OCM’s 2001 Food and Agriculture Conference in Nashville was a wonderful success. In keeping with our belief that everyone has an interest in fair and competitive markets for food and fiber products, we included many people beyond the traditional farm and ranch sector. OCM argues that it is fundamental that we have markets that are free from abuses of power, provide equal access on equal terms, minimize barriers to entry, and are transparent.
The July conference revealed that the issue of competitive markets can be a bridge between many constituencies, such as consumer groups, food security organizations, rural development advocates, and organic food producers, for example. With dwindling numbers of farmers in the country, it becomes clear that limited, issue specific alliances are necessary to protect our interests. The Farm Foundation and the Kerr Center for Sustainable Agriculture generously provided funding for the conference.
Although OCM focuses primarily on antitrust and related rules to create competitive markets, competition can also be increased through the entry of new firms into the sector. Stated another way, the improper exercise of power by dominant firms can be constrained through the countervailing power of government (antitrust rules) or the countervailing power of private industry (new or existing firms). In the food system, the niche markets are the deepest reservoir of meaningful new or potential competition. This was the focus of the first day of the conference.
Mark Winne spoke of how many constituencies can seek the same goals for very different reasons. Winne, executive director of the Hartford (Connecticut) Food System, gave the example of the school lunch program created several decades ago. The U.S. military, concerned about the poor nutritional status of new recruits, and farm interests, wanting an outlet for excess food, drove the ultimate creation of this program.
Pam Roy, past president of the North American Direct Marketing Association, spoke of how farmers bypass the conventional food processing, distribution and sales infrastructure through farmers markets and other methods. The level of economic activity of farmer direct marketing is far larger, especially in more urban areas, than many believe.
Does the government have any role? Neil Hamilton, ag law professor at Drake University, told of how state governmental programs have a large impact on the ability of farmers to market directly and capture a larger portion of the consumer dollar. State food policy councils and state specific food labels are examples of how some state departments of agriculture and departments of economic development are focusing more of their resources on small farmers.
Randy Torgerson, USDA Rural Development, presented information on the cooperative form of business organization, which is receiving increased attention during this period of food industry consolidation as a way for farmers to capture more of the consumer dollar. The federal government is increasing its budget to support farmer-owned processing, distribution and sales entities.
Vanessa Langston, of the Center for Industrial Services in Nashville, spoke of how her organization can help farmer-owned businesses keep abreast of, and bid on, government food procurement contracts. Clara Klotz, an ag economist with the USDA Wholesale and Alternative Markets Program, told about how the USDA is increasingly tracking and assisting farmer direct marketing efforts.
What of the private sector? This is where the major activity lies. Mike Callicrate talked about how his company, Ranch Foods Direct, is responding to consumer demand for natural beef produced by families. Callicrate’s company (www.ranchfoodsdirect.com) is finding widespread demand for high quality beef produced without hormones or subtherapeutic antibiotics and is working to return more money to farmers who produce this beef.
Barbara Meister, of America Fresh in California (www.americafresh.com), uses a computer system and website to provide an efficient forum for buying, selling and delivering produce in and around major urban areas. The system matches farmers’ supply with restaurants’ demand with regard to volume and timing in the San Francisco Bay area. Meister is seeking to franchise the business across the country in target areas.
Stan Rosendahl, of Family Quality Pork Processors Cooperative, is aggressively developing a pork processing and sales company owned by Nebraska pork producers. He told of the challenges and opportunities he found as the cooperative strives to build a packing plant to serve his producers and to sell pork to food service and retail outlets.
The second day of the conference focused on conventional agriculture and how we can correct the problems with strategic behavior and abuse of power in the marketplace. The first panel dealt with the issue of increasing concentration among food retailers.
Ron Bloch, a former Federal Trade Commission attorney, discussed the problems of the increasingly concentrated retail supermarket sector. He spoke of the issue of slotting fees (retailers demanding large payments from food sellers for the privilege of getting shelf space) as well as the ramifications for small communities who lose their local grocery stores.
Bert Foer, of the American Antitrust Institute (www.antitrustinstitute.org), presented the newly emerging phenomenon of “category captains” as a mechanism for food manufacturers to engage in improper opportunistic behavior. Large supermarkets increasingly turn over the management of a food category (such as pet food) to the dominant supplier. That supplier then gets the information on competitors to design pricing strategies and allocate shelf space. The potential for abuse of the information is great and the potential for new competitors to get shelf space diminishes.
Ron Cotteril, ag economist from the University of Connecticut, presented his recent study of the Northeast U.S. dairy sector concluding that Suiza Foods, the dominant dairy processor there, had used its power to improperly raise milk prices. Cotteril directs the Food Marketing Policy Center (www.are.uconn.edu/FMktC.html). His study also concluded that the Northeast Dairy Compact had little impact on consumer milk prices.
