Agbiz Gets Vertical; Bad News for Farmers

No matter where you go today in rural America the two things that most concern commercial family farmers are price and concentration &emdash; a fair price for what they produce and the increasing concentration one sees in corporate agribusiness.

Concentration has several different forms, however, which need to be studied and carefully addressed by both farmers and anti-trust advocates.

In undertaking such an effort the movement needs to realize that economic concentration within the food industry is not simply found in examining market shares or market concentration, but rather can also be found in vertical concentration, conglomerate concentration and aggregate concentration.

Clearly corporations possessing large market shares have become the most visible form of economic concentration today. One has only to talk with the nation's beleaguered independent cattle and hog producers facing a beef packing industry where four firms &emdash; Tyson's, Excel, Cargill's subsidiary, ConAgra and Farmland National Beef Pkg. Co. &emdash; control 81% of the industry and where four firms &emdash; Smithfield, ConAgra [Swift], and Cargill [Excel] &emdash; control 59% of the pork slaughter to hear the dire consequences they face in trying to survive.

Consumers, meanwhile, can testify to the consequences of four firms [Kellogg, General Mills, General Foods (a "subsidiary" of Philip Morris, the nation's number one food manufacturer), and Quaker Oats] controlling 88.5% of the ready-to-eat cereal market where they are forced to pay ever-esculating prices to a $7 billion annual market while the average annual return on equity (profitability) from 1993-1997 for the "Big Four" was: Quaker Oats 28.9%, Kellogg‚s 24%, General Mills 25.2%, and Philip Morris 22%.

In January, 1999 testimony before the US Senate Agriculture Committee hearings on concentration in agribusiness, C. Robert Taylor, Alfa Eminent Scholar and Professor of Agriculture and Public Policy at Auburn University, testified about the implications for the agriculture economy of general trends in vertical integration and market concentration in agribusiness.

Among his findings were the fact that since 1984 the real price of a USDA market basket of food has increased but 2.8% while the farm value of that food has fallen by 35.7% and that a "widening gap" between retail price and farm value also exists for the components of that market basket, specifically meat products, poultry, eggs, dairy products, cereal and bakery products, fresh fruit and vegetables, and processed fruit and vegetables.

By way of illustration, between 1980 and 1996 in choice beef that gap widened by 42.4%, in pork it widened to 74.6%. In a one-pound loaf of wheat bread the gap from 1970 to 1996 was 238% and the gap in one pound of oranges from 1982-1996 was 59.8%, to name a few commonly purchased items.

It is when one looks at return on investment (equity) that the true picture begins to emerge as to who profits and who pays when it comes to the food we eat. During the 1990's, Professor Taylor points out, the rate of return on investment for retail food chains was 18%, for food manufacturers the rate of return was 17.2%, for agriculture banks it was 10.8% and for farming the rate of return from current income averaged 2.38%. USDA figures reveal that from 1995 through 1999 the rate of average return to farmers was 2.11%!

Looking carefully at Professor Taylor's testimony it is noted, buried in a footnote, that "the average return to farming may actually include a return to integrators and non-family corporations, thus overstating returns to farmers, per se."

He goes on to point out that not only would retail food prices be relatively lower if markets were more competitive, but with the high profitability of concentrated agribusiness attributable to market power or to the realizing of economies of size it would permit such corporations to invest in product development "which might eventually benefit food consumers."

Outside of developing agricultural biotechnology and genetically modified organisms (GMOs) in food we see very little of the type of "product development" that Professor Taylor speaks about. Rather we see large amounts of money being spent on packaging, food advertising ($11 billion spent in 1996 compared with $8.4. billion in 1991) and corporate agribusiness's merging and acquiring to the extent that food manufacturing remains one of the most leveraged industries in the US economy.

Vertical integration as a form of economic concentration has been for a number of years and continues to be clearly evident in agriculture and the food industry, particularly in the fruits and vegetable sectors having seedling to supermarket control of various agricultural commodities. No better example though of such vertical concentration exists today than ConAgra, the nation's second largest food manufacturer, who boasts of producing food "from the ground to the table."

Conglomerate concentration can be defined simply as the possession of a large share of a given industry's resources or activity by companies that are primarily engaged in other industries, but are not suppliers or users of the given industry's products. Two of the nation's three largest food manufacturers, tobacco companies Philip Morris and RJR Nabisco are prime examples of this form of economic concentration.

Finally, we have aggregate concentration, which as John D. Blair, former chief economist for the US Senate Anti-Trust and Monopoly Subcommittee, showed in his landmark work, "Economic Concentration: Structure, Behavior and Public Policy" [Harcourt Brace Jovanovich, Inc.: 1972] has a distinct effect on market behavior since it is based on what can be referred to as "communities of economic interest."

"Through such communities revolving around powerful family and financial groups, clusters of great corporations are said to be related by interlocking directorates, intercorporate stock holdings, historical relationships, and other means." Such concentration in corporate agribusiness, because it relies so heavily on natural resources such as land, water, energy, etc. and increasing amounts of capital, is widespread, if not endemic.

Blair notes: "The effect of such communities, it is contended, is to bring about greater cohesiveness and unity of action than would otherwise be the case. Control is sufficient to prevent any member of a community from undertaking a course of action which, though beneficial to itself, would be harmful to other members of the community. The inevitable result is a lessening of the potential for independent, competitive behavior."

