On July 19 and 20, OCM will host the 2001
Food and Agriculture Conference in Nashville at the Radisson Hotel
Opryland. The first day will feature
The New Competition: how direct marketing, farmer controlled entities and
changing consumer tastes provide substantial competition to Big Agribusiness.
The second day will focus upon
Competition and Trade Practices Policy.
Topics include the converging interests of farmers and consumers, and
federal involvement in the marketplace.
Additionally, Luther Tweeten of Ohio State and Roger McEowen of Kansas
State will present two very different views of the preferred future of
agriculture.
On July 21, the OCM membership will
convene to discuss priorities for the new year. Please plan to attend.
We have to convince them (opponents) that this is
coming and that it’s irreversible. We
have to show them that these anti-corporate farming laws have cost (states with
such laws) pork production as production has increased in (states without such
laws), and we have to show them that a national corporate farming law would
force production to Canada, where grain is cheaper, or Mexico, where labor is
cheaper.” Joseph Luter III, CEO
Smithfield Foods, Inc., at the Rabobank International’s Global Animal Protein
Conference April 3-4, 2001. Feedstuffs,
pg. 34, April 9, 2001.
"Consolidation over the next few years will
create just three major, global retailers and we will be one." K. Alan Warren, general merchandising
manager for meat at the Giant food stores owned by Ahold USA at the same
conference.
Last fall OCM proposed that the next
Farm Bill should include a Competition Title to fix the rules of competition in
the marketplace. The Farm Bill is
renewed every five to seven years and expires next year. It contains topical “titles” on matters such
as commodity programs, ag research, and conservation. Because the farm economy is in dire need of better rules to
facilitate competition in agriculture, the Farm Bill may be the best vehicle
for doing so.
The idea has taken off. Nearly seventy diverse groups have recently
signed a letter asking for a Competition Title in the next farm bill. The letter was sent to the respective chairs
of the House and Senate Agriculture Committees. Sen. Harkin (D. Ia.) has now said that the next Farm Bill will
have a Competition Title. Sen. Lugar
(R. Ind.) was rumored to be supportive of including some competition issues in
the Farm Bill before the recent switch of party control in the Senate.
What should be in the legislation? The first step is to ask what is the purpose
of market rules. The answer is to
protect the individual producer so as to promote the diverse ownership of the
productive assets in agriculture. The
next step is to agree on fundamental principals. OCM proposes the following fundamental principals of market
facilitation: access, fairness, freedom from conflict of interest,
transparency/full information, and vigorous price competition.
Three subsections of the Competition Title should
include rules governing : (1) the open market; (2) contractual relationships;
and (3) the ability to bargain collectively.
These rules should not be commodity specific because market facilitation
is important across the board. Stay
tuned in the upcoming months as these principals are honed into specific
proposals.
Retail supermarket concentration
continues to rise. With this rise comes
new and imaginative ways to exclude competitors. Last year Congress held hearings on the practice of slotting
fees. Slotting fees are moneys paid to
super-markets by food manufacturers for the privilege of securing shelf
space. The practice makes retail food
shelves the highest price real estate in the world. The problem is that only huge food manufacturing conglomerates
can afford the fees paid to the likes of Walmart. If smaller upstarts produce better or more innovative products,
their products are precluded from display to consumers.
Another development, recently
analyzed by Dr. Robert Steiner for the American Antitrust Institute, is the
emergence of “Category Captains.”
Category Captains (CC’s) are the dominant company in a sales category. For example, a large supermarket may outsource
its shelf space allocation and presentation design functions in pet food to the
dominant firm. The supermarket benefits
from reducing labor costs while receiving specialized expertise for free from
the pet food experts in the dominant firm or CC.
The anticompetitive side is that the
CC receives proprietary information on competitors and the supermarket to the
exclusion of others. The CC makes
pricing suggestions/decisions which are likely designed to maximize revenue for
both the manufacturers and the supermarket.
Small pet food companies are more likely precluded from achieving a
place on the shelf because the CC has an incentive to recommend exclusion. Further, large competitors to the CC are at
an information disadvantage because they do not receive this information and
influence.
This coordination means that
consumers are likely to pay too much because price competition through bids is
suppressed. Farmers, as usual, will not
see any of the profits achieved by the practice. Further, innovation can only come from dominant firms because
upstarts cannot get their products, no matter how unique, before
consumers. The Category Captain
phenomenon is one which both farmers and consumers have an interest in stopping.
Since the 1980’s, federal antitrust
officials have used a concentration index, among other tools, as a guide to
determine whether a horizontal merger may have anticompetitive results. In rough terms, that index was designed to
reveal whether a firm or firms were becoming too powerful in a particular
product category and in a particular geographic market. The focus is narrow, coldly analytical, and
exclusive of many concerns that the public has about corporate power.
