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Monday, March 15, 2010

A Summary and Wrap Up of the Iowa Ag Competition Hearings

Posted by Peter Carstensen

The DOJ-USDA Session on Agricultural Competition–March 12, Ankeny, Iowa

Farmers were instrumental in forcing the adoption of the Sherman Act and they remain one of the most interested and commitment constituencies for antitrust. The turnout at the session was substantial with estimates of the audience ranging from over 650 to more than 800. As one speaker put in, “I have never seen so many people interested in antitrust law except lawyers getting CLE credits.” Another sign of interest is that interested parties have filed more than 15,000 comments related to these workshops (available at the DOJ web site).

Attorney General Holder and Secretary of Agriculture Vilsack each emphasized a commitment to competition and to addressing competitive issues in markets involving agriculture. This is the first real cooperation between the agencies each of which has significant actual or potential authority to affect competition. Also present was a representation of the CFTC who signaled that agency’s commitment. Conspicuously absent was the FTC which has authority over retail grocery issues as well as all processed food production except meat and dairy products. When, after several comments about competitive issues resulting from retailer and general grocery manufacturer buyers power, the question of FTC absence was addressed the organizers said the FTC would be “invited” to the final meeting in DC in December. Informal conversation suggested to me that the FTC has signaled disinterest in these proceedings. I hope that is not true as it would mean a major gap in enforcement.

The initial presentation from high ranking enforcers served to stress an intent to act whenever there was cause as well as an implicit recognition that there are serious competitive issues in agriculture. The subsequent panels focused on issues in the seed market, in the sale of hogs and cattle, and general problems in enforcing the laws affecting these markets. The final hour plus was taken up with individual comments from the audience. A deputy assistant attorney general and a senior official of the USDA were there to hear the views of individual farms. The substantive panels included farmers, and academic experts as well as a Monsanto representative on the seed panel.

In the case of seeds a few farmers indicated acceptance of the current system and enthusiasm for the genetically modified seed available to them. Monsanto’s representative similarly stressed the number and variety of genetic modifications that exist without acknowledging Monsanto’s current hold on the market for genetics. A major focus of discussion and general concern was the state of the world after the current Monsanto glyphosate tolerant gene comes off patent. To continue to produce crops with that gene requires continued registration with various countries. Monsanto is only committed to providing that service for 3 years after the end of the patent. Moreover, it is infringement to experiment with various staked genetics that include that patented gene prior to expiration. I did not hear the kind of commitment to facilitating market access that needs to occur if the patent based Monsanto monopoly is to be dissipated. However, it is notable that both enforcers and the agricultural community are quite aware of the issues and looking for prompt solutions.

The second focal point of discussion was on the use of advance contracts to sell livestock, especially hogs, in contrast to the use of the spot market. One recurring theme was the need for better price discovery. Currently between 5 and 10% of all hogs are actually sold on the spot market but those prices set the price for over 50% of all hogs. Moreover, the price system is subject to a variety of manipulations as it is currently constituted. This topic will be the focus of the session in Colorado in August. The challenge for the USDA is to find regulations (it has very substantial market facilitating regulatory authority under the Packers and Stockyards Act) that police the contract terms and provide sufficient disclosure and insulation of contract prices from market prices in the short run to allow the market to continue to serve its price making function. This is not a simple assignment.

Little was said about dairy (the subject of a session in Wisconsin in June), poultry contracts (subject of a session in Alabama in May) or the status of Capper-Volstead. One farmer during the open mike period defended DFA as a source of price stability in dairy, but another demanded to know what was going on in the long standing DOJ investigation of DFA’s exclusionary conduct. Yet another farmer was very critical of the large cooperatives in the rice industry.

Finally, for the first time in an agricultural competition forum, I was not the only law conventional professor present. Neil Hamilton of Drake, an expert on agricultural contracting, was present as he often is because his work focuses in this area. More interestingly, both George Priest and Geoff Manne were there. Both came for the IP debate, but may, if their conversation is any guide, have left with a broader interest in the competition and market issues presented by agricultural markets.