Art Jaeger, of the Consumer Federation of America (CFA), gave a consumer perspective on food issues. He said that consumers are very concerned about food safety but have not been complaining of high food prices, even though food prices have not declined when farm gate prices decline. Nonetheless, he said that he is very interested in taking action if there is proof of a link between industry concentration and higher prices, such as in the Cotteril study.
Brett Kay, of the National Consumer League (NCL), also said that food safety was a major consumer concern as well as biotechnology and other issues. He agreed with Jaeger that consumers have not been complaining about high food prices. NCL, however, is very concerned with retail and agribusiness consolidation and is interested in working with farmers to remedy the problem.
The next panel focused on the federal government’s recent activities relating to the agricultural marketplace. John VanDyke, USDA Market News Service, informed participants about how USDA is altering the much criticized 3-60 rule in the Mandatory Price Reporting system. That rule prevented the reporting of many livestock market reports because of an insufficient number of buyers. VanDyke said that USDA would implement a 3-70-20 rule to increase the number of reports (see article below).
Warren Preston, USDA Packers & Stockyards Programs, described his agency’s activities in enforcing the Packers & Stockyards Act. He discussed recent cases and how the agency is responding to recent government reports which were critical of its activities.
Doug Ross, Special Counsel for Agriculture at the Department of Justice Antitrust Division, presented on the history of antitrust law in agriculture. He also discussed recent cases undertaken by the Antitrust Division in the grain processing, farm equipment, and crop seed industries.
The last panel was a presentation of divergent views on the preferred structure of agriculture. Roger McEowen, professor of agricultural law at Kansas State University, told of how the law reflects, over the long term, the values and preferences of the citizenry. His overarching point was that there are many public policy considerations in legislating in the agricultural arena. Economic efficiency is merely one of the considerations. Concepts of fairness, the environment, hunger, rural community viability, worker safety, etc. are some of the many other considerations.
Luther Tweeten, professor of agricultural economics (now emeritus) at Ohio State University, discussed the successes of agribusiness in this country. “Farmers should get down on their knees each day and give thanks for agribusiness,” he said. His experience in Russia and the third world showed that major problems with hunger and food distribution result from the lack of a strong agribusiness infrastructure. However, in this country, the agribusiness sector has provided plenty of food, efficiency and profits, he said.
Award winning investigative journalist Alan Guebert delivered the key note address at the conference banquet. Guebert encouraged the audience to continue to work for the economic interests of independent farmers. He also highlighted some of the more egregious trade practices found in agribusiness, such as the efforts of Big Biotech to leverage market power to create farmer harm.
Most of us have at least some sympathy for the libertarian desire to “get government out of our lives.” Government can certainly be intrusive and oppressive. The problem is that government regulation is often replaced by corporate regulation. A better slogan would be to “get institutional power out of our lives.”
We interact with powerful institutions every day, public and private. In his book , The Anatomy of Power, John Kenneth Galbraith argued that the power of large organizations is the dominant force in modern society. Farmers and ranchers deal with the power of organizations when paying taxes, when buying food and inputs, and when selling their products.
The trend in the modern agricultural marketplace is for corporate power to be dominant, to the detriment of the less powerful producers. While OCM is concerned primarily with the family-based producers, even large corporate producers are subject to the power of processors, food manufacturers and retailers. Thus, we seek government rules to minimize unfair practices, strategic behavior, and other abuses of power. We seek to balance corporate power (exercised through contracts and market practices) with government power (antitrust enforcement and rules of competition).
While our preference may be for organizational power to go away, it will not. If government is too weak, corporate power fills the void. If we as citizens are too weak and unorganized, government can become too oppressive. The best strategy, at least in the agricultural marketplace, is the proper use of government power as a countervailing force to keep corporate power in check.
So what is the proper role of government in the ag markets? Let’s start with the minimal goal of facilitating properly operating markets. Properly operating markets require rules for access, fairness, transparency (full information), and freedom from conflicts of interest. An example of a relatively well-operated market is the stock market.
First, access is easy, almost anyone can buy or sell stock, even an incredibly small amount of stock. Second, fairness is facilitated by rules preventing unequal access to information or prices by the preferred few and by requiring trading fees to be equitable among large and small.
Third, the stock market is very transparent in that information on price and quantity of trading is accessible at all times. Also, the quality of the stock offerings can be evaluated due to the forced disclosure of detailed financial information by listed companies. Fourth, conflicts of interest are minimized in the stock markets by, for example, regulations preventing certain trading by insiders who would otherwise use superior information to engage in strategic behavior to the detriment of others.
