S P E C I A L E D I T I ON
EXAMINER Issue # 50 October 8, 1999
Monitoring Corporate Agribusiness From a Public Interest
EFFORT TO BLOCK CARGILL \ CONTINENTAL SALE
PUBLIC COMMENT DEADLINE AT HAND
October 12, 1999 remains the deadline for public comment on the U.S Department of Justice's Anti-Trust Division's "Final Judgment" relative to the sale by Continental Grain of its grain merchandising division to Cargill, the world's largest grain trader.
After characterizing what it publicly called an almost year long "investigation" of the sale the Department of Justice (DofJ) in fact filed a formal "Complaint" with the U.S. District Court for the District of Columbia. However, the DofJ totally neutralized its "Complaint" by filing it on the same day (July 8, 1999) and at the same time that it furtively filed a consented "Final Judgment," agreed to by all parties. While the DofJ's "Final Judgment" now awaits the approval of presiding U.S. District Court Judge Gladys Kessler, the public comment period regarding the Department's decision remains open until October 12.
In their "Complaint" the DofJ formally charged that Cargill's purchase would "substantially lessen competition for purchases of corn, soybeans, and wheat in each of the relevant geographic markets, enabling it unilaterally to depress the prices paid to farmers. The proposed transaction will also make it more likely that the few remaining grain trading companies that purchase corn, soybeans, and wheat in these markets will engage in anticompetitive coordination to depress farm prices."
Liberals and progressives and those individuals and organizations that seemingly care so deeply about the plight of the nation's family farmers may pride themselves on being on the cutting edge of today's economic and social issues such as genetic engineering and the upcoming World Trade Organization meeting in Seattle, Washington.
At the moment, however, agrarian populists and thousands of family farmers throughout the U.S. see such issues, as important as they may be for the future of agriculture, merely as additional logs on that fire that is intended to smoke them out of the business of farming.
Meanwhile, the crucial issue that is today deeply distressing family farmers to the point of near hopelessness is the rapid corporate concentration within agriculture as exemplified by the recent announced purchases by Cargill of Continental Grain's merchandising business and Smithfield Foods buying up of Murphy Family Farms and Tyson Food's Pork Group.
While Dan "Of the Grain Trade, By the Grain Trade and For the Grain Trade" Glickman may be "very pleased that the Department of Justice has taken . . . steps to protect American farmers from the potential adverse effects" of the Cargill\Continental sale by its recent "Final Judgment" and divestiture order, farmers from Stockton, California to Hampton Roads, Virginia see the consolidation of two of the world's largest grain traders as nothing but more economic and social adversity for them and their families.
Thus, in an attempt to force the Department of Justice anti-trust division to conduct a more thorough investigation of the Cargill\Continental sale, efforts are currently underway to forestall the Department from submitting its "Final Judgment" for the approval to presiding U.S. District Court Judge Gladys Kessler. This Special Issue" of THE AGRIBUSINESS EXAMINER is part of that effort.
For once, not simply acting as a mere mouthpiece for corporate agribusiness, but actually serving as "a voice for American Agriculture," American Farm Bureau President Dean Kleckner, has rightfully observed that "the time has come for the Justice Department to have someone with agricultural expertise to oversee such concentration issues. Agriculture is a unique industry. It requires someone with the experience and background to ensure anti-trust laws are not being violated and that opportunities for all farmers are protected."
The hour is late, the deadline for public comment on the Cargill\Continental "Final Judgment" is Tuesday, October 12.
No matter what one's degree of involvement in various and related public interest issues might be or what political or ideological persuasion one might be if they care about who grows their food, who produces and manufacturers it, its availability, its safety, its cost and the future of family farming agriculture the effort to block this sale is one that deserves their immediate and highest priority.
The "Antitrust Procedures and Penalties Act" (APPA) of the U.S. Code provides that any person may submit to the United States written comments regarding the proposed "Final Judgment." Any person who wishes to comment should do so by October 12. The comments and the response of the United States will be filed with the Court and published in the Federal Register.
Written comments should be submitted to:
Roger W. Fones
Chief, Transportation, Energy & Agriculture Section
United States Department of Justice
325 Seventh Street, N.W., Suite 500
Washington, DC 20530
Legal precedent, according to the DofJ, requires that "[t]he balancing of competing social and political interests affected by a proposed antitrust consent decree must be left, in the first instance, to the discretion of the Attorney General. The court's role in protecting the public interest is one of insuring that the government has not breached its duty to the public in consenting to the decree.
"The court is required to determine not whether a particular decree is the one that will best serve society, but whether the settlement is `within the reaches of the public interest.' [A] proposed decree must be approved even if it falls short of the remedy the court would impose on its own, as long as it falls within the range of acceptability or is 'within the reaches of public interest.'."
