Saturday, June 19, 2010

We need a New Ag/DOJ Hearing on Competition in Agriculture

Posted by D. Daniel Sokol

How about a hearing that focuses on anti-competitive government regulation and steps to take to reduce such regulations?  See this proposed rule from Friday as an example.  Price increases would end up being passed onto the consumers for this attempt to stop "unfair" competition.  If the Administration has confidence in DOJ Antitrust (which it should, there are some really great people there), then the Administration should let DOJ bring cases against monopolistic practices in agriculture.  Instead, the Administration has proposed a protection of small farmers regulation, which will raise prices for consumers.  I hope that being captured by small producer interests is worth it for the administration politically as a trade-off for the rest of us paying higher prices.  This is yet another example of public choice problems.  Elsewhere I have explained how this process affects antitrust.  We need some visibility to anti-competitive regulation and some competition advocacy.

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Dan Sokol’s comments on the proposed Packers and Stockyards Act (PSA) regulations of livestock and poultry markets misunderstands the issues in these markets, misrepresents the scope and nature of antitrust law's capacity to deal with the issues of concern, and claims a consumer harm that is questionable at best. The problems in the markets for cattle, hogs and poultry stem from the great buyer power of the relatively concentrated buying side and dispersed character of the sellers who are selling perishable commodities which further limit their capacity to negotiate. All transactional and contract markets need rules and regulations. The PSA was enacted (but until now rarely enforced) to facilitate the efficient, transparent, and fair operation of markets for livestock and poultry. To assert that antitrust can solve all problems of strategic, deceptive and fraudulent conduct is analogous to claiming that because highway rules interfere with the competitive freedom to decide which side of the road to drive on and whether to obey traffic signs and signals that antitrust law is the only remedy we need. The same is true in many market situations. Regulation can facilitate market efficiency, openness, and transparency exactly because it does provide “rules of the road” for those engaged in market transactions. The SEC is a good example of a regulatory agency whose contribution to our economy has been to fashion an efficient, transparent, open public capital market. That market is highly “regulated” in order to achieve the goal of a workably competitive market. These proposed rules, which have not yet been released, aim at achieving the same function. Sokol is wrong when he asserts that the Sherman Act’s Section 2 is a good substitute. He would be, however, in stronger position if he pointed out how the FTC’s failure to concern itself with the buyer power resulting from grocery mergers, both regionally and nationally, has increased the capacity and incentive to exploit upstream suppliers in ways that harm the competitive process over time. Whether the new rules will have much effect, if any, on the prices consumers pay is another interesting question. First, given the intermediate oligopolies between farm-gate and consumer, there is only a very modest relationship between the price paid to the farmer and the price the consumer pays. Indeed, the spread, holding processing costs constant, has actually increased and the response to price changes at the farm gate–especially price declines–has been sluggish at best. Second the rules will affect different types of livestock and poultry differently, so assuming some substitution among meats, the potential to raise relative prices will be constrained as the higher relative price may diminish oligopoly profits more than retaining a relatively constant price difference. Third, consumers will also substitute non-meat items for meat (there is long history of this). Vegetarians and vegans will, of course, be unaffected.

On a different but related note, there are seriously anticompetitive problems arising from some agricultural regulations. The primary source is the Agricultural Marketing Agreement Act (7 U.S.C. § 608b) which authorizes the creation of government enforced agricultural cartels and provides the basis for the milk market order system that, as currently administered, harms both dairy farmers and consumers. If one wants to look critically at anticompetitive agricultural policies enforced by the USDA, there are plenty, but they are not in the market facilitating set of rules being proposed under the PSA.

Posted by: Peter Carstensen | Jun 21, 2010 7:35:04 AM

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