EXAMINER                                                                   Issue # 87   August 30, 2000

Monitoring Corporate Agribusiness From a Public Interest Perspective

A.V. Krebs

                                                                      EDITORS NOTE
Due to travel, personal affairs and attending the FarmAid Concert in Virginia on September 17 the next issue of THE AGRIBUSINESS EXAMINER will apear the week of September 18-22, 2000.

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Charging that  top-level executives from Jewel and Dominick's food stores held secret meetings to discuss keeping retail milk prices high a lawsuit has been filed in Illinois’s Cook County Circuit Court claiming that the two companies conspired to keep the price of a gallon of milk $1 higher in Chicago than the rest of the U.S..

Former State Senate President Philip Rock, whose law firm filed the lawsuit  told the Associated Press that the two grocery chains raised the price of milk in Chicago $1 above the national average because they can. Jewel controls 37% of the grocery market in Chicago, Dominick's 26%. The nearest competitor is Cub Foods, with 4.6 percent.

 "If people were mad about gasoline, they're sure as hell gonna be mad about milk," Rock added.

Rock's law firm surveyed 30 Jewel and Dominick's stores in the Chicago area and found every Jewel charged $3.69 for a gallon of Deans milk and 29 out 30 Dominick's charged $3.69 for its own brand of milk. The 30th Dominick's store charged $3.59.

Dominick's and Jewel executives participated in a series of secret meetings and conversations during which retail milk prices were discussed and agreed to, according to the suit. The lawsuit seeks class action status and damages for consumers who have bought milk from Jewel and Dominick's.

Representatives for Jewel and Dominick's deny the charges.

The lawsuit also charges both companies let representatives of the other enter their stores with hand-held scanners to record prices.

"That is common in the food industry," Brian Dowling, a spokesman for Dominick's parent company, Safeway, told AP. "We're not fixing prices; we're checking to make sure we're competitive on a very sensitive item. We do key our sensitive items, like milk, to what the competition is doing."

While the price consumers paid for milk dropped about 18 cents a gallon nationally since last summer, the lawsuit charges. In Chicago, the price of milk purchased in Jewel and Dominick's has risen to $3.69 from $3.09 since last summer.

Jewel is owned by Albertson's Inc. of Boise, Idaho, the nation's second-largest supermarket chain. Safeway in the nation's third-largest supermarket group.


Reacting to the news of the Jewel and Dominick’s milk price-fixing suit in Chicago some economists, according to the Wall Street Journal’s Scott Kilman and May Merrick, believe what is happening to milk “is an early sign of how the merger wave sweeping through the supermarket industry might change the way food prices fluctuate.”

Currently, the top five U.S. chains now handle 40% of grocery sales, a share controlled by 10 companies five years ago.

While the price of raw milk nationwide has dropped sharply since 1998, high prices at that time encouraged farmers to expand their herds, resulting in a glut of milk on the market today as Midwestern farmers are being paid the smallest amount for their milk in two decades forcing many family operations to quit dairy farming .

In Chicago, while retail milk prices have been rising, the average price of a gallon of milk in supermarkets across the nation has slipped 6%, or 18 cents a gallon, since January 1999, according to government surveys. But the same survey shows that the price dairy processors are paying farmers for beverage-quality milk has dropped about 26%, or 44 cents a gallon, since January 1999.

And in the same period, the cost of the lower-quality milk used to make cheese has plunged 42%, but the average price of cheese in many supermarkets has hardly fluctuated.

According to Kilman and Merrick the reason that consumers are not benefiting from the milk price drop varies according to region.

“The six New England states, in a move to help the region's dairy farmers, three years ago set a minimum price that processors must pay for milk. With the processors passing this on, New England consumers saw an extra 14 cents tacked on to a gallon of milk, according to a July study by Ken Bailey, an associate professor of dairy policy at Pennsylvania State University.

But Bailey also discovered something having little to do with the states' setting a minimum price for processors. When raw milk prices fell as low as permitted in New England, supermarkets were not cutting retail prices as they did before., consequently  the new store strategy is costing the typical New England consumer an extra 10 cents per gallon on top of the 14-cent increase resulting from the processors' minimum price.

