Archives For agriculture

Recently, I discussed at this site the Supreme Court’s imposition of takings liability on the U.S. Department of Agriculture (“USDA”), because USDA fined a small raisin grower for refusing to cooperate with the California Raisins Marketing Order – which, stripped of the fancy verbiage, is little more than a government-supervised output limitation cartel.  The California raisin cartel is far from unique.  There are many other USDA cartels (and analogous regulatory schemes) out there, the bitter fruits of anti-consumer and corporatist New Deal economic policy.  On August 14, in Humane Society of the United States v. Thomas J. Vilsack, the U.S. Court of Appeals for the D.C. Circuit, applying standing doctrine, took the knives to a less obviously anticompetitive, but no less pernicious, USDA agricultural order, the “Pork Order,” promulgated pursuant to the infelicitously named Pork Act (7 U.S.C. §§ 4801-19).

The case was filed in federal court by Harvey Dillenburg (a pork producer) and two organizations whose members include pork producers against the National Pork Board, claiming that it misappropriated millions of dollars from a fund for pork promotion into which all pork producers are required by law to contribute for the benefit of a trade association that is funded and controlled by large pork producers.  The district court dismissed the case for lack of standing, but that decision has now been reversed by the D.C. Circuit.  It is to be hoped that upon remand, the district court will take the next step and slaughter the Pork Order, thereby “bringing home the economic liberties bacon.”  Such an outcome would strike at the abuse of governmental processes by well-organized, powerful businesses, one of the worst aspects of crony capitalism.

The D.C. Circuit’s summary description of the case is instructive:

“The National Pork Board [Board] is a quasi-governmental entity responsible for administering a federal regulatory scheme known as the ‘Pork Order[,]’ [which implements] . . . the Pork Act, . . . the purpose of which is to promote pork in the marketplace. . . .  The Board strengthens, maintains, develops, and expands markets for pork and pork products through research and consumer information campaigns. In exchange for the Board’s efforts on behalf of their industry, pork producers pay the Board a special assessment on each hog they import or sell. . . . 

In 2006, the Board, with the approval of the Secretary of the Department of Agriculture, bought four trademarks associated with the slogan Pork:  The Other White Meat . . . from the National Pork Producers Council [Council], an industry trade group, for $60 million.  [Footnote deleted which explains that the USDA Secretary is charged by statute with reviewing the Pork Board’s actions, but that the reviewing court attributes those actions to the Board.]  The payment terms provide that the Board will pay the Council $3 million annually for twenty years. The Board can terminate the payments at any time with one year’s notice, in which case ownership of the phrase reverts back to the Council. Five years after buying the mark, the Board replaced it with a new motto, Pork:  Be Inspired. Now the Board keeps the initial slogan around as a “heritage brand” that it does not feature in its advertising.

The plaintiffs claim that the Board did not buy the slogan for its value as a marketing tool. They allege that the Board used the purchase of the slogan as a means to cut a sweetheart deal with the Council to keep the Council in business and support its lobbying efforts. They maintain that the Board overpaid for the slogan and that the Board’s shift to the Pork: Be Inspired campaign makes the initial slogan all but worthless.  According to the plaintiffs, the purchase of the mark and continued payment for it was and is arbitrary and capricious.  The plaintiffs also argue that the Board’s purchase of the slogan with the purpose of supporting the Council’s lobbying efforts violates the Pork Act and Order’s prohibitions against the Board spending funds to influence legislation.

The plaintiffs sued the Secretary of the Department of Agriculture under the Administrative Procedure Act seeking an order enjoining the Board’s further payments to the Council and directing the Secretary to claw back what payments he can from the deal.  The district court dismissed the plaintiffs’ suit for lack of Article III standing. . . .  The court held that Dillenburg failed to establish an injury in fact fairly traceable to the Board’s actions that is likely to be redressed by a favorable decision. . . .  It also held that the two plaintiff organizations could not establish standing to sue in their own right or on behalf of their pork-producing members. . . .

