OCM Newsletter February, 2001

 

Quote of the Month

“You must pay your checkoff and you’ll be prosecuted if you don’t.”  Barb Determan, president-elect of the National Pork Producers Council. 

 

Competition and the Farm Bill

            OCM has called for competition to take a pre-eminent status in the farm bill debate during this year.  Without a competitive industry structure, most initiatives designed to increase farmers’ income will actually be transferred to the dominant input companies (higher input prices) or output buyers (lower commodity prices). 

            Consider export policy.  We know that predictions of skyrocketing exports was a fundamental underlying assumption in debate preceding the 1996 Freedom to Farm Act.  That prediction has not come true and probably will not come true due to the number of countries achieving self-sufficiency or exporter status. 

            Even if exports increase, if Cargill is the only buyer in the area, they have little incentive to pay more for grain or oilseeds.  They need only pay enough to persuade the farmers to continue producing.

            Similarly, when federal payments subsidize farm income, input suppliers are positioned to extract much of the new money from farmers.  While a good part of this increased income is capitalized into cash rents and land values, we cannot ignore that Monsanto, DuPont/Pioneer and Novartis have gained incredible control over seed through patents.  They can raise or lower technology fees (fees for the biotech gene which is an addition to the underlying seed price) at will in response to farmers’ ability to pay.  As the biotechnology debate rages on, far too little ink is dedicated to issues of monopoly property rights on life in the form of patents.

Unless we increase, not merely maintain, competition in agribusiness, farmers and ranchers remain mere pass-through intermediaries for agribusinesses to profit from the next farm bill.

 

Pork checkoff vote

            The nation’s hog producers voted to halt the pork checkoff.  Despite heavy pressure by the National Pork Producer’s Council (NPPC), Ag Secretary Glickman decided to hold a referendum on whether to continue the program.  While hog farmers were somewhat unsure of whether the checkoff program increased pork demand, the major reason was dissatisfaction with the pro-corporate hog industry positions of NPPC.

            NPPC was the major beneficiary of the checkoff.  While the federal statutes enabling the checkoff required that the funds only be used for research, promotion and education, the fact is that the funds also greatly strengthened NPPC advocacy for industrializing the industry.  Steve Meyer, NPPC economist, belittled those who wanted more open market competition rather than supply chains.  Now his paycheck may be gone… as it should be.

            The corporate hog farm types took over NPPC and waged civil war on the family-style operators.  The corporate farms won the power struggle.  But the family-style farmers won the checkoff vote.  NPPC has now sued in federal court to block the producer’s will.  A judge in Michigan has granted an order requiring the government to keep the NPPC paycheck coming. 

            This is a pivotal battle over the control of a major organization which should advocate for hog farmers.  Its result will determine whether NPPC will serve that purpose, or whether it will be a mere front organization for the industry.

 

Beef checkoff vote

            A similar effort to halt the mandatory beef checkoff which funds the National Cattleman’s Beef Assn. (NCBA) failed amidst controversy.  The Livestock Marketing Assn. (LMA) and the Western Organization of Resource Councils (WORC) spearheaded the recall effort. The USDA contracted with Price Waterhouse Coopers (PWC) to validate the signatures.              LMA and WORC turned in 146,000 signatures.  They needed 107,000.  PWC threw out 40% of the petitions for a variety of reasons.  Thus, only 87,000 signatures were declared valid.  The matter is currently in suit.

            NCBA claims to have 36,000 members, a small fraction of the nation’s cattle producers.  More than four times that number signed petitions to defund NCBA’s advocacy of packer and corporate feedlot interests.

In separate beef checkoff lawsuit, a federal judge in South Dakota ruled that NCBA must stop using checkoff funds on producer communications.  Judge Kornman found that NCBA was likely using the checkoff money to fight the recall and referendum effort.

The resources and organizational effort needed to express the will of the cattle ranchers is phenomenal.  The federal statute authorizing the checkoff is – at a minimum – flawed  in that it is permanent, allowing for no re-authorization vote.  Many think it should be voluntary to preserve constant accountability.  Thus, ranchers end up funding an organization they don’t agree with and one they have been unable to change.  Yet, USDA can and does aggressively prosecute those who do not cough up the money to NCBA.

 

Veneman’s transition team

Dan Glickman is now without a federal paycheck for the first time since 1977.  His rhetoric as a Kansas Congressman in the 1980’s gave hope to family farmers and ranchers.  He actually seemed to understand agribusiness market power issues.  But as Ag Secretary, he was a dud on the same issues.  Now comes Ann Veneman.

Veneman’s public record reveals strong support for so-called “free trade” but little or no concern over concentration.  However, in response to questioning before the Senate Ag Committee, she said she intends to enforce the Packers & Stockyards Act to the full extent of her authority.  Yet she refused to be drawn into criticizing the wave of mergers.  We can be hopeful, but not naïve. 

One negative indication is her ag transition team.  It is made up largely of leaders in commodity groups.  These commodity groups have often championed industry interests over those of farmers on issues, such as concentration, where industry versus farmer interests diverged.  Members of the 31 member ag transition team include top executives in the American Soybean Assn., National Pork Producers Council, National Cattleman’s Beef Assn., Food Marketing Institute, National Chicken Council, and National Corn Growers Assn. 

