March, 2002
“Those who oppose all reform will do well to remember
that ruin in its worst form is inevitable if our national life brings us
nothing better than swollen fortunes for the few and the triumph in both
politics and business of a sordid and selfish materialism.” Teddy Roosevelt, 1910
What a very inefficient governance system we have in the
United States. We have redundant law
making branches – in the form of the executive, legislative and judiciary
branches – that squabble and contradict each other. We have federal, state and local governments that do the
same. Periodic general elections
contribute tremendous expense to the public coffers only to have persons
elected who are not trained to govern.
Why not get rid of this redundancy, wasted expense, and
conflict? What good is it? Why not have a corporate style government
with a CEO of the United States appointing all others according to merit? We could base all policies in this new and
improved system upon sound science and dismiss concerns that our experts could
not prove through careful studies. Some
would call this dictatorship but they would merely be emotional, frustrated
dissidents.
The answer is that this “efficient” government model
without checks and balances and without infrastructure for citizen
participation (i.e. elections and public information) has proven inferior to
the chaotic progress of democracy.
Democracy allows the multiple freedoms that produce diverse development
of social, economic and individual betterment.
Similarly,
the chaotic progress resulting from a diverse economic system is superior to
the control of the monopolists.
We believe that OCM has proven extremely effective in
creating the demand for change in antitrust and competition policy due to our
research, analysis and education efforts.
We hold ourselves to very high quality standards and have become a
trusted resource. Perhaps you agree and
would like to be supportive.
To progress, we need to increase our financial base and
our membership. Our dues are higher
than those of other organizations, but we believe that OCM has proven its
value. Founding member dues are
$1,000. Regular member dues are
$200. Mere newsletter support is
$25. If you agree with OCM and have the
means to support us financially, please join as a member.
There has been reason to cheer during this latest Farm
Bill debate, at least on the issues relating to market competition and fairness. The U.S. Senate included four important
amendments in its version of the Farm Bill which are now under discussion in
conference committee. First, the Senate
adopted an amendment prohibiting packers from owning or controlling
livestock. Unfortunately it does not
affect market distorting captive supplies.
More on this later.
Second, the Senate passed an amendment requiring meats
and produce to be labeled as to country of origin. Consumers overwhelmingly support having more information about
where their food is grown in making purchasing decisions. Markets need full information to function
properly.
Third, a provision was adopted allowing farmers in
agricultural contracts more choice in how to resolve disputes with processors
by voiding mandatory arbitration clauses in those contracts. Processors write the contracts which they
offer to producers. These contracts
often include a clause which requires producers to submit to arbitration in the
event the processor breaches the contract.
The problem is that arbitration is biased against the producer,
expensive, and contains fewer producer protections than exist in the civil
court system. The result is that
producers can choose whether to go to court or arbitration after a dispute
arises.
Fourth, the Senate approved Senator Harkin’s amendment to
limit confidentiality clauses in livestock contracts and to include production
contracts under the Packers & Stockyards Act. Confidentiality clauses are a mechanism for processors to
increase their power through isolating producers in their information gathering
and consultation capabilities. These
contract clauses are inserted by the processors to prevent producers from
sharing the contracts with others to determine the producer’s rights or to make
an informed decision as to whether to enter into the contract in the first
place.
As to production contracts, the Harkin amendment brings
them within the scope of the Packers & Stockyards Act (PSA). The PSA “unfair practices” provisions covers
contracts between producers and processors of meat and poultry when the
livestock or poultry are going to slaughter.
The Harkin amendment would also include contracts with non-processors
(e.g. producers contracting with a large corporate farm) as well as applying to
contracts for livestock not intended for immediate slaughter (feeder pig or
laying hens).
The
packer lobby worked very hard to defeat these provisions. The American Meat Institute, the National
Cattleman’s Beef Association, and the National Pork Producers Council deployed
significant financial resources to thwart the will of the grass roots. Intense citizen support trumped the
lobbyists in the Senate. The question
now is whether the House members of the conference committee (where the Senate
and House versions of the Farm Bill are being negotiated for a compromise bill)
will stand with producers or with lobbyists.
Soon after the packer feeding ban first passed on
December 13, 2001, the packer lobby immediately attacked it. They used the “Doomsday Defense” also known
as the “The Sky is Falling” strategy.
They claimed that the bill would eliminate all contracts, joint ventures
while clobbering the market with a glut of divested animals. All claims were and are untrue.
The Senate passed another version of the packer feeding
ban on February 12, 2002 to make clear that it only affects packer-owned
livestock and livestock raised by producers who may hold mere title to the
animals, but the processor exercises management control. Also exempted were farmer owned cooperatives
and farmer-controlled packing plants which have less than 2% of the national
market share.
After the Senate approved its full version of the Farm
Bill, the packer lobby increased the scope of its “Doomsday Defense.” It claimed that the provision will shift
processing capacity overseas, eliminate billions of dollars in equity from
agriculture, lessen consumer demand, etc.
Professors John Connor (Purdue), Roger McEowen (Kansas State), Peter
Carstensen (Wisconsin) and Neil Harl (Iowa State) presented an independent
report on March 12, 2002 rebutting each and every one of the packer
claims. That report and was released by
Senators Johnson, Grassley, Harkin, Wellstone and Thomas and is on the OCM
website.