[W]e reverse and remand [to the district court].  This case involves a concrete and particularized harm caused by an agency’s failure to confer a direct economic benefit on a statutory beneficiary. We also reject the government’s argument that the plaintiffs have failed to exhaust their administrative remedies.  The statute’s provision for administrative review would not offer the plaintiffs adequate relief, and therefore they were not required to pursue it.”

This case is an example of rent-seeking in action, and, in particular, the abuse of regulatory processes to impose disproportionate costs on less-connected rivals (a phenomenon well-documented in public choice analysis of regulation), as further revealed in the D.C. Circuit’s opinion.  The Council, as a private trade organization, could not require all pork producers to join it and pay dues to support institutional advertising and other pork-related promotional activities.  The Council, however, achieved its goal indirectly by establishing and manipulating government regulation.  It successfully lobbied for passage of the Pork Act, proposed the text that ultimately served as foundation for the Pork Order, and used the Board to exercise regulatory authority over all pork producers.  Part of that exercise of regulatory authority involved the Board’s agreement to pay the Council $60 million for “The Other White Meat” mark.  This fee inevitably would be passed on to all pork industry members (including those that were not members of the Council), which are required by force of law to render payments to the Board.

The Board’s regulatory capture by the Council (the “big industry members’” lobby) is apparent, as further revealed in the Court’s opinion:

“Even though the Board paid for the mark’s development, the Council registered the mark in its own name and as its sole owner. . .  The Board and the Council were so enmeshed that, in 1986 when the Board voted to adopt the campaign [to promote the Other White Meat mark] and so committed itself to spend tens of millions of dollars in assessment funds over two decades on the promotion, it did not execute any licensing agreement or fee contract to formalize that arrangement. . . . [USDA’s] Office of Inspector General concluded in a 1999 audit that the Board ‘had relinquished too much authority to its primary contractor, the [Council], and ha[d] placed the [Council] in a position to exert undue influence over Board budgets and grant proposals.’  That history . . . raises a plausible inference that the Board’s purchase was not the product of arm’s length negotiation.

[Moreover], [b]efore the Board entered the . . . [subsequent formal] licensing agreement [for the Other White Meat mark], the Board’s own economist recommended that the Board pay no more than $375,000 annually to license the mark. . . .  [Furthermore], facts plausibly show[] that, whatever its value when the Board purchased it, the [Other White Meat] mark is no longer worth $3 million per year.”

A more compelling judicial account of the manipulation of government authority to achieve the aims of an organized private lobbying group (namely, using government to foist its promotional and licensing costs on the less-well-connected rivals of the lobbying organization’s members) is hard to imagine.

In conclusion, while the Pork Order in and of itself may have only limited economic impact, it is symptomatic of the more general problem of rent-seeking-induced special interest regulation (both federal and state) that, collectively, imposes enormous costs on the American economy.  It is also emblematic of the existence of countless federal government programs for which there is no principled justification in our republic, based on a federal Constitution that establishes limited enumerated powers and focuses on restricting government incursions into individual liberties.  It is to be hoped that the federal courts will keep this in mind and use their full panoply of constitutional tools in empowering private parties to fight cronyist governmental programs.

On May 9, 2014, in Horne v. Department of Agriculture, the Ninth Circuit struck a blow against economic liberty by denying two California raisin growers’ efforts to recover penalties imposed against them by the U.S. Department of Agriculture (USDA).  The growers’ heinous offense was their refusal to continue participating in a highly anticompetitive cartel.  In order to understand this bizarre miscarriage of justice, which turns orthodox anti-cartel policy on its head, a bit of background is in order.  

Perhaps the most serious affront to a sound consumer welfare-based American antitrust policy is the persistence of federal government-sponsored agricultural cartels.  In a form of bureaucratic schizophrenia, while the Justice Department works hard to send private cartelists to jail, and grants leniency to informers who undermine cartels, the U.S. Agriculture Department (USDA) seeks to punish individuals who undercut USDA-sponsored cartels created pursuant to Agricultural Marketing Agreement Act marketing orders.  Those orders establish antitrust-exempt government-approved frameworks under which private industry members restrict output and raise the price of specific crops, in the name of ensuring “orderly” markets.  (Various scholars, such as Mario Loyola, have explored the public choice explanations for the private-public collusion that leads to marketing orders and other government-supported cartels.)    

