Ten Reasons to Worry about Food System Mergers, and What Farmers Must Do in Response Richard A. Levins Professor Emeritus Department of Applied Economics University of Minnesota

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Ten Reasons to Worry about Food System Mergers,
and What Farmers Must Do in ResponseRichard A.
LevinsProfessor EmeritusDepartment of Applied
EconomicsUniversity of Minnesota
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• A word of caution
• We will always need the services provided by
  agribusiness and food retailers.
• In talking with you today, I am concerned with
  the size and concentration of non-farm
  corporations throughout our food system, and what
  that means for farm income and farmer
  independence.
• I do not question the basic role agribusiness and
  food retailers play in our food system, nor do I
  think we can, or should, try to do without them.
• What we do need, however, is a more level playing
  field between farmers and those who buy and
  process their products.

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• 1. Very few corporations buy and process farm
  products
• Four corporations control 81 of beef packing
• Tyson is in the top four corporations of beef,
  pork and broilers
• only Cargill and ADM (have) real control of all
  U.S. corn and soybean exports.
• Hendrickson and Heffernan,
• Concentration of Agricultural Markets,
• February 2002

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• 2. Farm income is threatened
• The rate of return on equity during the 1990s
  has been 18.0 for retail food chains, 17.2 for
  food manufacturers, 10.8 for agricultural banks,
  and 4.5 for farming . . . to some extent, these
  comparative returns reflect comparative market
  power, and not relative economic efficiency, in
  my opinion.
• C. Robert Taylor, in testimony given before
  a U.S. Senate committee, 1/26/99
• In a recent poll of 680 North Dakota farmers,
  70 said agribusiness concentration was a major
  cause of the current farm recession.
• Fedgazette, January 2000

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• 3. Farmer independence is threatened
• Farmingdoes not includethe production of
  poultry or poultry products
• Minnesota Statutes, Section 500.24
• The worlds largest packer-producer of pork,
  Smithfield Foods, continues to charge full speed
  ahead
• If Smithfiled buys Farmland and Alliance, it
  would add three packing plants and 68,500 sows to
  its arsenal, bringing total U.S. sow ownership to
  825,000
• On top of its U.S. sows, Smithfield has 93,041
  sows internationally, with two operations in
  Mexico and one each in Brazil and Poland.
• Successful Farming, October 2003

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• 4. Think processors are big? Food retailers
  calling the shots are much bigger.
• In business, there is big and there is
  Wal-Mart. With 245 billion in revenues in 2002,
  Wal-Mart Stores Inc. is the worlds largest
  company.
• Wal-Mart is the nations largest grocer, with
  a 19 market share, and its third largest
  pharmacy, with 16.
• At Wal-Mart, everyday low prices is more than
  a slogan it is the fundamental tenet of a cult
  masquerading as a company. Over the years,
  Wal-Mart has relentlessly wrung tens of billions
  of dollars in cost efficiencies out of the retail
  supply chain
• Business Week, October, 2003

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• 5. Specialty markets no longer offer protection
• Dean Foods Company to Acquire Horizon Organic
  Holding Corporation
• Dean Foods News Release, June 30, 2003
• Ben and Jerrys Goes Corporate Anglo-Dutch
  Unilever to Buy Ice-Cream Maker in 326 Million
  Deal
• ABCNEWS.com, April 12, 2000

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• 6. Antitrust rules do little
• Wal-Mart appears to be in no imminent danger of
  running afoul of federal antitrust
  statutesGiants like Wal-Mart have wide latitude
  to do as they wish to rivals and suppliers so
  long as they deliver lower prices to consumers.
• Business Week, October 6, 2003
• Cargill raises ante for Farmland Foods, queues
  up with Smithfield for auction.
• Headline in Feedstuffs,
• September 22, 2003

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Top 10 pork producers daily kill capacity (per
head)
Source John Nalivka, Sterling Marketing Inc.,
Vail, CO
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• 7. The problem is global
• U.S. Wilmington eyes feedgrain, soymeal
  imports.
• News item, October 15, 2003
• In 1994 and 1995, the record price-fixing fines
  grew out of purely domestic cartels, but all the
  subsequent record fines were from members of
  global cartels.
• John M. Connor
• Global Price Fixing Our Customers
• Are the Enemy

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• 8. When competition is compromised, supply and
  demand is not the whole story.
• The rule of thumb has been that farmers share
  is about half the retail milk price. During
  these 31 months, farm-level value averaged 1.25
  a gallon while the retail price averaged 2.85.
  But even more disconcerting and frustrating is
  that there is little relationship between what
  you and us receive for our milk and what people
  pay in stores.
• Something is wrong.
• Hoards Dairymen, October 10, 2003

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• 9. Market power is used everywhere except farming
• The market power effect of concentration is the
  most familiar. Concentration leads to higher
  food prices because, as fewer and fewer companies
  own larger and larger chunks of the food
  business, tacit collusion arises and competition
  suffers
• Overall, of the 33 food-processing industries,
  rising concentration had an upward effect on
  market power in 28
• The market power effect more than dominated the
  cost-efficiency effect associated with rising
  concentration, resulting in higher food prices in
  most food industries.
• Center for Agri-Food Industrial Policy and
• Organization, University of Nebraska,
• February 4, 2002

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• 10. Price negotiation is used in all phases of
  modern business except farming.
• When competitive markets are compromised,
  classical market forces no longer determine
  prices. They are negotiated.
• Dr. Neil Harl, Iowa State University
• After receiving initial bids for a 31 hike in
  health insurance costs next year, CalPERS
  negotiated a multiyear contract with Blue Shield
  and stepped up efforts to manage costly chronic
  diseases. The payoff Premiums will rise 18.
• Business Week, October 20, 2003

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• A review of your world
• Very few corporations
• Farm income is threatened
• Farmer independence is threatened
• Food retailers are calling the shots
• Specialty markets offer no protection
• Antitrust rules do little
• The problem is global
• Supply and demand is not the whole story
• Market power is everywhere
• Price negotiation is used in modern business

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• What to do?
• 1. Get more efficient
• Or
• 2. Government, or political, power
• Or
• 3. Farmer, or economic, power

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• 1. Get more efficient and learn to live with low
  prices.
• Efficiency is the rich mans counsel for the
  poor man.
• Dr. Ron Cotterill
• University of Connecticut Food
• Marketing Policy Center

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• 2. Will government help?
• Wal-Mart appears to be in no imminent danger of
  running afoul of federal antitrust
  statutesGiants like Wal-Mart have wide latitude
  to do as they will to rivals and suppliers so
  long as they deliver low prices to consumers.
• Business Week, October 6, 2003
• Cargill raises ante for Farmland Foods, queues
  up with Smithfield for auction
• Headline in Feedstuffs,
• September 22, 2003

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• 2. Can government help?
• ADM Files Notice of intent to submit claim
  against government of Mexico for violations of
  the investment provisions of the North American
  Free Trade Agreement
• ADM press release, October 14, 2003
• WTO deadline looms ahead farm program
  litigation likely
• Feedstuffs, October 13, 2003

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• 3. Building Farmer Economic Power through
  Cooperation
• Market power is being used in the food industry
• Prices are negotiated, but from positions of
  strength
• Cooperation is possible
• Cooperation, like your buyers, should be global

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• In closing
• Cooperation may be difficult, but is your best
  option
• Your income and your independence depend on it!