How do you know if an agricultural economist is biased in
favor of agribusiness and against farmers?
Whether the economist is employed by a university is irrelevant. First, one must look to see if the economist
has received packer money in the past and whether he/she discloses that
financial conflict. Second, one must
determine whether the economist primarily defends the packer in public policy
decision making while casting a blind eye to market failure and producer
harm. Third, one must investigate
whether the economist paints a one-sided picture in favor of the packer while
ignoring facts and evidence showing that some market activities are either
partially harmful or exclusively harmful.
Case in point: A
recent paper was written by eight university economists arguing against a
packer feeding ban. Their names are
Wayne Purcell (Virginia Tech.); Ted Schroeder (Kansas State); Clem Ward
(Oklahoma State); Marvin Hayenga (Iowa State); Glenn Grimes (Missouri); Dillon
Feuz (Nebraska); John Lawrence (Iowa State); and Stephen Koontz (Colorado
State). The paper fails the objectivity
test.
First,
most of these economists have received money from the American Meat Institute
or the meat packers in the past and failed to disclose this fact. Second, they ineptly attempted to be lawyers
in interpreting the legal language in the bill, no doubt helped by Cargill
attorneys, thereby claiming that the legislation would prohibit most all
livestock contracts.
Third, they failed to recognize any potential for captive
supply contracts or packer owned livestock to distort the market or increase
packer market power – despite the fact that one or more of these economists
publicly acknowledged the risk of market manipulation in past writings.
The packer economists made a host of other claims which
were unsupported by logic or evidence.
For further information on rebutting the claims of the packer lobby,
including the packer economists, go to the OCM website on the “What’s New” page.
The Mandatory Price Reporting Act of 1999 was designed to
provide full information to farmers on the prices of commodities. It was gutted by the USDA which chose to
black-out prices in regions where concentration is the highest. Farmers and ranchers now have less market information
than they had under the prior voluntary price reporting system.
Consider the writings of the recent Nobel Prize winner in
economics, Dr. Joseph Stiglitz.
Stiglitz, former chief economist of the World Bank, pioneered an
important aspect of modern economic theory on market information. Financial markets, he argued, require full
information for all parties in order to function properly. Without rules to require information
disclosure, only a few sophisticated and powerful players would dominate.
Company
management has a strong incentive to withhold negative facts from the public.
Absent disclosure rules, the investing public would find themselves purchasing
stock without sufficient data to determine value. Stiglitz says that if this “asymmetry” – or difference – in
information between parties interacting in the markets happened often enough,
the markets would begin to break down.
This dynamic justifies government rules to make the markets work properly,
according to Stiglitz.
Unfortunately, USDA has not grasped this concept. Farmers have little information as compared
to processors. As a result, USDA
credibility is near an all time low and market dysfunction is near an all time
high.
One lesson learned from the Enron collapse, according to
Paul Krugman, economist and op-ed writer for The New York Times, is how adept
corporate executives are at shifting risk away from themselves and onto
others.
First,
Enron shifted company debt from its own books to the books of related companies
controlled by its executives to make Enron balance sheets look fantastic. Second, Enron compensation agreements for
executives allowed them to remain rich after the collapse. However, Enron employees were not shielded
from risk of collapse thereby losing both their salaries and their pension
plans.
Similarly, agribusinesses that contract with farmers are
shifting risks and responsibilities from the company to the farmers. For example, such contracts place all risk
and responsibility for environmental harm, quality, production efficiency,
disease control, etc. on the farmer.
Why is this a problem? Farmers
bore these risks without contracts, did they not?
The difference is that processors have taken much of the
management discretion from farmers in many contracts – discretion that could be
used to avoid risk. Consider a contract
in which the processor specifies the inputs, the management methods, and the
type of production system. The farmer
cannot use his/her management discretion to avoid legal or financial risks
because that discretion has been removed via contract.
If
the company provides diseased chicks or unhealthy young pigs, the farmer
suffers the loss but cannot switch to another supplier. If the company provides poor or improper
feed causing poor growth performance, the farmer suffers the loss but cannot
change feed companies. If the company
specifies management methods or equipment that violate environmental rules, the
farmer again bears the loss though he was contractually required to act in an
environmentally unfriendly manner.
Companies are “repeat players” in the contract
business. Farmers are not. This means companies have more
sophistication in adjusting the nuances of contract clauses over time to
maximize company profitability and to minimize risk. They also have the power to offer these contracts on a
take-it-or-leave-it basis. Farmers are
concerned with price, income, volume and other basic matters. Farmers often do not appreciate the
importance of the risk shifting nuances in the relationship. However, when farmers receive sick animals,
bad feed, or environmental sanctions stemming from company requirements, the
risk shifting can and does result in severe financial harm.
During the cold war, there arose a concept called
“Finlandization.” The country of
Finland was nominally free of the Soviet Union, but was so threatened by Moscow
that it could not act unilaterally without tempering its actions so as not to
offend its giant neighbor. Moscow could
crush it at will. So it is in
agriculture.
In many cases, farmers may be nominally free to act, but they are still dominated and cower in fear of the monopolist unbound. Thus, the Finlandization of producers restricts freedom to act. This illustrates one aspect of the impact of power on choice.