Ag Mergers Prompt Call for Moratorium

Alarmed over the growing corporate concentration in agribusiness and recognizing that such concentration is seen by family farmers and farm organizations as agriculture's number one problem today, Senator Paul Wellstone (D-Minnesota) has introduced the Agribusiness Merger Moratorium Act of 1999.

Wellstone's legislation, co-sponsored by Senators Byron Dorgan (D-North Dakota), Tom Daschle (D-South Dakota), Tom Harkin (D-Iowa), Russ Feingold (D-Wisconsin) and Tim Johnson (D-South Dakota) would impose a moratorium on mergers and acquisitions among agribusinesses with annual net revenue or assets of more than $100 million for one party, and $10 million for the other. The moratorium would remain in effect for 18 months, or until Congress enacts legislation to address the problem of concentration in agriculture, whichever occurs first.

The legislation also would establish a federal review commission to study and make additional legislative recommendations regarding concentration in agriculture.The commission would consist of 12 members, including four farmers. Members would be appointed by the leadership of both houses.

"The current system is failing America's family farmers, that's certain," says Wellstone. "We need to restore competition to the marketplace by reversing the trend towards concentration and by putting a stop to anti-competitive practices in the agricultural sector. Until Congress develops a long-term solution to this problem, we need immediate action in the form of a moratorium on new mergers and acquisitions among large agribusinesses. While a long-term solution to the growing problem of concentration in agriculture may take time to enact, Congress can and must take action now."

The recent increase in merger and acquisition activity such as Cargill acquiring Continental Grain's grain merchandising division, Smithfield Foods buying up Murphy Family Farms and Tyson Foods Pork Group, Farmland Industries and Cenex merging, Monsanto's purchase of Dekalb and its pending acquisition of Delta Pine & Land Co., DuPont's purchase of Pioneer Hi-Bred, the Union Pacific and Southern Pacific Railroad merger, and a pending deal between farm implement manufacturers New Holland and Case and anti-competitive practices such as Archer Daniels Midland (ADM) pleading guilty to price fixing in the feed additive market has all undermined the marketplace competition farmers depend upon to get a fair price for their production.

For Sen. Dorgan, the "last straw" was the merger between the nation's two largest grain exporters, Continental Grain Co. and Cargill Inc., which left little competition in that sector. He said that the freedom to farm is becoming "the freedom to farm in a marketplace that is now controlled by monopolies." This legislation is "an attempt to see if we can't put a stop to the increased concentration," Dorgan said

For family farmers throughout the nation the crucial issue that is today depressing them to the point of near hopelessness is the rapid corporate concentration within agriculture as exemplified by the announced Cargill and Smithfield purchases.

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.

Recently, in an attempt to force the Department of Justice anti-trust division to conduct a more thorough investigation of the Cargill/Continental sale a grassroots effort was launched to forestall the Department of Justice from submitting its "Final Judgment" for final approval to presiding U.S. District Court Judge Gladys Kessler.

And 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, 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."

Likewise, in a recent letter to Roger W. Fones, Chief of Justice's Transportation, Energy & Agriculture Section of the Antitrust Division, the Organization for Competitive Markets' (OCM) Jon Lauck wrote that Cargill's acquisition would unify the second and third largest grain traders in North America, which export 40 percent of American agricultural commodities.

Specifically, Lauck, the author of an article entitled "Toward an Agrarian Antitrust," in the 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.

"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.

"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," Lauck's letter warns.

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). These companies 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 overemphasized. As the respected University of Missouri rural sociologist William Heffernan points out, 75 percent 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.

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.

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 includes 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 percent of all corn and soybean purchases in these markets as Cargill alone accounts for about 44 percent of all soybean purchases and 23 percent of all corn purchases. Continental, in a joint venture with Cenex Harvest States, accounts for about 50 percent of all soybean purchases and 30 percent of all corn purchases in the same port range.

After the proposed acquisition, Cargill would have accounted for about 94 percent of Pacific Northwest soybean purchases and about 53 percent 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.

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. If, hypothetically, one independent corporation should buy all those elevators covered by the divestiture order their combined storage capacity would be but between 3 and 4 percent of Cargill's storage capacity and a similar percentage of ADM's ("Supermarkup to the World") total storage capacity.

Surprisingly, the DofJ's divestiture drew initial praise from National Farmers Union President Leland Swenson. "We commend the Justice Department's recognition that this merger, as originally proposed, would have gone too far. The department's careful consideration of the merger and its impact on farm income sends a strong signal to the industry that they can't just go out into the countryside and buy up markets. It is important to know that the administration is watching the situation in rural America and won't stand idly by when farmers face anti-competitive prices."

However, immediately prior to the closing of the public comment period on October 12 the NFU urged Judge Kessler to reject the agreement saying that the deal would adversely impact net farm income. NFU, echoing the OCM, said, "even with the divestitures, the deal is still too large to avoid having a chilling effect on market competition for producers selling grain.This merger cannot be in the public interest because there is no way it will increase competition to either farmers or ranchers or the general public. It must be stopped."

NFU also said the mandated divestitures would be difficult to enforce. "There is no guarantee a buyer can be found for these divestitures. Moreover, there is no guarantee a buyer will be in a position to compete with a firm the size of Cargill," Swenson stated. "There are no safeguards for competition."

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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