OCM Newsletter

February 2000

Mergers and egos

In the 1950's, it was widely considered that mergers were the product of inflated CEO egos. Since that time, the big business community has convinced many that mergers created more efficiencies and "value" for themselves, shareholders and the economy in general. Now, the "ego theory" is coming back.

Mitchell Lee Marks, a management consultant, recently wrote about the role of egos in the January 24, 2000 edition of The Wall Street Journal. Marks stated that when the Federal Trade Commission asked top Wall Street professionals what's behind the current wave of megamergers, the No. 1 reason cited was ego. He also pointed out that less than 20% of all mergers and acquisitions are financially successful.

Yet in agriculture, many still blindly pronounce that bigger is better. In light of studies from Iowa State University and others showing that economies of scale are captured at relatively low levels of production, the "ego theory" needs to be more closely examined in the agribusiness sector.

NCBA doesn't get it

The farm share of the retail food dollar has been plummeting for years. Packer mergers and retail grocery mergers have concentrated ever more market power in the hands of a few.

What does the National Cattleman's Beef Assn. (NCBA) think about mega-retailers? NCBA president George Hall was quoted in the January 2000 issue of Beef Magazine as seeing "a bright spot" in the current trend of retail mega-mergers. He says the benefit to the beef industry is that there are "fewer players to influence. Once they are convinced of beef's viability, their impact on the number of retail stores is greater, resulting in more beef on more shelves."

Who is going to influence whom Mr. Hall? When a commodity group president sees a benefit to the "industry", it means everyone but the producer. NCBA needs to change its goal from promoting greater volumes of beef to promoting greater numbers of beef producers. Of course, if there are only three beef producers, Mr. Hall has fewer people to influence.

Iowa AG sues Smithfield

Iowa's Attorney General Tom Miller has filed suit to block the Smithfield acquisition of Murphy Farms. He joins Missouri's Attorney General Jay Nixon who filed a similar case in Missouri in December. Both Miller and Nixon base their claims on the states' respective corporate farming bans, not antitrust law.

While state corporate farming bans differ in language, they generally prevent large corporations from owning farms and ranches. But Miller and Nixon are both alleging that contract pork production transfers so much decision making authority to Smithfield as to be equivalent to ownership. There is little if any judicial precedent on this novel, but rational, claim.

Smithfield has tried to get around Iowa law by loaning a newly created front company the money to buy Murphy's hogs. "Nine hundred thousand hogs for sale - no money down," according to OCM member David Kruse. What a deal. Miller and Nixon should be applauded for their courageous effort to protect independent agriculture.

Farmland competes with members

The big ag cooperatives, such as Farmland Industries and Land'O'Lakes, have been justly criticized for entering hog production in competition with their members. Now Farmland is supporting the development of a 22,000 head finishing cluster in Pottawattomie County, Iowa.

The hog complex is owned by a sub-unit of a Creston, Iowa cooperative and will produce pork under contract to Farmland. Citizens of the county are trying to stop the project.

The old-line cooperatives were a good idea, in theory, 70 years ago. But now they are acting like Big Agribusiness and driving their farmer-members out of business. The recent failure of members to approve of the merger between Farmland and Cenex/Harvest States was caused by the attendant huge bonuses for senior coop management and lack of producer benefit. Despite this rejection, they are combining their agronomy, seed and feed businesses with that of Land'O'Lakes. This deal can be done without approval from members.

Members of the Iowa Pork Producers Association voted for a resolution calling for an end to farm cooperative ownership of livestock in their January annual meeting.

Plain's World

Dr. Ron Plain, University of Missouri agricultural economist, is a champion of big meat packers controlling the hog industry. Speaking at North Iowa Pork Industry Day in Mason City, Iowa in December, Plain said that the open market in hogs will not exist in five years. This may be a true statement. The chicken market disappeared decades ago. He also said that 75% of hogs are either owned by packers or under contract to them. This is also a true statement.

But then Plain gets off-track. "If you sell under a contract, the packer wants to keep you in business." Tell that to the poultry contractors producing for Tyson or Perdue. Packer production contract strategies historically start out with beneficial arrangements - relative to the open market - to draw in their victims as the spot market withers away. Then, the contract gives the "integrator" (the packer) unprecedented power to transfer risk and financial burden to the producer. Contracting becomes the mechanism for the new "company store." Producers can't afford to stay under the contract and they can't afford to get out.

As Steve Cady, OCM board member and Nebraska pork producers executive director, says, hog farmers are transformed from profit centers into costs centers. This means that the overarching focus on a farm as a profit making business becomes subsumed by the packer perspective. The packer perspective is that the farm is now a mere locked in cost which the packer has the incentive and newly found control to reduce.

