers.  But it distorted milk production and moved it from the lowest cost but lowest price regions, basically the upper Midwest, into higher cost, less efficient regions.  This has produced substantial distortions in the production of milk and in doing so, has created new economic stakehlders that have advocated for protection of their interests.   Lastly, of course, the large coops exercise significant control over access to the marketplace.  Independent milk haulers and their farmer customers are the initial targets of exclusion.  But the impact is to give substantial control over participation to the cooperative’s management.
            Last year, Congress created a new dairy subsidy system with a national subsidy for all dairy farmers.  The subsidy price is based on the difference between a set price floor for milk used as fluid milk and the comparable New England fluid milk price.  If the New England price is blow the floor, then all dairy farmers will get a subsidy based on that difference and the proportion of the milk produced in their area going for fluid milk use.  Thus, in regions where such use is the predominant one, such as the southeast, the subsidy will be much more substantial than in the upper Midwest where only 20% of milk production goes to fluid uses.  Because of excess production nationally, the price for milk in various manufacturing uses has dropped dramatically, this means that the subsidy will have to be very large and that in turn will exhaust the funding allocated for this use in the very near term.  Moreover, dairy farmers in the most efficient producing areas will get the lowest subsidy because of the relatively higher proportion of their milk going to non-fluid uses.   In trying to bring about more equal treatment of dairy farmers, Congress seems to have made worse the tensions within the system.  Local political interests have played a very strong role in creating this dissonance.
            The focus of the diary marketing program is product specific and its blending method is one that is workable in milk where the product is very homogenous but has very different value depending on its end uses.  This approach would not be workable in other contexts such as livestock because of the greater variation in the crops and livestock being produced.
            There are a couple of other important statutes that establish more generic controls over agricultural product market activities. The Agricultural Fair Practices Act (AFPA) prohibits specific kinds of unfair trade practices involving coercion of producers into joining or not joining associations.49  This is a recognition that buyers may be hostile to producer associations and can retaliate by discriminatory refusals to deal with those join such organizations.  The case law enforcing this statute is sparse.  In part this is a consequence of the fact that buyers can find many apparently legitimate bases to refuse to deal with any specific producer.  The burden on the producer to disprove these claims is substantial.  Because the statute does not provide for a reasonable attorney’s fee if the producer prevails, the daunting nature of the litigation can further discourage its use.  In addition, most production contracts contain arbitration clauses that preclude recourse to courts and often entail very restrictive conditions that give substantial advantage to the buyer if arbitration is sought.
            The policy of the AFPA remains clear and consistent with the overall structure of the law in this area: it seeks to ensure producers are free from arbitrary and unjustified refusals to deal.  Implicitly it acknowledges that in many parts of agriculture, the producer has very few alternatives.  Hence, a refusal to deal by one of the few or only potential buyers takes on a much greater economic significance than would be the case in there were more buyers in the market.  In effect, this is an effort to protect the voice of the farmer.
            The Capper Volstead Act not only exempts agricultural cooperatives from antitrust law in some significant degree but also requires the Secretary to police market conduct to ensure that cooperatives do not unduly raise price.50  The goal here is to ensure that the power of such associations is not exploited unfairly.  The statute does not provide a definition of what constitutes an excessive price, and the Secretary has never enforced this provision or adopted explanatory regulations so the concept remains elusive. 
            Of equal significance, the statute does not provide any explicit authority to review the internal operations of the cooperative organizations.  They remain strictly creatures of state law.  If there are, as seems very likely to be the case, major issues concerning access, treatment and voice in cooperatives, then the present statutory structure does not provide coherent review and oversight of these problems.   
            These various laws do have some clear common themes: Congress identified specific failures of these agricultural product markets to operate in fair, accessible and efficient ways and adopted specific statutory rules in the belief that these interventions would remedy the problems and restore competition on the merits.  However, from a more inclusive perspective, the result is a patchwork of responses to particular issues and problems that has not been revised and made systematic to define a workable legal context for agricultural markets.51

B. Evaluation of the Legal Framework                     
            The present legal framework regulating agricultural product markets has three major deficiencies: the statutory authority is a patchwork, the USDA has failed to use its powers within the areas over which it has authority to develop appropriate, market facilitating regulations, and its enforcement of even the existing rules has been ineffectual.  These failings parallel and reinforce the structural and conduct problems that confront these markets.  Moreover, the same economic forces that operate in the market have, not surprisingly, influenced the regulatory and legislative processes.  The result is that the skeletal structure of law and public policy lacks the muscle and coordination necessary to have a substantial influence on the conditions under which most product markets operate.

