The
AGRIBUSINESS
EXAMINER                            Issue # 39      June 23, 1999

Monitoring Corporate Agribusiness From a Public Interest Perspective
 

A.V. Krebs
Editor\Publisher
 

                                                 Editors Note
Although there is no subscription fee for THE AGRIBUSINESS EXAMINER, donations will, as always, be gladly  accepted. One of my subscribers says he pays $30 a year for 12 issues of a Health  letter, and my weekly will hopefully go up to 52 so he feels it is worth at  least the cost of a monthly newsletter.  I hope you agree. Checks made out to A.V.  Krebs, P.O. Box 2201, Everett, Washington 98203-0201 [NOT to "Agribusiness Examiner"] will continue to be received with much gratitude.

To those readers of THE AGRIBUSINESS EXAMINER who have already sent donations I want to express my sincere thanks for your continued support and interest in this venture. A reminder also to those who might wish to receive a weekly  e-mail edition of THE AGRIBUSINESS EXAMINER, please provide your NAME and E-MAIL ADDRESS. At this time THE AGRIBUSINESS EXAMINER is not available in printed form.
 

LOUISIANA JUDGE CASTIGATES MID-AM CO-OP
AWARDS RINKY DINK FARM OWNERS $356,238.80

Efforts by the milk co-op  Mid-America Dairymen, Inc. (Mid-Am), now known as Dairy Farmers of America to silence one of its critics by not only terminating the critic and her family's membership in the co-op, but effectively terminating the market for their farm's milk has cost the co-op $356,238.80, plus court costs.

In a blistering decision Judge Patricia T. Hedges of the 22nd Judicial District Court of the Parish of Washington, Louisiana ruled that Mid-Am was responsible for the demise of Rinky Dink Dairy, owned and operated by Clayton S. Knight. Carole B. Knight, and James Knight, and the losses therefrom and that it was also responsible for the attendant emotional and mental distress associated with the liquidation of the Knight's dairy.

In her ruling Judge Hedges noted that while "the directors of the association are not individually responsible for these consequences, for they were acting in the capacity of their offices and under the direction of management. Mid-Am is totally at fault."

In addition the court found that the Knights and Rinky Dink Dairy "undeniably had a contract with Mid-Am for their milk to be marketed through the cooperative until January 1, 1996.  Upon the expulsion of the Knights and the dairy as members of the co-op, the marketing contract was broken . . . there was not just cause for that expulsion, and in fact the expulsion had been planned in detail for several months . . . the breach of contract was obviously an action instigated by Mid-Am alone, and the offering of a `new' contract to market their milk `to the extent practical' is not a legal contract.  Therefore, under contract law, Mid-Am is also totally at fault."

Carole Knight has been very active in the organizations connected with the milk industry during her many years of marriage.  After Mid-Am took control of the cooperative, Knight, a trained and experienced journalist, began a newsletter entitled "Louisiana Lagniappe" in August 1995. The name of the newsletter was changed to "Milklines" by September 1995. She continued this monthly newsletter until April 1997, long after she was out of the dairy business.

When she was elected by 54 farmers to be a director on the regional "little" board of directors of District 28 in December, 1995 Knight took her duties seriously. She objected to signing the "Loyalty Oath" in that she had to pledge "undivided loyalty" to Mid-Am itself, not the members. However, she signed it finally under duress. Only two months later the co-op recommended her expulsion from membership.

She had asked "hard" questions of both directors and management for some time. Mid-Am was continuing its merger mode, and Knight suspected that profits were being spread out to support the new branches. She never received any accounting of operating expenses, or exactly how the mailbox price was calculated, despite repeated requests. While she was definitely annoying to management and knew it, her "Milklines" afforded her an audience for her views although she was also aware that management would have liked to shut the newsletter down.

Soon she had begun to rally other farmers to her point of view, resulting in her being elected a director by her fellow coop members in December 1995. Many of the other directors, however, had been farmers all their lives and decried her outspoken and aggressive criticism. They also resented Knight's bringing a laptop computer into the meetings to record information.

Also, according to court testimony, it was clear that they wanted to get the meeting over and get back to work as quickly as possible, so they discouraged discussion of issues. That had been the way they were used to conducting the business of the boards, and the directors clearly did not want Knight asking questions. However, Knight wanted answers to her questions, especially those questions about where the money was going and why the farmers' checks were decreasing.