A particularly notorious USDA cartel is the California Raisin Marketing Order (“Raisin Order”), in operation since 1949, which establishes a Raisin Administrative Committee (“RAC”).  The RAC is comprised almost entirely of self-interested raisin growers and packers (it is comprised of 47 growers and packers, plus a public member).  The RAC sets annual raisin “reserve tonnage” requirements as a percentage of the overall crop, with the remainder comprising “free raisins.”  “Reserve raisins” are diverted from the market but may be released when supplies are low.  Under the Raisin Order, raisin producers convey their entire crop to raisin packer-distributors known as “handlers,” with producers receiving a pre-negotiated price for the free tonnage.  Handlers sell free tonnage raisins on the open market, and divert the RAC-required percentage of each producer’s crop to the account of the RAC.  The RAC tracks how many raisins each producer contributes to the reserve pool, and has a regulatory duty to sell them in a way that maximizes producer returns.  The RAC finances its activities from reserve raisin sales proceeds, and disburses whatever net income remains to producers.  Reserve raisins are diverted to “low value” markets, such as the export sector, while American consumers typically buy free raisins.  The Raisin Order imposes substantial harm on American consumers:  for example, in 2001 free raisins sold for $877.50 per ton compared to $250 per ton for reserve raisins, and the free raisins/reserve raisins price ration approached 10/1 in 1984 and 1991

California raisin producers Marvin and Laura Horne sought to evade these cartel strictures by handling their own raisin crop, rather than selling it to traditional handlers, against whom the reserve requirement of the Raisin Order clearly operated.  Similarly, by buying and handling other producers’ raisins for a per-pound fee, the Hornes believed that they could avoid the Raisin Order’s definition of “handler” with respect to those purchased raisins.  A USDA judicial officer disagreed, finding the Hornes liable for numerous Order violations and fining them over $695,000, including an assessment of nearly $484,000 for the dollar value of the raisins not held in reserve. 

The Hornes challenged this USDA order in federal district court, arguing that they were not “handlers” within the meaning of the Raisin Order and that the order violated the Fifth Amendment’s Takings Clause and the Eighth Amendment’s prohibition against excessive fines.  The district court granted summary judgment for USDA on all counts.  On appeal, the Ninth Circuit affirmed the application of the Raisin Order and the denial of the Eighth Amendment claim, but held that the Court of Federal Claims rather than the district court had jurisdiction over the takings claim.  The U.S. Supreme Court granted certiorari on the jurisdictional issue only, holding that the Hornes could assert their takings claim in district court.  The Supreme Court remanded for a determination of the merits of the takings claim, and on May 9 the Ninth Circuit, applying de novo review, affirmed the district court’s rejection of that claim.

The Ninth Circuit acknowledged that USDA linked a monetary exaction (the penalty imposed for failure to comply with the Raisin Order) to specific property (the reserved raisins) and that the Hornes faced a choice – give the RAC the raisins or face a penalty.  Because the government did not literally seize raisins from the Holmes’ land or remove money from their bank account, the court held that the USDA’s action had to be analyzed as a potential regulatory taking.  The court then noted that the Takings Clause affords less protection to personal property than to real property, and that the Hornes did not lose all economically valuable use of their property.  The court asserted that the Hornes’ rights with respect to the reserved raisins were not extinguished because they retained a claim on certain future proceeds from reserved raisin sales (even though, as the Hornes pointed out, the “equitable distribution” of reserved sales might be zero).  The court reasoned that even though the Hornes might not receive cash distributions in some years, the reserved raisins were not “permanently occupied,” and that the RAC’s diversion of reserved raisins inured to the Hornes’ benefit by stabilizing raisin prices.  The court viewed the raisin diversion program as granting a conditional government benefit in exchange for an exaction.  In short, by smoothing price fluctuations in the raisin industry, the Raisin Order made “market conditions predictable” and thereby bore a “sufficient nexus” to a legitimate interest the government sought to protect.  (The court never asked why the reduction of consumer welfare and the imposition of deadweight losses through industry cartelization is a legitimate government interest.)  Moreover, the RAC’s imposition of a reserve requirement on all producers was roughly proportional to the USDA’s market stabilizing goal as reflected in the Raisin Order.  Thus, applying the nexus/proportionaliy test of Nollan v. California Coastal Commission and Dolan v. City of Tigard, the Ninth Circuit held that the application of the Marketing Order to the Hornes’ activities did not constitute a taking.