1. A Patchwork Statutory Framework
            First,  the authority of the Secretary to police the fairness and equity of treatment in agricultural markets is limited and different from product market to product market.  For example, the most pervasive statute, the PSA, applies only to livestock and poultry.  No comparable authority exists to police grain or dairy contracts.  As market structure and conduct akin to that in livestock and poultry markets come to dominate other sectors, it will be increasingly apparent that there is a need to provide comparable rules and regulations to ensure fairness in pricing and equal access to market opportunities for all farmers and ranchers.
            AFPA only provides a limited protection against refusals to deal based on membership or non-membership in marketing groups.  This statute recognizes the potential for unjustified exclusion from the market.  But its coverage is limited to a single issue and does not more broadly address the problem of unfair treatment or create criteria that provide workable tools to evaluate and remedy such exclusions.  Moreover, the increasingly pervasive use of arbitration can further blunt the impact of such rights.  The fundamental policy behind the AFPA is an essential element to facilitating workable market conditions, but its details and lack of rule making authority to define and clarify its application mean that its effectiveness is limited.
            Capper-Volstead provides yet another example of limited and incomplete authority.  The Secretary can only review and challenge the pricing policies of cooperatives and then only if they impose excessive prices.  What is lacking here, despite its presence in various forms in the AFPA and PSA, is any authority to oversee the internal conduct of cooperatives.  As the market in some crops and dairy products has become dominated by one or a few cooperatives, the issues of internal governance are likely to emerge as central sources of concern.  Livestock and poultry cooperatives would be subject to the PSA’s requirements of fair and non-discriminatory conduct because they fall within the categories identified in the PSA.  Crop and dairy cooperatives are not subject to effective federal oversight on their internal actions.  It is not within the capacity of state law, the source of legal status for cooperatives, to provide effective oversight and response to these issues.
            As Congress has come to rely more on the market place to set prices and allocate demand for supplies in these markets, there is an increased need to review this legislative thicket and identify a systematic set of rules to govern the market process in agriculture.  The elements of this system recur in various legislative contexts and are entirely consistent with the PSA.  The goals are efficient, competitive, fair and accessible markets.

2. The Failure to Use Existing Rule-Making Authority   
            Congress can not write and revise regulations that are fine tuned to the needs of specific markets.  This why it often delegates to an agency or department the obligation to draft and revise regulations that implement the basic statutory scheme.  The various agricultural market statutes have a range of such authorization from the very sweeping authorization of the PSA to no explicit authorization in Capper-Volstead.  Nonetheless, it is clear that the USDA has substantial authority to draft rules in a number of important areas and could use its inherent authority to promulgate interpretive rules as well as the more general right of agencies to adopt guidelines that codify agency interpretation which in turn can influence judicial interpretation.
            The USDA has failed to use any of the authority given to it to frame rules to facility open, fair and accessible markets in light of prevailing marketing practices.  This is a very serious weakness.  The most obvious example is the failure over 80 years to use the rule making power of the PSA to facilitate more open, accessible, and fair processes in the livestock and poultry business.  In a lesser way the Capper-Volstead Act’s prohibition on excessive prices might have been used to create stronger oversight on the conduct of cooperatives with dominant market positions not subject to the PSA.  Similarly, the AFPA might have provided as basis for interpretative rule making that would have barred practices lacking substantial economic justification but which seriously impaired the workings of the market process.
             The USDA has been unable even to propose relevant regulations, let alone adopt them.   Again, this is most evident in the case of livestock where the USDA has explicitly failed to act.  In September 2000, in Denver, the Department convened a meeting of experts on captive supply issues.52   The panel did not agree on much, but they were in agreement that packers should never be permitted to use as the basis for pricing a future delivery their own price for cattle on the day of delivery.  Such a method of pricing was unduly vulnerable to manipulation and was unnecessary for any legitimate pricing need.  Yet the USDA neither proposed nor adopted even such a basic prophylactic rule!