In her ruling Judge Hedges pointed out that "it seems to this Court that this is exactly the way a good director, or even a good member, of a cooperative should conduct him or herself. The job of the directors is to ask questions in order to inform the membership, which elected them. Mrs. Knight's manner possibly was abrasive, especially after answers were not given to repeated questions, but still should not stop management from answering a member's questions about her own cooperative.

“The cooperative is owned by the farmers. However, management and many of the directors who testified seemed to think they need not tell the farmers anything they wished not to tell. Their testimony was that corporate `secrets' were for the good of the association. But the association is the members, not the hired management. The members needed to be informed fully of the workings of its management. Instead, it is clear that the members of the coop were deliberately kept ignorant of facts. The farmers were expected to produce milk, accept whatever mailbox price was given them, and not question management. The hostility and resentment shown by the individual defendants on the witness stand toward Mrs. Knight was appalling, especially after three years," Judge Hedges noted in her decision.

Court testimony revealed that a August 28, 1995 letter, written four months before Knight was elected to the regional board of directors by her fellow dairy farmers, from Wayne Heckert to Buckey Jones, Chairman of Mid-Am, about the "Carole Knight situation" outlines the plans management plotted to terminate the Knights' membership.

At trial all the defendant were closely interrogated on what damage they perceived as resulting from Knight's questions and/or publication of information in "Milklines."  Not one of the defendants could give an example of damage.  None knew of any members lost.  None knew of any money lost.  None knew of any damage they could specifically illustrate from Knight's actions.
 

RINKY DINK FARM OWNERS STRUGGLE
TYPICAL OF NATION'S DAIRY PRODUCERS PLIGHT

In the case of how Clayton S. Knight. Carole B. Knight, and their son James Knight, lost their Rinky Dink Dairy in Washington Parish, Louisiana and their ensuing court fight with Mid-America Dairymen, Inc. (Mid-Am) can be seen the stark reality that a goodly number of the nation's dairy farmers face today in their efforts to maintain their farms.

Not only are they faced with a deteriorating price structure for what they produce, but often their sole buyer, their local co-op, is more of a problem for them than a solution to their marketing difficulties.

Clayton Knight had begun the farm with his father and brother. His father retired from the dairy business, and Clayton bought out his brother's interest in the business in 1988.  Clayton then co-owned the farm and the cows with his wife Carole and his son James. Carole was a full  partner on this farm, performing all bookkeeping and paperwork for the dairy as well as many of the physical tasks. Their son James helped on the farm during the years he lived at home, and he came home from college on many occasions to continue his work on the farm.

Rinky Dink Dairy marketed its milk through Gulf Dairy Association until March 1, 1994, when that company was sold to MidAm. After subsequent mergers, the successor corporation became known as Dairy Farmers of America.

In December 1995 Carole Knight was elected to membership on Gulf South Division Board of directors of Mid-Am. This board was referred to throughout their subsequent trial as the "little board," which distinguish it from the Corporate Board, referred to as the "big board." The Corporate Board exercised control over all the divisions. She was sworn in as a director of the "little board" in February 1996.

On April 25, 1996, the "little board," or Board of the Gulf South Division, voted 19-7 to recommend expulsion of the Knights and their dairy from membership in the Mid-Am cooperative (see above story). An appointed committee of the corporate board (or "big board") met on May 21 and June 4, 1996 to consider this recommendation. At an executive closed session on June 4, that appointed committee voted to recommend expulsion. The corporate board then acted in open session on June 5, 1996 where it repeated its resolution adopted in executive session and "terminated by expulsion" the membership of the Knights and their dairy from membership in the Mid-Am cooperative.

The reason given was "pursuant to Article 1, Section 4 of the Bylaws which reads that `Any member may be expelled from membership for cause or action injurious to the Association by a vote of the Board . . ..'"  Since Mid-Am was the only marketing agent for milk in the Knights' area at the time, the termination of membership in the co-op effectively terminated the market for milk produced by Rinky Dink Dairy.