Milk in supermarkets has traditionally been sold with little markup in an effort to draw customers into their stores. Likewise, big grocery chains  have always been slow to pass along lower milk costs to consumers than they have been to raise prices. In recent years giant supermarket chains have sought to transform the dairy section into a profit center.

"A lot of grocers --- perhaps because of consolidation --- have decided milk is no longer going to be a loss leader for them," says Donald Ratajczak, an Atlanta economist who specializes in food prices.

According to USDA surveys, a gallon of milk cost a Chicago consumer an average of $3.32 at large grocery stores a year ago, which is 30% more than the price consumers paid in Milwaukee just 92 miles away and which also gets its milk from the same farms.

In New York, the price of a gallon of milk in Jewel or Dominick's in Chicago would be, as the Empire State is the only state in the country that has a price-gouging law (in this case, one that is designed to stop retailers from selling milk for more than 200% of the price that farmers got paid for producing it).


Consumers advocates have reacted in shock to recently  announced reports that the USDA is discussing the possibility of loosening their new standards for preventing salmonella contamination in ground beef used for the nation's school lunch program.

When asked recently by the New York Times Marian Burros  whether the department was scaling back their standards, Kathleen Merrigan, administrator of USDA's Agricultural Marketing Service, said, "I would  prefer to say we are fine-tuning them." Neither Ms. Merrigan nor anyone else at the department would say what the new standards might be.

Since last June, the department, which provides 70%of the ground beef used in schools, has required that every batch it buys be free of salmonella whereas prior to that time  there were no standards for any pathogens, including salmonella, a bacteria responsible for about 600 deaths and 1.4 million illnesses in 1999.

Since the regulations went into effect, Burros reports, salmonella contamination has dropped by as much as 50% studies show.

“Meat processors complained that the standards were unnecessary,” she adds, “because proper cooking kills the bacteria, and were too difficult to meet. At first many declined to even bid on government contracts for the school lunch program. But the industry ended up with a glut of beef and over the last few weeks more companies have offered their meat for sale.”

Meanwhile, USDA has been able to buy only half the ground beef it needs for the schools, and at about 55 cents a pound more.

Officials of the American School Food Service Association said its members, who are in charge of school feeding programs, are caught  in the middle.

 "We are fully committed to all steps appropriate to ensuring safety of food for kids," Barry Sackin, the association's director of government affairs, said of the salmonella rules. "Our only concern is the precipitous way it has been implemented."

USDA adopted the new specifications after a federal judge thwarted the department's efforts to implement random tests for salmonella at a Texas meat-processing plant. USDA wanted to close the plant, which had supplied as much as 45% of the ground beef used in the school lunch program, after it failed tests for salmonella three times. But the judge said the department did not have the authority to use such tests, which the department has implemented nationwide, and ordered that the plant remain open. There upon Secretary of Agriculture  Dan Glickman canceled the department's contract with the company, Supreme Beef, and adopted the new standards for its ground beef purchases.

On August 1 meatpackers asked USDA to reconsider its testing rules, saying in a letter that the program was "unworkable and detrimental to the agency's commodity procurement program, your agency and the industry.''

Since December the department and meatpackers have been in a dispute  over salmonella testing for all beef sold in the United States.
Some schools "are doing menu changes; some are going to the commercial
market to buy product,'' said Barry Sackin, director of government affairs for the American School Food Service Association. Meat that schools buy from commercial sources doesn't have to meet USDA's new standards

"We do not object to the food safety efforts that the department is making . . . The precipitous nature of this is where the problem lies, not the intent,'' said Sackin.

USDA has said it is confident  that it will obtain enough beef to supply school
needs, according to spokesman Andy Solomon. The department buys about 125 million pounds of beef a year.  "We're committed to procuring high-quality, safe product for use in the school lunch program and other federal feeding programs,'' he added.


After reviewing records covering cases from 1999 through July, 2000 the Des Moines Register’s George Anthan has learned that meat and poultry contaminated with the potentially dangerous bacterias of E. coli and listeria, in some cases, made it to stores and consumers weeks or even months before the public was warned.

