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Corporate ag biz concentration (Sunday, Feb. 9, 2003 -- CropChoice news) -- Keesia Wirt, DTN: AMES, Iowa -- Some say it's the most urgent issue facing farmers today and they sum it up with one word -- concentration. How much? How serious? Why worry?
These questions and many others were discussed this week at a one-day conference on concentration in agriculture sponsored by the Leopold Center for Sustainable Agriculture in Ames, Iowa.
Several hundred farmers and agribusiness people listened as experts in economics, rural sociology, antitrust law and government policy predicted the possible repercussions of an ag industry that is owned and operated by just a handful of megafirms.
How much?
Just how concentrated has agriculture become? Mary Hendrickson, extension specialist and professor of rural sociology at the University of Missouri, Columbia, has done extensive research in this area. Her presentation focused on levels of concentration that she compiled in 2002 about the seed, livestock and grain handling industries.
There are now five companies that dominate the world's seed market -- Bayer (Aventis), Monsanto, DuPont, Dow, and Syngenta (Novartis and AstraZeneca).
The livestock industry is also highly concentrated. Four firms control 81 percent of the beef packing industry, up from 72 percent in 1990. The firms are: Tyson (IBP), Cargill (Excell), Swift & Co. (ConAgra) and Farmland National Beef.
About 59 percent of the pork packing industry is controlled by four firms -- Smithfield, Tyson, ConAgra (Swift & Co.) and Cargill. They controlled 40 percent of the industry in 1990.
And in the chicken industry, four firms control 50 percent of the broiler business -- Tyson, Gold Kist, Pilgrim's Pride and ConAgra. This is up from 44 percent in 1990.
"What do you notice about these?" Hendrickson asked. "They're all the same companies. It's no longer the beef industry and the pork industry, now it's the protein industry. And these companies control it."
In the grain and milling sector, 60 percent of terminal grain handling facilities are controlled by four companies -- Cargill, Cenex Harvest States, Archer Daniels Midland (ADM) and General Mills. The same four companies control 61 percent of the flour milling industry.
ADM, Cargill, Bunge and Ag Processing Inc. (AGP) control 80 percent of the soybean crushing industry. Exporters Cargill, ADM and Zen Noh export 81 percent of U.S. corn and 65 percent of U.S. soybeans.
What's more, Hendrickson said, many of these firms control markets in foreign countries as well. For instance, Bunge, ADM and Cargill control 64 percent of the soybean oil processing in Brazil.
The food service industry is also becoming concentrated. In 1997, 24 percent of the U.S. food retailing industry was controlled by five companies -- Kroger, Wal-Mart, Albertson's, Safeway and Ahold. In 2000, the concentration by those five firms had increased to 42 percent. Hendrickson said she has seen estimates that concentration would reach as high as 54 percent by the end of 2003.
"Four years ago, we did a report identifying emerging food chain clusters, meaning companies that control the product from genetic development to when it lands on the shelf," she said. "We identified three, but they've changed a bit in the past four years. We now believe there will be five or six food chain clusters that control the entire world's food supply."
How Serious?
To discuss how serious the concentration problem is becoming for farmers, Iowa State University professor of agriculture and economics Neil Harl explained the economic impact of continuing to proceed as we are now.
Harl said the biggest problem with concentration is a lack of competition for farmers' products.
"A producer without meaningful competitive options is a relatively powerless pawn in the production process," he said.
Several factors have led to the increased concentration in agriculture.
One area is the rise of contract production. Harl said contracts create a tilt in market power by shifting the bargaining power from the farmers to the purchasers.
Another problem is the increase of mergers, alliances and other business arrangements that have reduced the number of players in input supply and output processing and handling. Input supply would be, for instance, a seed company, and output processing and handling would be the crushing and milling companies or grain exporters. When only four companies sell the seeds and fertilizers, and those same four companies buy and process the harvested crops, it leaves farmers with very few options to bargain shop for cheaper seed or negotiate higher prices for grain.
Finally, Harl said the revolution in ownership of seed genetics has put market power into the hands of just a few companies. These companies not only control the seed market, but the processes by which genetic manipulation occurs, which enables them to control the technologies and stop other firms from competing.
"While a major concern is over concentration in seeds and chemicals, there is also concern over concentration in livestock slaughter, grain handling and shipping, farm equipment manufacturing and food retailing," Harl said.
Why Worry?
Concentration will likely lead to production contracts that favor the input supplier, instead of the farmer, Harl said. The division of revenue from production would be expected to shift over time in favor of the party with the monopoly. Input suppliers can be expected to drive the best possible bargain, which means in the case of seed, capturing the greatest possible percentage of the value from any yield premium.
Harl used the hog industry as another example.
"Let's assume concentration in hog slaughter continues to increase and the hog slaughtering firms vertically integrate. Let's say we're down to two huge firms and each is 90 percent integrated. A producer with a five-year contract with one of the two major firms comes to the end of the contract. The new contract is considerably less attractive than the expiring contract. The producer is told -- take it or leave it.
"If the closest competitive option is 900 miles away, and is also heavily integrated, the producer seeking another option for hogs is highly vulnerable. If the producer had made a heavy financial commitment to his operation, the vulnerability is greater yet with significant barriers to exit. Clearly, a producer in that situation is likely to be squeezed."