            Left to their own devices, large buyers will, as the Attorney General of Oklahoma has opined, force contracts of adhesion onto farmers and ranchers.  For example, such contracts often deny the producer access to the courts and at the same time impose unfair and inequitable arbitration terms that effectively deny the producer all recourse.  Confidentially clauses keep farmers and ranchers from sharing information that would make them more sophisticated decision makers.  Even price reporting is unavailable where buyers are very highly concentrated.  This fact would seem to require special regulations to ensure equitable treatment of sellers in such markets.  What is frustrating from the perspective of preserving and improving an open, fair, efficient and informed transactional market is the failure of the Department to use the powers it does have to develop such policies and regulations where it has authority.  Such efforts would simultaneously highlight the gaps in its jurisdiction.
            It is important to appreciate here that market facilitating regulation includes creating safe harbors and other rules that make clear that buyers do have legitimate discretion with respect to some aspects of their actions.   Regulation can define “fair” arbitration clauses and as well as condemn unfair ones.53  It can specific the subjects that may be arbitrated and those that may not.  The central point is that if the USDA does not define the scope of what is permitted in contractual arrangements, the incentives in the market process with dominant buyers and many, powerless sellers, will drive contracts toward the lowest level of protection for the sellers’ interests and accord the buyer the greatest discretion over all aspects of the deal.
            Political will is necessary for rule making.  The great economic power of the large buyers translates into substantial political power as well.   In addition, there are important groups of producers in the livestock area that gain or believe that they gain from the present system.  Hence, the trade associations and farm organizations have not spoken with a single voice on these issues.  Interestingly, it appears that many farmers and farm leaders recognize the need for specific reforms but have not found a way to generalize that interest into effective political action.  The needs of mass politics often results in either narrowly framed proposals that can be presented in a sound bit such as the packer ban or in a focus on the immediate economic interest of producers in some new form of subsidy.  The dispersed farm community thus suffers many of the same problems in carrying forward a legislative or administrative agenda that it faces in the marketplace.

3. Enforcement of the Existing Laws
            Third, regulations, however good, have little effect if there is no enforcement.  While farmers and ranchers can bring individual cases or class actions, such efforts are very time consuming and may focus more on specific private concerns and less on the broad public interest in ensuring open and fair markets.  Moreover, unless those suits directly develop or enforce relatively clear rules, their impact on future conduct can be quite limited.
            Thus, effective public law enforcement is essential to the creation and maintenance of fair and open markets.  This is the lesson of antitrust law and securities law to name but two examples.  In both fields, the government agencies have set policy both directly and through amicus participation in key litigation.  In contrast, there is widespread recognition that the USDA has failed badly in its responsibilities to police and enforce the rules that do exist.  These persistent failures are the object of bipartisan concern in Congress and a source of great frustration to farmers and ranchers who look to the Department to protect their interests.
            Essentially, despite widespread evidence that cattle feeders who are not favored with contracts get lower prices for their cattle, the USDA has failed to challenge the failure to offer such contracts to all feeders on an equal basis.  Indeed, it has done very little to enforce any aspect of the PSA except for the financial integrity element. 
            The current staffing and structure of enforcement almost ensures that little will be accomplished.  There is a disjointed structure to the USDA’s own enforcement efforts.  GIPSA deals with meat and grain.  Another part of the Department deals with cooperatives and still others focus on market information.54  The GIPSA division charged with enforcing the PSA is largely staffed with economists and not lawyers.  It lacks the authority as well as the staff to initiate actions.  Instead, proposed cases must be referred to the general counsel’s office that itself is seriously understaffed and appears to require that any matter be re-investigated before any action is initiated.  The end result is that there is very little enforcement.         
            In sum, despite a consistent basic legislative message concerning fundamental policy toward dysfunctional agricultural markets, the statutes lack necessary scope and coverage.  Furthermore, the USDA has failed to use the powers it has to facilitate the more efficient, transparent, fair and accessible goals that underlie these statutes.  Finally, its very modest efforts to enforce the existing law lack focus, appropriate organization and staffing.  The result is that the law has had little positive impact in nudging markets for agricultural products toward more socially desirable conduct.IV. The Limited Role of Antitrust Law in the Operation of Agricultural Markets
            Antitrust law focuses on two elements of markets–their structure and conduct. Merger and monopoly law address structural issues.  Conspiracy law and the aspect of monopoly law concerned with exclusionary and exploitative conduct provide the rules for the conduct element of antitrust.