The Corporate Board, however, passed a second resolution "that management, to the extent practical, continue to market the milk production of Rinky Dink Dairy until the end of the current term of agreement, January 18, 1997." Testimony from both the Knights and the co-op established that the price of milk offered to the Knights to continue marketing their milk would be the same as that given to cooperative members.  The fees and deductions for equity in the cooperative corporation would continue to be subtracted from the Knights' proceeds and kept by the cooperative.

In Judge Patricia T. Hedges' ruling in favor of the Knights she correctly notes that "it is undisputed that Mid-Am is a corporation which operates under the rules of a cooperative. It is an association, which is owned and operated by the producers, the dairy farmers, in order to market their milk to the public. The producers elect directors of the regional `little' boards throughout the Mid-Am area, and then regional `little' boards elect officers to the Corporate Board, the ultimate governing body of the corporation.

"Most individual milk producers, therefore, have a very small voice in the organization. The elected officials are ultimately responsible to the milk producers or farmers. It is a democratic form of government, with some boards having more members than others in an attempt for equity. The officers and CEO of the cooperative are hired employees of this corporation. They draw a salary along with other compensation, and the parties agreed that these officers are hired by the Corporate Board.  They ultimately work for the producers, just as directors of a corporation work for the stockholders."

Expulsion from a co-op is a very serious action, for unless there is another viable marketing entity in the area, the producer has no way to sell his\her milk. The Knights viewed their expulsion seriously. They realized that with no other marketing agent available at that time in South Louisiana, their milk was a useless commodity and would have to be dumped on the ground.

The wording of the corporate board resolution of June 5, 1995, that to the extent practical  Mid-Am would continue the contract for marketing the Knights' milk, was viewed by the Knights as a legal loophole and therefore no contract at all. In addition, the Knights' milk was to be taxed for all membership fees and deductions even though the Knights themselves would no longer benefit from that membership.

When the Knights protested this arrangement, they were informed by letter on June 25, 1996 from Richard Trawick, the manager of Gulf South Division, that unless they agreed to this arrangement, their milk would not be marketed at all. Therefore, the Knights decided to dissolve their dairy farm as soon as possible. The Knights were also rejected by Parish National Bank on July 2, 1996, for a bank loan for cattle feed after the bank received word that the Knights no longer had a market for their milk.
 

CURRENT U.S. MILK PRICING SYSTEM
IGNORES FUNDAMENTAL RULE OF SUPPLY AND DEMAND

No one area of agriculture production has become so byzantine, shrouded in myth, dominated by narrow regional interests, politically and corporate exploited and unfair to its producers than the nation's dairy industry.

All milk today is priced to farmers from a reference price known as Basic Formula Price (BFP). The U.S. Department of Agriculture (USDA) develops the BFP from information obtained from processors. Processors therefore, are always able to maintain a direct relationship of their selling price to their prime input cost, milk. The survey is almost entirely influenced by the wholesale price survey of unbranded cheddar type cheese commonly called American type cheese. No survey of fluid milk is included in the BFP. There is no price information taken from the eastern U.S.

From 1980 through 1998 the average BFP was just $12.08. Taking the 1980 BFP of $11.88 and adjusting for inflation the 1998 BFP should have been $26.04. Thus, what the nation has is a dairy market system not driven by fluid milk and one which bears no relationship to supply and demand for fluid milk and thus, according to many of the nation's dairy farmers, should be replaced.

The USDA's own figures for the recent six-year period illustrates the basic market flaws in the BFP for pricing fluid milk as, for example, a growing supply of cheese is pricing a diminishing supply of milk in the Northeast.

As John Bunting, a Treadwell, New York dairy farmer, recently testified before the U.S. House of Representatives Judicial Subcommittee on Commercial and Administrative Law, the current milk pricing system "ignores the fundamental rule of supply and demand. True markets are essentially an exchange of information. No system which ignores vital information is an honest market. Obviously, there is a need for an honest alternative to the existing cheese based pricing system."

In May, 1999 USDA figures show that the total economic milk production costs for the Northeast U.S. was $18.78; for the Southeast $18.55, the Upper Midwest $17.52, the Corn Belt $19.44, the Southern Plains $15.93 and the Pacific region $11.79. Yet, in May, 1999 the BFP was $11.26.

