Lady Justice Lives!

Michael Andreas, 49, on leave as executive vice president of ADM; Terrance Wilson, 60, retired head of ADM's corn-processing unit; and former ADM biochemist Mark Whitacre, 41 have been convicted by a Chicago federal jury of conspiring with competitors to fix the price of the feed additive lysine.

They face a maximum three-year prison sentence and at least a $350,000 fine.

"This was a crime of greed--a crime by an extremely large corporation that wanted to make even more money at the expense of their customers," U.S. Attorney Scott Lassar told the Associated Press..

After hearing six weeks of testimony, the U.S. District Court jury deliberated four days before returning the guilty verdicts. Andreas is the son of Dwayne O. Andreas, the long-time "good friend" of the politically powerful and chairman and founder of ADM, "Supermarkup to the World," headquartered in Decatur, Illinois. In 1995, the company itself pleaded guilty to price-fixing involving lysine and another substance, citric acid. It paid a $100 million fine, the largest in U.S. history.

Michael Andreas' attorney, John Bray, throughout the trial continually reminded the jury that it is legal for competitors to exchange information about prices and quantities. In his closing arguments, Bray showed the jury several snippets of tape transcripts, culled from over 200 hours of audio and video tape, in which Andreas repeatedly said ADM "doesn't make deals."The rest of the conversations with competitors, Bray said, were a lot of "bluster and bluffing." Nice try, Mr. Bray!

Lassar, his staff and prosecutors from the U.S. Justice Department using the tapes and documents from ADM and competitors, particularly the Tokyo-based Ajinomoto Co. Inc., contended that the three ADM executives used the same model that an ADM employee testified had been designed to fix prices for citric acid--a model he said was masterminded by Wilson.

Lassar showed the jury video tape, notes and charts that he said proved that ADM agreed that it would have a 27% share of the world's $600 million lysine market in 1994--a target that he says the company hit within tenths of a percentage point.

Reed Weingarten, Wilson's lawyer, told the jury that his client met with competitors in order to get information from a tight-knit "Asian cartel" (as opposed to the "American cartel"?) that had controlled the lysine market for years. He said Wilson may have offered information about prices and production and sales volumes, but said that on purpose much of that information was incorrect.

Not Business Ethics 101

Aside from the verdict in the ADM case, which some have called the best-documented corporate crime in American history, the trial provided an

interesting peek into the world of corporate speak.

"This is not Business Ethics 101. This is how you deal in the real world. That's how Dwayne Andreas told Terry Wilson to do business. This is how you deal with the real world. You have to mislead the competition," Reed Weingarten told jurors in his closing argument. In reality, competitors lied to each other routinely, but Weingarten told jurors that no price-fixing agreements were made. Weingarten is now defending former USDA Secretary Mike Espy amid allegations that he took gifts from lobbyists and companies he regulated and is currently on trial on 38 felony counts of corruption.

Earlier in the ADM trial Weingarten told jurors in an opening statement, "there was bluffing; the philosophy here is to hold your competitor's hand so you don't get stabbed in the back." And it was Mark Whitacre who recalled that also within the ADM family it was common to hear the advice that "the competitor is our friend and the customer is our enemy."

During the Andreas-Wilson-Whitacre trial, one of the tapes showed executives from rival livestock-feed market companies meeting secretly in an Atlanta hotel under cover of a trade show getting ready to talk prices when they hear a knock on the door. "Yes? FTC?" jokes Ajinomoto Co. executive Kanji Mimoto, in a guilty reference to regulators at the Federal Trade Commission. As it turned out, Mimoto wasn't far off. An FBI agent posing as a bellhop was delivering a bugged briefcase to the private room, while his colleagues were recording the meeting with a hidden video camera.

As Greg Burns has written in the Chicago Tribune, "The ADM trial tapes reveal a casual disregard for the rules of commerce that seems to confirm the worst suspicions about big business. The jet-set life of executives at powerful global companies is cast in a dark light, giving the impression that lawlessness is a routine part of doing business on the world stage."