The rate of concentration has
increased so much in the last 20 years that policy makers need to look at the
problem systemically. In the food and
agriculture subeconomy, concentration begets concentration as companies strive
for market share and bargaining power.
If one grain processor makes a major acquisition, competing processors
are driven to do the same. When
retailers grow larger, food processors and manufacturers strive to grow so they
may maintain or increase their bargaining power with the retailers. The cycle continues unchecked.
There must be intervention at some
point in the cycle to slow or halt its continuation. The analysis must be broadened beyond conventional antitrust
analysis to include broader, longer term public policy goals that lead to a
preferred industry structure. Such an
analysis would prevent some mergers which would drive the sector away from the
longer term goals of increased competition and choice. The role of public policy and the citizenry
should be increased.
Consolidation in agriculture, as in
the rest of the economy, has been occurring for decades, The rise of the
internet and the dot com proliferation was a powerful trend in the late 1990’s
that many regarded as the death knell of large, hierarchical organizations. The Year 2000 collapse of the NASDAQ,
venture capital, and dot com bubbles may have pleased some who were jealous of
the major wealth generated by twenty-somethings, but it confirmed the enduring
power of the conglomerates.
Yet individual decision making and
choice is more important and powerful than ever. Unfortunately, the concentrated structure of the economy limits
choice. Consolidation in food and
agriculture still allows theoretical choice, but is it meaningful? Farmers have few choices as to market
outlets. Consumers have fewer choices
as to companies from which to purchase their food – although brands and
products have increased in number.
The food industry analog to the dot
com revolution is the rise of direct marketing and farmer controlled
entities. Organic farming, “natural”
food products, and sustainable agriculture pioneered this trend. Changing and diversified consumer tastes are
providing fuel and opportunity for sustained growth. But as such alternative products become mainstream, established
corporations are buying successful upstarts.
For example, major companies such as Suiza Foods and Sainsbury’s have
entered the organic markets.
Consumers, farmers and policy makers
must provide strength to the decentralization trends in food and
agriculture. Consumers should seek out
food products from small or farmer-controlled outlets. Farmers should build more new generation
cooperatives and similar firms. Policy
makers should shift government resources towards these cottage-industry
businesses and away from dominant players.
Concentration is not merely a “natural” progression. Many individual choices are made which could
help, or hurt.
The consolidation cheerleaders often
hyperventilate with ecstatic claims of benefits to shareholders when selling
the most recent merger deal. However,
the validity of those claims often vanish in the presence of thought. A recent study by KPMG Transactions Services
concluded that 70% of merger deals between 1997 and 1999 failed to create
shareholder value.
The results were found by comparing
the share prices of the merged entity with those of their competitors. When directors were surveyed in the same
study, three-quarters of them considered their deals successful after the
fact. In many cases, however, their companies
did not attempt to measure how well the deal had gone, or did so without regard
to shareholder value.
Innovation and success can be
pursued in many ways. If a company
thinks it has to merge to succeed, the real problem may be weak
management. The dangers of
consolidation to competition and free markets must be taken more
seriously.
The consolidation cheerleaders also
trumpet bloated claims of efficiencies which will benefit consumers when the
newest merger is announced. Most
credible economists realize that efficiency is probably the most confusing word
in economics and efficiency measures are of severely limited usefulness. But what happens when a company has to
(gasp) prove its claims of efficiency?
The answer is: it cannot.
Consider the recent case where the
Federal Trade Commission (FTC) sought to block a merger between H.J. Heinz Co.
and Beech-Nut Nutrition Corp., two large baby food makers. Heinz attorneys asserted that efficiency gains
will make the merger beneficial thereby overcoming market power concerns. The U.S. Court of Appeals for the District
of Columbia found that efficiency claims were not sufficiently proven. The court also said that Heinz failed to
show that the claimed efficiencies could not be achieved by means other than a
merger.
There are many roads to efficiency:
technology, quality personnel, information management, innovation, etc. If a Big Agribusiness CEO tells you that
he/she needs to do a merger to be more efficient, maybe he/she is really saying
that a new CEO is needed.
Organic agriculture has been a major
marketing success. Sale of organic food
products has increased by 20% per year over the past decade. USDA predicts that growth to continue into the
next decade. More and more consumers
worry about “industrial” food. But now
organic is becoming industrialized.
Cascadian Farm is one of the older
organic brands. “Better Food for a
Better Planet,” is its slogan. But what
the label does not say is that the company is now a subsidiary of General
Mills. Organic Cow of Vermont is a
popular organic milk brand in the Northeast U.S. Started by Vermont farmers who built it into a successful
company, it is now owned by Horizon, a Colorado “factory dairy farm”
company. Suiza Foods, the nation’s
largest dairy, owns a 13.8% stake in Horizon.
Sainsbury’s, a large British food retailer, is engaging in captive
supply organic production with large producers. Last year, it was reportedly negotiating with the island nation
of Grenada to turn all the country’s ag land into organic production.