If only a few companies control the food production process, farmers aren't the only ones who should be worried, Harl said, consumers will feel the effects as well.
Harl said a monopoly generally leads to higher prices at food stores because there is no competition to drive prices down. Because there is no competition, the companies in the monopoly have no incentive to create new technologies or more efficient production models.
Harl quoted a group of Purdue agricultural economists, who stated, "We see evidence of increased concentration to the point where public vigilance is warranted. Concentration indices are high and may be reaching the point where markdown pricing on hogs will be significant and place producers at a clear disadvantage."
Possible Solutions
To assure competition, steps must be taken to increase competition in all areas where high levels of concentration exist, and particularly in areas where high levels of concentration exist in tandem with efforts to integrate vertically the production and processing functions from the top down, Harl said.
He offered three solutions to the concentration problem:
* Antitrust oversight. Aggressive antitrust oversight at the federal level is the traditional way for proposed mergers and alliances, tying contracts and other anti-competitive practices to be evaluated on the basis of potential anti-competitive effects, he said.
"If the objective is to maintain significant levels of competition, the Federal Trade Commission and the Department of Justice should scrutinize all agribusiness mergers carefully for anti-competitive consequences from the standpoint of producers and all practices by companies in tying credit, insurance, risk management or other needed inputs to potential items," he said.
* Barriers to entry. In general, one would expect monopoly behavior to be met by entry of new competitors who are attracted by the generous terms of contracts in favor of the input suppliers. That would likely occur if entry were possible, Harl said, but barrier to entry in agribusiness is fairly high.
"One barrier is capital needed to mount the kind of research effort needed to maintain a product flow similar to the companies in the monopoly," he said. "Also, existing patent and plant variety protection may mean that potential competitors are frozen out of competition as a practical matter for the duration of the patent certificate."
* Ending packer ownership of livestock. If agriculture is to be comprised of a sector of independent farmers, it is imperative to ban packer ownership of livestock, Harl said.
"An effort was made, in the 2002 farm bill, to legislate such a ban in the form of the Johnson Amendment included in S. 1731, the Senate-passed farm bill," he said.
The amendment didn't make it into the farm bill, but Sen. Charles Grassley, R-Iowa, has reintroduced this ban and it's now in a senate committee.
Farmer Power
Wrapping up the conference was Richard Levins, professor of applied economics at the University of Minnesota, St. Paul. He urged farmers to fight concentration by working together in groups to negotiate higher prices.
"Farmers, I think all of them, realize this is a difficult situation we're in. What's been described here today is a flood, an economic flood," he said. "What we need to do is stop that flood. And like Noah, we need to build an arc -- a vehicle appropriate for the conditions we're in. What is that vehicle? Negotiations and supply management."
Negotiating and supply management are two important marketing tools for farmers to consider, he said. They are commonly used in business, but they work in different ways. He used as an example, the process of buying a car.
The supply and demand situation for cars influences their sticker prices. Today, the demand for most cars is low in relation to their supply, so dealers are offering all sorts of incentives to potential buyers. At other times, it's been the opposite: certain desirable cars have commanded hefty premiums. This is supply and demand.
However, the sticker price is only part of the story, Levins said. It is often regarded as a starting point for a bargaining process. Some people do better than others in this bargaining, so some pay less for the same car. Some people get the free undercoating, some don't. These are examples of negotiating. In a nutshell, negotiating tries to get a better deal no matter what the level of supply and demand might be.
"When farmers talk about changing farm prices, the discussion immediately turns to supply management," he said. "Supply control won't work unless almost everyone participates, so the issue of farmer independence immediately comes into play."
Fairness is another sticking point, Levins said. Farmers who don't participate in supply management will receive the same benefits as those who do participate. Because of this, he said, there will always be a temptation to jump ship.
"Even though we all know we'd be better off with supply management, we can't think of a way to make it work," he said.
Instead of supply management, Levins said farmers must consider negotiations. With negotiations, it wouldn't matter so much if everyone participated. Also, those who don't participate don't get any benefits. And regardless of what happens in government policy, there will always be wiggle room in prices that skilled negotiators can exploit, he said.
"There is another advantage to negotiating that will no doubt become more important if agriculture stays on its current path," Levins said. "Negotiating works as well for contract terms as it does for farm prices."
Consider, he said, a farmer growing hogs that someone else owns. Managing the supply of hogs might mean fewer farmers, not higher farm income, in some cases. Farmers in these situations need better contract terms on how much is paid for raising each animal, on how death losses are treated, or how manure handling is to be charged. These issues are ideally suited to negotiation, he said.
"Believe me, if I thought farmers could play this game as independents I would be teaching how to do it," he said. "In this game, even if you do get ahead someone is going to take it away from you. I don't know if the government is going to fix this in time to save all of our farmers.
"So use the assets you have. You control the land and the food. That's all there is to it."
Coming Soon
Stay tuned next week for more stories from the Concentration in Agriculture seminar, including anti-trust laws and actions, public seed banks, and federal and state policies about concentration.
Next week's sustainable ag story will feature a review of the Organic Agriculture Conference recently held in Atlantic, Iowa. Future articles will include programs for beginning farmers, fish farming and information about the Kerr Center for Sustainable Agriculture in Poteau, Oklahoma.
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