Newsletter October 2000

 

Quote of the Month

“If there's one thing I've learned in government, it's that openness is most essential in those realms where expertise seems to matter most.”  Dr. Joseph Stiglitz, former chief economist, World Bank.

 

Leisure suits and the Chicago School

            Back in the 1970’s, Milton Friedman and his followers at the University of Chicago put forth the proposition that the government need not involve itself in the economy except as limited to basic infra-structure functions.  The market would adjust itself so precisely that the beneficial result would always happen.

            The “Chicago School” theory has a profound effect on the judiciary and policy makers.  The Reagan administration nearly dismantled federal antitrust efforts and federal courts took a tougher line against plaintiffs in such cases.

            Today, the strict Chicago School interpretation may join leisure suits in the closet containing relics of the 1970’s.  It is now clear that dominant companies can and do take actions which are harmful and anti-competitive.  Markets don’t remedy all.  The counterveiling power of government is needed in more instances than was thought.  The counterveiling power of new players in the private sector is also key to a healthy marketplace.

 

Cargill merger approved

            The silence was deafening.  Judge Gladys Kessler approved the Cargill/Continental Grain merger on June 30, 2000.  But the Department of Justice (DOJ), rather than face irate farmers, failed to let anyone know, in Congress or otherwise.  Republican and Democratic senators alike tried to find out about the approval, but no one in DOJ would tell them anything.

            OCM found out about the approval at the end of September.  OCM member Dr. Jon Lauck wrote a comprehensive analysis of the merger last year.  The analysis was the basis for several U.S. senators and state attorneys general to send in comments to the judge opposing approval.

            But DOJ still thinks agriculture is competitive.  The antitrust attorneys have been trained to focus on consumer harm, not supplier (i.e. farmer/rancher) harm.  Agriculture is set apart from other industries due to the benefits provided to rural communities by a diverse agricultural production sector.  Thus, laws tailored to agriculture should address the supplier harm.  Allowing the biggest grain merchandizer in North America to buy its next competitor is absurd at best, and devastating at worst.

 

OCM testifies on captive supply

            The USDA held hearings on September 21 on an open markets rule proposed by the Western Organization of Resource Councils (WORC).  Submitted in 1996, the open market rule would require that captive supply cattle contracts be traded in an open, public manner.  Captive supplies include packer owned cattle, as well as cattle committed to a particular packer under contract.

            There are several problems with captive supplies.  The overarching issue is that they give packers more power in the marketplace.  Depending upon whose numbers you believe, national captive supply numbers are 30 to 70 percent in cattle and about 73 percent in hogs. 

            When a meat packer has a large number of cattle committed, it can either stay out of the cash market for some time or, at best, bid conservatively to procure the remainder of its inventory for its kill numbers.  According to Dr. Richard Sexton at the University of California at Berkeley, when you have few buyers and one of the few either stops bidding or bids more conservatively, price suffers.

            An additional worry is that the spot market is increasingly thin.  Captive supply cattle are not part of the publicly reported market prices because packers buy them without bidding.  The remainder, in the so-called “spot market”, are procured through some bidding.  The spot market does not include the full volume of livestock as in the past.  The thin cash market is significantly more susceptible to manipulation than a broad and deep market.

            OCM’s testimony to USDA included a comprehensive review of Secretary Dan Glickman’s authority under the Packers & Stockyards Act to regulate captive supplies.  It also presented a full analysis of the economic evidence showing that captive supplies depress prices. 

OCM’s written testimony is necessary reading for those interested in this issue.  It can be found on the OCM website.

 

Joel Klein resigns

            Joel Klein resigned as the head of the antitrust division of the Department of Justice (DOJ) last month.  After taking over from Clinton’s first antitrust cop, Ann Bingaman, Klein built a reputation of making the division more aggressive than it had been for decades.  Of course, his crowning achievement is the case of U.S. vs. Microsoft in which Judge Jackson ruled almost entirely for the government on all levels.

            But Klein’s underlings have not understood the special needs of agriculture.  Standard antitrust theory focuses upon consumer harm as the “bad thing” which must be prevented.  Lower prices for suppliers in industry is a good thing.

            But in agriculture, public policy deems farmers as worthy of protection from low prices caused by downstream monopoly power.  Farmers are suppliers in the terms of the general economy.  This is why Rep. David Minge (D. Minn.) has introduced a bill which would, in part, amend the antitrust laws to make the focus on supplier harm more clear.

            The Cargill/Continental merger was a destructive combination that Klein let slip through on condition of a few asset divestitures.  Senator Paul Wellstone’s agribusiness merger moratorium bill should be revisited and passed.

 

Demand as red herring

            When farmers and ranchers charge that meat packers are driving prices below competitive levels, the retort is that we must work together to increase demand.  Commodity group leaders buy this packer produced baloney.  The truth is that increased demand has not resulted in increased farmer profit.  IBP and Cargill just recorded strong profits due to increased beef demand without sharing the wealth with farmers.  A concentrated industry allows retailers and packers to keep any benefits.  Proper allocation of resources is the issue. 