Waiting for Dan Glickman

It came as no surprise to independent cattle ranchers or family farmers that a controversial cattle marketing practice costs them tens of millions of dollars each year, according to an economic analysis released by the Western Organization of Resource Councils (WORC).

The organization of cattle ranchers and family farmers believes the analysis gives Secretary of Agriculture Dan Glickman more than enough evidence that he needs to restrict the use of the marketing practice, called "captive supplies" by ranchers.

Eighteen months ago, the United States Department of Agriculture asked for public comment on a "petition for rulemaking" filed by WORC. The petition asked USDA to limit the use of "captive supplies" of cattle by beef packers. Cattle that packers own and feed in their own feed lots are called "captive" because the packers control them.

Packers also sign contracts with feedlot owners to buy some or all of their cattle, which are also called "captive." Many farmers and ranchers say that beef packers' use of captive supplies limits open competition and lowers the price they get for their cattle--without lowering the price of beef to consumers.

At the present time the USDA is still considering new rule-making power based on proposals submitted to it by WORC that would 1) disallow formula or basis pricing on forward contracted slaughter cattle; 2) require that forward contracts be offered in an open, public manner, and 3) require that packer-fed cattle be sold on an open, public market.

Currently, beef packing companies can take such cattle without ever bidding in open markets, such as livestock sale barns. By keeping their packing plants full for days and weeks at a time with such "captive supplies" they can easily force open market prices (or "cash" market prices) down by simply not buying for long periods.

Currently, with the huge numbers of cattle that are fed by the major meatpackers plus non-negotiated formula cattle, there is little interest left in their competing in the cash market. An independent analysis published recently by Les Messinger, Market analyst for Barnes Brokerage in Chicago, shows conservatively that the cattle producer has lost $220 per head since the growth in captive supplies (March, 1994) and the loss of competition among the big three packers, IBP, Cargill and ConAgra, who today currently control over 81% of the beef slaughtering industry.

The recent analysis, prepared for WORC by agricultural economist Catherine Durham of Oregon State University, uses information in a study done for USDA to estimate how much the use of captive supplies lowered prices paid to cattle producers. The total impact of captive supplies on cattle prices was between $51.9 million and $527 million, according to Professor Durham's analysis. The difference in the numbers depends on which of several models in the USDA study is used, and on other assumptions needed to make the estimate.

"USDA officials have denied that there is evidence of harm to cattle producers from captive supplies," said Tom Breitbach, a Circle, Montana, farmer speaking for WORC. "This analysis by Dr. Durham shows there is evidence of significant harm to producers. If USDA won't act with this evidence, what on earth good is it?"

Meanwhile, back at the USDA corral Glickman has met with a bipartisan group of U.S. senators to discuss legislation that would require that meat be labeled as domestic or imported. A memo circulating within the USDA's leadership ranks recently caught the attention of some agricultural groups. The memo expressed some USDA officials' opposition to the meat-labeling provision because it could cost the government $60 million a year to enforce and could hurt U.S. exports.

Glickman has told reporters that he is willing to work with lawmakers to reach a sensible plan for meat labeling, as long as the plan would not distort trade.

More Grapes, More Wrath

Once again farm labor contractors have been found in violation of farm worker protection laws. This time a widespread federal investigation of California's grape vineyards shows that nearly 80% of the labor contractors used by grape growers violate farm worker protection laws, failing to meet minimum wage and other workplace guidelines.

The violations range from not posting worker protections to using underage and underpaid workers and having unsafe housing and transportation.

"Nothing like this has ever been done to focus on the industry," said George Friday Jr., acting regional administrator of the U.S. Department of Labor's wage and hour division in San Francisco. The Labor Department has levied $43,200 in civil penalties and awarded $39,654 in back pay to 369 workers as a result of its first in-depth inspection of the nation's wine producing business.

