In the public discussion over who's killing the family farm, the
lineup of suspects is longindustrialization on the farm, unfair
trade and subsidy practices in other countries, the Freedom to Farm
Act and other federal farm policies, to name a few. None of them,
however, seems to elicit the same emotion as the issue of consolidation
and concentration among agribusinesses, particularly food processors
like meatpackers and flour mills that purchase and process the bulk
of farm commodities. Unlike mushy demons such as international trade,
concentration in agribusiness provides a tangible, well-defined
target for farm advocates.
Providing much of the ammunition is a feverish pace of consolidation
in agribusiness. Particularly in the food processing industry, if
you'll excuse the pun, it's eat or be eaten. International food
giant ConAgra acquired 11 different companies or product lines in
the last two years, including the likes of Seaboard, a chicken company
with annual sales of $480 million. Cargill wrestled with the federal
Department of Justice last year to purchase the grain operations
of Continental, a century-long competitor.
Meat conglomerate IBP bought five different companies or food
lines in 1999, and is starting this year off by finalizing the purchase
of Corporate Brand Foods America, which had sales of $800 million
last year. In September, Smithfield Foodsthe nation's largest
hog producer-processorwent shopping and came home with No.
2 producer Murphy Family Farms.
Concentration itself matters only to the extent that it adversely
affects competition and, by extension, the prices farmers receive
for commodities like corn and cattle. But critics point out that
agribusiness concentration has drastically reduced sales outlets
for farm commodities, amplifying the potential for these companies
to abuse their market power and keep commodity prices artificially
"We are concerned about the possible misuse of market power,"
said Gerald Grinnell, a director with the Grain Inspection, Packers
and Stockyards Administration (GIPSA), an inspection and enforcement
arm of the U.S. Department of Agriculture (USDA). As concentration
increases, Grinnell said, "the opportunity for mischief probably
A backlashmostly rhetoricalhas sprouted against further
agribusiness consolidation, including a federal legislative proposal
to place a moratorium on agribusiness mergers.
In supporting the legislation, the National Farmers Union (NFU)
stated, "Mergers, acquisitions, and alliances are squelching competition
and drying up markets for farmers and ranchers. How can producers
possibly earn a fair price when they have just one or two buyers
for their product?"
While the bill was ultimately voted down, it is likely to be introduced
again and pushed by a number of politicians from the Ninth District.
Concentration? Yes ...
The question of whether concentration actually exists in food processing
has been settled for some time. The answer is a resounding yes,
according to numerous sources.
As of 1995, the four largest firms in flour milling, grain storage
capacity, brewing and minor oilseed processing held 70 percent of
those markets, according to research at North Dakota State University.
Earlier concentration data for each of these markets is not readily
available, but in 1973, the four-firm concentration in flour milling
was just 34 percent.
In 1985, the four largest beef packers controlled 39 percent of
the cattle slaughter market. Last year it hit 70 percent, according
to GIPSA. The top four firms in pork packing went from a 32 percent
market share in 1985 to 56 percent in 1998.
Given such market concentration, "there's a need to be more diligent
to ensure there is no anti-competitive behavior," Grinnell said.
But while farmers might not like it, the trend in consolidation
and concentration in agriculture is "irrefutable and irreversible,"
according to Rod Smith, staff editor of the trade publication Feedstuffs.
"It's happening in every other industry in every country."
Consolidation and concentration is the result of what Smith called
"matching scale of forward players," or becoming more like the companies
you sell to. The concentration in processing is the result of a
consolidation trend down the food chain, starting in supermarket
retailing, where one source put average four-firm concentration
in U.S. metro areas at 74 percent.
Once you reach a certain size, Smith said, "You don't 'buy' something
from a processor. You tell him what to bring you" at a price you're
willing to pay, Smith said. This forces consolidation down the food
chainfrom packers and other processors through the family
farmas each level looks for cost efficiencies through scale.
The driver behind concentration is not "a packer wanting to put
a farmer out of business," Smith said. It's the packer "trying to
keep up with the [next-level] processor, who's trying to keep up
with the retailer."
"Family farms can't survive in that kind of setting," Smith said,
unless they are willing to act like the rest of this integrated
Bill Wilson, a professor of agricultural economics at North Dakota
State University, pointed out that agriculture is hardly the only
concentrated industry. "Concentration in agribusiness is nothing,"
Wilson said, adding it "doesn't hold a candle" to concentration
in other industries like computers and software.