            The farmer share of the retail food dollar has fallen from 48% in the 1950’s to nine percent today.  Demand for food has increased in volume and price throughout.  In the beef industry, retail prices are at record highs, demand is strong, and packer profits are setting records.  Yet feedlots are losing one to two hundred dollars per head.  As Les Messinger, floor trader at the Chicago Mercantile Exchange, observes in the beef market, “Chain stores and meat packers sell beef, the cattle producer sells live cattle and there is little relation between the two.”

            The poultry industry has been the most successful meat sector to increase demand.  Yet poultry producers are the least well off of any producer in any sector.  They are essentially indentured servants under onerous production contracts.  Powerful processors have extracted most all economic benefits because they can. 

            The solution to a proper allocation of benefits is to foster a decentralized food system at all levels.  One, two or three buyers for a commodity have every incentive to avoid competitive bidding and have no incentive to share the wealth with disorganized farmers and ranchers.  Demand as the solution is a red herring.

 

Railroad merger guidelines

            The analogies are striking.  Railroad customers (which are big businesses) have been complaining that the recent series of mergers in the railroad industry have caused extensive service failures and reduction in competition.  They forcefully opposed a recent proposed combination of Burlington Northern Santa Fe Corp. and Canadian National Railway Co.  The effort resulted in a 15-month merger moratorium announced by the Surface Transportation Board in Washington.

            The Board has proposed new rules raising the bar for mergers to pass muster.  Specifically, a proposed merger must be shown to enhance competition, maintain rail service and clarify alleged merger benefits.  The Board was concerned that the Burlington/Canadian merger could have triggered a railroad merger endgame that left North America with only two railroads.

            The Alliance for Rail Competition, which represents utility, chemicals and agricultural rail customers, is pressing for legislative relief in Congress nonetheless.  Diane Duff, executive director for the Alliance, said the proposed rules “do not guarantee any increase in competition among railroads.” 

 

USDA loses 10% of budget

            And we wonder why they can’t enforce the Packers & Stockyards Act.  USDA has an annual budget of $60 billion.  This is greater than net farm income for the entire country.  It is also greater than the budget of every federal department except defense.  But USDA can’t account for nearly 10% of its budget – it can’t find $5 billion.  The good news is that the prior amount of lost money was $7.1 billion.  USDA is asking for another $100 million from Congress to find the missing revenue.  Perhaps the FBI should be the agency tabbed to look for the money.

           

Rationalizing the poultry industry

            They are rationalizing the poultry industry.  “Rationalizing” is the new buzz word for justifying the recent acquisition of WLR Foods Inc. (fourth largest turkey company) by Pilgrim’s Pride (number two chicken company).  Rationalizing is a good word for this.  It means nothing, but one sort of feels important and knowledgeable when saying it. 

For example Rod Smith, reporter for Feedstuffs, consistently parrots meaningless CEO justifications in his news articles.  He thinks they are rationalizing the industry too.  Informing the readers of Feedstuffs that big poultry giants are rationalizing certainly makes him feel as important and knowledgeable as the CEO’s.

Of course, one can’t help but wonder just how irrational Pilgrim’s Pride and WLR were before the merger.

 

Orrin Hatch chokes on mergers

            Senator Orrin Hatch (R. Utah) appears to be increasingly concerned with mergers.  Hatch is the chair of the Senate Judiciary Committee which has jurisdiction over antitrust law matters.  In the face of the proposed merger between America Online and Time Warner, he has written a letter to the Federal Trade Commission stating, “I am concerned that the AOL-Time Warner merger, if approved with this intertwined interest with AT&T, might have anticompetitive effects to the detriment of consumers.”

            AT&T owns a 25% stake in the Time Warner Entertainment partnership.  Hatch is concerned that the link between the nation’s two largest providers of high speed Internet access is a problem.  It is this committee which would preside over any attempt to change antitrust laws as they apply to agriculture.

            Unfortunately, Hatch has yet to be concerned with competition problems in agriculture.  It is crucial that farmers, as disorganized sellers, have many buyers for their products.  An increase in one or two market outlets can make a tremendous regional difference in farm gate prices.  “Farmer choice” should become just as important as “consumer choice.”

 

Pork moves north

            Move over North Carolina, its now Canada.  Canadian sow farms are increasing their herds at a torrid pace.  "Everybody wants to grow," says Paul Schneider of Elite Swine, a 58,600-sow Manitoba company owned by packer Maple Leaf Foods. According to Successful Farming, Elite plans to add 18,000 sows a year for the next three years.

            While the largest U.S. hog producers added 50,000 sows in the last year, Canada has or has plans to add that amount as well.  Shackle space is not yet full.  Schneider Corporation, a Canadian pork packer owned by Smithfield, would like to expand from 35,000 to 90,000 hogs per week but does not have the supply available. 

            Premium Brands in Vancouver, British Columbia has the capacity to kill 16,000 per day but only kills 6,000 per day due to supply limitations.  Alberta and British Columbia are welcoming hog expansion, in contrast to much of the U.S. which has developed a problematic track record with large scale farms.  "We live in a sea of cheap feed grain," explains Florian Possberg, CEO of Big Sky Farms in Humboldt, Saskatchewan.  Successful Farming’s recently released ranking of the top 50 hog facilities in North America provides a snapshot of the top end of the industry.