Stripped of its convoluted reasoning and highly selective application of Supreme Court precedents, the Ninth Circuit’s holding indicates that industrious and entrepreneurial individuals will not be allowed to avoid and thereby undermine agricultural cartels through creative commercial innovations.  It means that individuals engaging in a legitimate business activity who wish not to contribute their product to a cartel that is imposed on them may suffer loss of their property, merely because the government approves of the cartel and wishes to protect it by punishing “cheaters.”  But when the government is the ringmaster, odious cartels are miraculously transformed into praiseworthy citizens who promote the public interest by “stabilizing” markets. 

Whatever the ultimate outcome of the Hornes’ legal saga, the Ninth Circuit’s crabbed analysis highlights the absurdity of imposing government financial exactions on private commercial conduct that unequivocally raises consumer welfare and enhances competition.  The egregiousness of this conduct is amplified when the government penalizes a business for refusing to transfer some of its property to a third party (here, the RAC), without assurance of being compensated.  Whether the business chooses to incur the penalty or instead accedes to the transfer, basic logic demonstrates that its property is being taken.  Hopefully, future courts will keep this in mind and be willing to apply the Takings Clause to analogous scenarios. 

If faced by a serious possibility of having to pay “just compensation” under the Takings Clause, the USDA may become less willing to sanction cartel avoiders through overly expansive interpretations of its agricultural marketing orders.  That in turn could encourage additional businesses to seek creative ways to opt out of these arrangements.  The end result could be the gradual weakening and ultimate dismantling of the marketing order framework.  Even better, the USDA could choose to act unilaterally tomorrow and move to rescind marketing order regulations.  (That might be asking too much, of course.)

Like Mike, we also have a short article in the latest issue of the CPI Antitrust Chronicle.  Also available on SSRN, for those without a CPI subscription.

Here’s our stab at an abstract:

There are very few industries that can attract the attention of Congress, multiple federal and state agencies, consumer groups, economists, antitrust lawyers, the business community, farmers, ranchers, and academics as the agriculture workshops have.  Of course, with intense interest from stakeholders comes intense pressure from potential winners and losers in the political process, heated disagreement over how gains from trade should be distributed among various stakeholders, and certainly a variety of competing views over the correct approach to competition policy in agriculture markets.  These pressures have the potential to distract antitrust analysis from its core mission: protecting competition and consumer welfare.  While imperfect, the economic approach to antitrust that has generated remarkable improvements in outcomes over the last fifty years has rejected simplistic and misleading notions that antitrust is meant to protect “small dealers and worthy men” or to fulfill non-economic objectives; that market concentration is a predictor of market performance; or that competition policy and intellectual property cannot peacefully co-exist.  Unfortunately, in the run-up to and during the workshops much of the policy rhetoric encouraged adopting these outdated antitrust approaches, especially ones that would favor one group of stakeholders over another rather than protecting the competitive process. In this essay, we argue that a first principles approach to antitrust analysis is required to guarantee the benefits of competition in the agricultural sector, and discuss three fundamental principles of modern antitrust that, at times, appear to be given short-shrift in the recent debate.