            The Clayton Act’s prohibition of  mergers that “may substantially lessen competition or tend to create a monopoly” is the most actively enforced element of structural law.  The objective in merger law is to prevent markets from becoming unduly concentrated. Monopoly law is the ultimate recourse: when market structure has reached monopoly, then dissolution of the monopoly becomes a remedy.  The key in both merger and monopoly law is to understand the nature of the markets involved and so be able to determine when a level of concentration raises serious risks of anticompetitive results.
            Conduct elements of antitrust focus on the identification and prohibition of conduct that has adverse economic effect and lacks a redeeming business justification.  Because antitrust focuses on individual actions and actors it does not have the capacity directly to regulate in a nuanced way the general conduct of actors.  It can and does forbid naked restraints such as those created by price fixing cartels or group boycotts having as their goal the elimination of a competitor or class of competitors from the market.  Under the rule of reason, antitrust law allows courts to make more focused judgments about the merits of particular actions, but recognizing the generalized character of such results, the tendency is to allow a wide range of conduct.  This is particularly true when the effect of the challenged conduct is only to impose harm on an individual enterprise.
            The central question for agriculture is how to apply these concerns to the market contexts. With respect to the supply side the analyses involved are conventional antitrust examinations of how customers might be adversely affected as a result of either collective or unilateral actions.  My view is that the government in its decisions and the courts in theirs have been too lax in allowing increased concentration and too willing to accept questionable conduct based on the potential that it might not create anticompetitive harms.  This results in real harm to competition and more importantly undermines the capacity of the market to provide buyers with a wide range of goods and services.  Reasonable people can disagree about the stringency of the tests, but there is little to differentiate the issues arising in a farm equipment merger from those involved in a truck or bank merger.  Similarly, the foreclosure of choices resulting from the current contracts associated with bio-engineered seeds are similar to other exclusionary practices.  In all these areas a greater skepticism about the putative benefits of size and integration would be a healthy reaction to the present and recent past tolerance, but the same can be said with respect to all over contexts where the competitive effects are felt in the down stream market.
            When farmers and ranchers sell goods into concentrated markets, the analysis is of buyer power.  While not unique to agriculture, these issues are much more relevant here than in many other areas of the economy and much less well developed.
            There is long standing recognition in case law and economics that anticompetitive consequences can arise from increased buyer power as much as from increased seller power.55  In the last few years, this insight has received powerful support from several courts of appeal decisions and by the Antitrust Division’s challenge to the Cargill acquisition of Continental Grain.
            The three leading, recent court of appeals decisions involve a variety of businesses.  In 2000, the Seventh Circuit Court of Appeals upheld the Federal Trade Commission’s challenge to the efforts of Toys R Us (TRU), a major toy retailer, to block its suppliers selling toys to TRU's discount competitors.56  TRU is the largest retailer of toys in the country–selling about 20%.  It induced its major suppliers to refuse to provide comparable toys to its lowest price competitors in order to protect its profit margins.  There is a somewhat similar merger case in the European Union involving retailer buying power.57
            In the same year and more directly related to agriculture, the Ninth Circuit has upheld the right of dairy farmers in California to sue the major cheese makers for the reduced milk prices that resulted from their manipulation of cheese prices.58  This decision most clearly recognized and articulated the stake of farmers and ranchers in having workably competitive markets into which they could sell their products.
            In 2001, the Second Circuit upheld a class action by employees of oil and gas companies that challenged information exchanges among these employers that allegedly had the effect of stabilizing wage competition and depressing earnings for the members of the class.59  Again, the decision canvassed the legal and economic bases for authorizing such cases and concluded that there was a strong public interest in preserving and promoting competition on the buying side of markets.  The court also emphasized that in buyer power cases the incentives of the parties to collude are different from those in a seller side conspiracy.  Specifically, the parties have a much greater incentive not to cheat by raising the prices they pay.  In a selling conspiracy, there is an incentive to cheat because a slight price reduction can capture a large sales volume. 
