Varney's comments from the DOJ/USDA hearings [#dojusda #agworkshop]

Geoffrey Manne —  23 March 2010

The DOJ has posted the transcript from the recent DOJ/USDA hearings on antitrust in agriculture here.  I figured our readers might be especially interested in seeing Christine Varney’s comments (especially without having to slog through all 350 pages to find them!).  I have bolded some of the most interesting parts of her comments.

As a special bonus, at the end of this post, I also reprint some of the particularly choice comments on Chicago economics by one of the farmer panelists.  I leave it to readers to decide whether the juxtaposition has any deep meaning.  I will say this: Technological innovation, increasing economies of scale, shifts in international trade and its restraints, and demographic changes–among other things–have no doubt wreaked havoc on many small farmers and farm communities.  The same can be said of the buggy whip makers, Atari game system manufacturers, and polio hospital administrators, to name but a few.  It is probably impossible to separate the populist impulse to serve (or, for politicians, to appear to serve) the Jeffersonian farmer from the enforcement of the antitrust laws, and this is why antitrust in agriculture will continue to be so contentious and so problematic.

Do be sure to check out the farmer’s comments at the end of the post.

ASSISTANT ATTORNEY GENERAL CHRISTINE VARNEY: Thank you very much, Secretary. If I can start by addressing what the panelists asked they would like to see, and I can absolutely commit on behalf of myself and my boss, the attorney general, Senator Grassley, that you will continue to see the unprecedented cooperation and collaboration between our office and the USDA.

As a matter of fact, I have hired someone formerly from the state attorney general’s office in Texas, Mark Tobey who’s here today, who specializes in agriculture. I have a deputy assistant also here today, Phil Weiser, who specializes in agriculture. [News to me–and probably to him (although Phil is thoughtful enough and capable enough to handle any issues thrown his way -ed.] Bill Stallings who’s the lead of our agriculture enforcement team, a long-time career lawyer, is here in the back. So you have our commitment to work with all the folks that are here from USDA in an unrelenting quest to find the right balance for farmers, producers, consumers across the whole agriculture chain.  We’re going to do that in this administration.

To Congressman Boswell, market transparency. We care deeply about transparency — and lieutenant governor. We understand that transparency helps maintain a competitive marketplace. So you can be sure that we’re going to be working closely with USDA to figure out where our law, our jurisdiction, and their law and their jurisdiction overlap so that we can get as much transparency as is possible into the system.

Packer and Stockyard Act enforcement.  USDA has tremendous expertise here, but we got a lot of lawyers at DOJ that can back you up. So we’re looking forward to and have started the conversation at the staff level of how we can work collaboratively to ensure the federal government is taking full advantage of the authority that’s delegated to us in the Packer and Stockyard Act.

Biotech, things coming off patent.  You know, patents have in the past been used to maintain or extend monopolies, and that’s illegal, and you can be sure, Secretary, that we are going to be looking very closely at any attempt to maintain or extend a monopoly through an abuse of patent laws.

So that’s generally — I think I can assure each member of the panel — I’ve been working with Attorney General Miller for not quite 30 years but for a long time, and he knows that he can continue to count on the offices of the Department of Justice in the antitrust division to work across the board on issues as they confront the state attorneys general, not only in agriculture, but really, you know, you folks are on the front lines, and your attorneys general are the people that we look to to understand what is affecting you in your life every day and what’s our appropriate role to support the attorneys general or to collaborate with them, and we will continue to do that.

You know, I got here a few minutes early, so I was able to talk with a lot of folks that are here today. I got to talk with the Food and Commercial Workers for a while. I got to talk with a lot of farmers who are here. My friends from the co-ops are here.