To expand on Geoff’s post about concentration in the seed industry, there has been a consistent line of discussion throughout the day raising the specter of monopoly and anti-competitive behavior, not only in seed but also in livestock.  There are continual references to adverse price effects and limitations in choice for consumers and producers alike, followed by such tagged-on qualifiers as “if there are any”. The implication is that there is good reason to believe such effects exist and simply have yet to be discovered if we look.

But that question has already been answered. The Government Accountability Office conducted a study of the agriculture sector.  In addition, they consulted the academic literature and scholars and other experts in the field. The GAO concluded there is no evidence that concentration has had any adverse price effects on commodities or consumer producers.

One would expect that someone among the panel of enforcers at the state or federal level, particularly the DOJ or USDA, would be aware of and familiar with the GAO report. I submitted a question to that effect, asking if–or how–the GAO report would inform the activities of the state and federal enforcers. That question was not selected by the moderator to be addressed.

Antitrust is an extremely blunt tool that cuts coarsely through an industry. Wielding such a tool blithely before the face of industry is likely to have chilling effects on investment and innovation. Why would (or should) businesses invest in facilities, producers, or innovations when there is such great uncertainty over how the politicization of antitrust enforcement is going to be brought down upon them?

There is some snow still on the ground here in Iowa. It will melt more slowly given the chill cast upon agriculture by the comments of the enforcers…if the comments have more behind them than just saying what a farmer-oriented audience wants to hear. Perhaps Marvel Comics had it right?

The morning’s panel of farmers represented a variety of perspectives, ranging from more reasoned to more reactionary.  Among the ideas suggested:

More reasoned:

  • Find a balance between food and fuel in the policy debate (though no clear directions how)
  • Increase trade in global markets (always easy to talk about forcing other countries to buy more of our stuff without addressing the domestic industry issues)
  • Invest in new research and technology (and in land-grant universities…now, how can I argue with that?)

More reactionary:

  • Take that research and technology and give it away (thereby eliminating any private incentive for investment)
  • Limit subsidies going to large farms so only small farms benefit
  • Big companies should be busted up (no matter the efficiency implications for consumers or ag producers)
  • Prohibit contracting between packers and livestock producers because it creates “captive supply” and thins out the cash market (thereby eliminating packers’ ability to provide consistent quality meat products to consumers and many producers’ abilities to access financial capital)

In short: Farmers want to make more money and want to change the rules to get more of the money in the system. Surprises, anyone?

The question of the morning (from my perspective):
How much of the consequences associated with some of these ideas are intended or simply foreseeable?

Bill Northey, IA Ag Sec’y, sounds a bit like an economist (ah, turns out he has a degree in ag business and an MBA . . . ).  Yes, price of seeds has gone up, but so has yield, and so has overall value.  The issue, he says, is how to divide the surplus, and he suggests that it’s dividing the pie that drives farmer concerns.  That’s not at all a surprise, but it’s also not much of an antitrust issue.  Unless the pie could be bigger absent, say, Monsanto’s huge investment in seeds and the resulting relatively-concentrated market structure (and basing enforcement on the theoretical possibility of that counter-factual is a perilous enterprise, as Josh and I have suggested many times), this is just a question of pecuniary transfers.  Sure, they matter a lot to the parties involved and there’s always an incentive to deputize the government to put a thumb on the scale of that dispute, but that’s not a matter of allocative efficiency, and not a matter for the antitrust laws.

Now we hear Iowa AG Miller pushing for the development of “the non-antitrust laws to deal with concentration.”  By which he means the Packers and Stockyards Act.  Maybe the DOJ has their Section 5 after all!

As if on cue, AG Miller trots out the pendulum story of antitrust enforcement–“how to bring the antitrust law back to the middle.”  This is not really an accurate description, unfortunately.  Even worse, it’s not an economically-sensible concept, and measuring the efficiency of antitrust enforcement by counting enforcement actions (or looking at rhetoric) is usually just flimsy cover for an essentially-political determination.  Combine that with Miller’s suggestion that the P&S Act’s “unfair practices” language should be enlisted in the service of dealing with concentration, and the risk of false positives is much magnified.  Which, of course, is a perfect lead-in for Christine Varney. Continue Reading…

As readers may know, Eric Holder was added to the workshop at the last minute (see the latest agenda here).  So the day starts out with Holder and Vilsack, and they are joined by Varney and Tom Miller (the Iowa AG) and a host of other politicos including Senator Grassley and Congressman Boswell.