            The challenge to Cargill’s acquisition of Continental, two of the largest grain merchants in the United States, resulted in a consent decree so it has less precedential value, but stands as an indication of the willingness of the antitrust law enforcers to focus exclusively on adverse buyer power concerns resulting from a proposed merger.  The position of the Department of Justice was that the merger would have no adverse effects in the downstream markets for grain, but it would have foreclosed competition in buying grain at various specific locations in the country as well as at some key export points.  Ultimately, the government consented to the acquisition after the parties divested facilities that in the government’s view, but not necessary that of a number of critics, eliminated the risk.  Indeed, by transferring the export facilities to an owner which did not own an extensive network of interior grain elevators, the government may have taken a minor step toward improving the long run competitive condition of grain buying.  The unintegrated export facility operator would have a stronger interest than an integrated firm in promoting new interior facilities.
            These decisions have re-emphasized the dangers of buying power to the overall competitive operation of the market.  In addition, the three court of appeals decisions highlight the ways in which buyer power exploitation requires different and lower market shares as well as involving a different incentive structure with respect to adherence to or defection from the anticompetitive understanding.
            Congressional hearings on the effect of slotting allowances have highlighted comparable harms to competition in the food distribution system.  They are another example of buyer power where the greatest competitive harm comes from the increased barrier to entry that is imposed on small firms and ones with a limited product line.  When combined with the declining number of food brokers each of which wants to avoid internal competition on its product lines, the barriers to entry and growth in food processing are increased.  These barriers to entry make it harder for producers to find alternative outlets for their product which in turn increases the buyer power of the established processors.  Thus, buying power raises important antitrust concerns throughout the food production process.
            Despite this evidence of the significance for competition of buying power, its implications have not been a primary focus of antitrust analysis.  But, in fact, the experience to date, strongly suggests that different standards might be very important in order to evaluate correctly the competitive implications of buying power.  The cases and the slotting allowance hearings taken together suggest that in at least some circumstances lower market shares create significant power on the buying side.  Moreover, the beef processing mergers of the 1980 show that even where conventional, selling side analysis would suggest no serious competitive problems, there have been serious adverse competitive effects on the buying side.  In retrospect those risks seem obvious once one accepts that the buying market is independent of the selling market.
            In developing buyer power standards, two situations would seem to be important.  First, a producer may need access to a large number of downstream buyers in order to be efficient.  Slotting allowances in the grocery business and the power of Toys R Us illustrate cases where upstream producers need access to either a key retail outlet (TRU) or to many retail outlets such that failure to get access to that segment of the marketplace results in significant loss of sales.  In either situation a buyer with a significant share–10% or more of the national retail market–gets substantial power over the supplier.  Each such buyer is an essential element of the producer’s marketing process regardless of other outlets.  This suggests that merger analysis ought to be attentive to the creation or expansion of such power even where the downstream market is not concentrated.  This is an application of the unilateral effects concept in terms of buying power.  Similarly, restrictive terms or special obligations on sellers in such contexts might be subject to stricter scrutiny even where the market shares seem low.
            The second context where power exists is where the seller has relatively few choices even though further downstream the ultimate consumer may have a number of choices.  In that situation, the buyer has power in the upstream market but may not have it in the down stream market.  Some agricultural product markets fit this model.  The local grain elevator or slaughter house will have substantial power over its suppliers because they have few if any options.  When reselling those products, there may not be much power because many other sellers will exist as well.  The concerns are analogous to issues that arise when a firm can engage in price discrimination among its customers.  Mergers or restraints that increase the capacity for a firm to engage in such conduct are anticompetitive.  Similarly, combinations that increase the capacity of a firm to exploit selectively buying power or agreements which increase the ability of the firm to engage in selective buying practices raise important anticompetitive concerns. 
            Further, when a buyer imposes lower prices on its supplier, if that supplier can reduce its input costs, it is likely to seek to do so.  Thus, when grocery stories reduce what they pay for goods via slotting allowances or requiring other discounts, the processors have every incentive to pass those lower prices on up the supply line.  Thus, the ripple effect of a remote downstream price cut will flow up to the parties without the power to respond.  The cheese exchange price manipulation is an example.  The cheese buyers manipulated their purchases in order to reduce price of cheese, the cheese makers in turn reduced the price of milk to the farmer.  The cheese makers may have absorbed some of the lower price but the farmers faced the bulk of that change. Here the implication for both merger and restraint analysis is that adverse effects may well occur in second or third tier supply markets.  This suggests the need to investigate transactions more comprehensively and emphasize the policy goal of antitrust to focus on protecting the competitive process and not be concerned with whether particular competitors are or, in this case, might not be harmed directly.  This expanded analysis applies to both merger evaluation and to the review of specific agreements that may be challenged as unlawfully anticompetitive.