Letters specifically demonstrating and\or documenting the impact of Cargill's monopoly of the grain trade and how the Continental purchase will affect that situation on one's own family farm operation or upon the rural community in which one lives will be most valuable.Copies of such letters should also be sent to the letter writer's state attorney general's office urging that office at the same time to utilize their good offices in not only calling upon the U.S. Department of Justice to revisit its "investigation" of the Cargill\Continental sale, but requesting that the deadline for comment be extended another sixty days to December 12.
Whether or not Judge Kessler concludes that the consent decree
is "within the reaches of public interest"the corporate
audaciousness of Cargill in attempting to summarily own
this nation's grain trade with its purchase of Continental's
grain assets is breathtaking. One need only look at the
facts brought to light in the DofJ's own "Complaint"
to see such covertness.
"A DARK DAY FOR AGRICULTURE"
"If the Cargill merger goes through, it is a dark day for agriculture," is the way Fred Stokes, a Mississippi cattleman and recently elected President of the Organization for Competitive Markets (OCM) describes the Cargill\Continental sale. "The loss of Continental Grain as a competitor while creating a more powerful Cargill will drive farmers' share of the retail dollar even lower. Continental Grain will then plow the new money into further consolidating the livestock industry."
Alone among farm organizations who have denounced the Department of Justice's "Final Judgment" decree the Organization for Competitive Markets is a non-profit, non-partisan organization of farmers, ranchers, academics and attorneys which provides information to the public about the importance of true competition in the agricultural marketplace.
Keith Mudd, a Missouri farmer and OCM board member, adds, "Farmers used to have several choices of elevators to market their grain. Mergers have reduced the number of buyers to two in many geographic areas. If the Cargill merger goes through, many farmers will have only one buyer. I fail to understand how the Department of Justice can view this merger as promoting competition."
"The immediate effects of the merger will be less market choices for farmers, more control over exports and a heightened ability by Cargill to unilaterally affect the futures markets," stated Dr. John Helmuth, agricultural economist and OCM board member. "The subsequent effects will be pressure for other grain merchandisers and their customers to merge in order to equal the market power of Cargill."
OCM's Jon Lauck and other Midwest farm activists have been meeting in recent weeks with both Republican and Democrat state attorney generals, in efforts to line up support for a lawsuit to block the sale
"Not too long ago," Lauck recently told The Corporate Crime Reporter, "antitrust officials would have looked at something like this and decided --- this is obviously too large, these are two dominant players. We are never going to allow something like this to go through.
"Given the DOJ's concerns about the anticompetitive consequences of the merger," Lauck stresses, "it is odd that no effort is made to justify its approval of the merger. The fears of antitcompetitive behavior set forth in the `Complaint' are not counter-balanced with a recognition of post-merger efficiencies, for example. With no apparent benefit to the merger and significant concerns expressed by many parties about its approval, the natural reaction would be to halt the merger. This response is further justified by the obvious difficulties that accompany the reversal of market concentration once it has become an economic fact."
One argument that defenders of the recent wave of corporate mergers within agribusiness have sought to make is that such mergers, specifically within the grain trade, are necessary so as enable U.S. companies to compete with foreign "parastatal monopolies."
Recently, the corporate agribusiness dominated International Policy Council on Agriculture, Food and Trade (IPC) issued a call for the elimination of parastatal monopolies in the next round of world trade talks. Although the Australian and Canadian Wheat Boards were not mentioned by name the IPC report bemoaned the fact that the monopoly power of such agricultural state-trading enterprises (STE's) "have the ability to distort domestic markets and international trade flows," even if they are not directly supported by government payments.
"As long as they enjoy exclusive powers or advantages not shared by their competitors, monopolies will not behave like `at risk' enterprises," the IPC said. "To end the resulting market distortions, the monopolies themselves should be eliminated, preferably by the end of the implementation period of the next round."
But, as Dr. Helmuth has noted, "when fewer and fewer individuals make more and more of the economic decisions, whether those individuals are in government or big business, the results is anti-competitive, inefficient and harmful to society as a whole; when more and more individuals make more and more of the economic decisions, the result is more competitive and more efficient and beneficial to society as a whole.
"There is even greater irony in that the principal advocates
of centralized economic planning --- the former Soviet Union and
Eastern European countries --- are abandoning it as an economic
failure, at the very time American industries are becoming more
and more centrally planned by those few firms with greater and
greater economic power resulting from ever increasing industry
concentration," he adds.
TO BECOME MORE POWERFUL AND SOPHISTICATED FIRM
"CAPABLE OF STRATEGIC,COOPERATIVE
AND ANTI-COMPETITIVE BEHAVIOR"
In a recent letter to Roger W. Fones, Chief of the Transportation, Energy & Agriculture Section of the Antitrust Division, United States Department of Justice, Organization for Competitive Markets Jon Lauck wrote that Cargill's acquisition of Continental Grain Company "would unify the second and third largest grain traders in North America, which export 40% of American agricultural commodities."