"You don't need an infinite number of firms to have a pretty intensely
competitive environment," Wilson said, estimating that four to six
firms can create the same competitive environment as one with many
Agribusiness is hardly alone in the merger movement. In 1998,
there were a record 4,728 company mergers and business acquisitionsabout
1,000 more than the alltime high established a year
earlier, and triple the number just six years previous.
lthough exact calculations are difficult to determine,
less than 4 percent of all mergers in 1998 appear to be related
to agricultural or food sectors, according to the joint annual
report of mergers and acquisitions by the Department of Justice
and the Federal Trade Commission.
Of those mergers having some reasonably direct connection
to farming (not including heavy machinery firms, for which
agricultural connections cannot be easily determined), acquisitions
in the "food and kindred products" industry numbered just
160, or 3.5 percent of the total. The DOJ and FTC challenged
just 84 of all proposed mergersfewer than two out of
100with varying results.
The report noted "a merger wave of unprecedented proportions"
that easily exceeded $1 trillion in value in 1998a threefold
increase since 1995, and sevenfold increase since 1992.
The merger mania rolling through corporate America got kick-started
in the 1980s, but is not without historical precedent. According
to The Economist, a brief period in the early
1900s saw the monetary value of mergers peak at 10 percent
of gross national product-a height not hit again until the
last half of the 1990s.
... But so what?
A larger question in the debate over concentration is one of net
impact: Does agribusiness concentration have any effectparticularly
negativeon prices paid to farmers?
Research to date says no, with small qualifications.
"To the extent that people are blaming low prices on concentration,
they're just looking for a bogeyman," said James MacDonald, a senior
economist with the USDA's Economic Research Service, and an expert
Most research so far has focused on the meatpacking industry.
The USDA has studied concentration in this area twice in the last
four years, concluding in its most recent effort that there was
"no evidence to support the assertion that increasing slaughter
concentration results in lower farm prices."
A 1996 USDA report pointed out that previous studies of the effects
of concentration in meatpacking were "inconclusive" due to limitations
in both data and research methods. Its own analysis showed that
"prices in local areas are affected very little by differences in
concentration in those regions ... (and) did not support any conclusions
about the exercise of market power by beef packers."
The report pointed out that although 95 percent of cattle were
shipped to plants within 270 miles, low transportation costs and
availability of plants within regions "likely diminishes" the opportunities
for packers to manipulate prices significantly or for long periods
Packers have strong incentives to actively compete on price because
today's larger feedlots mean producers are in the marketplace more
frequently, according to MacDonald, which gives them the expertise
and experience "to react quickly to price differences among cattle
Were a packer or miller strong-arming a farmer on price, "it's
hard to believe that a [different] company couldn't take advantage
of the price differential," said Maury Bredahl, an ag specialist
at the University of Missouri.
That's not to say there are no black eyes for this new economic
order. In 1997, grain giant Archer-Daniels Midland (ADM) was fined
$100 million for conspiring to fix prices for lysine (an animal
food additive) and citric acid, and three of its executives were
sent to prison. Cargill was also implicated in the citric acid case,
but was eventually cleared.
It can happen at the sub-market level as well. A case against
five Minnesota dairies accused of price fixing was recently settled
out of court, with four required to give state food shelves 250,000
gallons of milk for the next five years.
Although mergers and acquisitions seem to be a hit on Wall Street,
some question whether they live up to advance billing.
"There's a million good reasons for mergers," said John Connor,
a professor of agricultural economics at Purdue University. But
oftentimes "companies claim synergies that simply aren't there in
six or seven out of eight cases." Predicted benefits often seem
logical on paper, Connor said, but "tend to disappear when you get
close to them."
MacDonald agreed. "A lot of mergers don't deliver the efficiencies
they promise ... especially if you're combining two companies and
expect something to happen."
Agribusiness: Making a killing or getting killed?
Examples of corporate wrongdoing have bred a fair number of skeptics
to concentration. Too much concentration at the upper level strips
the ag economy of any opportunity "to provide for viable alternatives"
if existing markets bottom out, said Paul Strandberg, program director
with the Minnesota Department of Agriculture.
Agribusiness is also feeling the heat of public suspicion and
mistrust. "There is a perception that [companies in the grain industry]
are making a killing," said Lori Johnson, a spokesperson for Cargill.
MacDonald disagreed with the characterization. "I don't think
evidence is showing they have been all that profitable, at least
over time," especially in meatpacking, he said.