            There is not yet a clear empirical or theoretical map of the contexts in which such dangers are enhanced or conversely where countervailing market characteristics would make such harms unlikely.  While the merger guidelines, for example, provide detailed analysis on the selling side of the circumstances under which an inference of likely adverse effect is or is not plausible, no comparable guidance exists on the buying side.  The lack of guidance means that the issues are framed in a very ad hoc way that is very merger specific.60  Similarly, in cases involving complaints about buyer conduct, the lack of a clearly defined analytic framework recognizing potential harms makes litigation of such cases much more complex and problematic despite the recent court of appeals decisions.
            Effective antitrust requires greater appreciation of and deeper analysis of buyer power. This would better inform all antitrust enforcement, but it would be particularly important for cases involving the sale of agricultural products.  This, then, is an argument for expanding the scope of carefully developed, general antitrust doctrine to take better and more consistent account of the issues involved in examining the buying side of cases.
            While such attention to buyer power would have a positive impact on the analysis of future mergers and could provide a basis to challenge some collective conduct among existing buyers in agricultural markets.  The fact remains that these markets have already become concentrated or highly concentrated and many aspects of buying power, as illustrated in both the cheese and Toys R Us situations, do not require collusion to bring about harm to the overall working of the market.  Antitrust is particularly limited in its doctrinal capacity to respond to abuse of market power by firms with less than a “monopoly” position.  Thus, it is unlikely that antitrust law can either police very completely the conduct of buyers in these concentrated markets or bring about the kind of restructuring of those markets that would significantly reduce the incentives to exploit buyer power.
            In contrast, by redefining the rules under which those markets operate, the market specific regulation discussed in Part II, it is more likely that the law could create a generalized reduction in the incentives to exploit power.  In sum, antitrust can be a part of the solution, but only a part.

Part IV. Reform of the Law and Its Enforcement: Positive Potential but Limited Prospects

            When Congress embarked on a major review of agricultural policy in 2002, there was active advocacy for including a title on competition issues. This might have lead to an effort to revise and restate this law in ways that are more applicable to modern conditions and provide for more general coverage of the basic policy principles found in those laws.  The proposal also included efforts to identify the means for effective enforcement of these regulations through an appropriate combination of public and private mechanisms.  Not surprisingly, it encountered major opposition from those on the buying side of these markets.  It was eliminated in the Senate committee in favor of seeking more immediate economic gains for specific agricultural interest groups. 
            In its place, the Senate adopted a proposal to prohibit packer ownership of livestock and a revision of the PSA to cover current hog raising contracts.  The “packer ban” is the current flash point of popular farm concern.61  Such a focused constraint on the process of procuring livestock would probably have only limited significance, but it was fought bitterly by the major meat packers and their farm allies who currently benefit from the differential price advantage accorded captive suppliers.  Although the packer ban was twice approved in the senate, it was deleted in conference.  Ultimately, the only change in farm market regulation was an expansion of the definition of the coverage of the PSA to ensure that the new forms of hog contracting were covered
            If it is clear that regulation of the market process is coming, there is more incentive for industry participants to take a pro-active role in forming regulation.  For example, to date, the packers have simply stonewalled any reform of the PSA.  They and their allies bitterly and successfully contested the proposed packer ownership ban. So long as they can succeed on this level, they will have no incentive to identify workable regulation. 
            A contrast can be seen in the successful effort of Wisconsin to revise its regulations governing contracts for vegetables.  These crops are usually the subject of contracts and involve particular risks to both buyers and sellers.  In the mid-1990s to modernize the regulations, the state department of agriculture convened a group broadly representative to both growers and processors who reviewed and discussed the regulation.  While neither interest group got all it wanted, the compromises that were achieved reflected a shared recognition and understanding of the process and the need to ensure its efficient operation.  Within a legal framework that authorizes regulation, such industry consultation where there is broadly based representation may well provide rules that facilitate market operations that are more acceptable to all segments of the market.
            I point to this contrast because it is important both to identify an ideal set of market facilitating regulations and to consider the political process necessary to move the law toward that goal.