Only a small fraction of the adulterated meat was recovered in a number of instances, the review revealed. Both bacteria can cause serious illness or even death. In each case, a public notice was issued by the USDA and the products were recalled.

"The companies don't wait for the test results before products are shipped," said Nancy Donley, a Chicago resident who lost a son to a food-borne illness in 1993. Donley now heads Safe Tables Our Priority (STOP), a group pushing for advances in food safety. Heather Klinkhamer, a STOP board member told a food safety conference recently, "The longer tainted product is in commerce, the higher the probability it will cause harm."

As an example of where meat had long since left a packing plant before consumers were warned about a problem Anthan relates how Oscar Mayer Foods of Madison, Wisconsin packed 28,312 pounds of luncheon meat on Oct. 29, 1998, and distributed the products nationally. Several weeks later, a federal food safety compliance officer took a sample of the packaged  meats following a report of an illness in Kansas City, Missouri.

“The sample tested positive for listeria, a potentially serious disease which can lead to meningitis. It is sometimes fatal in people with weakened immune systems,” he reports.

A public notice and a recall were issued Jan. 15, 1999 --- 2? months after the meat was originally processed. Only 771 of the 28,312 pounds  were recovered.

"Unfortunately, there are times when we discover a need to recall product after the product is, in fact, on the retail shelf," said Charles Gioglio, director of the USDA's recall management division. Gioglio said when the amount recovered is less than the amount recalled, "Some of that product is being consumed by the public. . . . The longer the product has been on the market, the less one would expect to recover."

From 1995 through last year, Anthan adds, almost 60% of the total of 32,000 USDA’s test samples were taken from retail stores.

“But the USDA, armed with new, more sensitive tests, has begun to shift its emphasis to processing facilities where many companies agree to hold  products while test samples are analyzed. So far this year, the USDA says, 3,700 microbiological tests have been conducted in processing plants, compared with 950 in retail stores.


Calling the recently announced purchase of 6.3% of IBP, Inc., the nation’s largest beef processor by Smithfield Foods, the nation’s largest pork processor, “another step toward corporate control of our food supply from gene to dinner table,” the National Farmers Union (NFU) has urged the Department of Justice (DOJ) anti-trust investigation to review the investment.

"This concentration of control further diminishes a waning competitive environment where hog farmers have little power to demand a fair price for their livestock," said NFU President Leland Swenson.  "Four firms now control over half of the of the pork slaughter in this country, with Smithfield being the biggest of all.  Smithfield also controls 70% of the animals they slaughter.”

Virginia-based Smithfield Foods recently acquired 6.3 percent of IBP, which is the next largest competitor in the pork processing industry. Smithfield now joins Archer Daniels Midland (ADM) “Supermarkup to the World” as one of the two major corporate stockholders in IBP. ADM currently holds a 13.3% investment in IBP.

 In addition, in recent months Smithfield has purchased the hog processing operations from Murphy Farms and Carroll Foods, two other pork industry giants.

 "Competition is the basis for ensuring fair markets," said Swenson.  "It is the basis for establishing fair prices for consumers and producers.  We do not believe it is possible for one company to possess such a substantial interest in its chief competitor and maintain an open and competitive marketplace.  Competition is fundamental to agriculture --- and American culture --- and is the reason behind the development of antitrust laws.  These laws must be enforced."

Meanwhile , Smithfield Foods, Inc. has reported record net income of $44.6 million for the first quarter of fiscal 2001; results that compare with $6.9 million in the same quarter of fiscal 2000. The earnings for the current year represented a more than six-fold increase in net income and a more than five-fold increase in net income per share.

Results in the first quarter of fiscal 2001 reflected a strong performance in the Company's Hog Production Group (HPG) which more than offset a  modest loss in the Meat Processing Group (MPG). The combination of  twice as many hogs raised, the result of the Murphy Farms acquisition this past January, and a 41% increase in live hog prices provided the  environment for this strong performance by the HPG.

Smithfield Foods provided the highest total return to shareholders among   food stocks in the last ten years, according to Fortune magazine's "Fortune 500 rankings". With annual sales of $5.2 billion, the Company is the largest  vertically integrated producer and marketer of fresh pork and processed   meats in the United States.

