April 23, 2002 #157
Monitoring Corporate Agribusiness
From a Public Interest Perspective
EDITOR\PUBLISHER: A.V. Krebs
ADDRESS: PO. Box 2201, Everett, Washington 98203-0201
WEB SITE: http://www.ea1.com/CARP/
TO RECEIVE: Name and e-mail address
WHERE'S THE BEEF?
MONOPOLY AND MONOPSONY
POWER IN THE BEEF INDUSTRY
C. ROBERT TAYLOR: Rapid consolidation in meatpacking in the last two decades raises considerable concern about the potential for creating an imbalance of economic power, particularly by meat packers over independent livestock producers, and by food retailers over consumers.
Similar concerns, which were expressed in the late 1800s and early 1900s, led to the Clayton and Sherman Antitrust Acts and the 1921 Packers and Stockyards Act (PSA). The PSA and earlier antitrust legislation led to divestiture in some highly concentrated markets, particularly in meatpacking. As we enter the 21st Century, however, we have witnessed an unprecedented wave of mergers, acquisitions and joint ventures leading to horizontal concentration, to vertical integration, to tight bilateral relationships between packers and retailers, and to a web of interlocked firms.
The permissive attitude behind approval of recent mergers, acquisitions and joint ventures appears to be based on the single-minded pursuit of economic efficiency. Legislation including GATT, NAFTA, and Freedom to Farm also reflect the pursuit of economic efficiency, as does the teaching of many present day professional economists.
Although many contemporary economists may seem to suffer from tunnel vision, the Fathers of a market economy, including Adam Smith in 1776, recognized that regulation of economic power was required for preservation of a market economy. Smith maintained that the natural evolution of a market economy, through firm growth or acquisition, would be monopoly. And he added that "Monopoly . . . is a great enemy to good management."
In the same year in which PSA was enacted, Professor Frank Knight, who some credit as the Father of the "Chicago School" of economics, cautioned against the single-minded pursuit of economic efficiency --- a warning that appears to be lost on proponents of the present Chicago School as well as economists involved in antitrust
Firms can be interlocked through joint ventures, strategic alliances, interlocking directorates, and partial ownership of other agribusiness firms. enforcement. In Knight's view, the general welfare of society depended jointly on three policy goals: (a) economic efficiency, (b) maintaining economic freedom, and (c) maintaining an acceptable balance of economic power. Moreover, he maintained that the pursuit of economic efficiency alone would be at the expense of economic freedom and a balance of economic power.
Food consumers have enjoyed unquestionable benefits from past consolidation and the resulting gains in efficiency. In the last few years, however, the efficiency gains are arguably negligible, yet the constant flux of reorganization and consolidation continues. It is time, if not past time, to step back from the single-minded pursuit of economic efficiency to examine broader issues such as tradeoffs between efficiency, economic power, and economic freedom. This report focuses on such issues in the beef industry.
Retail Meat Prices: Defenders of consolidation often point to a general decline in inflation adjusted (real) meat prices in support of their argument that consolidation, concentration, and vertical integration are beneficial to consumers. . . . As can be seen, there is a substantial long-term downward trend, to the obvious benefit of beef consumers. Retail prices alone, however, cannot be used to ascertain the effectiveness, efficiency and fairness of the emerging system.
A general downward trend in retail prices may occur, for example, if the upward pressure on prices due to anti-competitive practices is masked or dominated by higher feed efficiency, cheaper feed, and higher slaughter efficiencies. Rather than examining retail prices alone, the farm-to-wholesale price spread (or margin) and the wholesale-to-retail price spread should also be examined for monopsony (buyer) and monopoly (seller) power on the part of meat packers or retailers.
Determination of the exact way or ways in which oligopsony power is exerted would be a mammoth undertaking, requiring extensive data from meat packers. However, we can gain considerable insight into the growing extent of monopsony and monopoly power in the beef and pork industries by analyzing trends in publicly available data on meat price spreads.
Farm-to-Wholesale Price Spreads: . . . it can be seen that the farm-to-wholesale (F-W) price spread for beef trended dramatically downward throughout the 1980s and into the early 1990s. A decrease in the F-W price spread is consistent with efficiency gains (lower unit slaughter costs) in meatpacking in a competitive market.