A. An Idealized Vision of Legal Reform of Agricultural Marketing Regulation
            The broad public policy of Congress, consistent across a wide range of specific pieces of legislation, is to facilitate a transparent, accessible, open, and fair, competitive market in agricultural products.  Dominant firms gain strategic opportunities from ill-defined market contexts.  They have the resources and incentives to impose their own, self-serving order on such contexts.  The public market will wither in such a situation and strategic behavior will play a major role in defining contractual relations that will arise outside the public arena.  Hence, legislation and regulation become essential antidotes.  The underlying model of the workably competitive market that motivates and informs antitrust law provides useful guideposts, but, as discussed earlier, antitrust alone can not provide the essential facilitating regulation essential to overcoming the dysfunctional aspects of contemporary agricultural product markets.  Moreover, implementation of these policies requires a public agency is ready, willing and able to act. 
            The basic structure for public policy is clear:

1) regulation should facilitate efficient market transactions whether in transactional markets or through longer term contractual relationships;
 
2) it should limit the opportunity for strategic behavior to reduce the incentive to engage in unfair or discriminatory conduct;
 
3) it should require open access to all major methods of buying produce whether those are transaction or contractual in character;
 
4) it should mandate full and timely disclosure of relevant information to all market participants.
 
            The first element is the most important.  The testimony of Professor Koontz to the Senate Agriculture Committee concerning livestock markets provides a useful illustration of the kinds of actions required. He suggested that the USDA needs to be much more pro-active in developing new grading standards and certification systems so that the transactional market could provide a place in which buyers could readily find the kind and quality of animal that they sought.62  It is not enough he points out to be concerned with bad practices, the government must be take the initiative to modernize the spot market and related market transactions to facilitate the desired transactions. 
            This point applies generally.  Government must take the initiative to facilitate workably competitive, efficient market contexts.  Public markets in agricultural products have not and will not happen on their own in equitable and fair ways.  The powerful economic interests of buyers at stake in these markets will shape them to serve those interests.  The role of government is to restore the balance and facilitate the equitable development of the market.
            Second, the law should minimize or eliminate the unfair, strategic, inefficient conduct of powerful buyers.  In a lawless market, economic power is unchecked.  That which is rational for individual, powerful economic actors is not necessarily fair to the parties on the other side of the transaction or, more importantly, in the best long run interest of economic efficiency.  The best method for achieving this objective is to limit the ability of dominant buyers to select terms and impose conditions in their buying programs.  The use of standard forms for transactions, public disclosure, and significant sanctions for violation of the standard procedures make it more costly for a dominant buyer to seek to engage in strategic behavior.  This element also should include safe harbors that define acceptable forms of, for example, arbitration or other terms that may in fact be rational elements to an efficient contract.
            Third, open access to the market is another essential element.  As buyers move away from reliance on spot markets in which sellers can easily participate by shipping livestock or other commodities to the maker, they have the capacity to pick and choose among specific suppliers in ways that can be harmful to the supplier.  This is true for bidding for livestock at the farm as well as for access to captive supply contracts.  If the buyer finds the open, public spot market unacceptable, then the contractual or other transactional market context needs to be defined in a way that gives all willing sellers equal opportunity to participate.  The goal of S1044, for example, is to ensure that all feeders have the ability to compete for forward contracts to supply livestock and that the pricing is done in a way that limits the capacity of the buyer to manipulate price by its future transactions.  In dairy and grain, the access rights would have to be product specific, but the same fundamental goal should govern the regulatory process.  Such reforms also reduce the scope for strategic conduct by buyers.
            Fourth, information disclosure needs to be a central policy objective.  As discussed earlier, dominant buyers have in many circumstances strong incentives to conceal or even misstate their buying activities.  Recent legislation has sought to require more disclosure of buying information with respect to livestock.  Not surprisingly, it was vigorously resisted by the packers and the resulting disclosures are of limited value because they exclude information from the most highly concentrated markets.  Exactly the ones where full information is most needed and least likely to be provided absent government regulation.  Such legislation makes clear the need for accurate and complete disclosure.  In an idealized world the law would command that all such information be provided to sellers.
            This idealized reform could be accomplished through a foundational statute analogous to the PSA.  It would establish broad goals for agricultural market processes: transparency, fairness, access and efficiency.  This authorization would include rule making authority so that the activity and product specific regulations could be adopted along with an effective set of incentives, public and private, to adhere to the regulations.