And there’s a couple of things that I would say. You know, you touched on it a little bit. The first question was, you know, what can antitrust really do? Well, there’s a number of things. When we see mergers, we look closely at the resulting concentration from a merger. As the attorney general referenced, we recently sued Dean Foods because we think it resulted in too much concentration in milk in Wisconsin, Illinois, and Michigan, and we were joined by the attorneys general in those states in suing to break up that merger to try and get competition back in to get a better price to farmers and lower prices to consumers. [Is it just me or do these seem like maybe contradictory goals? -ed.]

We did JBS last year, same thing. We will continue to carefully and closely scrutinize every single merger that comes before us, look at it on its facts, and make a decision on the facts of the merger. If it doesn’t result in undue concentration and in lessening of competition and provides efficiency and helps farmers and growers get better prices and get more efficiency in what can get to consumers, that will be okay with us, but those that don’t, we will stop. They will not go through during this Department of Justice.

The other thing that we look at, and a lot of you have talked to me about this this morning as I moved around, big companies in the chain, wherever they are, and your views about how much power they have.

Well, as one of my panelists said, look, in the United States — I think it was Senator Grassley said big is not bad. But with big comes an awful lot of responsibility. When you have a tremendous amount of market share, you have the responsibility to behave in ways that keep the competitive playing field open. You cannot engage in acts that are designed to protect or extend your monopoly, so we look very, very closely across all sectors wherever you see an enterprise that has enormous market power.

And you know, America is a great country because we have not only great farmers and great small entrepreneurs, but we’ve grown some of the best companies in the world that are worldwide leaders, and for the most part I believe those companies take their obligations under the antitrust laws very, very seriously. But we take very seriously our obligation to enforce those laws, so we look very carefully.

The final thing I would say is something I think a lot of you in Iowa are familiar with. We have criminal authority in the antitrust division, and it is illegal for competitors to sit down together and fix prices. That’s what you saw — I don’t know if you all out here have seen the movie that just came out called The Informant, and it’s a movie about the lysine cartel, and we will, wherever we find — particularly in the international sphere, wherever we find price fixing like that, we will prosecute that criminally.

So you have my commitment that we’re going to do everything we can to make sure that it’s a competitive agriculture economy, that farmers, growers, packers, processors, are all making a decent wage, and we’re getting American consumers food on their table that’s safe and healthy and a decent price. [This last bit still bothers me immensely.  What part of the antitrust laws or the cases interpreting them give the DOJ the authority to enforce those laws to ensure “decent” wages and “safe” and “healthy” food? -ed.]

* * *

[HOG FARMER] JIM FOSTER . . . Fast forward to today and what did I see? I saw where weeds grew up through the concrete cracks last winter because there was no cattle on feed. I see silos torn down or having been empty for decades. Remains of those portable hog houses are seen stacked rotting in the corner of the field. Very little human activity around what was once a thriving economic model can be seen.

What happened? Perhaps the biggest thing, we were taken back by the Chicago School of Economics where the biggest, toughest boar hog at the trough deserved to be the last one standing, no matter who got rooted out or even killed or economically killed by its tusks. He deserved to win because he would be the most efficient, and that efficiency would be transferred to the consumer. That Chicago school is hogwash.

The recent economic global meltdown is the most vivid costly disaster caused by that thinking. Too big to let fail became the buzz word. Will the biggest of our packers and food retailers finally reach that level? We’re probably close. If so, our food security is at risk.

What is the true real cost of so-called cheap food? I’m glad to read the Illinois Agri-News that a leading proponent of that who’s a civil court judge has turned 180 degrees after he saw the economic meltdown. I’m here today to tell you our price discovery system for finished cattle and hogs is absolutely broken. Not cracked or weakened. It’s broke.

Geoffrey Manne

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2 responses to Varney's comments from the DOJ/USDA hearings [#dojusda #agworkshop]

  1. 

    Increasing economies of scale is often cited as an efficiency of the market that is good. Often this economy of scale is a sly disguise for the abuse of market power. Vertical integration in the hog and poultry industries provides perfect examples. Vertical integration into the feed, the genetics, and management, and contracts gives the packer huge influences over the variables that determine a farmer’s income. Often these variables are used to convince the farmers into accepting contract terms that are good for the packer or integrator, but not good for the farmer. Any plain reading of the Packers and Stockyards Act would preclude companies from using these variables as tools or threats to gain concessions from suppliers but they do it all the time.