Specifically, Lauck, the author of a law review article entitled "Toward an Agrarian Antitrust," 75 North Dakota Law Review (August/September 1999, objected to the analysis used by the Department of Justice when reviewing the acquisition. DofJ's analysis: (1) fails to consider the wider concentration in agricultural markets beyond grain buying; (2) fails to consider the continuing potential for anticompetitive behavior in the post-merger market; (3) fails to show that the divested remnants of Continental will be a competitive force absent a large network of elevators which buy grain; (4) fails to consider the nature of the grain selling market; (5) fails to consider the economic disorganization of farmers which can be exploited by powerful buyers; (6) fails to consider information disparities in agricultural markets; (7) fails to explain the benefits of the merger; (8) and fails to consider a range of statutes that Congress intended courts to consider when making decisions about agricultural markets.
"In recent years," he continues, "agricultural processing markets have become highly concentrated. From a top-five concentration ratio of 24% in the early 1980s, for example, the beef-packing sector's five-firm concentration ratio has grown to 85 percent. Similar statistics apply to several other sectors of the agricultural processing economy.
"The DofJ's analysis did not consider the wider context of consolidation in the agricultural system and instead focused on the grain buying activities of Cargill and Continental. Growing concentration in agricultural markets should have been considered by the DofJ given the continuing consolidation of agribusiness firms," he adds.
"It was the growing power of agribusiness firms that triggered concerns among farmers and inspired the passage of the Sherman Act. And it was continuing concentration in agricultural markets, particularly through merger, that prompted passage of additional antitrust statutes such as the Clayton Act. The importance of the antitrust laws to farmers is explained by the difficulties inherent in farmers bargaining with large and powerful agribusiness buyers. Legislators and courts have fully recognized these concerns in statutes and in cases, respectively, but the DOJ's merger analysis failed to weigh these considerations.
Lauck's letter goes on to warn the Department of Justice that it "must consider more that the grain buying operations of Cargill. The acquisition of Continental's seventy elevators will enhance the economic power of Cargill as a general matter. Such a result concerns farmers because Cargill's assets and economic power can be deployed across a range of agricultural sectors. For example, Cargill stands out as a top-four firm in beef packing, cattle feedlots (where Continental is the largest), pork packing, broiler production, turkey production, animal feed plants, grain elevator capacity, flour milling, dry corn milling, wet corn milling, soybean crushing, and ethanol production.
"Such a dominant position across many agricultural markets will allow Cargill to transfer resources between sectors according to the economic conditions that are prevailing at a given time. The ability to transfer assets will allow Cargill to maintain its dominant status in all of these markets irrespective of its competitive prowess. Unlike farmers, who are forced into bankruptcy after a few bad seasons, Cargill will maintain its dominant status over time regardless of economic performance over the short-term. With Continental's assets, Cargill will become an even more powerful and `sophisticated' firm, even more capable of strategic, cooperative, and anti-competitive behavior.
"The DofJ argues in its complaint that within particular draw areas very few firms buy grain. It argues that if Continental's operations were absorbed `Cargill would be in a position unilaterally, or in coordinated interaction with the few remaining competitors, to depress prices paid to producers and other suppliers because transportation costs would preclude them from selling to purchasers outside the captive draw areas in sufficient quantities to prevent the price decrease.' Divestitures in a few of these markets as proposed by the DofJ does not address this problem. Even with the divestitures, grain buying would remain heavily concentrated and susceptive to collusive and cooperative activity,"Laucks letter warns.
"Furthermore, it is unclear how Continental will remain an effective competitor with Cargill after selling almost all of its elevator capacity. The few facilities that will not be acquired by Cargill hardly constitute a legitimate competitive threat. As the DofJ emphasized in its complaint, grain buying involves a large-scale network of facilities. The few remaining Continental facilities, stripped of their internal networks which provide them with competitive flexibility and information about grain flows, will be powerless in comparison with Cargill, with its $51 billion in annual revenues and 81,000 employees in 60 different countries.
"Continental's decision to sell off its grain buying operation may also indicate that it no longer considers grain buying a priority. In short, there is no assurance that the remaining facilities will even compete in the markets that concerned the DofJ. Given the need for a network of elevators to compete in the grain buying business, it is also highly unlikely that any new firms will enter the market to challenge Cargill. The DofJ openly concedes in its complaint that it is `unlikely that Cargill's exercise of market power will be prevented by new entry, by farmers and other suppliers transporting their products to more distant markets, or by any other countervailing competitive force'."