Veneman must learn that the farm and food economy will not allocate benefits fairly to farmers and ranchers when there is no competition.  She also must realize that decentralized ownership and control of the production sector is key to rural economic and social health.

 

The worst corporations

The Multinational Monitor (www.essential.org/monitor) recently released its annual list of 10 worst corporations of the year.  Smithfield Foods made the list.  Aventis, of Starlink fame, also received honors.

 

Price reporting corrupted

After a long fight over mandatory price reporting, independent producers won two years ago when Congress passed the necessary legislation – or so we thought.  After the initial publication of the implementing regulations, the federal government slipped the infamous “3-60 rule” into the final rule.  The result guts Mandatory Price Reporting. 

The 3-60 rule means that no market in any geographic region will be reported unless there are at least three companies bidding and no company buys more than 60% of the particular livestock, such as steers, heifers, hogs, etc. 

But most markets in the U.S. have little competition, so that there are either less than three buyers or one buyer procures more than 60% of the livestock on a given day.  The result is that most markets will not be reported.  In cattle, the only states that are projected to be reported consistently are Texas, Oklahoma, New Mexico, Kansas and Nebraska.  In hogs, the surviving reports will include Iowa-Southern Minnesota, Western Cornbelt, and perhaps the Eastern Cornbelt.  All other reporting will be national.

The government’s defensive argument to this debacle is that they want to protect the confidentiality of the buyers.  If one buyer dominates in a market, they say, reporting will be akin to disclosing that buyer’s bid price to competitors on a given day. 

The retort is, “So what?”  Competitors always know their competitors’ prices, if they have competitors.  Further, under voluntary reporting this public disclosure already occurred.  The price reporting legislation was designed to protect farmers and ranchers, not packers.

The 3-60 rule must go.  Farmers and ranchers also learned that it is dangerous to disarm after they win legislation.  They must keep the pressure on. 

 

Tyson to buy IBP

            Tyson won the bidding war for IBP.  Its rival, Smithfield, which owned about six percent of IBP stock, won a handsome profit because IBP’s stock price was driven up by forty to forty five percent during the bidding war.  Thus, Tyson is now placed in a position to supply all meat to the major supermarkets with a heightened ability to foreclose all competitors, big and small.

            Some policy makers expressed “concern” about the merger and urged the Justice Department to scrutinize the merger carefully.  OCM immediately concluded that antitrust law, as currently interpreted, was inadequate to deal with the potential problems of the number one poultry processor buying the number one red meat processor.  OCM is calling for a two year suspension on meat and poultry processor mergers to allow time for Congress to consider whether current laws should be changed to deal with the problems of the day.

            At the end of January, Tyson announced that the Justice Department had let all deadlines run without action.  This means that Justice will not act to prevent the merger.  Unfortunately, OCM’s opinion on the inadequacy of current antitrust law was validated.

            The merger is still not conclusive.  Tyson has extended the deadline for completing the merger because IBP allegedly did not disclose a Securities and Exchange Commission investigation into whether IBP lied on certain SEC filings.  Analysts believe that the lack of disclosure (some people call it lying) is not a deal breaker, but Tyson is keeping strangely closed-mouthed on the subject.

 

Profit reports

            Concentration cheerleaders argued that there is no undue market power in livestock because profits were not high.  There is no doubt that it costs serious money to drive your competitors out of business or buy their plants and shut them down.  But now the effort is paying off.

            Smithfield Foods has reported vastly higher profits for the first six months of their fiscal year.  Net earnings were $89.1 million on sales of $2.9 billion versus net earnings of $29.1 million on $2.4 billion in sales during the first six months last year.  This is an astounding 207% increase in net earnings.

            Hormel Foods Corp. reported record earnings.  Its quarterly net of $61 million compares with $59.7 during the same period last year.  Meanwhile, the farm share of the consumer food dollar continues on its ceaseless trend towards zero in the year 2020. 

Economics is supposed to be about allocating scarce resources properly.  This industry structure is not up to the task.

 

On academic independence

            Why is it that academia incessantly propounds the junk-science claiming that production agriculture must become more efficient to flourish?  More efficiency has been achieved in agriculture than in any other sector.  The “flourishing” theory should now only produce laughs. 

Yet when academes challenge the power structure in the sector to which their research is relevant, they can expect to get whacked.

            Consider the case of Dr. Erdem Cantekin in medical research reported recently in The Wall Street Journal.  In 1986, he was a co-investigator in a study on the efficacy of antibiotics in treating earaches in children.  At the time, the conventional view was that immediate antibiotic therapy was the best treatment.  His study concluded otherwise.  But his partner in the study allegedly interpreted the data in a way favorable to the $3 billion a year drug industry.  Cantekin charged foul and fraud.

            Fifteen years later, researchers are finding out Cantekin was right.  However, he is broke and viewed as a trouble-making whistleblower.  While he has a whistleblower suit pending against his former employer, he is quoted as stating, “If I had known the consequences would be so abrupt and severe, I wouldn’t have done it.”