Vilsack is introducing the event, and seems to be lamenting the extraordinary increase in productivity in the farm sector–by which I mean, he laments the loss of farm jobs even though output has increased by leaps and bounds.  That’s an unfortunate framing of the issue, but it suggests that economic efficiency won’t be at the core of the discussion.

Some choice quotes from Vilsack:

“Great efficiencies have led to consolidation.  They’ve also led to lower prices for consumers.  . . . Is marketplace providing a fair deal to ranchers and farmers.”

“We know seed companies control the lion’s share of certain commodities–does that help or hurt farmers?”

“The purpose of the workshops is to determine if the system is fair [not efficient, fair –ed.].”

And now Eric Holder:

“erosion of free competition is one of the greatest threats to our economy.”

“We’ve learned the hard way that reckless deregulation can foster conduct that is harmful [this is a paraphrase . . . ]”

“Enforcement of the antitrust laws does not fully address the concerns of farmers and other stakeholders.  [Which explains why this isn’t an antitrust event . . . ]”

And now comments from the panel, moderated by Vilsack . . . I’ll focus on the most relevant (if any) . . .

Holder:

“commitment to enforcing the antitrust laws in the ag sector.”

Grassley:

refers to “concentration and lack of competition in agriculture”

“not enough competition and too much concentration [I’ll assume that’s not an economic conclusion]”

“bigger isn’t per se bad but it can lead to predatory practices and behavior.”

“I don’t want anything to be done that stifles innovation.”

Well, as the political speeches proceed, there’s not much to report.  I’ll post this and await Varney’s comments . . . .

UPDATE:  Trying to find the right hash tag for the event, I’ve changed the title of this post and we’ll follow the convention for our live blogging today–posts from the Workshop will all have “#agworkshop” in the title.

Later this week Mike Sykuta and I will be winging our way to Iowa on behalf of the ICLE to attend the first of the year-long series of DOJ/USDA Workshops on Agriculture and Antitrust Enforcement Issues.  You can find the agenda for the first workshop, to be held Friday, March 12 in Ankeny, Iowa, here.  Intrepid reporters, we, our plan is to “live blog” the event for those of you unable to attend.  This first workshop, in addition to introducing the series, will focus on farming, which means seeds, which means the dispute between DuPont and Monsanto over licensing terms and everyone’s perennial favorite: industry concentration.

The agenda clearly reflects the highly-politicized nature of the issues under discussion, and, for example, a few news reports have suggested that the agenda has changed in response to pressure from Iowa Senator Tom Harkin.  Regardless, we expect a lively and interesting discussion.

For ease of reference all of our blogs from the workshop will be categorized under “ag/antitrust workshop,” and each post will have “DOJ/USDA Workshop” in the title.

TOTM is no stranger to the issues, and Mike and I have blogged a few times about the antitrust/licensing issues involved.  See:

Competition in Agriculture Redux (Manne, Kieff and Wright)

Competition in Agriculture (Sykuta)

Monsanto’s Licensing Case Victory (Manne)

Yet More Evidence Against the DOJ’s Antitrust Plantings (Sykuta)

The Seeds of an Antitrust Disaster (Manne)

DOJ Disconnect: Do We Really Need a Roadshow? (Sykuta)

Together with Scott Kieff and Joshua Wright, we also submitted a comment to the DOJ on the topic, “Comment on Intellectual Property, Concentration and the Limits of Antitrust in the Biotech Seed Industry,” available here (SSRN) or here (if you prefer to get it directly from the DOJ website).

The news has also been covering the seed industry antitrust issues, the DOJ/USDA workshops and agricultural antitrust issues more generally, and you can find a host of relevant news articles here.

We’re looking forward to the workshops and to your comments on the day’s events.