***************************************
In this issue...
1. Quote
of the Month
2. Truth,
Beauty, Love, Justice
3. What
Works?
4. OCM's Food and Ag Conference
5. Enforcing
the P&S Act: USDA
6. Enforcing
the P&S Act: Litigation
7. Mergers
Revealing Weakness
8. Plant
Patent Monopolies
9. J.E.M.
Ag Supply vs. Pioneer
10. What
of GMO Animals?
11. Cargill/Hormel Nonmerger Merger
****************************************
“This dispersed ownership and dispersed decision-making gives market capitalism one of its strongest advantages – economic flexibility, the ability to respond quickly and correctly to changing economic circumstances. That is why western market capitalism has succeeded and Soviet Communism failed.
But, we have also known for over fifty years, that market capitalism will have the same inefficient, exploitative outcome as Soviet Communism if the ownership of resources becomes concentrated in the hands of fewer and fewer large corporations; and if economic/ business decisions come to be made by those relatively few individuals who own and/or operate large concentrated corporations.” Dr. Frederick A. Hayek, American Economic Review, 1946.
Ahh, politics. Ideals are proclaimed and deals are made. Country folks call their senators and representatives to demand one thing and instead the officials deliver what non-constituent power brokers whispered was better. Let’s review the joys of the farm bill.
The bad news is that every meaningful provision related to the improvement of domestic competition was stricken. The good news is that the breadth and depth of support for such laws has reached a new high. The latter is little consolation for farmers losing money due to the crash in livestock markets. Row crop farmers also see little farm gate competition but tax dollars provide a partial cushion. Livestock producers did get a win in the inclusion of the country of origin labeling provision, however, though that is not squarely a domestic competition issue.
The domestic competition provisions that made it into the conference committee – where the House and Senate hashed out the differences in their farm bills – where the packer ownership ban, a prohibition on arbitration clauses in meat and poultry contracts, a limited prohibition on confidentiality clauses in meat and poultry contracts, and a technical expansion to the P&S Act. The latter two survived and the former two were taken out.
In other words, the structure of agriculture was untouched. “Structure” means how many companies control how much market share in various sectors. In OCM’s view, a decentralized structure enables efficiency and competition. But a concentrated structure produces profiteering and monopoly.
The packer ownership ban was a partial vertical breakup targeted to packers. Captive supplies in livestock need to be reduced or eliminated for the ag markets to produce results more in line with supply and demand. We need to start talking about breaking up the packers because they are imposing local monopolies on the buy side. We also need to start addressing captive supplies in row crop agriculture – despite the fact that some still promote the monopolistic supply chain fad.
This will take a lot of work. We need to expand our supporters beyond traditional allies, including former opponents. We need to expose intellectual dishonesty such as that emanating from some university ag economists and Sparks Companies. We need to increase the pressure for change in the House of Representatives. Last year, this did not appear possible. This year, the realm of the possible has greatly expanded.
Now let’s look at the lessons. Lesson # 1: The real world is not a handshake over the hood of a pickup truck and a smiling exchange of promises. Rather, the real world is the dynamics of power. He/she who brings the most pressure to bear on a situation in a consistent manner wins. Macchiavelli rules.
Lesson #2: Default status in Washington is to do what the agri-business lobby wants in agriculture because of money and superior organization. But default status can always be overcome with organized constituency pressure on a mass scale. Calling your representatives repeatedly in concert with others takes little time – and it works despite the fact that it is an irritating task and despite the fact that you may view your contribution as insignificant.
Lesson #3: The dominant national commodity groups are working against the interests of producers. They engage in vigorous and shameless disinformation campaigns to ensure that agriculture consolidates, markets fail, and their funding keeps coming in. All the while claiming that the end result is a “natural progression.”
Lesson #4: Organizational power is necessary to succeed – so support the organization(s) that work for you and ditch the rest. Obviously, we think that OCM should be supported en masse.
Speaking of supporting OCM, folks should strongly consider attending our 2002 Food and Agriculture Conference in Omaha on August 16. It will be held at the Doubletree Inn. On August 17, we will hold our annual membership meeting.
The conference will feature the cutting edge ideas for reclaiming the agricultural marketplace for producers. The first panel will feature an examination of the Farm Bill. We will look at what is, what should have been, and what next. The second panel will examine Competition versus Efficiency. We will look at what the disciplines of law, economics and marketing have to offer. What is the role of economists? Arbitors of the debate or mere contributors? Can marketing fill out the flesh of economic analysis? Does law and public policy prescribe the values and the goals – or does economics do that for us?
The third panel involves the presentation of litigation as a means to hold monopolists accountable and to change marketing practices. Farmers and ranchers want the laws to be enforced. We will look at how that is being done by private parties.
The fourth panel features new agricultural upstarts as a means to improve competition and price. What are the successes? What are the barriers? How can we learn from prior business ventures?