Whether agribusiness is "making a killing" probably depends on
your definition. For starters, the food processing industry runs
on very slim margins. IBP's profit margins have averaged 1.5 percent
for the last three years, according to Gary Mickelson, manager of
communication for IBP.
The same was true at Cargill. "The grain business is in the tank,"
Johnson said, adding there were "zero margins on the export side.
We're moving grain because we have the facilities." She added that
Cargill's average margin is "fractions of a cent per bushel."
A look at financial performance for several major agribusinesses
showed times have been better for them as well as farmers. ADM saw
total revenue drop by 11 percent last year, and net earnings by
34 percent ($138 million).
Cargill's profits were down also: 62 percent in fiscal year 1999,
including a $182 million loss in the fourth quarter, and total revenue
was down more than 10 percent. Johnson called it "the worst year
we've had in probably a hundred," and added that there has been
"retrenchment throughout the industry."
ConAgra, for example, is in the early stages of a reorganization
called "Operation Overdrive," thanks in part to plummeting revenue
and operating profits in its agricultural products segment. The
initiative is expected to close a number of production plants along
with dozens of storage, distribution and smaller processing facilities,
spin off about 20 small noncore businesses or lines of business,
and reduce the company's workforce by 6,700 employees. The company
is taking a pretax charge of more than $800 million, spread over
Not everybody is feeling sorry for them. The major agribusinesses
still manage to earn a profitusually in the hundreds of millionssomething
that has eluded many farmers. ConAgra, despite its reorganization,
and IBP both announced record earnings in their most recent quarters.
Some critics will tell you that profit comes off farmers' backs.
Alan Kluis, president of Northstar Commodity, a commodity brokerage
in Minneapolis, said packers and other processors are making "profits
at the expense of farmers."
"They don't ever pay what they can. They pay the minimum amount
they can get away with. That's an economic fact of life," Kluis
He admitted that agribusiness profits were not likely "as exorbitant"
as many farmers believe, but low commodity prices have nonetheless
helped out processors' bottom line and contributed to a widening
farm-to-retail price spread that was "not fair to the farmer or
consumer," Kluis said.
He pointed out that when processors and retailers fail to pass
low commodity prices on to consumers, farmers get the double-whammy
because artificially high prices "don't stimulate more demand" like
lower prices would, which then keeps supplies high and prices low.
Food processors have argued that there are many cost factors involved
in moving, say, a pork chop from pen to plate, and prices paid to
farmers are a fraction of the total retail cost. Retail pork costs
also lag behind hog prices to the farmer, and retailers try to protect
consumers from wide price swings, which is why lower commodity prices
don't always show up quicklyor at allat the checkout
If that's the case, Kluis said, "then the flip side should be
true"-namely that consumer costs should not rise when commodity
prices increase. "It's smoke and mirrors," Kluis argued, because
low commodity prices were "definitely helping [processors'] bottom
Research on farm-to-retail prices shows three things. First, farm-to-retail
price spreads have increased for most farm products, but not dramatically
so for many commodities when inflation is considered.
Second, the greatest share of the farm-to-retail price increase
has been taken not by packers and others in wholesale (what's referred
to as the farm-wholesale margin), but by distributors and retailers
For example, the average retail price for choice beef in 1989
was $2.66 per retail pound, according to the USDA. Of that, farmers
received $1.58, while the farm-wholesale cut was 19 cents, and wholesale-retail
collected the remaining 89 cents.
By 1998, retail beef prices averaged $2.77 a pound, but the price
paid to farmers dropped to $1.31meaning farmers' share of
the retail price shrank from almost 60 percent to 47 percent. Packers
and others in the wholesale end saw their cut increase to 23 cents,
but retailers saw their slice for a pound of beef rise to $1.23a
jump of almost 40 percent.
Third, there have been instances where the margins for wholesalers
have increased while those of farmers have fallen. For example,
hog prices went into a free fall in the last quarter of 1998 due
to a huge glut of hogs and low excess capacity in packing plants,
but there was little subsequent price cutting to consumers.
During this time, packers and others in the wholesale chain saw
their cut for a pound of pork rise from 28 cents in 1997 to 36 cents
in 1998, including a fourth quarter spike to 48 cents, according
to USDA data.
In its 1998 annual report, IBP noted that pork was the company's
"big achiever." Citing a number of factors, including higher than
expected hog supplies, the annual report stated that pork had "its
strongest and most profitable full year on record at IBP." In the
fourth quarter ending Dec. 26, 1998, the company posted net earnings
of $92 millionalmost as much as the previous three quarters
GIPSA has been investigating the farm-to-retail price gap in the
pork industry, but is still at least a year away from any findings,
according to a GIPSA official. The office is also studying the effect
of recent pork plant closings on kill capacity, and has not released
findings on that study.