Lauck concludes his carefully documented 13-page letter to
Fones by emphasizing that "given the importance of this merger
and the constraints on state action if the consent decree is approved,
I respectfully request that the comment period for this merger
be extended another sixty days to December 12th Several
parties have expressed interest in commenting on the merger and
will not be able to do so by October 12th In the interest
of a fair hearing on this critical matter, I urge DofJ to support
a lengthening of the comment period, as allowed under the Tunney
Act. If the DofJ and the court do not see fit to extend the comment
period, I urge the court to reject the proposed consent decree
for failing to consider the factors set forth herein. "
WHY DID CONTINENTAL SELL?
WHY DID CARGILL BECOME A BUYER?
Prior to the Department of Justice's "Final Judgment" Iowa State Department of Economics professors Marvin Hayenga and Robert Wisner addressed the questions of why Continental sought to sell its grain merchandising division and why Cargill became such a willing buyer.
The complete text of the Hayenga-Wisner paper can be viewed
Professors Hayenga and Wisner note in their January, 1999 paper, "Cargill's Acquisition of Continental Grain's Grain Merchandising Business," that industry speculation was that Continental excelled in very large volume bulk export trading, and had not diversified enough into the value added processing to compete effectively in a market environment where export volumes have been sharply reduced in recent years.
"To compete effectively by restructuring their operations at this late date," they add, "would require too much capital and too much risk. Continental's storage capacity declined significantly over the last ten years, while Cargill, ADM and Peavey [ConAgra] expanded. Their capital could be more productively employed in their other agricultural and financial businesses."
In seeking answers as to why Cargill expected the Continental purchase acquisition to contribute to its ability to compete effectively in a rapidly changing market environment the Iowa State study summarized that the acquisition will contribute to "more effective knowledge acquisition and transfer from an expanded global presence and a broader base of grain origination facilities in the countries where grain is produced.
"The grain merchandising system is a high fixed cost system. Cargill hopes to compete more effectively and keep a large share of the Continental volume, capturing economies of scale by running more volume through without equivalent changes in the costs of managing their system. Further, Cargill expects that it will be more able to take costs out of the system, not just through fewer people, but by dedicating some facilities to specialized products and getting more efficiencies in operations (shorter barge turnaround times, longer runs in elevator handling, etc.).
Hayenga and Wisner point out that Cargill's new joint venture with Monsanto to arrange production and to market value-added specialty grains and oilseeds for the feed and processing industries "will require greater capacity to handle segregated grain flows throughout the domestic and export marketing system. Continental has had a significant presence in the identity preserved grain market, with half its international feed customers converted to high oil corn.
"Cargill expects to better serve the producer by enhancing productivity and passing some of those cost savings on in the form of better prices to their suppliers and customers. They also plan offer many more price risk management alternatives and advice, financing, etc., to farmers," they add.
The study goes no to add that "the basic concern expressed by some farmers, politicians, and industry participants is that Cargill bought Continental to remove a significant competitor, particularly in the export market, and expand merchandising margins. The ability to `control' more facilities and larger volumes of grain and soybeans might adversely influence competition and the transparency and effectiveness of the price discovery process in the grain marketing system."
The two professors then ask a series of key questions: Will the merger result other merchandisers and processors having to conform to Cargill standards in grain merchandising?; Will the merger result in exclusivity in marketing arrangements with Cargill such that firms that do business with Cargill are excluded from or penalized for doing business with other merchandisers? Will Cargill bundle products or terms into their merchandising arrangements, like requiring its buyers and suppliers to use Cargill transportation or Cargill risk management tools? Will Cargill control so much grain at various stages of the system that fewer negotiated prices and price reports are available to keep the price discovery system transparent?
It is these questions that many farm critics feel that the
Department of Justice's "Final Judgment" fails to answer.
"CAPTIVE DRAW AREAS" AND THE HHI
Although Cargill and Continental have from the outset sought to minimize the monopoly situation the purchase would have created within the grain trade the facts are that farmers typically sell their crops to rural grain elevator operators, many of which are owned by cooperatives and small companies.These elevators then either export the grain or resell it to flour mills and other food processors with much of it being sold to grain trading corporations such as Cargill, Continental and Archer Daniels Midland (ADM) and it is these companies that own and operate the larger grain elevators, rail links, terminals, barges and ships needed to move grain around the country and the world.
The role of the grain trade in a nation that is constantly touted as being "the world's breadbasket" cannot be over emphasized as the respected University of Missouri rural sociologist William Heffernan points out, 75% of the world's food (based on dry weight) is grain based.
In discussing the nation's grain network the DofJ in its "Complaint" notes that in each instance, the geographic area from which a country elevator, river elevator, rail terminal, or port elevator receives grain is limited by transportation costs and is known as the "draw area" for that facility. Draw areas, they conclude, expand and contract only slightly in response to normal economic fluctuations in crop supply, crop demand, and transportation costs.