As Bunting notes, "only one region could produce milk at near that price. Is it reasonable to think that all the milk for all the country could be produced in one region? Absolutely not. Nor is it reasonable from an historical perspective to think we can count on Idaho remaining viable under the current pricing system. This is a race to the bottom. Within five years it could be Idaho, presently increasing milk production, competing with milk from the grassy plains of Argentina. Will fluid milk from Argentina cost less?"

Corporate interests in the dairy business argue that higher prices to dairy farmers will most likely generated a surplus despite the fact that there is no data to support that conclusion. According to USDA figures, 30 out of 50 states increased production in 1998. Wisconsin produced 4.75 times the increase that Vermont did. Idaho nearly 5.5 times. In fact, Idaho, which generated the largest increase, had farm milk prices six percent lower than the Northeast region. This indicates that low prices can and do generate surpluses. The reason for this, many dairy farmers argue, is that they do not set the price of their milk. In order to stay in business when the price is low they must compensate with increased volume.

Interestingly the corporate argument for greater volume is at the center of Monsanto's rationale for developing rBGH, the bovine growth hormone which promises to increase the cow's milk production.

A USDA table illustrates significant milk increases in 1995, a low price year, and a decrease from that in 1996, a high price year:

                                              1992      1993       1994        1995          1996         1997

 All milk price ($/cwt)           13.15     12.84      13.01       12.78         14.75       13.36
 National  Production        150,885  150,637  153,602  155,293     154,006   156,091

While dairy farmers have been suffering from low prices consumers have hardly benefited from the torture applied to dairy farmers by the current pricing system?

                                     1992   1993   1994    1995   1996   1997

 Farm Milk Price        13.15  12.84  13.01   12.78  14.75  13.36
 ($/cwt)
 Retail Price  Indices  ('82-'84=100)

 Whole Milk               126.4  127.9  131.2   132.3  142.4  141.9
 Cheese                       135.5  135.3  136.4   137.9  144.7  144.7
 All Dairy                    128.5  129.4  131.7   132.8  142.1  145.5
 All Food                    137.9  140.9  144.3   148.4  153.3  157.5
 CPIndex                    140.3  144.5  148.2   152.4  156.9  160.6

Data source: USDA
 

NORTHEAST DAIRY COMPACT:
MARKET ORIENTED PRICING STRUCTURE
AWAITING FEDERAL APPROVAL

Attempting to bring about some sort of price equity to the dairy industry and institute a "market oriented" pricing structure, farmers in the Northeastern U.S. conceived a regional dairy compact several years ago which was made part of the so-called 1996 Freedom to Farm bill. It authorized USDA Secretary Dan Glickman to allow the creation of a Northeast Dairy Compact as a temporary measure until he took action on amending the Federal Milk Marketing Orders.

The Dairy Compact prices only fluid milk and then only as a necessary floor.  It does this through an appointed Compact Commission, made up of three members from each participating state, who represent farmers, consumers and processors.  After holding public hearings, examining cost of production and other things which are all part of the public record, the Commission sets the minimum price.

Volatility of milk pricing by the "market" allows for asymmetry of price in which it falls to the farmers, but not to the consumers.  This is where margins and profits are to be made.  Essentially the concentration of supermarkets has them in the drivers seat.  Virtually all regions of the country have three main retail outlets.  Even Kraft ( a subsidiary of Philip Morris, the nation's largest food manufacturer), the nation's largest cheese manufacturer has to get its cheese in all three.

The Compact blocks the passing down of cost, therefore the processors have opposed through their International Dairy Foods Association (IDFA) That organization is an interesting and influential empire of E.Linnwood and Connie Tipton, insiders in Washington, D.C. who can walk in many doors and who are rumored to have several corporate sponsors.

At the same time Alan Rosenfeld, formerly with Public Voice, which has always purported itself to be a liberal consumer organization, is now in the employ of Malcolm and Ross, a lawyer/lobby firm and one of the top ten lobbyists in Albany, New York, in developing anti-compact strategy. In 1996 alone Public Voice received $40,000 from the IDFA. Public Voice recently merged with Consumer Federation of America, whose new Food Policy Institute is being headed by Carol Tucker Foreman, former lobbyist for Monsanto's rBGH, bovine growth hormone.

