Newsletter September 2000

 

Quote of the Month

"You know when the tyrants are in control.  The crops are good, the cattle are fat and the people are poor.” Rod Thorsen, WLPO radio, LaSalle, Illinois.

 

IBP sold to investment bankers

            A tangled web.  Donaldson, Lufkin & Jenrette, Inc. (DLJ) announced a deal to buy IBP on October 2 for $3.8 billion.  Rawhide Holdings Corporation is the acquiring company.  Rawhide is a wholly owned subsidiary of DLJ Merchant Banking Partners III, L.P. which, in turn, is a private equity fund “affiliated” with DLJ.  Credit Suisse, a large global bank, previously announced a $13.5 billion deal to acquire DLJ on August 30.  Thus, IBP’s corporate parent will ultimately be Credit Suisse.

            IBP has four business segments: the IBP Fresh Meats Company, Foodbrands America, Inc., the Consumer Branded Products Group and the IBP International Sales Company.  It is the world’s largest beef processor and the second largest pork processor. 

            This transaction came as a large surprise.  OCM will be monitoring the information from the deal for any possible problems to competition in agricultural markets.

 

Small capital vs. big capital

            “The old political paradigms – capital versus labor, free enterprise versus big government – are less relevant than the new one: big capital versus small capital,” says Tom Reed, an auto dealership owner in East Lake, Texas.  Reed’s op-ed piece appeared in The New York Times where he clarified the trend of large businesses in many sectors cannibalizing their former partners for profits.  Sound familiar?

            Health care companies are squeezing doctors and patients; automakers are trying to eliminate dealerships to sell direct; insurance companies are cutting commissions for local brokers; airlines are driving travel agents out of business.  Despite the potential efficiency gains, health care premiums rise and service suffers; car prices go up; other insurance premiums rise; and the companies’ profits hit records.  The only exception is airline tickets which have fallen, not due to efficiency, but to more competition.

            Will we have “managed food” in the food and agriculture sector?  Milk prices in Chicago have hit highs, yet dairy farmers receive nearly record low prices.  When hogs were at or near eight dollars per hundred weight, the consumer received no benefit.  Competition and innovation with many firms drives progress.  Efficiency, or claims thereof, delivers no benefits absent an industry structure which will allocate resources properly among the participants.

 

Biotech farmers as plow-boys

            The transition of row crop growers from independent business persons to share croppers continues.  A new company, Syngenta, will strive aggressively to become a general contractor for retailers and food processing companies in arranging production that will be committed to the ultimate buyer.  Syngenta will be the result of a spin off and merger of the ag-biotech divisions of both Novartis and Astra-Zeneca.  Thus, they are trying to create a company with deep pockets and a new revenue model.

In that model, Syngenta would recruit growers and establish detailed protocols stipulating everything from color and taste of crops or vegetables and special properties desired for successful transport over long distances, to guarantees on maximum residue levels from pesticides.  "It would give retailers complete control of what arrives in shops in Britain or Germany -- 'traceability' is the key concept here," says Heinz Imhoff, chairman designate of Syngenta. "We're discussing protocol deals with several major retailers in Europe and the U.S., and the first big deal will be announced next year," he adds.

The poultry model is thus proceeding to hogs, cattle and now row crops.  Is this Big Brother or Big Mother?

 

Smithfield’s critical mass

            Smithfield is the world’s largest hog producer as well as the world’s largest hog processor.  CEO Joseph W. Luter IIII said, in the company’s annual report, that its fast growth confirmed the strategy to vertically integrate to a present critical mass so substantial that its position will likely never be challenged.  The acquisitions of Murphy Family Farms, Inc. and Carroll’s Foods Inc. in 1999 doubled the company’s hog production business to 700,000 sows, about four times that of its nearest competitor.  This is about 50% of Smithfield’s slaughter.

            Murphy and Carroll’s were acquired at the bottom of the hog cycle and at a substantial discount.  This was “a feat that we believe no other company can duplicate in the environmental, regulatory and political climate surrounding hog production today,” said Luter.

            Smithfield owns a genetics company called National Pig Development.  It is the second largest packer in Canada after its 1998 acquisition of Schneider Corp.  In Mexico it bought an interest in integrated processor Agroindustrial del Noroeste in 1998.  It also owns large processors in France and Poland.

 

Biotech update

·                    The Canadian Wheat Board is considering plans to segregate genetically modified (GM) wheat in anticipation of the expected first plantings in 2003.

·                     Even China is requiring GM food to be labeled, according to the Organic Consumers Assn.

·                    “This is getting extremely serious.  We regard [the European Union] requiring GM labeling as economic fraud,” according to an FDA spokesman as printed in the British newspaper, the Guardian.

·                    In a severe blow to Pharmacia/Monsanto, a Brazilian court in August barred growing GM soybeans in the second largest soybean producing nation.

·                    Contrary to the food crops, GM cotton acreage is going up.  People don’t eat cotton.