That is, in a competitive market, we expect the F-W spread, which reflects gross revenue to packers, to decrease with unit slaughter cost decreases. The trend in the F-W price spread for beef during the 1980s and into the first few years of the 1990s is thus consistent with the unquestionable efficiency gains in meatpacking during that period in a competitive market .. . . however, the trend in the F-W price spread has been strongly upward since the early 1990s, which is a dramatic departure from the efficiency-driven downward trend in the 1980s.
The trend-line F-W price spread for beef in December of 2001 was 46.9% higher than at the bottom of the trend in late 1993. This increase in the F-W price spread reflects a dramatic increase in the gross revenue to beef packers.
A common argument made by packers to justify the increasing F-W price spread is that they are adding more value. This explanation is easily dismissed for two reasons. First, USDA/ERS calculates the spread for a standard animal so that the spread will reflect only price changes . Second, even if meat quality improves over time, there should be no long-run trend in the F-W spread for given slaughter costs.
Meat packers claim that they are realizing efficiency gains by moving to larger and larger slaughter operations. Moreover, they claim that unit slaughter costs are actually less for the leaner animals now produced. Realization of these efficiency gains in a competitive environment would result in the F-W spread continuing to trend downward, not upward as it has in the mid to late 1990s.
The strong upward trend for much of the 1990s and into 2001 is much too strong and too persistent to be explained by short-term spikes in prices, spreads, production, or competition with other meats.
The F-W price spread for beef was analyzed in an article published by USDA/ERS in the June-July 2000 issue of Agricultural Outlook. This report noted the upward spike in the F-W spread in the last half of 1999 and compared it to previous short-term spikes in 1980, 1991, and 1995. . . . .
The USDA report concluded by asking the question: "As consolidation is completed, will packers successfully limit price competition among themselves and maintain 1999's high spreads?"
As can be seen . . . high price spreads in 1999 have not just been maintained, but they have actually trended upward in the two years since this report was published. Since spikes in the F-W price spread for beef due to exogenous demand and supply shocks normally last only 2-3 months, the answer to the question posed by USDA is an unqualified yes. Packers have indeed limited price competition and maintained the high F-W spreads. The real question is why hasn't USDA stepped forward and enforced the Packers and Stockyards Act, which was intended to prevent anti-competitive practices that would lead to this situation? In summary, exertion of oligopsony power is the only plausible explanation for the strong upward trend in the F-W spread for beef.
Wholesale-to-Retail Price Spreads: The Wholesale-to-Retail (W-R) price spread for beef . . . can be seen to be more volatile in the 1980s than in the 1990s. In the early 1990s, the W-R spread swung upward somewhat, and then swung downward somewhat in the late 1990s. During the 1990s, the W-R spread for pork tended to move in opposite directions from the W-R spread for beef. Such a linkage between the W-R spreads for beef and pork has been explained by joint costing in meat retailing.
But even accounting for joint costing of beef and pork, there is no appreciable long-term trend in the W-R spread for beef during the 1980s and 1990s. However, the recent upward spike stands in stark contrast to the two previous decades. As can be seen, the W-R spread for beef has suddenly shot up, taking the unit gross revenue to beef retailers to unprecedented levels. The strong upward spike in the W-R spread, which has continued for almost a year, suggests that monopoly power has been and is being exerted by meat retailers. . . . .
A downward trend in the F-R spread during the 1980s is apparent . . . However, the strong upward movement during the last few years due to exertion of monopsony and monopoly power has negated the efficiency gains in meatpacking and retailing that occurred during the 1980s.
USDA/GIPSA Captive Supply Studies: The Grain Inspection, Packers and Stockyards Agency (GIPSA) of USDA funded several studies of consolidation, with special reference to the effects of captive supplies on the cash market price for beef, . . . Although the GIPSA studies continue to be cited by economists who are defending consolidation and concentration in meatpacking . . . it is critical to note that even the most recent GIPSA study used data only through 1996. It is curious, to say the least, that GIPSA, the agency charged with enforcement of the Packers and Stockyards Act, would seemingly ignore the obvious implications of the strong upward trend in the F-W price spread for beef (which has occurred largely since 1996.
It is also troubling that GIPSA has "studied" the consolidation and concentration issues for over a decade, apparently oblivious to a body of antitrust literature on collusion detection. This literature points out that if the firms understand the range of econometric techniques available to the antitrust enforcement authority, then those firms can calculate the limits of undetectable collusion . . . . So, what GIPSA has done with their highly publicized studies is to inform meatpackers of the issues, the data that will be used for analyses, the econometric techniques that will be used for detection, and what constitutes statistical significance and detectable collusion. Perhaps more troubling is that USDA has not used their authority to obtain potentially richer data sets analyzed with much more sophisticated statistical and econometric techniques.