An earlier item in this Newsletter
argued that the organic/natural movement is part of a dot com revolution in
food. Many unconventional upstarts
bypassed the conventional companies to access the consumer and transform how
people think of their industry. Many
have succeeded and many have failed.
Overall growth was tremendous.
But many of the most successful dot coms and some of the most successful
organic businesses have been incorporated into old line companies. The uniform organic standards provided by
the National Organic Standards Act have increased the ability to industrialize
the sector.
The next step for food producers is
to convince consumers that they should care about who produces their food. Direct marketing by farmers individually or
through farmer-owned entities is increasing dramatically. If consumers can be persuaded to perceive
value in buying from a family farm based food source, it would go a long way
towards increasing the strength of decentralization trends in the food sector.
The fluid milk market is where the
consumer has felt the effects of concentration the most. Chicago and the Northeastern U.S. have
experienced increased milk prices that are caused by lack of competition in the
milk processing and supermarket retailing sectors. Now the nation’s two largest dairy processors, Suiza Foods and
Dean Foods, are planning to merge. This
is the dairy equivalent of the Cargill acquisition of Continental Grain.
The two companies have submitted
documents relating to the merger to the Department of Justice (DOJ) for
review. This process is mandated by the
Hart-Scott-Rodino Act. DOJ is now
conducting a “second review,” seeking more documents and indicating that it is
actively scrutinizing the merger. This
is a good sign.
To avoid problems, the companies
have offered to sell six plants that overlap in their geographical milk
procurement. Antitrust authorities have
often taken the “fix it first” approach in allowing mergers by requiring
divestiture of assets which overlap.
But the divestiture remedy is not enough here.
DOJ should stop the merger
altogether. The last thing that dairy
farmers need is less choice and less bargaining power in the marketplace. The dairy cooperatives should be raising
“heck” about this because they will have less marketing choices. A competitive market requires choice.
Dr. Ron Cotteril has authored a study consumer dairy
price increases in the states covered by the Northeast Dairy Compact. The study shows that nearly $50 million of
the $130 million increase in the milk bill paid by New England consumers at
supermarkets over a three-year period (from July 1997 through July 2000) is due
to increased profits by supermarket retailers and dairy processors.
"The
public interest is being subverted by private economic power," said Ronald
Cotterill, director of the Food Marketing Policy Center at the University of
Connecticut and lead author of the study. "Higher retail prices and
related consumer losses have been entirely attributed by many observers to the
(Northeast Dairy) Compact's operation and other cost increases. This clearly is not the case."
Suiza Foods is a major culprit,
according to the study. Since its entry
into the New England market in 1997, the Dallas-based dairy processing giant
Suiza Foods Corp., "has closed, or caused the closure and dismantling of
several milk processing plants in the region," the study says. Cotteril
states that Suiza now controls 80 to 90 percent of the supermarket milk
business in Boston and Providence, having acquired Garelick farms in 1997, West
Lynn Creamery and Cumberland Farms in 1998, and Stop & Shop’s milk business
in 2000 as well as Nature's Best Dairy in Rhode Island and New England Dairies
in Connecticut. All but Garelick and
West Lynn plants are now closed.
Dairy farmers, their cooperatives
and consumer organizations have not yet realized the impact of private economic
power on the dairy industry. They would
be well advised to take a crash course in industry structure and market
power. They may find that farmers and
consumers have more in common than they previously thought.
The recent USDA report “U.S. Hog
Breeding Herd Structure” shows that operations with more than 5,000 sows
accounted for 73% of the pig crop in 2000 compared with only 27% in 1994. The USDA summarizes that, “The makeup of the
U.S. hog breeding herd by size of operation has changed dramatically over the
last 6 years.”
The primary cause of this change is
vertical integration by packers. One
can argue that price is the factor, but OCM believes that price is the symptom
– not the cause.
When meat packers such as Smithfield
control most of their inventory through ownership or contract arrangements it
causes major and tragic effects on the structure of independent hog
production. If the policy is to spread
ownership of the productive assets of agriculture widely, the U.S. has obviously
failed.
Canada’s Department of Agriculture
has a June order preventing its scientists from talking to reporters. Canada’s National Farmers Union (unrelated
to the U.S. organization) charged that the government was trying to limit what
the public hears on controversial issues such as the genetic manipulation of
food.
In the U.S., plant biotechnology
companies such as Monsanto have cozy relationships with government and
academia. Studies on academic
independence have, for years, named biotechnology companies as a chief culprit
in determining which university studies are undertaken or published.
Former ag secretary Dan Glickman stated earlier this
year that to question biotechnology in USDA was to achieve near heretical
status. The issues surrounding genetic
modification of plants will be resolved much sooner if GMO cheerleaders
surrender rhetorical dogma for truthful debate.
[Edited by Michael C. Stumo]