            In agriculture, some academics are well funded by industry, refuse to disclose these private funding sources, and still testify before policy makers as “objective” illuminators of the truth.  Consider that Kansas State University recently refused to provide documents to OCM outlining the extent to which Dr. Ted Schroeder and Dr. David Mintert, ag economists there, are funded by the meat packing industry. 

More commonly, those who may consider performing or disclosing research which the locally powerful agribusinesses deem against their interests, take more placid and less illuminating paths.  They are well aware of the likely consequences to their funding and reputation.

            However, there may be hope after the emeritus (academic semi-retirement) letter is received.

 

Polls, politics and silence

            The 2000 Iowa Farm and Rural Life Poll indicated that over 80% of respondents were concerned about concentration in the food industry.  Business Week magazine revealed a large majority of Americans thought corporations have too much power.  Why are politicians not clamoring to respond to the concerns of real people?

            It is true, but incomplete, to say that large businesses have the money and influence so as to dull the legislative impetus to respond to the will of the general public.  The fact is that the public has not gotten excited about efforts to restrain market power, or other brands of corporate influence.

            OCM has been instrumental in raising the profile of these issues in the last three years.  But if an elected representatives takes up the cause, they sometimes complain that farmers just want to talk about loan deficiency payments.

            If you are concerned about concentration and market power in agriculture, you should let your elected representatives know.  They should feel that this is an issue which you will strongly consider when the next election rolls around.  Politicians should be warmly praised for doing the right thing on competition issues, and scolded for doing the wrong thing.

 

Mergers and oxymorons

            This newsletter has written about the lack of profitability that a majority of mergers have produced for shareholder owners in the last decade.  One of the biggest mergers in history, that of Time Warner and AOL, is following the trend.  Profitable mergers are becoming an oxymoron, except in the eyes of bonus-toting chief executives.

            The AOL/Time Warner marriage was approved only after extensive tinkering by the European Union antitrust authority and the United States competition agencies, the Federal Trade Commission and the Federal Communications Commission.  Whether or not these entertainment and internet powerhouses should have merged is now subsiding as an issue.  The question now is whether the new company will flourish.

            The stock market has wiped one-third off AOL’s share price since the deal was announced.  But you can bet that the top-tier executives were handsomely rewarded.  The allegedly omniscient wisdom of the equity markets has spoken again and again on mergers… in the negative.  Yet the crusty economic intelligentsia have trouble contemplating small, smart, nimble and decentralized innovation as they ogle behemoth corporations and trumpet efficiencies of scale. 

 

Home vs. Farm Ownership

            The number of American families owning a home hit 71.6 million last year, a record that amounted to nearly 68% of households.  The national policy promoting homeownership has been a huge success.  There is little doubt homeownership has produced tremendous social and economic benefits.  Homes are a major source of wealth creation for owners and stabilizing forces for communities.  What of farm ownership?

            We all know that a farm sector consisting of decentralized farm owner/operators provides very stabilizing forces for the community.  Tremendous amounts of money are spent locally.  The tax base is greater, disparities in wealth are less, social institutions are healthier and the work ethic is stronger.  Yet national policy is against owner/operator agriculture and for corporate supply chain agriculture.  It is more “efficient” to adopt large, industrial-style farms held captive by a single processor/customer. 

Whether derided as feudalism or lovingly applauded as “supply chains” (ala Mark Drabenstott of the Kansas City Federal Reserve Bank), corporate controlled agriculture causes rural economies to degrade. 

The economic significance of colonialism was that the dominant power vacuumed resources out of a country causing greater poverty and instability.  Economic development has an additive effect.  Farm ownership is economic (and social) development.  Corporate farming is economic colonialism.

 

Hormel increases turkey lead

            Hormel Foods is the world leader in turkey processing through its wholly-owned subsidiary, Jennie-O Foods.  Hormel is now acquiring The Turkey Store Company, a leading producer, processor and marketer of fresh and cooked turkey products, marketed principally under The Turkey Store brand.  The brand is sold nationwide in supermarkets, delis and foodservice operations.

            According to a 1999 report by Drs. William Heffernan, Mary Hendrickson and Robert Gronski, “Consolidation in the Food and Agriculture System,” the four firm concentration ration has risen in turkey processing from 31% in 1988 to 40% in 1996.

 

Books and reports

            Mary Hendrickson, William Heffernan, Philip H. Howard and Judith B. Heffernan, Consolidation in Food Retailing and Dairy: Implications for Farmers and Consumers in the Global Food System, a report to the National Farmers Union, see www.nfu.org.

Kurt Eichenwald, The Informant: A True Story, New York: Broadway Books (2000), on ADM price fixing. 

James Lieber. Rats in the Grain: The Dirty Tricks and Trials of Archer Daniels Midland; New York: Four Walls Eight Windows (2000) on ADM price fixing.

            (A review of the latter two books by Dr. John Connor is available at www.antitrustinstitute.org).

 

[Edited by Michael C. Stumo]