The Well-Being of Society: In a book published in the same year ---1921-in which the Packers and Stockyards Act (PSA) was signed into law, Professor Frank Knight maintained that the well-being of society depended on maintaining a balance of: (a) economic efficiency, (b) economic power, and (c) economic freedom. He cautioned that the single-minded pursuit of economic efficiency would be at the expense of economic freedom and an economic power imbalance; nevertheless, economic efficiency has come to dominate the thinking of contemporary economists and also come to dominate public policy, including interpretation and enforcement of the PSA and other antitrust legislation.
In the last few years, in particular, the efficiency gains from consolidation and concentration in meatpacking are arguably quite modest, yet the economic power imbalance worsens and participation in production agriculture increasingly comes by invitation only, which is a loss in economic freedom. . . . .
Even Adam Smith, patron saint of CEOs, pointed out that there is an inherent instability in a market economy; namely that through natural growth of firms (e.g. Wal-Mart) or through mergers and acquisitions (e.g. Tyson/IBP) that the market system could evolve to monopoly. He added that monopoly would lead to poor management and to higher prices for consumers.
Regulations and enforcement of those regulations are thus necessary for preservation of a market economy.
Food consumers have historically benefited tremendously from efficiency gains resulting from horizontal concentration and vertical integration. But the manifestation of monopsony power several years ago and now the manifestation of monopoly power as well may negate efficiency gains realized by beef consumers prior to the mid-1990s.
So where's the Beef? The "beef" is with USDA not enforcing the Packers and Stockyards Act, which was intended to prevent meatpackers from engaging in unfair, discriminatory, and anti-competitive practices, harming both beef producers and consumers.
C. Robert Taylor is Alfa Eminent Scholar and Professor in the College of Agriculture, Auburn University.
The complete report can be seen at
REPORT CONCLUDES USDA AND ITC
ECONOMIC MODELS FOR U.S CATTLE PRICES OUTDATED,
FAIL TO DEAL WITH ECONOMIC CONCENTRATION
JULIANNE JOHNSTON, AG WEEK: Senate Majority Leader Tom Daschle requested the General Accounting Office (GAO) to review the economic models of USDA and the U.S. International Trade Commission, especially their treatment of competition, marketing practices, and international trade effects on U.S. cattle prices and producers' incomes. The report concluded the model is outdated, noting a review of the model hasn't been completed for over a decade.
In their report, the GAO concluded that USDA and ITC models include imports but "do not incorporate market concentration, marketing agreements, and forward contracts because they were not designed to answer questions about these factors."
"The entire model has not been reestimated in more than a decade, even though much of the data used to estimate it predate the rapid rise of meatpacking concentration during the 1980s, the growing popularity of marketing agreements and forward contracts, technological change, and shifting consumer preferences," states the report. "Thus, it is not clear to what extent the estimated values of model parameters would change and lead to different projections of cattle prices if newer data were used."
"Moreover, data sets used to estimate the model have been lost, along with standard measures of statistical goodness of fit and other diagnostics of model performance," states the report. "This information is critical to model evaluation."
The report states that USDA offered several reasons for this lack of documentation. Foremost was that budgetary cuts have led to a lack of resources needed to provide better documentation and to replace lost data.
"The panel believed that domestic cattle demand and supply are the fundamental forces driving cattle prices and producers' incomes," states the report. "It agreed less about the importance of international trade and structural changes that include market concentration, marketing agreements, and forward contracts."
The panel identified a number of important data and modeling issues to be addressed in developing a comprehensive modeling system to predict cattle prices and producers' incomes. To ensure that models USDA uses to project cattle prices are properly documented, the GAO recommend that the secretary of agriculture:
* Collecting better data to quantify a number of important factors not included in the model;
* A more complete characterization of the supply and demand relationships connecting the cattle producer to the final consumer.
"The panel's emphasis on a more complete characterization of the cattle and beef industry underscores the idea that the demand for cattle is ultimately driven by consumer demand for beef and other demand and supply forces linking cattle producers to feedlots, meatpackers, and retailers," states the report.
"The majority of the panel believed that the federal government should take
steps to improve the quantity and quality of data that are available to
researchers so that their understanding of the factors that explain cattle
prices and producers' incomes will be better," says GAO.
