How the 2007 Farm Bill can help restore market competition
Are federal authorities finally taking the idea that a few companies shouldn’t be allowed to dominate the food system seriously?
Well, the Federal Trade Commission recently blocked Whole Foods from gobbling up rival natural foods marketer Wild Oats. Congratulations to the FTC for busting up the natural-foods trust!
But even combined, Whole Foods and Wild Oats would account for only 15 percent of natural-foods sales. Meanwhile, Smithfield Foods alone now controls 30 percent of the pork market after acquiring Premium Standard Farms a month ago — a deal that the Department of Justice waved on. In fact, our food production system is full of examples of market concentration that make the Whole Foods/Wild Oats tie-up look like small (organic, heirloom) potatoes.
Given such brazen inconsistencies, Congress needs to step in and give the executive branch some direction when applying antitrust theory to food companies. Adding a Competition Title to the Farm Bill would do just that.
In the last two decades horizontal consolidation combined with vertical integration through ownership or supply chain management has occurred at an unprecedented rate in the livestock industry. In two recent policy issue briefs, Elanor Starmer, a research consultant for the Agribusiness Accountability Initiative, explains why that matters. She explains that market concentration is a problem because it “limits the information and choices available to farmers and consumers, making it difficult for both groups to make informed, responsible decisions about our food system.”
Starmer explains that farmers living in an area dominated by one or two company buyers are often left with no other option but to sign production contracts. Many times the contracts written by large livestock companies prescribe practices that wind up having negative environmental and health impacts. Market concentration negatively affects consumers as well by leaving them with fewer choices about the kinds of foods they can purchase. Eventually an uncompetitive market can lead to higher retail prices.
Economic theory suggests that a market is concentrated when four firms control over 40 percent of the sector. In a recent article over in Victual Reality, Tom Philpott cited the newest market concentration ratios from Mary Hendrickson and William Heffernan of the University of Missouri.
Hendrickson and Heffernan’s recent work finds four-firm market ratios for livestock packing and processing sectors ranging from 58.5 percent to 83.5 percent.
You would think whatever criteria the federal government uses to investigate antitrust might be triggered by such figures, but it hasn’t. So why doesn’t the government intervene if such figures suggest a breakdown in the competitive market system? And what government agency is responsible for dropping the ball on farmers and ranchers?
Michael Stumo of the Organization of Competitive Markets explains that both the Federal Trade Commission and the Antitrust Division of the Department of Justice have jurisdiction over and responsibility to enforce antitrust laws in the food production sector. To avoid duplicate analysis of the same merger, however, food retailers seeking to merge have to get FTC approval (thus the FTC intervened in the case of Whole Foods/Wild Oats), while meat packers seeking to merge file for DOJ approval. Stumo says that dividing up this responsibility makes sense, but that the DOJ approving every merger it sees does not.
He thinks part of the difference lies with the head honcho. Thomas Barnett is the current antitrust chief and comes from the same law firm that defended Microsoft from past federal antitrust prosecutions. According to Stumo, “Barnett is killing competition in America one merger at a time.”
In recent years, the DOJ has approved a number of mergers between large meatpacking and processing companies. Just last month Smithfield Foods, the largest processor and marketer of fresh pork and processed meats in the U.S., as well as the country’s largest producer of hogs, acquired Premium Standard Farms. PSF was the second largest pork producer and the sixth largest pork processor when it was bought out. Post-merger concentration ratios are not available, but in 2006 the top four firms controlled 65 percent of the pork production market.
Yet the Justice Department’s antitrust investigation of the proposed acquisition concluded that it was “not likely to harm competition, consumers, or farmers … and not likely to substantially lessen competition in the Midwest.”
In a press release issued after the DOJ’s approval of the Smithfield/Premium merger, OCM commented that, in realty, the merger between Smithfield and Premium Standard left southeastern hog farmers with only one packer to buy hogs and predicted that Midwest producers would also see lower hog prices.
John Crabtree of the Center for Rural Affairs closely follows market consolidation and its impact on farmers and ranchers and says that the responsibility also lies in the hands of USDA. In his recent testimony to the House Agriculture Committee hearing on agriculture concentration, Crabtree stated that the mergers that have been allowed by the DOJ over the last ten years combined with lack of enforcement of the Packers and Stockyards Act by the U.S. Department of Agriculture have resulted in high levels of market concentration. He suggests that part of the solution is for Congress to define the rules of livestock market competition and provide clearer direction for USDA’s enforcement.
USDA enforcement is where the 2007 Farm Bill comes in.
The 2007 Farm Bill is an important opportunity to make sure farmers and consumers are protected against market concentration and that production contracts that farmers enter into are fair. A Competition Title would essentially do three things:
- Diminish the power of the dominant food companies through steps that affect the structure of the industry.
- Increase the power of producers through collective bargaining.
- Improve the enforcement of existing agricultural antitrust laws.
Legislation that would be part of comprehensive Competition Title has been introduced in the House and the Senate, but it is going to be a tough fight. The large livestock companies have plenty of clout and were able to block a Competition Title from passing in 2002.
With the full House Agriculture Committee set to meet the week of June 25, now is the time to demand a Competition Title in the 2007 Farm Bill.