Our keynote speaker is ag economist John Connor from Purdue University. Dr. Connor authored the book entitled Global Price Fixing: Our Customers are the Enemy. He will discuss price fixing by ADM and other major multinational corporations.
OCM asks that you register soon for the meeting using the form attached to this newsletter.
Producers have asked/demanded that USDA enforce the Packers & Stockyards Act for years. USDA officials have claimed that they lack the resources. GAO claims that USDA internal management and staff decisions are lacking. Former Secretary Glickman says that the Act does not provide USDA the power that folks think it does. All are true but Glickman’s claim. But the main question is: What is the most significant, cost effective action USDA could take to clean up the livestock markets.
The answer is to use its power to draft regulations in order to define what practices violate the P&S Act. The taxpayer cost is low, no new bureaucracy need be created, such rules would promote certainty and consistency, and enforcement burdens would be lowered by the establishment of firm guidelines. Here the USDA has failed miserably.
Consider the roughly analogous Federal Trade Commission Act that established the Federal Trade Commission in the early 1900’s. That law prevents business from engaging in “unfair and deceptive practices” as to consumers. It also prevents business from engaging in “unfair competition.” FTC used their authority to draft regulations to define their view of these phrases in the succeeding decades. FTC also established separate divisions to specialize in “unfair and deceptive practices” (Bureau of Consumer Protection) and “unfair competition” (Bureau of Competition).
USDA could have and should follow the FTC lead. The P&S Act provides USDA with broader authority over livestock commerce than the FTC Act provides to the FTC with regard to consumer commerce. USDA should establish one office to deal with “unfair and deceptive practices” perhaps entitled the “Producer Protection Division.” It should establish a “Livestock Competition Division” to deal with “price manipulation” and the creation of a monopoly, other activities banned by the P&S Act.
The need to separate the functions is that “unfair and deceptive practices” are agribusiness activities involving such things as fraud and dishonesty against one or more producers but do not affect market prices. The price manipulation and monopoly prevention aspect of the P&S Act involves systemic market impact in a manner squarely within antitrust and competition legislation and caselaw.
Unfortunately, USDA does not have regulations or guidelines on what is “unfair”, “unjustly discriminatory,” or “deceptive.” It does not have regulations or guidelines on what is “price manipulation” or the “creation of a monopoly,” all things prohibited by law. Thus, USDA staff are relegated to the “I know it when I see it” analysis. We can see that this approach does not work.
Thus, the best near-term hope for enforcement of the Packers & Stockyards Act lies not with the USDA. Rather, it lies with farmers and ranchers using lawyers to hold wrongdoing processors accountable. Litigation has been used by both the right and the left to promote property rights, the Second Amendment, environmental values, etc. Farmers and ranchers have let their knee-jerk discomfort with trial lawyers get in the way of law enforcement.
Consider a very important example. The Pickett v. IBP case will go to trial next year. The plaintiffs allege that IBP used captive supplies of cattle to manipulate or depress prices. The court refused to throw the case out despite numerous motions by IBP asking it to do so. Though the case file is sealed from public view, an Alabama jury will receive detailed testimony as to whether the captive supplies are inherently unlawful, and whether IBP used those supplies strategically to depress prices.
If the jury finds IBP’s use of captive supplies unlawful, then it can award damages to all producers who sold cattle to IBP in the past several years on the cash market. Additionally, the judge can order IBP to procure future cattle in a way that does not violate harm the markets. This court order could very well redefine how cattle are bought in the U.S.
But what good will it do if IBP is the only one changing its buying practices? To solve this problem, similar cases have now been filed against ConAgra and Cargill’s Excel. Assuming a successful result in Pickett, the likelihood of achieving an industry-wide remedy for marketing are enhanced far beyond what the packer ownership ban could hope to achieve.
During the merger mania of the 1990’s, the helter-skelter acquisition artists were praised for acquiring more and more new companies. This category included the CEO’s of Tyco, Enron, WorldCom, Global Crossing and Adelphia. This newsletter in the past has criticized the acquisition strategy as a sign of managerial weakness rather than a sign of visionary management. A recent Op-Ed piece in The New York Times agrees.
Jeffrey Sonnenfeld, associate dean at the Yale School of Management, wrote in The Times that the strategy of acquisition pursued by many CEO’s now has been shown to conceal disaster. “Mesmerizing Wall Street with a dazzling number of deals makes an absence of long-term management vision easy to hide.” Now we see that a vigorous merger strategy may be the mark of a charlatan. The dishonesty previously concealed and now revealed in the cases of Tyco, Enron, WorldCom, etc. has harmed us all.
What are the lessons? First, the claimed efficiencies of mergers do not outweigh the harm to competition to the extent many believed – primarily because mergers do not produce the benefits claimed by the cheerleaders. Second, there are many other avenues available to improve efficiency and productivity that do not reduce competition – such as good management. Third, the so-called “populist” criticism of merger mania has now been revealed as healthy skepticism. Fourth, the market does not fix things before folks are harmed by negligence, concealment, misdirection and fraud.