Donald Ross is a founding executive board member of NY Public Interest Research Group (NYPIRG), which has been at the forefront of Compact opposition.  All the other PIRG's in the Northeast have supported the Compact.
 
Sheldon Silver is the New York State Assembly Speaker. In New York, politics is sometimes described as three men and a budget.  Silver is one of those men.  His most important aide is Patricia Lynch, whose last employer was Donald Ross of Malcolm and Ross. The Compact Bill, however, passed the State Senate handily, after months of effort by Silver  to block it from coming to a vote.

Efforts to get it passed in Washington, D.C, have proved frustrating as IDFA paid Ken Bailey of the University of Missouri $15,000 to do a study which makes the Compact look bad.  According to the Compact's advocates he did it by little tricks which few would pick up i.e.. exaggerating elasticity of supply by a factor of three, assuming that all cost would be passed on to the consumer which they were not. Meanwhile, politicians from the Midwest are opposing the Dairy Compact even though at a grass roots level their farmers are supportive.
 

KATHY LAWRENCE:
"WHY, GIVEN THE CURRENT LOW PRICE TO FARMERS
IS THE PRICE OF MILK TO CONSUMERS SO HIGH ?"

In addressing consumer concerns about the Northeast Dairy Compact's pricing structure, Kathy Lawrence, Executive Director of Just Food, a New York City-based non-profit organization that is working to develop a sustainable food system in that city and throughout the region, recently told a U.S.House of Representatives Committee on the Judiciary Subcommittee on Commercial and Administrative Law

"The purpose of the Compact is to set a floor for the price that farmers receive for their milk --- a floor that should cover their cost of production. The result would be a more stable and predictable income for farmers and an end to the kind of situation we're in right now, with prices to farmers at close to a twenty-year low!  For years, dairy farmers have sold their milk for prices below the cost of production --- meaning they get less for their milk than it costs them to make it."

According to a USDA study of agricultural and financial issues, in 1996 dairy farmers in Vermont, Pennsylvania and New York took an average loss of $2.61 per  hundredweight of milk.  Although this was an improvement from the $4.35 loss in 1995, milk production was still in the red.  "Can we really blame farmers for seeking a price that at least allows them to cover their costs?  Is it any wonder they began to explore a mechanism that would provide them with fair prices?," Lawrence noted.

"Most importantly, the fantastical figures that Compact opponents seem to pull from thin air bear no relation to the documented impact of the Compact on the consumer price of milk in participating states.  The impact has been very modest indeed.  According to a February 1998 report of the U.S. Office of Management and Budget (OMB) report, during the first six months the Compact was in effect, the total additional cost of fluid milk for an average family of four in the Compact region was $1.67 or 28 cents per month!  That same report showed that consumer prices in New England six
months after the Compact took effect averaged five cents per gallon less than in the rest of the country.

"Many well-meaning groups and individuals doing terrific work in the fight against hunger have raised grave concerns about increases in the consumer price of milk.  These concerns are completely understandable and valid.  For people living at or below the poverty level, every penny counts and the prospect of major price increases in such an essential food as milk is very frightening.  I share this concern and I deplore the industry-funded organizations who have played on this fear with scare tactics, dishonest labels like `milk tax' and `dairy cartel' and grossly exaggerated projections."

In her testimony Lawrence also made the telling point that with a Compact price to farmers of $1.46 per gallon, the maximum consumer price under the Compact would be $2.92.  According to the latest figures from the International Association of Milk Control Agencies, the current price per gallon of milk in New York City ranges from $2.30 to $3.59.

"So where's the dramatic increase," she asks. "And why, given the current low price to farmers, is the price to consumers so high?  It certainly can't be blamed on the Compact. Will we get better consumer prices as more farmers go out of business and our food production is monopolized by mega-corporations?  No chance.

"Shouldn't the market and production efficiency dictate what farms are profitable?" she concludes. "Many say farms should go out of business if they aren't `efficient' enough and can't compete in the `free' market. But the market isn't free and the only efficiency that counts is maximum, short-term profit generation for fewer corporations, while the social, economic and environmental `external costs' of industrialized agriculture are borne by society as a whole and by farmers and low-income rural and urban communities in particular.  Dairy farming in the U.S. is shifting rapidly to the West and Southwest, where electricity, water, and fuel are all subsidized and where grain and water must be transported long, destructive distances to feed huge herds of confined dairy cattle.  Is this the food system we want?"