"Smithfield is realizing profits that boggle the mind of market analysts," added Swenson.  "We have nothing against profit and do not intend to begrudge Smithfield of theirs.  Still, we take serious issue with the tactics used to ensure this profit while making it more and more difficult for pork producers to achieve a fair price in the market place.

After listening to testimony that the danger to workers posed by PCBs was the reason state officials had to demolish and replace a 12-story state building next to the Capitol after a 1994 fire, a Philadelphia jury stunned the Monsanto Co. recently by ruling that the company should pay $90 million in damages to the state of Pennsylvania for selling defective and toxic PCBs that left the building contaminated after a 1994 fire.

The state argued that the danger to workers posed by the PCBs was the reason state officials had to demolish and replace the 12-story building. State officials sought more than $200 million in damages to cover cleanup, demolition and replacement costs. Monsanto, which stopped making PCBs in the 1970s, countered that the state was seeking a scapegoat for its own mismanagement of the building and was trying to stick the chemical company with the bill for a modern office facility that was needed anyway.

But, as the Philadelphia Inquirer's Ken Dilanian reports, the 12-member Commonwealth Court jury of six men and six women after a 10 days of deliberations and a 15-month civil trial found Monsanto liable for the contamination.

At the same time they also cleared two other defendants in the case, U.S. Mineral Corp. and Courtaulds Aerospace Inc., of any liability. The state previously reached a $1 million settlement with U.S. Mineral over asbestos in the building.

PCB, a suspected carcinogen banned by Congress in 1976, was present  in glue used in the ductwork of the 30-year-old Department of Transportation headquarters. Elevated levels of PCBs were discovered  only after the fire, and state officials cited the contamination as a reason for their decision to demolish the building in August 1998.

Kenneth McClain, a Kansas City, Missouri. litigator who tried the case for the state, said the verdict made history as the first time Monsanto had been held liable for PCB contamination in a building. The case was also unusual in that it was brought by a state government, he said.

"This is a very historic case," he told Dilanian, "one which establishes an incredible precedent: that Monsanto is responsible for PCB contamination, which for years they have ignored and denied all over the country."

Monsanto's lead defense lawyer, Thomas Goutman, said the company would appeal the jury's decision to the trial judge. He said the company  also might seek state Supreme Court review of the judge's decision to  allow the state to seek replacement costs for the building, which Monsanto believes is contrary to state law.

Three jurors interviewed after the verdict said that no one on the panel  believed Monsanto's contention that PCBs in the office building were not  a human health risk. The jurors said they considered $90 million a compromise verdict.

More “legal problems” for an already suit-plagued IBP Inc., often referred to as the nation’s number one “corporate outlaw,” came last week when a federal appeals court affirmed a $10.9  million damage award against the nation’s largest meat packer for allegedly  stealing trade secrets from a pizza-topping rival.

The appeals court also ordered a trial on related claims by a sausage-toppings  maker against Pizza Hut, a unit of Tricon Global Restaurants Inc.  An  attorney for the plaintiff, C&F Packing Co. of Chicago, said damages in that  case could exceed $120 million if his client won.

Both cases involve the sale of Italian sausage toppings to Pizza Hut. IBP replaced C&F as a supplier in the early 1990s after C&F had agreed to share its production method with other companies under confidentiality agreements  at Pizza Hut's behest, C&F's attorney, Raymond P. Niro of Chicago, told Dow  Jones Newswires Richard Gibson

In 1998 a jury found that IBP had illegally used the information to make  toppings for Pizza Hut and  the U.S. Circuit Court in Washington  concurred. It also ruled that dismissal of Pizza Hut from the case had been  premature and ordered the new trial. Niro applauded the court's decision, and said that "forcing Pizza Hut to  account for itself at trial is a real victory for us. Pizza Hut was the  mastermind behind IBP's misappropriation."

IBP spokesman Gary Michelson said the Dakota Dunes, S.D., meatpacker was  "disappointed with the ruling and the court's decision to ignore our side of  the story." He said IBP had "worked extremely hard to succeed in the  precooked pizza toppings business. We did not need, nor did we take, any  information from C&F."  He told Gibson that the company was reviewing the ruling and hadn't decided whether to appeal it to the U.S. Supreme Court.