The Labor Department focused on California because it provides the best snapshot of the grape growing industry, leading all states with 8,012 vineyards and $2.1 billion in annual receipts.

The charge against the labor contractors is not a new one. Farm labor contractors, or "crew leaders," as they are sometimes known on the East Coast and in the Midwest, are usually persons who recruit workers for a grower and then subsequently will often "care for" and yet at the same time "shake down" the workers, not unlike the manner in which pimps handle their prostitutes.

Recognizing the abuses of farm labor contractors the federal government has sought to regulate their behavior for over the past 35 years, beginning with the passage of the Farm Labor Contract Registration Act of 1963. But because it is seldom enforced it has had only a minimal effect on the lives of farm workers. An amended act in 1974 sought to broaden its coverage and enforcement capabilities.

It was not until in the early 1980's, however, after negotiations between farm workers and farmers that one of the few consensus farm labor bills in history was enacted in 1983. The Migrant and Seasonal Agricultural Worker Protection Act switched emphasis from registering farm labor contractors to protecting migrant and seasonal farm workers.

While progressively stricter regulation in recent years was expected to diminish contractor activity it has been expanding despite enforcement efforts indicating that more than half of all contractors investigated are violating at least one provision of the 1983 act. Despite criminal fines of up to $10,000 and three-year prison terms and civil fines of $1,000 per undocumented worker, estimates indicate that many contract crews are 30% to 60% illegal alien workers.

It was an angry Cesar Chavez, founder and long-time president of the United Farm Workers (UFW) who once declared: "I would rather that there be no union at all than to recognize the rotten contractor system."

Snap, Pop and Crackle

Kellogg Co., the nation's largest cereal manufacturer, in two short weeks in September lost two of its top executives. First, it was Donald Fritz, president of Kellogg Europe and then the president of its flagship North America division, Thomas Knowlton, resigned.

The shake-up, according to the Bloomberg News Service, at Battle Creek, Michigan, is the latest fallout from the company's struggle to reignite its sales and earnings and to halt a decade-old slide in its share of the U.S. cereal market.

Currently Kellogg is still the nation's biggest producer of ready-to-eat cereal; however, its share of the U.S. cereal market has dropped to 32% from 41.4% a decade ago, according to Information Resources Inc. (IRI), a research firm in Chicago, with General Mills closing in on Kellogg's lead.

At the present time four firms control 88.5% of the U.S. cereal market. The U.S. market share is Kellogg: 32%; General Mills: 31.3%; General Foods (Post): 16.4%; Quaker Oats: 8.8%; Store brands: 7.8%, and other: 3.7%.

The Department of Justice uses the Herfindahl-Hirschman Index ("HHI") to measure concentration. It is calculated by taking the sum of the square of market shares. A monopoly is 100 squared, or 10,000. Ten firms, each with 10 percent, would be 10 times 10 = 1,000. A duopoly with equal shares would be 50 times 50 = 5,000. Because small shares don't add up to much, even when squared, it is pretty safe to ignore them.

The Department of Justice Antitrust guidelines consider an industry with an HHI of 1,000 or less to be competitive, and an HHI of 1,800 or more to be pretty concentrated. An increase in the HHI of 100 is considered important enough to trigger a merger review.

The concentration index for the cereal industry, based on the HHI formula, in 1996 was 2084. Today it is 2350.09.

The cereal business in the U.S. is an $7 billion annual market. The U.S. cereal market is also probably THE most profitable sector of corporate agribusiness. The average annual return on equity (profitability) from 1993-1997 for the four largest cereal manufacturers was: Quaker Oats 28.9%, Kellogg's 24%, General Mills 25.2%, and Philip Morris 22%.

A.V. Krebs is Director of the Corporate Agribusiness Research Project, P.O. Box 2201, Everett, Washington 98203-0201; e-mail:

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