    It is Alexander the Great’s war strategy and implementation of the phalanx. The phalanx was a compact set warriors that was used to put all the pressure that one could muster into a specific spot of the battle. With the use of this tactic, greater strategies could be attained. In this case, it is the use of the variables of pay to the farmer that the integrator packer controls on individual farmers to gain a strategic goal of shoving down their throat contracts that are not based on actual efficiency of the market or the individual farmer, but on the goals of the integrator/packer. With these tools and the large capital investments that farmers put up in good faith, the companies can come up with formulas of pay that encourage the efficiency of the integrator but it comes at the expense of efficiency of the farmer. Largely it is due to the fact that the pay is not based on a actual efficiency gained, but one of “efficiency” within the tournament system.

    A perfect example of this is illustrated in the following article on the use of alum in the production of chickens. If a farmer is the one who invests in alum, he may get a benefit relative to other growers in the tournament system but he does not get the complete benefit of the investment. Due to the nature of the contracts of pay, the integrator gets the lion’s share of investment.

    http://www.sera17.ext.vt.edu/Documents/BMP_poultry_litter.pdf

    Note in the article who gets the benefit if the farmer is the one paying for the chemical. It is the integrator. Thus, the integrator can require houses to put down alum in its management terms and then garnish the lion’s share of the benefit. The integrator is not paying on the absolute increase in value, only the relative increase in value. If the integrator can get some growers to “invest” in the application and in their system of pay get those who don’t to pay for part of it, then the integrator can gain concessions from growers that benefit the integrator but actually have a net cost to the growers. This kind of “efficiency” is nothing more than an economic fraud on the farmers and lumped into the over all term “efficiency”. Technological innovations are imposed on the farmer with the integrator getting the all the gain. The strategic use of formulas of pay and the phalanx of vertical integration market power allows these kind of inefficiencies to the farmer to be passed as efficiencies to the packer with which they either pocket the gains or use it in the competition game. The worst offenders of the use of these unfair deceptive practices comes out the winner with the farmer the loser just about every time.

    When an integrator or packer can take away the value of the capital investment of the grower, which in aggregate is often as large as the capital investment of the packer, by denying them a contract, the integrator or packer makes the capital investment of the grower captive to its own economic interests. It is captive capital.

    This is not a buggy whip comparison and to think so is rather uninformed view of what is actually happening in these markets.

    When packers can make investments with negative returns for the grower be economical for the grower via contract terms, there is a deception being played through the contract and passed on to growers with the abuse of contract terms. This comes from the fact that growers are not payed on an absolute scale, but on a relative scale. They do not get the absolute gains of the investments they make and can be manipulated through contract terms into investments that are negative to them but extremely positive to the packers.

    To compare this type of economic fraud to changes in technology as the buggy whip comparison does, is nothing more than ignorance of the industry and what is happening in it. It is one of the most uninformed applications of an analogy due to the lack of knowledge of the specific industry and the complaints of farmers.

    I call this failure of application of economic principles in this case the robin hood affect. The robin hood affect is an effect where the robin hood takes from the suppliers through market power and shares with the consumers. Of course robin hood is only doing it for his own self interests in competing with other robin hoods in the economy. This is not the famed robin hood of lore who stole from the rich and gave to the poor, but of today’s predatory integrator. The predation is justified in many different ways as we have seen here, but the arguments just don’t hold up under scrutiny of what is actually happening. Technological advances do not all have positive returns but the integrator, with their use of market power, can make the economics seem that way to the individual by breaking the prohibitions enumerated in Section 202 of the Packers and Stockyards Act.

    Tom

  2. 

    What is the true real cost of so-called cheap food? tiffany is equeal to food?