For many country elevators, river elevators, railroad terminals, and port elevators, draw areas overlap. Cargill and Continental often operate facilities that have overlapping draw areas, and they therefore compete with one another for the purchase of wheat, corn, and soybeans from the same producers or other suppliers. In some areas within these overlapping draw areas, Cargill and Continental have been two of a small number of competing grain trading companies.
"Sometimes they are the best," the DofJ observes, "and occasionally the only realistic alternative purchasers of grain from producers and other suppliers. By acquiring Continental's facilities that purchase grain from these `captive draw areas,' Cargill would be in a position unilaterally, or in coordinated interaction with the few remaining competitors, to depress prices paid to producers and other suppliers because transportation costs would preclude them from selling to purchasers outside the captive draw areas in sufficient quantities to prevent the price decrease."
By way of evaluating concentration is these "captive draw areas" the Department of Justice uses a criteria based on the Herfindahl-Hirschman Index (HHI), a commonly accepted measure of market concentration. The HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers.
For example, for a market consisting of four firms with shares of 30, 30, 20, and 20 percent, the HHI is 2,600 (302 + 302 + 202 + 202 = 2,600). The HHI takes into account the relative size and distribution of the firms in a market. It approaches zero when a market is occupied by a large number of firms of relatively equal size and reaches its maximum of 10,000 when a market is controlled by a single firm. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases.
Markets in which the HHI is between 1000 and 1800 are considered to be moderately concentrated, and markets in which the HHI is in excess of 1800 points are considered to be highly concentrated. Transactions that increase the HHI by more than 100 points in highly concentrated markets presumptively raise significant antitrust concerns under the Department of Justice and Federal Trade Commission 1992 Horizontal Merger Guidelines.
In their "Complaint" the DofJ vividly shows that even prior to the purchase agreement Cargill and Continental were two of a very small number of grain trading companies competing to purchase grain in four key "captive draw area" including: the Pacific Northwest port range, which include western Minnesota, eastern North Dakota, and northeastern South Dakota; the Central California port range, which include the areas around Stockton, California, to West Sacramento, California; elevators in the Texas Gulf port range, which include portions of Texas and Louisiana; elevators along the Illinois river, stretching from Morris, Illinois, to Chicago, Illinois, and on the Mississippi river in the vicinities of Dubuque, Iowa, and New Madrid/Caruthersville, Missouri, and the captive draw areas for rail terminals in the vicinities of Salina, Kansas, and Troy, Ohio.
Each of those "captive draw areas" is already highly concentrated based on HHI figures. The potential combination of Cargill and Continental would have dramatically and substantially increased concentration in already highly concentrated grain purchasing markets.
For example, in the Pacific Northwest port range markets for corn and soybean purchases are highly concentrated, with the top four port elevator operators accounting for 100% of all corn and soybean purchases in these markets as Cargill alone accounts for about 44% of all soybean purchases and 23% of all corn purchases. Continental, in a joint venture with Cenex Harvest States, accounts for about 50% of all soybean purchases and 30% of all corn purchases in the same port range.
After the proposed acquisition, Cargill would have accounted for about 94% of Pacific Northwest soybean purchases and about 53% of Pacific Northwest corn purchases. The approximate post-merger HHIs for purchases of soybeans and corn in the Pacific Northwest port range would be about 8868 and 5004, with increases in the HHIs of 4400 and 1364 points, respectively, resulting from this transaction.
Likewise, the Central California port range market for wheat is highly concentrated, with Cargill and Continental accounting for virtually all wheat purchases in this market. The approximate post-merger HHI for purchases of wheat in the Central California port range would be about 10,000, with an increase in the HHI of 7,888 points resulting from this transaction.
In the Texas Gulf port range markets for soybeans and wheat are also highly concentrated, with the top three purchasers accounting for 100% of all purchases of soybeans and the top four purchasers accounting for 79% of all purchases of wheat in these markets. Cargill accounts for about 16% of all soybean purchases and 25% of all wheat purchases in the Texas Gulf port range. Continental accounts for about 33% of all soybean purchases and 9% of all wheat purchases in the same port range.
After the proposed acquisition, Cargill would have accounted for about 49% of Texas Gulf soybean purchases and about 34% of Texas Gulf wheat purchases. The approximate post-merger HHIs for purchases of soybeans and wheat in the Texas Gulf port range would be 5105 and 2611, with increases in the HHIs of 1056 and 451 points, respectively, resulting from this transaction.
Other geographic markets in which Cargill and Continental
compete for purchases of corn, soybeans, and wheat are also highly
concentrated. These markets include river elevator markets on
the Illinois River and the Mississippi River, authorized delivery
points on the Illinois River for corn and soybean futures contracts,
and rail terminal markets in Kansas and Ohio. The proposed transaction
would have increased the HHIs in each of these markets to over
TRADE COLLUSION BY ANY OTHER NAME????
