Contact:  OCM Founding member Neal Smith 515-288-2500, ns@lawiowa.com
OCM Founding member and Board member Dr. John W. Helmuth,
307-637-5778, jhelmuth@wyoming.com

FOR IMMEDIATE RELEASE
December 11, 1998

Des Moines, Iowa, December 11, 1998.

In a letter (text attached) to Attorney General Janet Reno, retired Iowa Congressman Neal Smith, drawing on over 30 years' experience, counseled that the outcome of the Federal Government review of the proposed Cargill/Continental merger "...will have far reaching effects on US and international grain markets for decades to come."

Mr. Smith said, "I hope my letter to Attorney General Reno (sent November 30, 1998), provides the kind of background the Department of Justice needs to give full consideration to this matter. Now that the Attorney General has had time to consider the content of the letter and it has been decided that the Department of Justice will have primary jurisdiction, I am making the letter public in the hope that it might help others in their consideration of the far-reaching impacts of the proposed merger."

In his letter Mr. Smith pointed out that any comprehensive, objective review must consider not only firm size and market share, but also:
 The Importance of Information in World Grain Markets;
 The Number of Buyers and Price Competition;
 The Number of Entities Making Economic Decisions;
 Grain Market Regulation Compared to Securities Markets; and
 Consider the Impacts on other Agricultural Markets--Livestock in Particular.

The Importance of Information in World Grain Markets

Large, international grain marketing firms have access to material, non-public information regarding grain transactions they engage in, which gives them a significant advantage over enterprises that do not have such "inside" information.  Merging the number one and number two grain marketing firms in the world, Smith explained, "...not only aggregates their physical facilities, it also aggregates their inside information gathering capabilities and increases at least proportionately their information advantage in the US and World grain markets."

The Number of Buyers and Price Competition

"When a local market currently has two buyers which happen to be Cargill and Continental, there will be only one buyer if the companies merge.  However, it should be understood that the local impact on grain prices will be mostly confined to the basis.  The major price impact, in dollars and cents per bushel, is likely to occur in the grain futures markets."

The Number of Entities Making Economic Decisions

Congressman Smith explained, "We've known for decades that the concentration of economic decision making in a relatively small number of individuals, regardless of whether those individuals are government bureaucrats as in the former Soviet Union or corporate executives in large companies, the result is the inefficient use of resources and non-competitive markets.  If Cargill acquires Continental, economic decision making clearly will become more concentrated and the efficiency of capitalistic grain markets is very likely to decline."

Grain Market Regulation Compared to Securities Markets

Mr. Smith charted the regulatory differences between grain markets and securities markets.  Smith said, "In the securities markets insider trading is prohibited; short sales can only occur if the last price change has been an up-tick; and short sales can only occur if actual stock certificates are borrowed from owners.  These regulations provide an underlying support against the erosion of the value of securities in America.  They have worked very well since the crash of 1929, when they were not in effect.  We do not have such protections in the grain markets and markets for other agricultural commodities.  The time has arrived to consider leveling the playing field and regulating agricultural markets as we regulate the stock markets.  The American public, and American farmers and ranchers, deserve no less."

Consider the Impacts on other Agricultural Markets--Livestock in Particular

Smith reminded the Attorney General, "While considering the grain market implications, federal officials should also consider the possible impacts on other agricultural markets such as livestock.  Such impacts could be substantial and far reaching."

TEXT OF NEAL SMITH LETTER TO ATTORNEY GENERAL JANET RENO:

November 30, 1998

Attorney General Janet Reno
Main Justice Building
Room 5111
10th and Constitution Avenue
Washington, D.C.  20530

RE:  Cargill Buyout of Continental Grain

Dear Attorney General Reno:

Please be advised that, while I am an agricultural producer
like millions of others, I do not represent any of the
parties on either side directly involved in the subject
matter of this letter, but am sending this letter because of
my long-time interest in international grain marketing
during the more than 30 years in Congress during which I
authored the CFTC Act and other legislation dealing with
grain exports.

The recent announcement of Cargill's plan to buy the grain
operations of Continental is subject to federal government
approval pending antitrust review.  I believe the outcome of
that review will have far reaching effects on US and
international grain markets for decades to come.  The size
of the two companies (measured by market share) is of
obvious importance to these considerations, especially since
there are so few international grain trading companies.  But
there are other equally important considerations that should
be taken into account by any comprehensive, objective review.
These are discussed below.

The Importance of Information in World Grain Markets

Detailed, accurate, daily information on literally hundreds
of variables impacting the worldwide supply and demand of
grain is essential for any company engaged in grain
marketing.  There are two sources of such information:
public and private.

Public information is generally gathered and disseminated
by governments around the world.  The accuracy of such
information varies across countries.  US, Canadian, and
European information generally set the standard for timely
accuracy.  By definition, public information is available to
anyone and has as one of its goals to provide "a level
playing field" for anyone buying and selling grain.

Private information is gathered by companies and/or
individuals and is usually not disseminated to others, or is
disseminated selectively to the advantage of the "owner" of
the information.  Arguably some of the most valuable private
information involves details of major transactions engaged
in by grain trading companies.  The larger the company and
the larger the transaction, the more valuable is the
"inside" information.