CARGILL REPORTS HEALTHY 63% INCREASE
IN THIRD-QUARTER EARNINGS, DUE TO
LOW FOOD, GRAIN AND ENERGY COSTS
K.T. ARASU, REUTERS: Agribusiness giant Cargill Inc. said [last] Tuesday quarterly earnings soared by 63%, buoyed by its food and grain units and lower energy costs.
Although economic turmoil in Argentina weighed on profits, the company said it benefited from a broader base of earnings worldwide. Minneapolis-based Cargill, the largest privately held company in the United States, said earnings in the fiscal third quarter ended February 28 rose to $161 million from $99 million a year earlier. Fiscal second-quarter profit was $234 million, up from $174 million a year earlier.
"The majority of our food ingredient businesses in Europe and North America, animal nutrition at home and abroad, the egg, pork and poultry processing units, and the export-oriented grain and oilseed businesses delivered improved results from a year ago," the company said.
Earnings for the first nine months of fiscal 2002 rose 53% to $683 million from $445 million in the year-earlier period. However, earnings at its beef processing business were below last year's level because of sluggish growth in the U.S. economy and a weaker export market. U.S. beef sales to top market Japan have fallen since last September, when mad cow disease, or bovine spongiform encephalopathy, was discovered in that country, scaring consumers away from beef.
Japan accounts for about half of beef exports from the United States. Japan's mad cow outbreak hit the restaurant industry and shattered faith in Japan's food-safety standards. To speed up the recovery of the Japanese beef market, the U.S. meat industry last month launched an $8 million beef marketing campaign there.
Cargill felt the impact of Japan's slowdown in beef imports in the fiscal
third quarter, spokeswoman Lisa Clemens said. But she said the company was
hopeful of a recovery, citing exports to Mexico that recovered after slumping in
the wake of the country's peso devaluation in the mid-1990s. "U.S. beef exports
to Mexico fell precipitously, but they did come back within a year or two, and
today Mexico is the second-largest consumer of
U.S. beef exports," she said.
Clemens also said Cargill's processing plants benefited from lower costs of natural gas and electricity. "We had energy (cost) savings in all three quarters," she told Reuters. Crude oil futures at the New York Mercantile Exchange began climbing in March on indications that U.S. economic growth was gathering pace and on violence in the Middle East.
Cargill Chairman and Chief Executive Warren Staley said the company's performance was affected by Argentina's economic woes and currency devaluation. "Cargill has operated in Argentina for 55 years," Staley said in a statement. "Our people are drawing on that experience to manage the company's exposure and help restore greater certainty to the country's domestic and export markets."
Argentina is suffering from its worst-ever financial crisis following a four-year recession that forced Latin America's No. 3 economy to default on part of its $141 billion debt and devalue its peso in January.
Cargill said its recent majority-stake purchase in Cerestar (RTAC), the French starch and sweetener producer, brought a diverse base of specialty products to the mix. "The acquisition fits in with our new strategy to go beyond buying and selling commodities and into the area of specialty food ingredients," Cargill spokesman Bill Brady told Reuters.
Cargill purchased a 56% stake in Cerestar held by Italy's Montedison for 474
million euros, plus 460 million euros in debt, to boost its presence in the
value-added food products sector. Cargill has offered 33 euros per share to
acquire the rest of Cerestar, one of four separately traded companies resulting
from the breakup of food processor Eridania Beghin-Say.
INDICTED EX-TYSON FOODS EXECUTIVE FACING
IMMIGRANT SMUGGLING CHARGES COMMITS SUICIDE
ASSOCIATED PRESS: One of six former Tyson Foods managers charged with participating in an immigrant smuggling scheme killed himself with his rifle, Tennessee police said Friday. Investigators said Jimmy Rowland, 36, was found with a gunshot wound in his chest Thursday, four days after he left home telling his wife he needed to get away to think.
Bedford County coroner Aubrey Richards ruled the death a suicide.
Rowland, a former manager at Tyson's Shelbyville plant, was indicted December 11 on federal charges of conspiring to smuggle illegal immigrants to work at company plants in nine states. He was free on a $100,000 bond and faced trial next February.
A federal prosecutor has said the maximum possible sentence for any defendant convicted on all 36 counts would be 395 years in prison.
"I knew he was having his ups and downs but didn't know he was this depressed," said Doug Trant, Rowland's attorney. "This is one of the worst tragedies I've ever known." Authorities said Rowland had been working as a hospital nurse. His body was found in the bed of his pickup truck, parked in a wooded pasture. Rowland is survived by his wife and two sons.