In it's "Final Judgment" the Department of Justice not only directs Cargill to divest all of its property rights in the po rt of Seattle elevator, East Dubuque and Morris river elevator, but also mandates that Continental is ordered and directed to divest all of its property rights in the Lockport and Caruthersville river elevators, the Salina rail and Troy rail elevators, the Beaumont,Stockton and Chicago port elevator to an Acquirer acceptable to the United States in its sole discretion.
When one totals the elevator capacities of those facilities that Cargill must relinquish and those Continental elevators which it is prohibited from operating some rather curious figures emerge.
The total domestic storage capacity for Cargill and Continental in January of 1999 was 463 million bushels for Cargill and 169 million bushels for Continental. This compares to 1981 figures of 148 million bushels for Cargill and 110 million bushels for Continental. The total capacity of the Seattle port and Morris River elevators and one third of the Havana river elevator (see below) is some five million bushels while the storage capacity of the Lockport, Caruthersville, Salina and Troy rail elevators and the Beaumont and Stockton port elevators totals some 15 million bushels. If hypothetically one independent corporation should buy all these elevators its combined storage capacity would be but between three and four percent of Cargill's storage capacity and a similar percentage of ADM's total storage capacity.
The DofJ directs that Cargill and Continental's assets shall be made to an Acquirer for whom it is demonstrated to the sole satisfaction of the United States that: 1) the purchase is for the purpose of using the Asset to compete effectively in the grain business; 2) the Acquirer has the managerial, operational, and financial capability to use the Asset to compete effectively in the grain business; and 3) none of the terms of any agreement between the Acquirer and defendant(s) give defendant(s) the ability unreasonably to raise the Acquirer's costs, to lower the Acquirer's efficiency, or otherwise to interfere in the ability or incentive of the Acquirer to compete effectively.
Among the other terms of the "Final Judgment" Cargill shall not purchase, lease or acquire any interest in the Lockport river elevator, Caruthersville river elevator, Salina rail elevator, Troy rail elevator, Beaumont port elevator, Stockton port elevator or Chicago port elevator, or any interest in the river elevator at or near Birds Point, Missouri (in which Continental formerly owned a minority interest, and had a right of first refusal to purchase grain).
Cargill was also directed to enter into a throughput agreement that makes one-third (1/3) of the daily loading capacity at its river elevator located at or near Havana, Illinois, or one barge-load per day, whichever is greater, to an independent grain company acceptable to the United States in its sole discretion (the "Havana Throughput Agreement"). Daily loading capacity shall be the capacity registered with the CBOT.
A "Standard Throughput Agreement" means an agreement that allows one grain company to move its grain through an elevator operated by another person, with unloading, storage, loading and ancillary services provided by the operator pursuant to terms, conditions and rates that are common in the grain industry.
The independent grain company that obtains the throughput right from Cargill (the "third party") must be qualified under CBOT rules and regulations to make delivery of at least one barge-load of corn and soybeans per day for the settlement of CBOT corn and soybean futures contracts, and must agree to register that capacity at the Havana facility with the CBOT.
The "Havana Throughput Agreement" shall allow the
third party to use its share of the loading capacity at the Havana
facility to transload grain from trucks onto barges for commercial
purposes unrelated to futures contract deliveries, as well as
to make deliveries under CBOT futures contracts. Cargill,
however, is not obligated by the "Final Judgment"to
provide storage services to the third party in excess of the storage
services required to accommodate the transloading of grain shipments
from trucks to barges. Load to barge loading, may not exceed the
GETTING THE "86" IN SEATTLE?
In the Department of Justice's original "Complaint," the anti-trust division asserted that competition for the purchase of grain and soybeans from farmers and other suppliers would have been harmed by combining Cargill's and Continental's competing port elevators in the Pacific Northwest, which purchase corn and soybeans from farmers in portions of Minnesota, North Dakota, and South Dakota. Currently, nearly 40% of Cargill's corn shipments abroad go through their Pier 86 elevator in Seattle.
Yet, in ordering the divestiture of Cargill's 4.2 million bushel terminal in Seattle, presently leased from the Port of Seattle, the nation's largest private corporation will now operate in part the TEMCO three million bushel grain elevator at the nearly Port of Tacoma. TEMCO or Tacoma Export Marketing Corp. has operated the terminal as a joint venture for Continental and Cenex Harvest States Co-op, now in the process of merging with Farmland Industries, to form United Country Brands, the nation's largest agricultural cooperative. (See Issue #25)
Slightly over 100 miles to the south of Tacoma, Mitsubishi Corp. a leading Japanese trading company, recently announced it has acquired about a 10% stake in the Kalama Export Company LLC equally owned by ConAgra Inc. and Archer Daniels Midland Co. ("Supermarkup to the World"). Kalama Export Company LLC operates a grain elevator along the Columbia River in Washington State, with hourly shipping capacity of around 3,000 tons and storage capacity of about 50,000 tons. It also plans to increase storage capacity to 90,000 tons by the end of 2000.