·                    Traces of a strain of GM corn which is unapproved for human consumption were found in Kraft taco shells sold by Taco Bell.

·                    Aventis SA, the French company which produces the seed found in the Kraft taco shells, will suspend sales of that strain of corn.  Aventis was created in the December 1999 merger of Hoechst AG and Rhone-Poulenc SA.

 

Pork checkoff referendum

            The pork checkoff referendum is complete.  While the results are as yet unknown, three Iowa Pork Producers Association board members previousloy announced their support for a voluntary pork checkoff system rather than the current mandatory one.  Betty Janssen, Wilbur Kehrli and Lisa Siebrecht said in September that the pork checkoff may have increased consumer recognition of pork, but farmers are receiving less of the consumer dollar.

            They also expressed concern that the checkoff funds the National Pork Producers Council which, contrary to the policy of the Iowa affiliate, publicly supports the right of meat packers to own hogs.  “When we proposed a resolution to limit packer ownership… [the NPPC] turned around and passed the opposite resolution, one supporting packer ownership of livestock,” according to Siebrecht.

            The Iowa board members are working for a voluntary pork checkoff which they believe will require more accountability of those spending the money.  Janssen said, “We had a voluntary checkoff before 1986 and it proved to be much more democratic and accountable to the interests of the independent pork producers than the mandatory one.”

 

Niche markets

            Dr. John Ikerd, agricultural economist at the University of Missouri, says that as the big food companies go global, they leave behind ever larger portions of the market.  He says that people are not willing to buy one-size-fits-all food.  Ikerd asserts that smaller farm operations have more opportunities than ever before in filling these small and large niches.  This can be done with a portion of a farm’s production as an investigation and transition process.

            Speaking from a different perspective, Dr. Dermot Hayes told a swine conference in Minnesota that the current trend towards branded pork will leave the U.S. pork industry at a disadvantage.  The U.S. commodity pork system may be low cost at this time, but the move towards a more differentiated market will allow Denmark an advantage despite its higher costs.

            Some surveys have shown that 24% of consumers are willing to pay more for food which is produced in ways that are perceived as more natural.  This includes claims of environmental sustainability, antibiotic free, without biotechnology, hormone free, or with reduced chemical use.  Family farm produced food is also a “value-added” product.  The organic market is a case in point as it has grown 20% per year for ten years despite opposition from mainstream agricultural interests.

            The best way for farmers to meet consumer demand is to move upstream closer to the consumer.  This happens to be more profitable as well for independent farmers.  However, the research, marketing and policy infrastructure on this point is in its infancy.  Unfortunately, many academics and Mark Drabenstott of the Federal Reserve Bank of Kansas City are still advocating vertical integration as the solution to problems in agriculture.

 

“Captive Shippers”

            Large shippers and manufacturers reacted angrily when Canadian National and Burlington Northern announced their planned combination in December, 1999.  By March, the Surface Transportation Board called a halt to all mergers until new rules could be drawn up for railroads.  That moratorium forced the two big railroads to call off their merger.

            What is most interesting is the reaction and arguments of the large shippers.  The Alliance for Rail Competition, representing the coal and chemical industries as well as other bulk shippers, said, “Mergers seem to be the only way they [the railroads] know how to ‘get efficiencies.’”

            Industry was especially worried about the “captive shipper” problem.  The American Chemistry Council said the chemical producers are particularly vulnerable to a lack of rail competition because 63% of the nation’s chemical plants and warehouses are already captive to a single railroad. 

            The Surface Transportation Board reacted appropriately in halting mergers in response to complaints.  Unfortunately, the USDA has failed miserably in protecting competition and in responding to the needs of commodity producers.  Thus, we have an agriculture sector which is failing in the midst of a booming economy. 

 

Seaboard chooses Kansas site

            Seaboard, the vertically integrated pork packer, has finally decided on a locale for its new plant.  The company has been seeking a home for its proposed 16,000 head/day plant for months.  More than a half-dozen sites were reportedly considered. 

Great Bend, Kansas was its first choice but local opposition drove the company elsewhere.  The next stop was St. Joseph, Missouri.  But local officials and the citizenry looked to the history of Seaboard elsewhere and decided not to roll out the red carpet.  This despite the rich packing plant history of the city.  Similarly, Bellevue, Nebraska was not interested in low-wage packing plant employment, the burden on town infrastructure, and the increase in transient workforce.

            However, town officials in Elwood, Kansas, across the Missouri River from St. Joseph, decided to welcome the plant.  Seaboard flew eight Elwood officials in August to Guymon, Oklahoma to tour its plant there.  The plant will employ about 2,200 people.  Elmwood has 1,400 residents.

 

Made in the USA

            In trying to appear as if it is listening to cattle producers, the USDA proposed to label domestically produced beef as “Made in the USA.”  The only trouble is, it isn’t.  Under the proposed certification system, cattle need only be in this country 100 days before slaughter to receive the label.  Most imported cattle are placed in a U.S. feedyard for 90-180 days as it is, a fraction of the life of steers and heifers.