A December report on the pork industry by the General Accounting
Officealso sparked by the 1998 drop in hog prices-noted that
the USDA overestimated retail pork prices that year by 14 cents,
which meant the farm-to-retail spread was not as large as USDA figures
indicated. However, the report did not identify what level within
the pork chain was most affected by the price error, or explain
whether retail prices in beef or other commodities tracked by the
USDA were similarly miscalculated. It did, however, confirm that
the historical widening of the farm-to-retail spread in pork was
due to higher prices at the retail end.
Skip the tree, look at the forest
There are some who believe the hand wringing over concentration
among food processors is nothing more than rantings from the margins.
Any effect concentration might have on prices, they say, pales in
comparison to simple economic forces reshaping agriculture.
"I don't think [concentration] is the right issue people are fixating
on," said Wilson of NDSU. "We've been evolving like this for 100
Effects of concentration can be real, MacDonald said, but their
overall impact on farm prices is likely small compared with macroeconomic
factors like supply and demand.
Johnson agreed, "What we have is too much supply chasing too little
Mickelson said it was "discouraging (for agribusiness) to have
to take the blame" for troubles in livestock farming when "study
after study" shows that concentration has not resulted in lower
prices. Complaints about concentration "are not unlike the complaints
we've heard in the past," Mickelson said. "The problems are driven
by basic economicssupply and demand."
Mickelson and many others at IBP "grew up on the family farm.
We understand the changes that have taken place. ... What's often
missing (from the discussion) is the facts," Mickelson said, adding
that too often emotion "overrides the truth in this issue."
Many Cargill employees come from rural and farming backgrounds,
Johnson said, and "find themselves kind of vilified" by the very
farm customers they serve. She added that sometimes even farmers
feel bad because "it's not that nameless, faceless [corporate] giant.
It's Joe Smith," whose been working with them for years.
Given global consolidation trends, "rather than fight it and pointing
fingers, it's better to anticipate and capitalize and adapt to it,
and seek ways to remain competitive," Mickelson said. Competitive
and economic forces at work are "bigger than any one company." "There
are no quick fixes," Johnson said. "Those looking for easy answers
find the wrong things."
Just when is an industry considered "concentrated"? Although
there are no hard-and-fast thresholds, some sources believe
an industry is concentrated when four-firm market share reaches
just 25 percent, and highly concentrated at 50 percent. One
expert said 70 percent was a useful, if crude, benchmark for
when concentration becomes problematic to market competition.
However, concentration, as it concerns antitrust laws and
action against mergers and acquisitions, is another matter.
By itself, the existence of four-firm concentration is not
enough to warrant the blocking of a merger by the Department
of Justice (DOJ), which handles antitrust matters.
When a merger is proposed, the DOJ looks at a number of
factors, including market structure and concentration. The
DOJ determines the significance of concentration through a
fairly complicated formula known as the Herfindahl-Hirschman
Index, or HHI, which is based roughly on the market share
of all companies in an industry.
HHI calculates the change in concentration, which in turn
is measured against established benchmarks and indicates whether
the merger is likely to "raise significant competitive concerns,"
according to DOJ guidelines. Even where concentration exists,
when evaluating a merger's effect on competition, the DOJ
must also consider factors like the availability of market
substituteseating more chicken or beef when pork prices
go upand ease of entry by potential competitors.
Many farm advocates have been critical of DOJ's unwillingness
to aggressively block food- and farm-related acquisitions.
Two things make doing so difficult. The first is that many
acquisitions are of smaller companies by the major players60
percent of those businesses being bought had sales under $100
million, and about 60 percent of buyers had sales of more
than $500 million in 1998. This tendency means that many acquisitions
fail to dramatically shift market share distribution and HHI
The second, and probably more overlooked, element is that
the Justice Department has no authority to stop mergers or
acquisitions. To halt mergers it believes will hurt industry
competition, it must sue and win an antitrust suit in courtoftentimes
in an all or nothing scenario.
That is why many DOJ antitrust suits are settled out of
court, including the recent acquisition of Continental's grain
operations by Cargill, which was approved after Cargill agreed
to divest a number of grain elevators.
"What Justice has to worry about is the ability to win a
case," according to James MacDonald, a senior economist with
the USDA and an adviser to DOJ on the Cargill suit. If you
lose, he said, "You don't get anything."