- A New Vision for Iowa Food and Agriculture, Food, Energy, and Agriculture Commentary
- September 13, 2010
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Market Concentration
by Francis Thicke[The following is an excerpt taken from my book, 'A New Vision for Iowa Food and Agriculture'.]
Chapter 5. Market Concentration
A growing problem in today’s agriculture – that reduces profits returned to farmers – is the increasing concentration of market power in the hands of a few corporations. Economists tell us that when four corporations control 40 percent or more of a market, that market loses its competitive nature and begins to take on the characteristics of a monopoly. As of 2007, four corporations control 84 percent of the beef packer market; four corporations control 66 percent of the pork packer market; four corporations control 59 percent of the broiler market. The turkey, flour milling, seed, and other agricultural markets are similarly concentrated.
The effects on farmers of the growing concentration of food processing markets are further accentuated by the increasing consolidation and concentration of the retail food market. “Big-box” grocery store chains have gained the power to dictate wholesale prices to food processors. That forces food processors in turn to reduce their transactional costs. One way to do that is to try to do business exclusively with large farmers. It is cheaper to buy 10,000 hogs from one farmer than to buy 1,000 hogs from each of 10 farmers.
In addition to the effects of market concentration, the system of vertical integration of markets by large corporations can also distort market conditions and reduce profits returned to farmers. Vertical integration refers to a company owning a commodity all the way through the food chain – from production, through marketing, to retailing. For example, if a corporation owns large numbers of hogs from farrowing (birth) through finishing to market weight, through processing and wholesaling of the meat, that corporation is in a position to use some discretion in how it allocates its overall profits within the various market segments. If that corporation were a dominant player in the market, it could allocate more profits to the processing and wholesale segments of the market and less to the hog production segment. That would depress market prices of hogs for independent producers selling into the same market but would not affect the overall profits of the vertically integrated corporation.
The anti-competitive effects of market concentration are further compounded by the prevalence of horizontal integration. Today several of the top four corporations in each concentrated market category are also among the top four corporations in other concentrated markets. For example, Tyson is No. 1 in beef packing, No. 2 in pork packing and No. 2 in broilers. This kind of horizontal integration encourages corporations that dominate in several markets to manipulate prices in order to increase their market share. For example, when beef and broiler prices are profitable, a corporation with dominant market share in beef, broilers, and pork can take measures to create and prolong unprofitable conditions in the pork market in order to force out other companies that deal only in pork. Meanwhile, the company that is horizontally integrated can maintain its own overall corporate profitability through the beef and broiler market sectors.
A recent example of the effect of market concentration on farmer profitability is what happened in the milk market in 2009. Dairy farmers experienced record losses due to low farm-level milk prices. At the same time, the largest dairy processor, Dean Foods – which purportedly controls 40 percent of U.S. dairy processing – posted record quarterly profits. Apparently, Dean Foods has found a modus operandi that enables it to achieve record high profits on its processed dairy products at the same time that dairy farmers receive record low prices for the milk that is used to make those dairy products.
In the past 15 years, Dean Foods has bought up more than 100 previously independent dairy processing plants. Dean Foods has powers of both horizontal and vertical integration. In 2008, it had net sales of $12.5 billion from a wide range of dairy products under many major brand names. Dean Foods is also the largest U.S. producer of both soy milk and organic milk.
In 2010, after many years of ignoring the growing market power of Dean Foods and many other companies that dominate agricultural markets, the U.S. Justice Department filed an antitrust suit against Dean Foods. The suit is seeking to overturn Dean Foods’ acquisition of two Midwest dairy processing plants. With those acquisitions, Dean Foods controlled 57 percent of the Midwestern regional dairy market, according to the Department of Justice.
What we need today is Teddy Roosevelt-style trust-busting to break up the oligarchy control of agricultural markets. Presidential administrations of recent decades have done little to nothing to stop the rapid consolidation of agricultural markets. However, the Obama Administration has promised to investigate the effects of concentrated market power on competition in agriculture. That provides a ray of hope, but it will take aggressive actions to break up monopoly power and bring competition back to agricultural markets.
[Stay tuned to this blog: I will be posting all the chapters from my book, 'A New Vision For Iowa Food And Agriculture' to this blog during the final weeks before the election on November 2nd. I look forward to any comments or questions you have.]
