**************************
In this issue...
1. Quote
of the Month
2. The
Importance of OCM
3. Distract
4. The
Bush Administration
5. Free
Trade and Market Power
6. Captive
Supplies in Row Crops
7. Oppose
the ADM Ethanol Acquisition
8. Grassley-Feingold
Legislation
9. The
"B" Word
10. I,
Robot
11. Cargill/Hormel
Nonmerger Merger
12. Risk
Management with Tyson
13. Price
Spreads
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“It is difficult to get a man to understand something when his salary depends upon his not understanding it.” Upton Sinclair
What a difference a year makes. Last year at this time, there was little evidence of a strong base in Congress for competition legislation, state legislature efforts had flagged, and few significant court cases were in the works.
This year, the packer ownership legislation revealed strong core of support in Congress, the Kansas state legislature passed a producer protection act, the Iowa legislature toughened its packer ownership statutes, and South Dakota voters turned back efforts to repeal that state’s anti-corporate farming law. In the courts, several new poultry and beef cases have been filed, and the landmark Pickett v. IBP case on captive supply cattle is set for trial in Alabama early next year.
OCM has been key to many of these efforts, but not all. Lawyers and other grass roots organizations have been getting stronger and more effective on these issues as well. Additionally, the strength of the traditional commodity groups has flagged significantly as members have left them due to the leadership drift away from the membership.
We wish the commodity groups would support competition, but since they oppose open and competitive markets it is just that their members vote with their feet.
The unique role of OCM is to articulate the economic and public policy basis for competition, transparency and fairness in the markets. We debunk the garbage rhetoric that many have accepted in the past because, while it did not make sense, folks were not clear on how to rebut. OCM has dispensed its information and analysis throughout the country. We have presented at Livestock Price Crisis Meetings this year in Nebraska, Texas, Wyoming, Kansas and Tennessee.
We need to show that the Emperor has no clothes. Time is running out.
Avoid the lure of distractions. If you can distract your opponent in a physical game of competition, you win. Similarly, if you can distract your opponent in the public debate, you win. Thus, the American Meat Institute, the National Cattlemen’s Beef Association, and the National Pork Producers Council use distract to gain the upper hand in Washington, and in the countryside.
“Distract” is steering a debate or conversation into irrelevant and preferably unresolvable issues. Distract does not meet the allegation of market harm head on. Rather, there is a shift in focus in three ways. Promote the negatives, the positives, or irrelevant remedies.
First, there is the “Doomsday Defense.” The lexicon for this tactic relies heavily on unproven rhetorical allegations of “unintended consequences.” The unintended consequences are never proven (though really long, speculative reports written by quacks claim to prove them), but are uttered and articulated in hushed and fearful language thereby sending family farm proponents scrambling for data to disprove the unsupported rhetoric.
Second, there is the “Polyanna Defense.” The opponents of competitive markets also promote the wonderful aspects of what everyone else says is bad. “It is efficient… it must be… otherwise ‘the market’ would not do this.” “Consumers demand it.” “It helps poor farmers manage risk.”
Third, there is the “Helpful Hanna Defense.” The lackeys of dominant firms, such as the NCBA and NPPC, profess to recognize the problem, then offer extremely helpful solutions that have little to do with the problem. “Cooperatives must be the answer.” “We need more exports!” “Let’s develop some risk management insurance.”
The lesson is to keep your focus and to label irrelevant rebuttals or suggestions as “Distract.” Then move on to a true solution.
This newsletter did not hold its fire for the failure of the Clinton Administration to enforce the antitrust laws and the Packers & Stockyards Act. But the Bush Administration has fallen to a historic low in antitrust enforcement. Ann Veneman of USDA finds little time to speak of anything except that trade and biotech will save us. Show us the data, Ann.
Charles James, the head of the Antitrust Division at the Department of Justice, proclaimed his allegiance to buyer power concerns in antitrust when subjected to questioning at his confirmation hearing, but has done nothing. He even refused the invitation of the Senate Judiciary Committee to testify on packer concentration in July. John Ashcroft, the U.S. Attorney General, beats his chest and seeks new authority when fighting terrorism but is conspicuously silent when it comes to the economic terrorism that is dismantling our diverse farm production sector.
Timothy Muris, the Chair of the Federal Trade Commission, presides over staff in his Competition Bureau who believe that monopoly is really, really efficient. If some folks, such as producers and consumers, are harmed, it must be the result of legitimate market decisions. Never mind that the unilateral decision making of corporate bureaucrats employed by economic dictators supplant the chaotic dynamics which are the market process.
In sum, the Bush Administration is effectively repealing the antitrust laws by way of a simplistic Chicago School ideology that trumpets unproven efficiency claims, ignores market failure, discounts the benefits of diverse economic sectors and legitimizes profiteering as good business.
When candidates of either party for office ask for your vote in November, make sure they commit to reducing captive supplies in livestock and row crops, banning packer ownership of livestock, and reducing market concentration without another study. Some other issues are important, but if we are going to have a pluralistic economic democracy with a productive entrepreneurial middle class in Rural America, effective action on competition is the key voting issue.