The government not only tolerates monopolies, it establishes them. Consider patent law. Back in the days of Thomas Edison, patents were conceived as a way to spur innovation. During the patent period, the inventor receives 20 years of monopoly rights to commercialize the invention. After the patent expires, the new widget is free game for all. The public policy bargain was that we want you to create new and better widgets, and in return society will provide you with temporary monopoly protection.
But what of biological advancements – modifications of living things. Plants have been in the “commons” – no one owns them and all can raise them – for all of human history. Yet, perhaps it is good to spur breeders to come up with new and better varieties so that we may avoid Malthusian devastation in which population growth exceeds the food supply. But should full patent monopoly protection be granted for plants as well as light bulbs?
Congress decided decades ago to balance these interests by enacting the Plant Variety Protection Act and the Plant Patent Act. These are “mini-patent” laws that grant plant developers exclusive commercialization rights while allowing farmers to save and replant seeds (as has been done since post hunter/gatherer days). Additionally anybody can perform research on the new plants to build on the advance-ments for the future.
The result of those “mini-patent” laws for plants was that the plant genome remained in the public commons while the plant breeder received the rights to exclusive sales. But no more – read on.
A few years back, Pioneer sued a small Iowa seed distributor for allegedly violating Pioneer’s patent rights by selling a genetically modified seed. The distributor counter-claimed that “hey, you can’t patent plants, biotech or no-biotech.” Rather, the distributor continued, one must use the mini-patent acts, i.e. the Plant Variety Protection Act (PVPA) or the Plant Patent Act (PPA). The case went to the U.S. Supreme Court.
The case, entitled J.E.M. Ag Supply v. Pioneer case, was decided last December. It may be the most significant agriculture-related case of the past few years.
The court rejected the arguments of the seed distributor that plants are not patentable under the main patent act. Instead, the court agreed with Pioneer holding that a plant breeder can achieve a full-blown patent under the general patent act, as well as mini-patents under the PVPA and the PPA, at the choice of the breeder. The case applies to all plants, GMO or conventional hybrids.
So what? First, whole lines of new plant advances will be proprietary and excluded from use or research by all scientists, university affiliated or private. Second, research will dry up in areas where full patent protection is not sought or available. Non-Monsanto varieties will become quickly obsolete – frozen in the 1990’s state of the art. Publicly available seed banks, such as those maintained by universities, will be outmoded.
Third, monopoly patents push the new vertical integration in crop agriculture like steroids. As smiling corporate faces promote “alliances,” they systemically shut down competitors who don’t have the right patented product. Less competitors mean less competition. Less competition means lower farm gate prices. Cargill and Monsanto are well ahead of these predictions in forming the joint venture, Renessen (www.renessen.com), to “discover and deliver the best food in our world” through biotechnology.
The solution is for Congress to exclude plants from the general patent act and specify that the mini-patent acts are the only way to patent plants.
The meat packers currently use run-of-the-mill market power tools such as captive supplies to freeze out competitors and drive down farm gate prices. At least they don’t have exclusive rights to patented animals – not yet anyway.
Sygen International, self described “world leader in applying genomics and biotechnology to animal breeding,” is among several companies achieving patent protections relating to animal breeding. Sygen’s patents relate to genetic markers and determination of pig coat color.
Prediction: Within the next few years, the packers will license patented animals from GMO animal breeding companies for all or most of their slaughter. If you raise Duroc’s, you need not look for a packer contract or a packer bid because packers will buy only patented animals. If you do raise patented animals, you need not think about breeding a boar to a sow without a license lest you be prosecuted in full Monsanto-style vigor – unless you pay the “technology fee.”
Solutions: (1) Deny patent protection to animal breeding
advancements. Let breeders make money
the old fashioned way – by consistently producing the best complete genome that
results in the best animals; or (2)
Approximate the balance struck in plants, before the recent Supreme Court case,
in allowing commercialization while also allowing farmers to breed animals
not-for-resale as breeding stock and permitting researchers to build on those
advances down the line.
Cargill/Hormel nonmerger
merger
Why do a merger when you can
accomplish the same thing with a mere joint venture? Last month, Excel (Cargill
subsidiary) and Hormel announced the creation of Precept Foods LLC.
“The two food companies are combining their
marketing and distribution capabilities and expertise through this joint
venture to provide complete case ready meat solutions that address consumers’
and retailers’ needs,” said Hormel’s press release. But, they claim that they will remain
independent competitors for operations outside the joint venture.
Because the companies are not merging, it appears
that they did not have to notify the Department of Justice of the
transaction. A full merger or
acquisition would have triggered DOJ review.
So what does this mean for competition? First, they will attempt to gain control of more retail shelf space. Second, their market power will be greatly enhanced. Third, the joint venture allows a wide range of communication and coordination that could give rise to unlawful activities. In other words, the two companies are less likely to compete as collaborators than they were as competitors.