For example, if the largest firm in the industry makes a
large sale of US wheat for export, public knowledge of such
a sale is likely to result in higher US (and World) wheat
prices.  It is very much in the exporting firm's best
interest to buy the US wheat (and possibly large numbers of
US wheat futures contracts) before knowledge of the export
sale becomes public, and before wheat prices increase.  Such
transactions, based upon inside knowledge are not prohibited
in cash or futures markets for agricultural commodities, as
they are in the Securities markets.

Placed in perspective, large grain trading companies have
access to the same public information everyone else has,
plus they have knowledge of their own transactions, and
information gathered by their worldwide offices and
subsidiaries, and information gathered by their privately
owned reconnaissance satellites.  Thus, while the playing
field may be level with regard to public information, and US
farmers may voluntarily give away valuable supply
information about their crops for USDA crop surveys out of a
sense of national duty, private companies are making daily
trading decisions based on jealously guarded private (mostly
demand) information.

Given this fact, combining the number one and number two
companies in the grain marketing industry not only
aggregates their physical facilities, it also aggregates
their inside information gathering capabilities and
increases at least proportionately their information
advantage in the US and World grain markets.

Number of Buyers, Price Competition

Price competition exists, if and only if, a market is
characterized by a large number of buyers and sellers.
"Large number" is not defined by economists.  However, mosteconomists would agree it is probably greater than two.
With respect to the market for farmers' grain at the locallevel, the number of buyers appears to be as low as one or
two.  To my knowledge, the federal government has not
documented the number of grain buyers since the mid-1970's.
In any event, when a local market currently has two
buyers which happen to be Cargill and Continental, there
will be only one buyer if the companies merge.

However, it should be understood that the local impact on
grain prices will be mostly confined to what is called "the
basis" which is the nearby futures price adjusted to reflect
local conditions.  The major price impact, in dollars and
cents per bushel, is likely to occur in the grain futures
markets.

The Number of Entities Making Economic Decisions

Fundamental to consideration of the Cargill acquisition of
Continental Grain is to weigh the impact on economic
decision making.  Over fifty years ago Noble Laureate
Fredrick von Hayek elucidated the core strength and
flexibility of market capitalism as being the making of
economic decisions by many relatively small resource owners,
who are close to the economic circumstances of time and
place.  Such market structure results in the most efficient
use of resources and competitive markets.  Hayek clearly
pointed out that the concentration of economic decision
making in a relatively small number of individuals,
regardless of whether those individuals are government
bureaucrats as in the former Soviet Union or corporate
executives in large companies, the result is the inefficient
use of resources and non-competitive markets.

If Cargill acquires Continental, economic decision making
clearly will become more concentrated and the efficiency of
capitalistic grain markets is very likely to decline.

A Level Playing Field:  Grain Markets Compared to Securities
Markets

Federal regulations affect grain markets based upon the
authority, inter alia, of the Commodity Exchange Act and the
Commodity Futures Trading Commission Act.  Federal
regulations affect securities markets based upon the
authority of the Securities Exchange Act.  While these laws
contain equally clear and strong language with respect to
fraudulent activities, regulations promulgated by
enforcement agencies are markedly different in the grain
(futures) markets and the securities markets.

The table below highlights the difference in federal
enforcement of anti-fraudulent regulations between the grain
futures markets and the securities markets.

Comparison of Anti-fraudulent Regulations

Securities       Grain Futures
Markets     Markets

Insider trading prohibited       YES   NO

Short selling prohibited unless
last price change was an up-tick     YES   NO

Short selling limited to actual  YES   NO
stock certificates borrowed
from owner

International grain companies with overseas offices also
have a way to avoid the speculative limits applying to local
grain elevators and producers.  Despite efforts, which have
been strongly opposed by those who benefit, this loop hole
has not been closed.  In one instance, twice as much grain
was covered in the futures market as the customer took
delivery of, and before the public was aware of the sale,
and the balance was then sold at a big profit after the
public overreacted to the exaggerated report.

In considering any merger in an area so involved with
international trade affecting the most local of US
businesses, and such a history, great caution should be
observed.

The American public and American farmers in particular, are
entitled to an answer to the question:  "Why are the playing
fields different?"

 If the two largest US securities firms were proposing a
merger, federal authorities would undoubtedly consider the
impact on securities markets.  No less is necessary
regarding the Cargill-Continental merger and its potential
impact on grain futures markets.

Consider the Impact on other Agricultural Markets

Finally, an astute observe reported that Continental is the
largest cattle feeder in the US (an industry that has been
rapidly concentrating over the last two decades) and that
public statements by Continental officials indicate a
company objective of expanding its cattle operations.  Such
an objective could be realized with the proceeds of the sale
of Continental's grain operations.

While considering the grain market implications, federal
officials should also consider the possible impacts on other
agricultural markets such as livestock.  Such impacts could
be substantial and far reaching.

 Sincerely,
 
 

Neal Smith
 Former Member of Congress
 from Iowa
NS/bn