Unless you have an Import/ Export license, free trade is not going to help you get better prices. In case folks have forgotten, farmers and ranchers do not export. Countries do not export. Companies export. We wait for trickle down.
But are we not deregulating trade? And deregulation is a good thing, is it not? Certainly many knees jerk with approval when the word “deregulation” is uttered. But the WTO agreement is not a bumper sticker that says “Free Trade.” Rather, the WTO agreement contains approximately 20,000 pages derived from months of negotiation between country representatives aided by the helpful input of the dominant multinationals. This is not deregulation, it is re-regulation. If you were not at the table, do not be surprised that those regulatory pages do not work for you.
Global procurement is inherently a source of buyer market power. Though U.S. antitrust laws are being gutted by the Bush Administration, at least we have antitrust laws. Many other countries have immature legal infrastructures without antitrust laws or enforcement. They also don’t have competition. But they produce commodities. Thus, Cargill and ADM can source product elsewhere without those pesky rules against price-fixing, monopoly/ monopsony conduct, etc. Then they can drive down the price of domestic U.S. production because they do not have to bid so aggressively.
Why all the fuss about captive supplies in livestock but not in row crops? Unfortunately, there is little data on the progression of contracting and other arrangements by which processors increase the volume of committed grain off the open market. Further, crop farmers have focused on farm programs.
But the same basic market principles apply to both livestock and crops: (1) When a few large and powerful buyers interact repeatedly in a thin market, it becomes very easy to act in parallel to negatively affect price. (2) When a buyer has a large volume of inventory committed, the buyer need not bid aggressively in the open market which sets the general price level. (3) When the contracts committing production to a buyer are priced using a formula based on the open market price, that buyer has a tremendous incentive to negatively affect that market so as to save money on the contracted commodity.
Captive supplies in row crops are increasing dramatically, threatening to chicken-ize the sector. There is no reasonable argument that this progression will stop.
Oppose
the ADM Ethanol Acquisition
ADM, affectionately called “Supermarkup to the World” by writer Al Krebs, is in the process of increasing its dominance in the ethanol market. As the country’s top ethanol producer, it will buy out the number two company, Minnesota Corn Processors. The U.S. Department of Justice sued to block the merger on September 6 and proposed a consent decree the same day proposing to allow the acquisition conditional upon a small divestiture in the wet corn milling business. The acquisition should be opposed.
First, the move will increase ADM’s market share in ethanol from 40% to 46%. Second, although there are many ethanol plants being built across the country, most are farmer-owned ventures. Farmer owned ventures are wonderful in theory, but realistically they have not been effective in increasing competition.
Most importantly, the acquisition should receive the strictest scrutiny because ADM is a serial price fixer. The company has pled guilty to criminal price fixing in lysine, citric acid and sodium glutomate. It has been found civilly liable in price fixing in carbon dioxide gas and monosodium glutamate. ADM is being investigated for price fixing in European wine auctions. It is a producer of methionine and nucleotides, industries in which the Department of Justice has pending price fixing investigations. Lastly, it is a defendant in pending civil cases involving price fixing in high fructose corn syrup and glucose.
Because the supply of corn is inelastic in the short run – corn farmers cannot reduce supply and shift to other products in less than a year – the “market” cannot correct the exercise of unlawful buyer power by producing less. Justice has failed to take these matter into account.
The DOJ consent decree triggered a 60 day period in which the public can comment. The court must find that the consent decree is in the public interest – a relatively easy standard - before it can be approved. OCM will be sending comments opposing that decree. For more information, visit the DOJ Antitrust website at www.usdoj.gov.
Senators Grassley (R. IA) and Feingold (D. WI) have introduced legislation that would halt the destruction of the open markets in livestock by requiring dominant packers to slaughter at least 25% open market cattle and hogs in each plant each day. Congressmen Latham (R. IA), Thune (R. SD), Ganske (R. IA) and Nussle (R. IA) introduced a similar bill on the House side.
While OCM and most producers want captive supplies ended because of their tremendous market distorting effects, this interim legislation is extremely important. The bills are essential to supplement the proposed packer ownership ban.
Open market hogs constituted 17% of volume 15 months ago. With the current drop in prices, we are months away from full chicken-ization. Open market cattle have two to three years absent intervention. You may disbelieve this latter prediction, but note that past vertical integration has spread like a cancer far faster than any predictions.
The odds of near term success in eliminating captive supplies in DC are zero. Stopping the pendulum is the first step to return from the brink. As much as OCM dislikes incrementalism, it is the rule in Washington. We need national legislation to stop the destruction of the open market and then proceed to vaster improvements through the courts, the states, and even in DC.
Must we be so hesitant to utter the word “Breakup” as a solution to consolidation problems? Is it draconian? Or is it the least intrusive regulatory action?