One example, of what Lawrence is referring to is Koch Industries, the nation's second largest private corporation, which has $35 billion in annual revenues, is now becoming a bigger player in the dairy industry. It owns Purina Mills,and in order to establish outlets for that feed business, Koch intends to build dairies that will milk up to 1,700 cows.

Currently, six of the nation's largest 20 dairy farms, according to Successful Farming, are headquartered in California (including the top three), three are based in Idaho and Florida, two in Arizona, and one each in Colorado, Kansas, Michigan, New Mexico, Oklahoma and Texas. The nation's largest dairy farm, Progressive Dairies, headquartered in Bakersfield, California has 18,500 cows in California, Texas and Georgia; the second largest is Joseph Gallo Farms in Atwater, California which has 14,000 cows, and third is Hettinga Dairies of Corona, California with 13,000 cows in California and Arizona.
 

SUPERMARKET GOUGING:
MILK PRICES IN L.A. MARKETS EXPLOITING POOR

In late May 1997, Consumers Union surveyed 77 food markets in Los Angeles and Orange Counties, California and found that specific gouging by  supermarket chain retailers, continues to be a primary cause of high milk prices in the Los Angeles area. The survey was the second one of Los Angeles area milk prices that Consumers Union has conducted in seven months.

The May survey of L.A. milk prices  showed an enormous range of prices at which Los Angeles consumers pay for a gallon of milk. Prices varied from $2.19 per gallon at the low end to $3.99 per gallon at the high end, a difference of $1.80 (or 82%) per gallon.

"Large supermarket chains in the Los Angeles area continue to charge among the highest prices in the area --- as much as $1.80 more for a gallon of milk than the local Mom-and-Pop grocers,"  Elisa Odabashian, Policy Analyst for Consumers Union and the author of the report pointed out.

Consumers Union, publisher of Consumer Reports, is an independent, nonprofit testing and information organization, serving only the consumer.

"There is little competition on milk between the big chains, as evidenced through the lack of advertising and price-cutting . . . Milk retailers know that there is no reasonably-priced, nutritional alternative to milk, particularly for the healthy growth of children, and that consumers will continue to buy it at almost any cost," Odabashian said.

"Supermarkets move a great volume of milk and most of them process the milk themselves, driving down their costs considerably. The fact that supermarkets are charging so much more for a gallon of milk than many smaller markets runs counter to economic sense, and certainly to what most consumers expect. Retailers are taking advantage of consumers' need for milk."

While most major supermarket chains accept food stamps and Women Infant and Children (WIC) milk coupons, the smaller markets do not accept food stamps, and few  accept WIC milk coupons.

"The poorest consumers know that their coupons will be accepted at the major chain supermarkets. So tax dollars for food stamps and WIC coupons are being spent on the highest-priced milk, enriching the biggest retailers," Odabashian charged.

"When food dollars are wasted on excessive milk prices, poor children get less food to eat."

While many Los Angeles area supermarkets dropped their retail milk prices by 6 to 10% after Consumers Union's survey in October 1996, a decrease in response to a 20% drop on February 1 in milk farm prices. Stores lowered their retail prices by $0.22 to $0.40 (to the then current $3.55-$3.99 retail price per gallon). The price farmers were then receiving  for milk dropped $0.30 (to $1.26 per gallon) in February. Farm prices for milk dropped another nine percent (to $1.16) on June 1, 1997.

"We commend the retailers for the recent drop," Odabashian noted, "but we must point out that when the farm price increases even a penny, grocers generally raise the price to consumers quickly and exponentially. When the farm price drops, as it has three times in the past two years, grocers have slowly passed on a fraction of the decrease to their customers."

"If that historical trend continues," she adds, "the large gap between the farm price and the price consumers pay will steadily grow. The gap translates into higher costs to consumers and higher profits for grocers. We encourage retailers to give consumers a break and pass along the June 1 farm price decrease."

