A Large Trader
Becomes a Monster

Special to The Progressive Populist

Terming the recent announcement by Cargill Inc. of its intention to buy the commodity marketing operations of Continental Grain, "the mother of all mergers," National Farmers Union (NFU) President Leland Swenson, in a recent speech to the North Dakota Farmers Union state convention, called upon President Bill Clinton "to issue an executive order to place a moratorium on approval of all pending and proposed mergers and acquisitions of agricultural interests of significant size until a net farm income study is completed and publicly reviewed."

Meanwhile, USDA Secretary Dan Glickman was talking meekly about "far reaching implications," yet stopping short of opposing the deal. In December the U.S. Department of Justice, whose approval is needed for the acquisition to be completed, began a 30-day review, according to spokeswoman Jennifer Rose.

"Mergers, acquisitions, and alliances are squelching competition in the marketplace," said Swenson. "It is an epidemic sweeping the entire industry, including the seed, chemical, transportation, livestock and grain sectors. The mother of all mergers--Cargill's purchase of Continental Grain--has far-reaching implications for the future direction of crop production and independent family farming."

Cargill Inc., the nation's largest private corporation with revenues of $51.4 billion in fiscal year 1997-98, has announced that it will acquire the worldwide commodity marketing business, including the grain storage, transportation, export and trading operations of the Continental Grain Corporation, the nation's fifth largest private corporation with current revenues of $16 billion. While the terms and price of the purchase have not been disclosed, financial analysts estimate the price will be in the neighborhood of $1 billion. The transaction is to be completed in the first quarter of 1999.

Cargill will add Continental's network of 32 country elevators and 33 domestic river and export terminals to its own organization of more than 200 interior elevators and 40 terminals. This will include a massive infrastructure throughout the Midwest with 27 storage facilities along the Mississippi, Ohio and Illinois rivers, as well as barges that take grain down to the Gulf of Mexico for export. It also owns six export terminals.

Cargill is likewise an international marketer, processor and distributor of agricultural, food, financial and industrial products with some 79,000 employees in more than 1,000 locations in 65 countries and with business activities in 130 more. With the Continental purchase it will transfer ownership of 21 overseas facilities.

According to Cargill board chair and chief executive officer Ernest S. Micek the combined grain operations "will extend farmers' reach" into the world's markets and improve the competitiveness of U.S. agriculture in capturing and holding those markets, which consist of increasingly demanding customers. Further, he explains, the additional infrastructure in the U.S. and worldwide will allow Cargill to add quality and value to farmers' grain and move production to customers more "efficiently and reliably." It will also strengthen the company's abilities in the growing market for identity-preserved and other specialty grains that require dedicated handling, processing and shipping capabilities, he adds.

ALTHOUGH THE COMPANIES involved in this purchase have claimed they operate in a highly competitive market, the reality of the trade in which they operate is quite different. Farmers typically sell their crops to rural grain elevator operators, many of which are owned by cooperatives and small companies. These elevators then resell their grain 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).

These three companies currently own and operate the larger grain elevators, rail links, terminals, barges and ships needed to move grain around the country and the world. It is estimated that Cargill, Continental Grain and ADM presently owns/controls between 70 and 80 percent of the world's grain trade.

Under the Department of Justice guidelines, any market with a Herfindahl-Hirschman Index (HHI) above 1,800 is considered highly concentrated. The HHI 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.

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. Based on a conservative estimate, utilizing the best data available, this latest purchase would leave Cargill and ADM alone with an HHI score of 2,500, an increase of 800 from the current three-firm 1700 index.

Further concentration in the grain trade promises to become more of an 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. 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 already owned by Cargill or Continental, and likely will be combined.

The proposed Cargill purchase of Continental's grain operations, if approved, would undoubtedly result in the closing and merging of many local grain elevators that serve as a vital part of rural economies, providing badly needed jobs, wages and revenues that would seriously erode, if not irreparably damage, the health of many of our nation's rural communities.

Currently, numerous rural areas are already experiencing grain storage shortages, resulting in the dumping of millions of bushels of grain on the ground. The shortage has even induced some elevators to charge producers with a "dumping" tax.

The reduction of local grain elevators will also increase producer costs for delivery of grain to the market as well as for storage and transportation. For example, Floyd Schultz currently transports his grain by truck just four miles to Lockport, Ill., where he can choose between Cargill and Continental grain terminals sitting side by side along a canal leading to the Illinois River. This Cargill-Continental sale would leave the nearest competitor, an ADM terminal, 30 miles away and another 10 cents a bushel in shipping costs.

While Cargill could lower its prices and improve its margins, Schultz notes, "We as farmers would be the ones who pay."

THE SHOCK WAVES from Cargill's pending purchase of Continental Grain Company's commodity marketing division may also soon be felt in the meat packing industry.

For some time there has been increased speculation in the industry that ConAgra, the nation's leading meat processor with its Fresh Meats Division including Monfort Beef and Lamb Co., Swift and Co., and ConAgra Poultry Co., is looking for a buyer of its cattle slaughtering operation. Likewise even IBP Inc., the nation's leading meat packer, might be for sale at the right price and terms, although there is also speculation that the Dakota City, Nebraska, headquartered company might be bought up by ADM ("Supermarkup to the World") which currently owns 13.3% of IBP's stock. Together ConAgra and IBP currently control 59% of the meat packing industry. Excel, the Cargill subsidiary, controls 22%.