FDA's revolving door II

Last month, this newsletter discussed the revolving door between Monsanto and FDA, which casts a pall on the independence of government plant biotechnology oversight. Here's an expanded "revolving door" list:

· William Ruckelshaus, former head of EPA, now on Monsanto's board of directors;

· Linda Fisher, former assistant administrator at EPA, now a Monsanto vice president;

· Marcial Hale, former presidential aide and director of intergovernmental affairs, now a Monsanto executive;

· Mickey Kantor, former U.S. Trade Representative, now on Monsanto's board;

· Margaret Miller, former chemical lab chief at Monsanto, now an FDA deputy director;

· Michael Friedman, former deputy commissioner at FDA, now head of clinical research at Monsanto's Searle unit;

· Josh King, former director of production for White House events, now Monsanto's director of global communications;

· Lidia Watrud, former Monsanto researcher, now at EPA environmental effects lab;

· Michael Taylor, formerly at FDA, now Monsanto lobbyist;

· Patrick Griffin, former chief congressional lobbyist for Clinton, now Monsanto lobbyist;

· David Johnson, former director of Democratic Senatorial Campaign Committee, now Monsanto lobbyist;

· Leonard Swinehart, former top aid to Gingrich, now Monsanto lobbyist;

· Keith Heard, former staffer for Sen. Thad Cochran, now Monsanto lobbyist.

Pioneer wins seed case

Opponents of keeping the plant genome in the public sphere won a battle in January. The U.S. Court of Appeals for the Federal Circuit ruled that Pioneer Hi-Bred International's (now a DuPont subsidiary) patents on seeds and plants from seeds are valid.

The case arose from Pioneer's suit against an Iowa seed distributor for patent infringement. Pioneer asserted that the dealer had no license agreement with Pioneer and thus sold seeds illegally. The dealer argued that plants and seeds are not patentable.

Patent rights are a very comprehensive and powerful form of intellectual property rights (IPR's). IPR's also include trademarks and copyrights. Before plant patenting became common this decade, breeders utilized the federal Plant Variety Protection Act for a lesser degree of protection.

This is a very important case in a relatively obscure, though far reaching, area of law. Proponents of public access to the plant genome will likely assist in pushing the case to the Supreme Court. Business interests against full public access, such as the Biotechnology Industry Assn. will offer substantial support to DuPont/Pioneer.

Delta Pine sues Monsanto

On May 8, 1998, Monsanto agreed to acquire the Delta & Pine Land Company (DPL). DPL is the dominant U.S. cotton seed breeder and marketer. It also developed the infamous Terminator Gene with USDA corporate welfare money.

Antitrust regulators were concerned about the degree of control the combined company would have over certain agricultural gene technologies. Thus, they made demands that Monsanto was unwilling to meet, especially since the GMO debate has hammered Big Biotech stock prices and market outlooks.

While Monsanto has already paid DPL an $81 million break up fee, DPL has brought suit alleging that Monsanto failed to "use commercially reasonable efforts" to meet the concerns of regulators. The underlying facts are that DPL is worth a mere fraction of its former value because investors are divesting their biotech holdings. DPL claims it was prevented from seeking another suitor for 18 months when its valuation was high.

Farmland/Cenex merger: The Sequel

Undeterred by the failure to gain member approval of a Farmland/Cenex-Harvest States merger last year, the management of these agribusiness cooperatives are trying again. Each coop needed approval from 2/3 majority of their members to authorize the merger. Eighty nine percent of Farmland members registered approval but only 64% of Cenex membership did so.

OCM member Dr. Robert Taylor, ag economist at Auburn, performed a study for the National Farmers Union which found that coop management would reap millions in payoffs should the merger go through. Also, Farmland was in a financially precarious position and facing a potential tax liability of $400 million in federal tax court.

Farmland won its tax court case and plans to submit another merger proposal to members in the summer. However, in a convoluted voting system loosely called "democratic", members do not really vote. Rather member coop boards vote for their members. Thus, merger proponents lobby only the boards and do not have to deal with convincing the grass roots of their position. This voting system prevents members from reigning in the out-of-control management and boards.

Corrections

Last month's newsletter stated that the commodity groups are compromised by too many financial ties to industry. Gary Goldberg, exec. dir. of the American Corn Growers Assn. notified OCM that it accepts no corporate money in view of potential corrupting affects. Hats off to ACGA!

January's OCM Newsletter incorrectly asserted that the federal judge with jurisdiction over the Cargill merger consent decree ordered the USDA to respond to letters in opposition. The correct statement is that the judge ordered the Department of Justice to respond, not USDA.

Biotech update

· Best Foods Inc. has decided to stop including GM ingredients in its products sold to Europe to avoid labeling the food as containing such ingredients.

· South Korea, the second largest U.S. corn export market, proposed a plan to require GM labeling of raw corn and soybeans by March 2001.

· The Tokyo Grain Exchange will offer GM and non-GM soy futures contracts for trading in April 2000.