            National Farmers Union and other groups criticized USDA’s Agricultural Marketing Service saying the label is designed to misinform consumers and is unfair to producers whose cattle are born and raised here.

            The efforts of Congresswoman Helen Chenoweth-Hage (R-Idaho) in pushing a bill requiring country-of-origin labeling has been key to keeping the issue near the front burner.  However, Chenoweth-Hage will not be running for re-election this year pursuant to a voluntary term limit pledge.  Thus, congressional support for this issue will have to come from other sources in the next session.

 

Iowa AG goes after contracting

            The maturity of the production contract in livestock has resulted in consistent degeneration in producer benefit.  Whereas early contracts were advantageous to producers, more recent contracts have taken most benefits away.  Thus, producers receive the financial risk and the manure.  Packers receive financial benefits, management control, and the ability to terminate the contract unilaterally in midstream.

            Iowa Attorney General Tom Miller has lead a recent initiative to reign in some of the more abusive practices in livestock contracting.  “Contracting poses serious risks for producers and ultimately for consumers,” Miller said.  “There can be a huge disparity in bargaining power between farmers and contractor companies.”

            Miller and sixteen State Attorneys General issued a joint statement in September calling for model legislation, the Producer Protection Act.  It would require that contracts be in plain language and disclose material risks.  It would also prohibit confidentiality clauses and protect producers from the risk of contract termination as a form of retribution by the contracting company.  The model legislation will likely be customized pursuant to the political winds in each of the seventeen states.

 

Swedes raid Monsanto

            In the last decade, Monsanto transformed itself from a chemical company to a “life sciences” company with a focus on biotechnology in the plant and human health fields.  The human health side of the business was Searle, its pharmaceutical division.  The agrichemical division was not ready to get its genes into plant seeds and then to farmers.

            To make the connection from the lab to the farmer, Monsanto bought scores of companies including DeKalb and Cargill’s seed division.  The torrid acquisition pace created a mountain of debt which could only be justified with a rapid consolidation of Monsanto’s market share of the seed business.  Mounting rejection of biotechnology resulted in a decline of biotech plantings this year and caused Monsanto to look for a suitor.

            Sweden-based Pharmacia bought Monsanto this year, mostly for the Searle drug division.  It is now trying to pay off some of that debt by liquidating 15% of the company, i.e. a portion of the less desirable agbiotech businesses.  Analysts believe that Pharmacia wants to sell more of Monsanto’s assets, but current market conditions make valuations very low. 

 

Biotech feeding the world?

            “If anyone tells you that GM is going to feed the world,” Steve Smith, a director of the world’s biggest biotechnology company, Novartis, insisted, “tell them that it is not. … To feed the world takes political and financial will – it’s not about production and distribution.”  This amazing quote, printed in the Guardian in London, contradicts comprehensive effort that the biotechnology industry has undertaken to convince government and the public that GM is needed to feed the world.

            Never mind that GM soybeans tend to yield less than conventional varieties.  Never mind that Bt corn produces only a marginal yield benefit in sporadic years of heavy pest infestations.  State governors and national politicians parrot the PR campaign of the Biotechnology Industry Organization regularly.

            Further, from the farmer perspective, no study of actual on-farm results has found a profit benefit from GM crops.  The few seed companies have the ability to adjust the price of the seed to capture most or all of any potential profit benefit.  In fact, even the advertisements do not talk about profit.  But GM crops do achieve labor savings and more effective pest control.  In any event, though farmers have little power – either in the marketplace or in the political sphere – Big Agribusiness is finding that consumers still rule.

 

Government’s role in the economy

            “After a couple of decades of a simplistic Social Darwinian ideology of ‘survival of the fittest’ at the end of the 19^th century, the progressives established regulations that made competition fairer…”, according to Jeff Madrick, editor of Challenge magazine.  In an article published in The New York Times, Madrick made the case that government has, and has had, a significant beneficial role in creating a beneficial national economy.

            Ishaq Nadiri, an economist at New York University, developed a model of public investment which shows that, in many cases, the returns on investment are as strong or stronger than returns on private investment.  Private investors will systematically underinvest in areas in which social returns exceed private returns because the individual company will not capture all the benefits.  “Good theory, then, tells us that investments in public goods… cannot be completely entrusted to private markets,” says Madrick.

            The “public goods” argument is central to the concept of multifunctionality.  The European and Japanese view of independent agriculture is that it is multifunctional – producing not only food as a private good but public goods such as food security, strong communities, and opportunities for conservation.  Supply chain agriculture does not produce these public goods.  The U.S. should take another look at multifunctionality when dealing with food and farm policy.

 

More poultry consolidation

            Pilgrim’s Pride Corp. has announced a merger with WLR Foods, which produces under the Wampler Foods label.  The acquisition would make Pilgrim’s Pride the number two chicken company in the U.S. and move Pilgrim’s Pride into turkey production, where WLR is the fourth largest producer in the U.S., according to the companies’ press release.

 

[Edited by Michael C. Stumo]