 

Aventis screws up

            Aventis is a second tier biotech company which has marketed Starlink corn to farmers.  Garst is one company which has licensed the particular corn for marketing.  Starlink corn has not been approved for human consumption because of concerns that it could cause allergies.  But it has now entered the food chain.

            Genetic ID, a firm that test for the presence of genetically altered ingredients in food, discovered that Kraft taco shells contained Starlink corn.  A tremendous chain of events followed.  The USDA agreed to buy all Starlink corn from farmers with Aventis paying the bill.  Strange that this wasn’t done for Firestone tires.

            The corn was also found in several other taco shell products.  Safeway, Food Lion and Shaw’s Supermarkets pulled their private label taco shells off their shelves.  ConAgra shut down a Kansas plant to clean up potential genetic contamination.  ADM and Cargill are using test kits to scan corn being bought from farmers.

            Despite claims that GM crops can be segregated and identity preserved, the fact is that the grain system is designed to blend, not separate.  The Aventis debacle is an expensive illustration of this core problem.

 

Blend or segregate

            The whole grain industry is geared to blending, not segregating, flows of commodities.  The controversy over GM crops has forced elevators and merchandizers to preserve the identities of conventional and biotech commodities, a task which they are not well equipped to do. 

            Monsanto forced GM crops into the system during the 1990’s through buying up hundreds of seed companies and related entities to get GM crop genes from the laboratory to the field.  In doing so, it acquired tremendous debt and dismantled the heretofore competitive seed industry.  Monsanto then had to sell itself to Pharmacia of Sweden.

            The grain and oilseed infrastructure is left to cope with the damage done by Monsanto.  Despite the Biotechnology Industry Organization’s strange strategy of name calling when consumers “irrationally” decide to avoid GM food, demand for GM food is relegated to places where it need not be disclosed.  Cargill, ADM, Bunge and A.E. Staley are not even powerful enough to avoid the cost of identity preserving commodity crops in the face of consumer rejection.  More competition in the seed industry is needed to provide more choice for farmers and consumers.

 

The Full Monti

            Mario Monti has been Europe’s top antitrust regulator since last year.  He is reputed as the toughest merger guy in the world, which merely means tougher than the Americans.  Monti blocked the Worldcom acquisition of Sprint, Volvo’s combination with Scania, as well as other high profile mergers.

            The big business press is gearing up its usual knee-jerk responses of government regulation.  However, Christopher Norall, an antitrust lawyer in Belgium, was quoted in the New York Times as saying that the scrutiny is appropriate because “these cases present new issues where each wave of mergers brings successive waves of concentration.”

            The number of mergers is escalating rapidly.  It is only natural that there should be more antitrust enforcement because so many industries are at unprecedented levels of concentration.  In OCM’s view, this enforcement should have occurred in agriculture back in the early 1980’s.  But USDA is unable and the Department of Justice thinks the technology and airline industries are more sexy.

 

New Agriculture

            Commodity agriculture moved westward out of the New England states a century ago.  That is not to say that New England has no agriculture; dairy is still a major sector.  But the northeast remains an agrarian trendsetter despite its urbanization.

            There is a major New Agriculture in New England.  It is the heart of the high value, niche market revolution that spawned the organic trend and the rebirth of farmers markets and subscription agriculture (customers prepay for their food before the season).  Small plots of ten to sixty acres are either reclaimed from brush or forest or converted from conventional cropland.  Farmers grow produce, bedding plants, nursery crops and organic grains to make a living.

            New England has been able to greenhouse this New Agriculture cottage industry due, in part, to the availability of the relatively wealthy and diverse population.  This has allowed new startups to explore alternatives with less risk of failure than in poorer, remote areas. 

            There is also a significant support structure.  Most land grant universities in the Northeast have departments which support small agriculture far more than in the Midwest and West.  There are numerous nonprofit organizations that spread institutional knowledge widely.  Additionally, there is a well developed apprenticeship program where college-age persons are clamoring for a season of experience on a working farm for a stipend. 

            Although there are multi-generation farmers converting all or some of their land to higher value food uses, many more have zero farming experience.  The apprentices, for example, usually are from the urban areas.  Many decide that the work is harder than they expected when reading about Old McDonald’s farm.  But others search for a plot of ground and set up a business within a few years.  This trend is growing, not receding, and spreading across the country.

 

Pharmacia/Monsanto IPO

            Pharmacia, a Swedish pharmaceutical company, made it clear at the beginning that it wanted Monsanto’s pharmaceutical business and not its plant biotechnology assets.  On October 18, Pharmacia stuck Monsanto’s ag business back in the public market with an initial public offering that generated a disappointing $700 million.  The Swedes will probably sell the whole ag division off in a couple years after the stock market has settled its valuation of the company.  Meanwhile, Monsanto’s patent on Roundup herbicide expired on September 20.

 

[Edited by Michael C. Stumo]