There are two categories of remedial solutions in antitrust law. One is conduct remedies. The other is structure remedies. Conduct remedies leave the antitrust violator’s business structure intact, but require the company to comply with certain restrictions in its business practices - “go forth and sin no more.” But the problem is that such agreements require constant policing, audits, bureaucratic oversight and other intrusions.
Structure remedies require divestiture of businesses. The AT&T breakup is the most notable in recent history. The U.S. Department of Justice considered asking the court in Microsoft to break the company into Baby Bills, one company for Windows, and one company for other software. The nice thing is that there is no ongoing policing when a breakup occurs. The court merely orders and supervises the breakup/divestiture, and then the newer, smaller and nimbler companies go out and compete.
There is little evidence that
breakup is bad for the economy. Would we
have had low telephone rates, cell phones and other services if AT&T were
still the only telephone company?
Breakups occur voluntarily many times per year in the business
world. Companies merge into
conglomerates and later sell off divisions to other companies, or spin them off
as independent.
What if Tyson/IBP were broken into Baby Bobs (noting that Bob Peterson is the former CEO of IBP)? Such an action should also encompass Excel and Monfort. Make each plant into a separate company. There would be more competition, more arms length trading, and less need for regulatory oversight of near monopolists.
Perhaps we should consider that the simplest, most effective, and least intrusive remedy is to split dominant firms into smaller, more innovative, more competitive firms.
Raise your hand if you are the perfectly Rational Economic Man (or Woman). Or if you know one. Why so few takers? Are you irrational? Emotional even? Are you spending unproductive time with family, friends or football when you could be generating income? The point is that the Rational Economic Man does not exist. We are not characters in Isaac Aasimov’ I, Robot.
Life is not merely a set of graphs and mathematical equations based exclusively on the binary logic of costs and benefits. It is a sophisticated and chaotic tapestry of color, texture, wants, fears, desires and relationships.
But the oversimplified laissez-faire theories that dominate policy today rest on the fundamental assertion of rational decision making to justify an extreme view that markets should not have rules. Markets in Indonesia and Russia do not have rules – look at their experience. We call it crony capitalism.
Behavioral economists – those that study how humans actually react to information and decision making – are showing that most folks really don’t rationally save for retirement on their own, they procrastinate. Also, they are showing that the stock markets are subject to fads and fashions, not just cold logic.
In agriculture, we need to focus on what really happens and dispense with theories that may be orderly, but unsupported by the facts. We need to recognize that market power is extremely difficult to dislodge and that “the market” does not address excessive, monopoly profits by attracting new competitors to the field. We need to recognize the non-monetary benefits of a diverse, decentralized production structure to the towns, churches and families of Rural America.
The June OCM Newsletter discussed the joint venture of Cargill and Hormel in red meats. They created a new company in April called Precept Foods, LLC to combine marketing and distribution in selling to retailers. Because there was no merger, the U.S. Department of Justice did not have to review the merger prior to it going forward – not that DOJ would have done anything about it. Now Hormel is closing its Rochelle, Illinois pork slaughter plant effective November 8.
This closure of shackle space will affect hundreds of producers, but Hormel can now get pork from Cargill through Precept Foods. So why compete with Cargill on the buying end? “This decision will result in the discontinuance of relationships with many outstanding hog producers who have been loyal suppliers to the Rochelle facility,” the Hormel statement read. “Both contract and open market hog purchases are affected.”
The Precept Foods joint venture constitutes consolidation and a classic method of inter-firm communication (i.e. collusion) which needs to be scrutinized now and in the future.
Risk Management with Tyson
Swine contracts promote risk management. Bankers support them. Politicians parrot the claims, especially Arkansas politicians.
Last month, Tyson announced the closing of 159 hog farms in Arkansas and Oklahoma. So much for the claim on Tyson’s website: “a contract relationship with Tyson means a stable source of farm income… a way to add balance and stability to other farming ventures that might carry more risk.”
Remember
the farm bill debate on the packer ownership ban? Arkansas Senators Blanche Lincoln and Tim
Hutchinson went to bat for Tyson, big time.
The Arkansas Pork Producers Association, ditto. Tyson has now rewarded them well with
loyalty.
Interesting,
Tyson claims that the company was losing money on the farms because of
transportation costs for hogs to market and for feed from the mills. The Texarkana Gazette in Texas
revealed that the growers claimed they received sick hogs and the disease
problems were getting very hard to control.
So much for the efficiency of Tyson.
USDA is
“investigating,” a euphemism for a white wash.
However, private litigation may provide some relief for the growers.
Price Spreads
A key
determinant to a finding that dominant firms are exercising market power is
look for price gouging. We are seeing
consumer price gouging at historic proportions in pork and beef.
While
cattle and hog prices are in the tank, retail prices are at all time
highs. Retail and wholesale meat prices
are continuing an accelerating price increase trend, far outpacing inflation.
NCBA and
AMI still claim it is not true. But the
USDA data is undeniable. Similar trends
are occurring in the product markets for poultry, milk, grains and oilseeds. Consumers and farmers have common interests
in reining in the market power of agribusiness.
[Edited by Michael C. Stumo]