Already the nation's single top cattle feeder, Continental currently owns and operates six large feedlots--three in Texas and one each in Colorado, Kansas and Oklahoma with a maximum total feeding capacity of 405,000 head and annual marketings to cattle packing plants totaling about 1.1 million head.

In addition, Continental produces more than two million hogs annually, mainly at its Missouri-based unit Premium Standard Farms. It also boasts of a huge poultry division, producing 1.2 billion pounds yearly of fresh poultry. In addition to also being active in aquaculture its has its own big animal feed and nutrition subsidiary, Wayne Feeds, which enables it to easily integrate production in its meat businesses.

Following the announcement of the Cargill sale, Continental chairman Paul Fribourg, in explaining the deal, made clear that Continental would be open to expanding its meat businesses. "Domestically, we will continue to integrate further up the food chain to obtain a greater share of the added-value portion of the business." He said that his firm would continue that integration "through acquisitions, investments and strategic partnerships."

At the same time, Reuters News Service reports, Continental spokesman Seth Tandlich emphasized that both Continental's pork and poultry operations already include slaughtering and processing but he declined to comment on any specific intention to move in the same direction in beef by acquiring a slaughter and processing plant. "We will be pursuing opportunities for growth in all of our existing agribusinesses, including pork, poultry and cattle," he said.

Currently the nation's family farmers are facing serious financial hardship due to a sharp drop in commodity prices over the past year. This sale would further erode competition in markets where producers are already struggling to get a fair price for their commodities. As a result, an already deteriorating net farm income would continue to degenerate.

Cargill, meanwhile, has repeatedly demonstrated its ability to engage in actions to manipulate and dramatically lower this nation's various agricultural commodity market prices, such as it did in soybeans in the summer of 1997 by threatening and then importing Brazilian soybeans.

Likewise, during the 1985 farm bill debate it announced plans to import nearly one million bushels of Argentine wheat for milling in the United States in what the Wall Street Journal described as an "apparent attempt to pressure U.S. lawmakers into changing farm policy ... a political step designed to pressure farm-state Congressmen who may oppose proposed reductions in farm price supports."

REACTION TO THE Cargill's proposed purchase of Continental was predictable and swift. "This looks to me like a curable merger," according to Ernest Gellhorn, a law professor at George Mason University in Fairfax, Virginia, "I think just a merger in this industry, with consolidation going on ... merits pretty close scrutiny."

A Cargill company official, has told the Wall Street Journal the two grain companies have so little overlap that Cargill expects to continue operating all of Continental's facilities.

Most financial analysts agree that the deal will strengthen Continental Grain's remaining businesses and enhance Cargill's leadership in the grain industry. "They were always a large trader," said Jeffrey Kanter of Prudential Securities. "Now they're a monster trader."

"There's a folklore of exploitation of farmers by grain companies," said C. Ford Runge, a professor of applied economics and law at the University of Minnesota. "But I would say that prices paid to farmers are a function of world prices determined on the Chicago exchanges, less transportation costs. The pricing of grain is quite transparent."

Ridiculous, suggests Dan McGuire, a members of the board of directors of the American Corn Growers Association and Nebraska Farmers Union.

"Cargill and the other multinational grain traders preach to Congress and U.S. farmers that we have to get rid of federal price supports on grain and oilseeds to compete on the world market. Such a 'free market' is an illusion." He points out, "considering that Cargill sits on the Board of Trade and is involved with the 'funds' that impact futures prices and then, also markets both the grain produced in the U.S. and nearly everywhere else in the world."

In recent history Cargill has shown the willingness, the ability, the human and financial resources and the tactics required to deal with appropriate political jurisdictions in implementing its own domestic and internal global trading strategy as demonstrated by the vital role it has played in recent years in crafting the P.L. 480 program ("Food for Peace"), the 1985 "Food Security Act," the North American Free Trade Agreement (NAFTA), the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) and the 1995 "Freedom to Farm" Act.

Many third world and developing countries with unstable economies have had to seek loans through the International Monetary Fund (IMF). When such a country receives an IMF bailout it is then forced to switch production to cash crops for export in order to pay off its debts, often times the bailout money being used to bail out bankers and investors.

Increasingly, it is large private agribusiness corporations like Cargill which not only "trade" those exports, but which also hold a variety of investments in those same countries. The result is that the country ceases to be self-sufficient in food production and subsistence farmers are turned into cheap raw material producers for a giant food manufacturing system producing finished products that neither the countries nor the people living within them can afford.

In the U.S. it is feared by family farmers and such organizations as the NFU that the devastating impact that this sale by Continental to Cargill would only exacerbate the rapidly diminishing number of family farmers. Since 1982 the U.S. has seen an average loss of 85 farmers a day in an already fragile U.S. rural economy where over 88% of farm operator household income is now derived from off-farm income.

A.V. Krebs is author of The Corporate Reapers: The Book of Agribusiness (Essential Books: 1992)

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