Investor concerns that retail giant Wal-Mart Stores Inc. is positioning itself to crush competitors in the grocery industry, just as it squeezed the profits of retail rivals like Kmart Corp. and Sears, Roebuck and Co. was underscored last week when  Albertson's, one of the nation's largest grocery operators, warned that its earnings for the fiscal second quarter ended August 3 will be well short of expectations, and that earnings in the near future also will be lower than anticipated.

Responding to the news, investors engaged in a high-volume sell-off that sent shares of the Boise, Idaho, company to a new 52-week low, losing $3.69, or 14%, to $22.75 on the New York Stock Exchange, on top of a more than 15% loss the preceding day.

And as the Chicago Tribune’s James P. Miller reported  Albertson's woes battered stocks of its rivals as well: Shares of Pleasanton, California.-based Safeway Inc., one of the nation's largest grocers, fell $1, or nearly two percent, to $51. Shares of Cincinnati-based Kroger--which recently reiterated that it was comfortable with analyst estimates for its earnings --- fell more than three percent, and other grocery companies, including A&P and Delhaize America Inc., also declined.

While Albertson’s says the company's profits are being squeezed by several factors, including higher labor costs and temporary  expenses associated with its ambitious growth-through-acquisition strategy it concedes another factor hurting its earnings was the "significant market-entry activity by competitors" in a number of key marketplaces.

 "Let the Share Wars Begin," wrote UBS Warburg analyst Neil Currie, in a report that downgraded the entire food-retailing sector. Albertson's earnings disappointment, the analyst said, represents a "warning of things to come" for the grocery industry.

The news from Albertson's shows, Currie contended, that "competitive pressures in the U.S. food retailing market are heating up even faster than we thought, as Wal-Mart continues its aggressive coast-to-coast rollout of superstores."

In the latest quarter, Albertson's sales proved most disappointing in markets in Idaho, Utah, Montana, Wyoming and South Dakota, the analyst noted, adding that he considers it "no coincidence" that those are regions where Wal-Mart has recently stepped up its drive into grocery sales.

As Miller points out “In recent years, the once-fragmented industry has undergone a dramatic consolidation, with Albertson's, Kroger, Safeway,  and Great Atlantic & Pacific Tea gaining economies of scale by snapping up regional chains, using volume to achieve growth in an industry with historically razor-thin profit margins. With their purchasing muscle, the national grocery chains have been able to squeeze lower prices from food suppliers, helping hold down prices for consumers.”

But even as they grow, Miller relates, they face a growing threat from Wal-Mart, the hugely successful Bentonville, Arkansas-based discount merchandiser. Wal-Mart operates the Sam's Club warehouse stores, and for more than a decade has been building a swelling number of "superstores," that boast a conventional Wal-Mart side by side with a low-price Wal-Mart food store.

“It's a potent combination, with heavy customer traffic for the merchandise store feeding sales at the grocery outlet. To date, the push has been focused in more rural areas, Wal-Mart's traditional core market,” he adds.

“Although Wal-Mart's designs on the national food-retailing sector helped drive grocery chains into the recent frenzy of mergers, even the bulked-up national chains are expected to be vulnerable to the Arkansas company once it eventually gains enough critical mass.”


The Corporate Agribusiness Research Project (CARP) web site now contains a
streamlined search engine which will not only allow viewers to  find needed
information by  simply using key words, but they will be able to also access  Issues #1 through  #77 of THE  AGRIBUSINESS EXAMINER.

The CARP web site, which is now posted on the World Wide Web, features: THE

THE AGBIZ TILLER, the progeny of the one-time printed newsletter, now
becomes an  on-line news feature of the Project. Its initial essay concerns one Hillary Rodham  Clinton,  the Democratic Party candidate for a U.S. Senate seat in New York State.

available  through THE AGBIZ TILLER you'll learn some of the messy details behind her cattle  futures "miracle." You will also find in this section the archives for past editions of  the THE  AGBIZ TILLER.

In "Between the Furrows" there is a wide range of pages designed to inform  and
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