In 1978 my Agbiz Tiller newsletter published an examination of 21 major US corporations involved in corporate agribusiness ("Club 21") and discovered an incredible concentration of decision-making power and a significant pattern of mutual corporate ownership.

The figures were derived from a study by the Corporate Date Exchange Center of New York for the US Senate Committee on Government Affairs' Subcommittee on Reports, Accounting and Management.

To comprehend the relationship between these corporations, whose combined 1977 assets totaled more than $25 billion, it was necessary to understand the terms "direct interlock" and "indirect interlock through an intermediate corporation."

A "direct interlock," for example, is John Bigbucks who sits on the board of directors of Bank A at the same time he serves as a board member for Corporation B and C. An "indirect interlock through an intermediate corporation" is John Bigbucks sitting on the board of Corporation D along with Mary Bigdoe of Bank B. Thus, there is an "indirect interlock" between Bank A and Bank B through the "intermediate corporation" Corporation D.

Examining all the agribusiness corporations in the "Club 21," the Tiller found an astonishing total of 53 "direct interlocks" and 1,038 "indirect interlocks" through 801 intermediate corporations.

The alarming degree of concentration within corporate agribusiness was recently highlighted in a report conducted for the National Farmers Union by Drs. Mary Hendrickson and William Heffernan from the University of Missouri. The statistics revealed ever increasing concentration in most agricultural markets.

In addition to showing that the top four beef packers dominated 81% of the market and four pork packers controlled 59%, the study revealed that Tyson and ConAgra were listed among the top four in all three meat groups. Cargill was named in two of the three groups.

"Although these concentration percentages are staggering by themselves, they inadequately reveal the extent of vertical integration occurring in the food system or the complex web of interaction among the top firms," past NFU president Leland Swenson noted in reacting to the Hendrickson-Heffernan report.

The same three grain giants &emdash; Cargill-Continental Grain, Archer Daniels Midland (ADM) and Zen Noh (a Japanese company) &emdash; were shown in the study to control 81% of the corn exports and 65% of the soybean exports. ADM and Cargill were also among the top four in terminal grain handling, flour milling, soybean crushing and ethanol production.

Swenson pointed out that the only agricultural sector not increasing in concentration was ethanol production. The ethanol concentration ratio decreased from 67% among the top four producers in 1999, to 49% percent.

According to Swenson, the recently-passed Senate farm bill includes provisions to somewhat remedy the growing concentration trends including:

• Prohibiting large meatpackers from owning livestock more than 14 days prior to slaughter;

• Mandatory country-of-origin labeling of fresh produce, meats, peanuts and farm-raised fish;

• Protection for producers in agricultural contracts by prohibiting confidentiality clauses;

• Capped EQIP funding for corporate confined animal feeding operations, and

• A ban on mandatory arbitration for farmers seeking legal recourse in contractual situations.

NFU is urging the Senate Judiciary Committee to hold a hearing on the lack of competition in agricultural markets.

According to the Henrickson-Heffernan "Concentration of Agricultural Markets" the concentration ratio (relative to 100%) of the top four firms in specific food industries include:

• Beef Packers: 81% (Tyson [IBP], ConAgra Beef Cos., Cargill [Excel], and Farmland National Beef Pkg. Co.)

• Pork Packers: 59% (Smithfield, Tyson [IBP], ConAgra [Swift], and Cargill [Excel]

• Pork Production: 46% (Smithfield Foods, Premium Standard Farms [ContiGroup], Seaboard Corp., and Triumph Pork Group [Farmland Managed]

• Broilers: 50% (Tyson Foods, Gold Kist, Pilgrim's Pride, and ConAgra)

• Turkeys: 45% (Hormel [Jennie-O Turkeys], Butterball [ConAgra], Cargill's Turkeys, Pilgrim's Pride)

• Animal Feed Plants: 25% (Land O'Lakes Farmland Feed LLC\Purina Mills, Cargill Animal Nutrition [Nutrena], ADM [Moorman's], and J.D. Heiskell & Co.)

• Terminal Grain Handling Facilities: 60% (Cargill, Cenex Harvest States, ADM, and General Mills)

• Corn Exports: 81% (Cargill-Continental Grain, ADM, and Zen Noh)

• Soybean Exports: 65% (Cargill-Continental Grain, ADM, Zen Noh)

• Flour Milling: 61% (ADM Milling, ConAgra, Cargill, General Mills)

• Soybean Crushing: 80% (ADM, Cargill, Bunge, and AGP)

• Ethanol Production: 49% (ADM, Minnesota Corn Producers [ADM has 50% equity stake], Williams Energy Services, and Cargill)

• Dairy Processors: (Dean Foods [Suiza Foods Corp.], Kraft Foods [Philip Morris], Dairy Farmers of America, Land O'Lakes)

• Food Retailing: 38% (Kroger Co., Albertson's, Safeway, Wal-Mart, Ahold)

As the late Dr. John Helmuth, Adjunct Associate Professor and Assistant Director, Center for Agriculture and Rural Development, Iowa State University, Ames, Iowa commented several years ago:

"When fewer and fewer individuals make more and more of the economic decisions, whether those individuals are in government or big business, the result is anti-competitive, inefficient and harmful to the 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 the society as a whole.

"There is an even great irony in the principal advocates of centralized economic planning &emdash; the Soviet Union and Eastern European countries &emdash; 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."

Next Issue: Concentration and the History of Anti-Trust Legislation

A.V. Krebs operates the Corporate Agribusiness Research Project, P.O. Box 2201, Everett, WA 98203-0201; email; web

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