Yet Cargill spokeswoman Lori Johnson said the Justice Department was concerned that her company would have too much business concentrated in the Pacific Northwest because of Continental's leasing of the Tacoma grain-storage facility. "We fought the Justice Department not to include Seattle," said Johnson. "We still need to sit down with Port officials and talk about the options and make it work for everyone," she said. "But we do have an obligation under the lease."
According to the DofJ's divestiture order the Seattle port elevator may enter into a Standard Throughput Agreement with Cargill, or any joint venture involving the Tacoma elevator to which Cargill is a party (the "Cargill Joint Venture"), provided that: 1) the Acquirer has no interest in Cargill or the "Cargill Joint Venture"; 2) the throughput agreement gives Cargill or the " Joint Venture" no more rights concerning the operations of the facility than are commonly granted to sublessees in Standard Throughput Agreements, and 3) Cargill or the "Cargill Joint Venture" obtains continuing rights to move no more than 8.5 million bushels of grain and oilseeds combined in any given month through the Seattle port elevator.
"Moreover," the Justice department states, "the United States must be satisfied, in its sole discretion, that any Standard Throughput Agreement that may be negotiated between Cargill or the `Cargill Joint Venture' and the Acquirer of the Seattle port elevator: 1)would leave the Acquirer with sufficient capacity for it to be a viable and effective competitor for the purchase of corn and soybeans in the Pacific Northwest draw area; and 2) would not adversely affect the Acquirer's ability or incentives to compete vigorously for the origination of corn and soybeans in the Pacific Northwest draw area, by raising the Acquirer's costs, lowering its efficiency, or otherwise interfering in the ability or incentive of the Acquirer to compete effectively."
The DofJ notes, however, that Cargill need not divest the Seattle port elevator if it does not buy, lease or otherwise acquire an interest in Continental's port elevator at or near Tacoma, Washington.
If another firm, however, acquires the Tacoma port elevator pursuant to a right of first refusal (and Cargill retains the Seattle port elevator), Cargill shall not subsequently purchase or lease the Tacoma port elevator. If another firm acquires the Tacoma port elevator pursuant to a right of first refusal, Cargill shall not subsequently acquire any other interest in that facility (including a joint venture interest) without the written consent of the United States.
As for the Seattle elevator the Seattle Times business correspondent Patrick Harrington recently reported, "with Cargill now planning to shift operations to Tacoma after all, it remains to be seen whether there is a player big enough to fill its shoes.
"Cargill, even before it acquired Continental
last month, was the nation's largest exporter of grain; Continental
was the second largest. Illinois-based Archer Daniels Midland,
another large grain company, had earlier expressed interest in
the facility, according to Port of Seattle officials, but spokesmen
for the company refused to comment.
BANKING ON THE FUTURES
The issue of concentration in the grain trade, even prior to the Continental purchase by Cargill was promising to become a major issue in the year 2000, when new delivery terms take effect for the Chicago Board of Trade's (CBOT) corn and soybean futures contracts as Toledo, Ohio, will cease being a delivery point for the CBOT contracts, and delivery points will instead be clustered up and down the Illinois River where a large portion of grain facilities, on the northern portion of that river, are owned by Cargill or Continental, and likely will be combined.
In its "Complaint" the DofJ stresses that by consolidating the Cargill and Continental river elevators on the Illinois River, their proposed transaction would concentrate approximately 80% of the authorized delivery capacity for settlement of Chicago Board of Trade corn and soybean futures contracts in two firms. "This concentration," they emphasize, "would increase the likelihood of price manipulation of futures contracts by those firms, resulting in higher risks for buyers and sellers of futures contracts.
For farmers like Floyd Schultz who currently transports his grain by truck just four miles to Lockport, Illinois where he can choose between Cargill and Continental grain terminals, sitting side by side along a canal leading to the Illinois River, the proposed merger of the two grain companies will leave the nearest competitor an Archer Daniels Midland terminal 30 miles and another 10 cents a bushel in shipping costs away. While Cargill could lower its prices and improve its margins, he notes, "we as farmers would be the ones who pay."
In Marvin Hayenga and Robert Wisner's 1998 study, "Cargill's Acquisition of Continental Grain's Grain Merchandising Business," (see above), the authors obvious area of concern at that time was the northern section of the Illinois River. They noted at the time that even if the Continental sale to Cargill was approved, ADM will remain the largest firm on the river, controlling 36% of storage space.
Faced with such a situation Sid Love, analyst with Joe Kropf & Sid Love Consulting Services in Overland Park, Kansas, told the Wall Street Journal that he regrets the possible departure of Continental from the grain market. "My concern is deliveries on the Illinois River," Love said. "Now, you'll basically have two big companies, and if they're both bullish, you won't have any deliveries," since they could export the grain rather than meet contract obligations.