Currently the supermarket industry in Southern California is dominated by Safeway Stores, who in 1997 bought up a remain financial interest in Vons; Ralphs (owned by Kroger) and Lucky Stores, formerly owned by American Stores (see below)
 

SUPERMARKET MERGERS:
AAI: CONSUMERS AND FARMERS THE ULTIMATE LOSERS
 
Labeling the increasing concentration in the supermarket industry "`a vicious cycle,' with consumers and farmers the ultimate losers," the American Antitrust Institute, in a recent letter to Federal Trade Commission (FTC) Chairman Robert Pitofsky, warned that recent mergers in the supermarket industry raise the likelihood that the U.S. industry is following a dangerous consolidation path.

According to the AAI,  a non-profit education organization dedicated to the vigorous use of antitrust as a vital component of national competition policy, "a substantial literature suggests that as supermarket concentration moves toward higher levels, price tends to follow."

The AAI observed that to date, the FTC has taken a permissive posture with regard to supermarket mergers, generally allowing supermarket mergers to occur, subject only to partial divestiture of some stores where competitive overlaps are clear. Most recently, it approved the merger of Kroger and Fred Meyer, combining over 2,000 stores, with only 8 stores to be divested. "We believe," says the AAI, "that a dangerous line may have been crossed and a new, more aggressive antitrust analysis must be developed to protect the American consumer against the price increases that rather clearly lay ahead if the consolidation trend is permitted to continue."

Focusing on the pending acquisition of Pathmark (132 stores in the New York City area) by Royal Ahold (over 1,000 stores in the U.S.), the AAI pointed out that there are substantial horizontal overlaps between Ahold's current operations and Pathmark's. These are so pervasive as to make it unlikely that partial divestitures will keep the merger from substantially reducing competition. This is especially true, the AAI points out, since previous partial divestitures in earlier Ahold acquisitions appear not to have maintained competitive markets.

Looking beyond specific local markets, the AAI called attention to the likelihood that permitting further growth of the mega-chains by merger will cripple the independent sector of grocery retailing, which in turn will likely result in higher prices for consumers. When mega-chains become power buyers able to squeeze the profits out of manufacturers, manufacturers can only stay in business if they charge more to their other customers, thereby reducing the ability of smaller chains to compete with the mega-chains.

Without such competition, the mega-chains will have little motivation to pass their savings along to consumers.. AAI urged the FTC to be highly skeptical of the merging parties' claims that there are merger-specific efficiencies that will be passed on to consumers.

If the concerns raised in its letter are confirmed by the FTC's investigation, the AAI concludes that the FTC should seek an injunction of the merger, rather than allow it to go forward subject to a partial divestiture of stores.  The AAI's complete ten-page letter is available on its website:
www.antitrust institute.org.

Shortly after the AAI letter was sent, however, the government gave its approval to the announced $12 billion merger of Albertson's Inc. and American Stores Co. which will create the second-largest supermarket chain in the nation.

The two companies agreed to sell stores in the largest retail divestiture in the FTC's history. Under the proposed order, the two companies will be forced to sell 144 supermarkets and five planned sites including 104 Albertson's supermarkets, 40 American Stores' supermarkets, three planned Albertson's stores and two planned American Stores in 57 local markets to five buyers.

Kroger immediately snapped up some of the supermarkets, saying it would buy 41           supermarkets from Albertson's -- 40 of them in California -- and will operate them under its established West Coast name of Ralphs. In the state, where the stores will have to divest 117 supermarkets and three planned supermarket sites, Attorney General Bill Lockyer said he did not expect a loss of supermarket jobs because other retailers will be buying the stores. .

Albertson's, of Boise, Idaho, operates in the Midwest, West and Southern states. The Salt Lake City-based American Stores is spread  across the country from Boston to California, but most of its stores are in California and Texas. The deal gives the companies a presence in 38 states and expected revenues of more than $36 billion.

William J. Baer, director of the FTC's Bureau of Competition, said the agreement will ensure that consumers in those states "will continue to receive the benefits of competition -- lower prices and good quality and selection -- from supermarkets in their communities."

The proposed order was approved by all four commissioners and is subject to a 60-day public comment period before the FTC makes it final. The agreement also requires the companies to inform the commission over the next ten years if they plan to buy stores in the markets where they were ordered to divest.