The entire proceedings were video taped and the DOJ will soon post them on its web site. In addition a transcript will eventually be available as I understand it.

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Comments

Thank you for the update. Below is a succinct comment in response to Mann's blog on the same meeting. I would like to be the one who signs Mann's paycheck to show him the meaning of "pecuniary transfers". In the poultry industry a pecuniary penny a lb. turns quickly into a present value $4,500 on a farm producing 450,000 lbs per grow out and with 5 grow outs per year turns into some real cash. Often it is the difference between profitability on huge investment for supplying these companies and working for slave and often negative wages when the investment and costs are considered. Price determination is not a matter of equal bargaining power based on the goods produced, but on leveraged blackmail and formulas of economic fraud. It is becoming more and more clear that the model of relying on courts to enforce the laws that make the free market work is at the least compromised and at the most, a fraud in itself. This is the same path that deregulation of the financial industry was on except in that case it wasn't just family farmers who pay the price but the whole economy. To the farm family it is often their whole personal economy. It is too bad that people more directly linked to these frauds are not held accountable and that the real puppeteers seem to get away with the goods. It is another case of lessons learned and put into law but ignored for the sake of those who seem to be the ones paying off our system.

Comment by Tom — March 15, 2010 @ 8:30 amI think this is being looked at in the wrong way and I will take examples pertaining to the Packers and Stockyards Act as an example. Section 202 of the Packers and Stockyards Act has prohibitions that affect competition with comparative advantages gained from market power. One of the problems with concentration is that there are few or no alternatives when someone does you wrong. Think about the old AT&T model where you had no choice but one company before the breakup. You can think about other "natural" monopolies like electrical service. You have only one viable source of electricity because natural efficiencies of scale, then you have no real choice. In these instances, we have government that attempts to regulate the activities of these companies and in the case of many electrical or water companies, they are structured so that they are public utilities, not subject to abuse of market power for the self interest of the greed of those at the top.

The prohibitions in Section 202 of the Packers and Stockyards Act addresses the abuse of market power by prohibiting certain actions that are normally identified with the abuse of market power. In a purely competitive state, these abuses would not be allowed to happen because competitors would gain the business of those who were felt they were cheated. Because much of agriculture, and in particular the meats markets, has a structure that more correlates to absolute monopsony power or at the least, oligopsony power (market power of buyers) the prohibitions in the Packers and Stockyards Act are particularly important. These prohibitions are being routinely broken by the big meats players who are taking advantage of their suppliers to gain competitive advantages in the market. They are, in effect, changing the definition of efficiency from one based on market efficiency to one based on their own efficiency. In this process, they break the prohibitions in the section 202, and use the gains they get by breaking those rules to compete with the other big players in meats markets. For the suppliers, it is a direct transfer of wealth from them to the consumers with the packers receiving the benefits.

You can argue that this makes agriculture "the most efficient" based on the lowest price, but not on the maximum utility of resources in the economy. Too many economists and judges get the lowest price mixed up with efficiency while ignoring the economic theft that abuse of market power allows.

Quite simply, we have too many Phil Gramm economists arguing for the break down of the markets as long as the lowest price and "efficiency" as measured solely by consumer welfare is considered. Of course this totally ignores the value stolen from suppliers and given to consumers by market power and it totally ignores the fact that when markets do get concentrated enough, the low ball price given to consumers will disappear as supplies decrease due to competitors being pushed out of the market. The arguments of maximizing consumer welfare are arguments of convenience and an excuse to steal from suppliers in order to win in the competition game.

Essentially, we are promoting those to the head of the class who are cheating on their tests and have the highest grades because of cheating, not on their own actual accomplishments. It leads to the worst people heading and controlling these companies who are able to buy the politicians they want and place the judicial activism they want with the help of high powered connected K Street law firms.

Tom

Posted by: Tom | Mar 16, 2010 1:01:31 PM

you should make it smaller!!!!!!!!!!!!!!!!

Posted by: yadira | Mar 31, 2010 6:13:44 PM

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