· AgriBioTech, a GM seed company, will seek protection from creditors by filing Chapter 11 bankruptcy.

· Frito-Lay Inc., which accounts for 2/3 of parent PepsiCo's sales, has told its suppliers not to use GMO corn.

USDA on Causation

On February 7, 2000, USDA's Economic Research Service (ERS) came out with a report entitled "The Aging of Farmers and Participation of Beginning Producers in Farming." The study quantified the obvious, i.e. the average age of farmers is increasing and few young people are entering production agriculture. The striking part of the report is neglect of the obvious cause.

The crucial issue, as always, is causation, a point that seems continually to escape USDA and policy makers. ERS failed to mention low farm prices as a cause of this trend. ERS failed to mention that agribusiness concentration results in less competition, fewer buyers and lower prices. Rather, ERS cited recommendations of the Advisory Committee on Beginning Farmers and Ranchers.

That committee laughably recommended various loan programs and informational outreach to beginning farmers. Evidently, it is politically incorrect at ERS to mention the real cause of farm decline: agribusiness concentration results in less competition, lower prices, and fewer beginning farmers. Low interest loans do not help if you cannot pay off the principal.

USDA's food labeling "study"

Consumers want labeling of meat's country of origin as well as whether food contains genetically engineered organisms. But USDA - in defense of agribusiness - has come up with a study claiming that the costs of labeling outweigh the benefits.

On the cost side, USDA focuses on: (1) segregating product; (2) labeling expenses; and (3) government enforcement costs. Yet USDA acknowledges that segregation is not new. Segregation currently occurs when products are graded or processed for the National School Lunch Program or identified with claims about how animals are produced.

On the benefit side, USDA states that consumers say they have a right to know about country of origin, but researchers cannot quantify the benefit. USDA implicitly concludes that "because we cannot quantify consumer benefit, it must be of little relevance."

In survey after survey, consumers show preferences for such labeling. Further, labeling would be an advancement towards recalling product if a foreign county's food was found to be contaminated with a toxin or other dangerous substance. USDA's position that "if we don't understand it, the value must not exist," is outdated at best.

Kansas' Commodity Groups

Kansas state legislators Stan Clark and Bruce Larkin, both OCM members, have been spearheading a drive across the Kansas countryside to pass legislation to promote market competition and lessen agribusiness power. The leadership of the Kansas house and senate have been stonewalling, but citizen support for Clark, Larkin and other supportive legislators has grown strong.

The Kansas Livestock Assn. and the Kansas Pork Producers Assn., both controlled by corporate farming and packer interests, are dead set against legislation for open market competition. On the proposed bill to enact a state level Packers & Stockyards Act (to insure fair trade), Mike Jensen, representing the pork group, testified before the Senate Ag Committee hearing . "We don't want to make Kansas an island. We don't want any legislative help. We believe our best chance of profitability is in reducing cost, not in marketing opportunities. Our producers saw no collusion with eight cent hogs."

Who raises the most hogs in Kansas? Seaboard Corporation and Murphy "Family" Farms. The statement speaks for itself.

FTC stronger on antitrust

Three government agencies have jurisdiction over competition policy in agriculture. The Federal Trade Commission (FTC) and Department of Justice (DOJ) do general antitrust work, including agriculture. USDA's Grain Inspection, Packers & Stockyards Administration (GIPSA) is assigned to anticompetitive practices in the meat packing industry.

FTC chief Robert Pitofsky has been tightening the commission's scrutiny of merger deals in practice and is expected to formally announce the factors underlying these considerations this month, according to the National Bar Journal. Evidence of FTC's new position was clear in its dealings with the failed Royal Ahold acquisition of Pathmark supermarkets and the BP-Amoco acquisition of ARCO, which is now in suit.

Contrast this with GIPSA, which continues to be an utter failure in the meat packer arena. Despite drastically reduced competition in livestock agriculture, GIPSA continues to insist that there is nothing it can do. Serious consideration should be given as to whether to transfer GIPSA's authority to DOJ. Ag Secretary Glickman, with his tremendous power and authority, is presiding over the collapse of family-style agriculture.

OCM member news

OCM president Fred Stokes spoke before the 53^rd Annual Southern Agribusiness Forum in Jackson, MS on the closure of farm markets and agribusiness concentration.

OCM general counsel Michael Stumo testified before the Senate Agriculture Committee in Washington, DC on USDA Packers & Stockyards Administration ineptitude.

Fred Stokes spoke before the annual meeting of the American Corn Growers Assn. in Las Vegas on agribusiness consolidation.

OCM vice president Mike Callicrate testified before the Kansas state legislature on unfair trade practices by meat packers.

Dr. William Heffernan, rural sociologist and OCM member, spoke before the National Farmers Org'n annual meeting in February on bypassing agribusinesses in the food chain.

[Edited by Michael C. Stumo]