Reacting to the initial announcement of the purchase one Illinois
farmer also speculated that if Continental was unable to
successfully compete financially with other grain trading companies
to the extent that it was willing to sell it's assets to a competitor
why would anyone believe that an independent elevator operator
could achieve success in such a concentrated market?
HIGH COSTS DISCOURAGE COMPETITION
The Department of Justice's willingness to use "throughput agreements" as part of its Cargill\Continental divestiture order has received sharp criticism from Dan McGuire, a member of the American Corn Growers Association and the Nebraska Farmers Union.
McGuire, a consultant on international trade farm policy, points out that the concept of "throughput" arrangements using established export houses is an important one relative to the "additional" concentration of market power "that certainly will take place" with the Cargill\Continental purchase.
By way of example, he recalls recent conversations he had with a European grain trader and a U.S. grain company that he works with and arranges cleaned wheat sales to Europe on a regular basis who seeking anonymity for fear that Cargill's marketing power could impact their businesses negatively. They made the following points:
* Neither Cargill nor the handful of exporters with export houses in the U.S. gulf region want any independent entities competing with them for export business. Consequently they are not going to make it easy or economically competitive for such "independents" to make an export sale using their facilities thus such market concentration inevitably limits the exporting players field.
* Because there are so few export facilities and those few are owned by a handful of companies, it is very difficult for even the established interior grain companies such as co-ops to actually make an export sale. Again, because of the exporting capacity being in the hands of so few, there is typically a lineup of ships waiting to load Cargill's or the others export houses.
* With a lineup of ships keeping their export facilities busy, Cargill is not likely to offer terms for grain, oilseed or processed product throughput to someone they view as a competitor. Asa result, the throughput costs are prohibitive. Consequently, that reduces competition and makes U.S. products less competitive in world markets. The other multinationals who have export houses simply follow suit with Cargill, so that would-be independent exporters who lack their own facilities are simply kept out of the market.
* As a practical matter, a foreign buyer who wants to buy U.S. grain directly from farmers or from organizations that represent farmers find that the throughput costs added on to the costs from the interior making the FOB export price noncompetitive with what Cargill could offer it for. That reality is a direct result of the market power now in the hands of a few multinational exporting firms.
McGuire also recounts a recent conversation with a large Nebraska grain producer who has been directly impacted by Cargill's recent acquisitions of numerous grain elevators in south central Nebraska.
"There is no competition" the producer who choose not to be named told McGuire. He added that he had no choice but to sell his 1998 corn production to Cargill. Previously, he had marketed his grain through the National Farmers Organization (NFO), however, Cargill now owns over 14 elevators in his region and with the Continental purchase will add one more meaning that between 70% to 80% of the market in his market area will be controlled by Cargill.
Often farmer-owned co-ops are forced to sell their grain to Cargill much of the time because of the Company's omnipresent marketing power.
Still another producer, fearful of being named, recounted to
McGuire how he had seen a document that contained Cargill's
plan already in place to purchase a large number of additional
grain elevators in the marketing region.
"THANK GOD FOR THE FREE ENTERPRISE SYSTEM"
In his book of essays Down the Seine and Up the Potomac (G.P. Putnam's Sons: 1977) political humorist Art Buchwald imagined a scenario where two corporations --- Samson Securities and Delilah Company --- asked the head of the Justice Department's Anti-Trust Division if the two companies could merge. At the time Samson Securities owned everything east of the Mississippi River, while Delilah Company owned everything west of the river. Initially, the head of the Anti-Trust Division indicated that he might have reservations about the merger of the only two companies left in the United States.
"Our department," he said, "will take a close look at this proposed merger. It is our job to further competition in private business and industry, and if we allow Samson and Delilah to merge we may be doing the consumer a disservice."
The chairman of Samson protested vigorously that merging with Delilah would not stifle competition, but would help it. "The public will be the true beneficiary of this merger," he said. "The larger we are, the more services we can perform, and the lower prices we can charge."
The president of Delilah backed him up. "In the Communist system the people don't have a choice. They must buy from the state. In our capitalistic society the people can buy from either the Samson or the Delilah Company."
"But if you merge," someone pointed out, "there will be only one company left in the United States."
"Exactly," said the president of Delilah. "Thank God for the free enterprise system."
The Anti-Trust Division of the Justice Department studied the merger for months. Finally the Attorney General made this ruling."While we find drawbacks to only one company being left in the United States, we feel the advantages to the public far outweigh the disadvantages."
"Therefore, we're making an exception in this case and allowing Samson and Delilah to merge."
"I would like to announce that the Samson and Delilah
Company is now negotiating at the White House with the President
to buy the United States. The Justice Department will naturally
study this merger to see if it violates any of our strong anti-trust
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