            New legislation with broad rule making authority is necessary for reforming agricultural product markets but it is not sufficient.  There must also be a willingness to use the authority to develop rules and enforce them.  The current structure of the USDA disperses the market facilitation responsibilities among a variety of bureaus and administrative divisions.  This makes it much harder to achieve a coordinated reform program that takes account of the interaction among the various elements of the legal system that can and should facilitate efficient and effective markets.  The same problems exist on the enforcement side.  An idealized reform would clearly have to create a new and more workable structure for developing regulations and enforcing them.
            This ideal would not resolve important problems in agriculture.  There would still be the potential for excess production especially when subsidy is keyed on out put.  Effective market facilitation would not address directly the serious problems of pollution of water and air resulting from very large feedlots for hogs and cattle or from the vast herds of dairy cows established in the west.  These issues involve other aspects of the economic process.  The distribution of subsidies in the form of direct payments as well as in the allowance of externalizing costs illustrates a different level of the economic issues arising from agriculture. Who gets a subsidy on what basis will strongly effect the options for economic success in any branch of agriculture.  Similarly, if operations with large numbers of animals are not required to compensate for the burdens they impose on adjacent property and the harms they impose on water and air quality, that will significantly change the economic calculus for investors deciding on the scale and type of animal operation in which to invest.
            Creating fair, open, accessible and efficient market processes does not directly address these underlying subsidy issues.  It may highlight some of them especially when the actual payments are publicly revealed, as they were a few years ago, so that the limited number of large beneficiaries is disclosed.  But reform in the underlying allocation of economic rights remains largely a separate and equally important aspect of the legal regime governing agriculture.

B. The Politics of Reform
            While many special interests are aligned against reform, there are increasingly persistent demands for change.  In the case of last year’s packer ownership ban, even the Farm Bureau supported the legislation contrary to its past position.  The Bureau has reconsidered its support and returned to opposition, but a number of its state affiliates continue to support that specific legislative item.  More generally, there seems to be an increasing awareness in many sectors of the farming and ranching world that change is necessary in the regulatory framework within which these product markets operate.   Whether these concerns will result in a coalescing around a major reform program is hard to predict.  Clearly, despite declining numbers, farmers and ranchers can marshal substantial political force.  This is particularly true in the Senate because it gives each state two senators regardless of population.  Moreover, as the current S1044 illustrates, senators from both political parties having substantial ideological divergence are willing to support reform legislation. 
            Thus, the political process may remain one through which farmers and ranchers can seek reform.  A greater concern is whether that reform will be too narrowly focused on attempting to resolve specific, ad hoc, issues rather than addressing the need for a broad re-constitution of markets for agricultural products.
            The long history of the lack of use of the PSA’s rule making authority and the weak to none existent enforcement of the rules highlights the related problem of implementation.  Because of the force of special interests in agriculture as well as the divergent views of farm groups on the role of government, only an idealized reform can imagine that this problem will be resolved easily.
            The history of the SEC, overall a successful regulatory experiment, provides some hope that effective rule making and enforcement can occur despite strong industry interests.  The majority of participants in public capital markets, however, recognize that the integrity of the market is an essential element for the success of those who work within that market.  Whether such a shared sense of the long run value of facilitating an efficient, open and accessible market in agricultural products can be developed is at best questionable.  Certainly no all processors would see such a development as in their own best economic interest.  On the other hand, the adverse public reaction to some of the practices in the industry may induce at least a willingness to compromise on the development of more effective rule making and enforcement tools.

C. The Courts as an Alternative
            The limited scope of existing law governing agricultural markets and the even more limited private rights of action have in turn restricted the capacity of the courts to act independently of the public regulatory process.  However, the pending Pickett case and other challenges in the livestock markets as well as the litigation on milk pricing reflected in both the cheese and butter cases as well as the challenges to further mergers in that industry suggest that a process of ad hoc judicial intervention in the current operation of these markets may occur.  Such litigation, if the farmers prevail, may create a situation in which there will be more incentives for the buying industries to support legislative action that redefines how such markets will operate.
            Legislation itself can also create more inducements for support for pro-active rule making and enforcement.  If private rights, including both pre-emption of arbitration with respect to key claims and autho