How do the agricultural markets in livestock, for example, compare? Not well. First, access is increasingly becoming a challenge because captive supplies squeeze out those producers who are not under contract or are relatively small. Consolidation has also caused access problems for producers in marginal areas that were not marginal before.
Second, fairness was supposed to be facilitated by the Packers & Stockyards Act. However, the failure of the USDA to propound regulations or enforce the act means that preferred parties receive special treatment on pricing, time of delivery, and market access.
Third, the market is not very transparent with regard to pricing, quantity or quality. Mandatory price reporting was supposed to address much of this problem, but the USDA put a higher value on packer confidentiality than on market information. This has resulted in large blackouts of market information.
Fourth, conflicts of interest are widespread. Packer feeding freezes out others from shackle space. Packer contracting gives special deals to aligned producers to the detriment of others with like quality cattle.
The role of the government is to remedy these very basic problems.
Now this is power. First, Missouri passes a sensible price discrimination law two years ago stating that packers must pay roughly equal prices for like grade and quality livestock, no preferences for their buddies. Second, packer interests sue to invalidate the law, win at trial court level and lose on appeal. Third, the price discrimination law goes into affect earlier this year. Fourth, the packers choose to take out their frustration by punishing Missouri in a partial boycott, an illegal one in OCM’s opinion.
So what is the reaction by
authorities? Investigate to see whether
packers are boycotting Missouri?
Prosecute packers for illegal behavior?
No. Lowell Mohler, Missouri
director of the Missouri Dept. of Agriculture, chooses to work extremely hard
to portray the packer conduct as “market problems” caused by the law. Mohler told federal authorities not to
investigate and spread baseless information that damages could be $20 million
for Missouri due to the law.
Another funny thing is that opponents of the law who claim that producers are being harmed refuse to produce evidence of harm. All claims are anecdotal and many of the anecdotes have proven not true. Calls for a study have been rejected by Mohler. So has there really been harm?
The analysis should be this. First, investigate the facts to determine the type of market conduct that has occurred after the law went into effect. Then, if packers have changed their buying practices to harm producers due to frustration with the state law, prosecute them. If there has not been a change of buying practices or producer harm, no problem. (Rumors are that federal authorities have found improvements in the livestock market in Missouri). In either event, the price discrimination law set forth standards to make the market more fair. Intentional packer decision making caused any problems occurring after the fact.
3/60, 3/70/20 or whatever
In 1999, grassroots livestock producers finally forced Congress to improve market information by passing the Mandatory Livestock Reporting Act. All sales of livestock would have to be reported to USDA Market News. But there was a clause in the statute stating that USDA should not disclose confidential information.
USDA could have interpreted that clause to mean that they should not disclose individual buyers or sellers in a transaction. But the packer lobby convinced USDA that it should not reveal prices in an entire region if there were not three buyers or if one buyer bought more than 60% of the livestock – the infamous 3/60 rule.
OCM found out about the 3/60 rule early on and cried foul. We argued that the rule would result in less, not more, price information. USDA argued that disclosing prices in a region where one packer was the primary buyer was akin to telling everyone what a particular packer was paying that day.
The perverse result is that producers in regions with little competition and the most market vulnerability received the least price information.
After the 3/60 rule caused price information blackouts all across the country on a daily basis, USDA is partially relenting. Its Market News Service will now use the 3/70/20 rule.
Under the rule, prices will be reported only if the following conditions are met: (1) At least three packers need to provide data at least 50 percent of the time over the most recent 60-day time period; (2) No packer may provide more than 70 percent of the data for a report over the most recent 60-day time period; and (3) No packer may be the sole reporting entity for an individual report more than 20 percent of the time over the most recent 60-day time period.
While this is an improvement, it still means that producers in areas with one or two buyer will not get price information. The asymmetry of information (packers have more, producers have less) will be increased by USDA’s choice to withhold information.
The proper confidentiality rule is as follows: The USDA shall not reveal the identities of specific parties to specific livestock transactions – PERIOD.
Keith Collins has been in USDA since the Reagan years. He was Chief Economist under Glickman and now Veneman. His office was instrumental in providing support for the 1996 Freedom to Farm Bill. He sees no problem with concentration.
At a May 17 hearing before the Senate Agricultural Appropriations Subcommittee, Keith Collins, USDA Chief Economist, vigorously sought to justify consolidation as a natural response to efficiency opportunities. He also argued that the declining farm share of the food dollar was primarily due to increased processing of foods before reaching the consumer. However, he failed to identify how a steak or milk is more processed today than in 1950.
[Edited by Michael C. Stumo]