Producer-to-retail price margins was the topic of the final workshop hosted jointly by the U.S. Department of Justice (DOJ) and the U.S. Department of Agriculture (USDA) on December 8 in Washington, D.C. The workshop was the culmination of a year of sessions held in several cities across the United States focusing on competition and antitrust concerns in various segments of the food and agricultural industries.

Although the final workshop's scheduled topic was margins in the food and agriculture industries, much of the workshop focused on margins in the retail grocery sector. Both panelists and workshop attendees focused on consolidation in the grocery sector and the growing market power of Wal-Mart. While rules proposed by the Grain Inspection, Packers and Stockyards Administration (GIPSA) were mentioned and discussed, they were not a significant part of the workshop and were mentioned far less frequently than at the workshop on the livestock industry held in Fort Collins, Colorado on August 27.

Opening Comments

As was the case at previous workshops, the day began with Attorney General Eric Holder and Secretary of Agriculture Tom Vilsack welcoming the crowd and providing opening remarks. During their remarks, both Vilsack and Holder discussed the benefit of the workshops in developing a better understanding of the issues facing farmers, ranchers and business people in rural America. Vilsack opened the margins discussion by noting that in 2009, a hog producer received about 25% of the value of a hog sold at retail but that in 1980 it had been double that. In 2009, 13.6% went to the packer and the retailer received 61% of the value of that hog. Similar changes have occurred in the beef industry, where a producer received 42% of the retail value of an animal in 2009, down from 69% in 1980.

Holder stated that one thing made clear during the workshops was that producers were not asking for a handout, just a level playing field. He indicated that the collaboration between DOJ and USDA was never stronger, and that meaningful, measurable steps were already being taken to address competition concerns. Specifically, Holder stated that a new online submission program was now available on the DOJ website for producers to report concerns and complaints. The work of the joint task force was touted, as were the combined efforts of USDA and DOJ to support the passage of legislation that brought an end to a series of discrimination claims against USDA (coincidentally signed by President Obama on the same day as the workshop).

Holder indicated that while "vigorous and appropriate enforcement" of antitrust laws is essential to ensuring a fair marketplace for agricultural producers, antitrust enforcement actions will not solve every problem. Vilsack and Holder emphasized that the agencies do not have all the answers. This is the reason that a continuing collaborative effort between the government, producers, consumers and the industry was necessary moving forward.

Industry Panel

The morning continued with Vilsack and Holder moderating the first of several panels. With representatives of businesses at all levels—from the farm to retail grocery—the session highlighted the fact that the question of price margins is not a black-and-white issue. The panel discussed a number of issues that may affect price margins, including changes in consumer demand that have resulted in more market demand for a wider variety of services from the retail and processing sectors of the industry; assurances of food safety; food from specific (local) locations; and food with guaranteed quality ingredients. These increased demands, in turn, raise the expenses for the processing and retail businesses. However, producers pointed out that while expenses may be rising for these sectors of the food chain, the same is true for farmers—yet farmers have not been able to capture the higher prices necessary to meet those growing expenses.

One key point raised throughout the discussion was that there needed to be increased communication and cooperation throughout the food chain, from the producer level up to retail grocery. The panel discussion highlighted extremely divergent views on this issue, depending on where in the chain an entity is. Growers and retail cooperatives looked at the concerns related to price margins much differently than those at the retail level. This was a difference seen throughout the entire workshop.

While the scheduled topic of the day was price margins, there was much discussion of the same types of issues raised in previous workshops, including processors contracting with growers in the poultry industry, concentration in dairy processing and milk pricing practices, and packers buying on advance contracts versus the spot market. The next two workshop panels focused specifically on these industries.

Dairy Panel

During the dairy industry panel, one producer, Eunice Biel of Minnesota, noted that there was a saying in her family, "There is money in farming, but only after it leaves the farm gate." This sentiment was largely echoed by other producers throughout the workshop. The dairy panel, made up of producers, economists and industry representatives, highlighted the fact that in the dairy industry, price volatility is a major issue, made more complicated because of the diversity of the supply chain.

Livestock Panel

The livestock panel focused on a number of issues identified in previous workshops, particularly regarding contracting and pricing practices in the poultry industry, with little specific focus given to issues surrounding price margins. Economists on the panel discussed the difficulty of using the current and available public data to support producer concerns when it came to concentration. The data just did not support many of the claims that the marketing practices of beef and pork processors were reducing competition. It was noted, however, that economists are constrained by the information available to them and that this is limited in certain areas, particularly in the poultry industry.

Retail Grocery Panel

The key panel of the day focused on food retailing and was most related to the scheduled focus of the workshop. The panel identified two major trends in the retail grocery business. First, concentration levels have increased. The entry of non-traditional big box grocery stores, and particularly Wal-Mart, has resulted in national four-firm concentration ratios of more than 50% and a top-twenty market share of 65%. Wal-Mart, by itself, has a market share of over 50% in 29 local markets. At the same time, concentration has increased through the acquisition of larger shares by large, traditional grocery chains, such as Safeway and Kroger, and the demise of many small grocery stores.

Second, the prices paid to farmers have declined or remained steady, while the prices paid to grocers by consumers have increased more than the Consumer Price Index—with the result that the farmer receives a lower percentage of the consumer food dollar and the retailer receives a greater share. The cause of the divergence can be attributable to (1) increased marketing and service costs at grocery stores for such functions as in-store food processing and preparation to meet evolving consumer demands and/or (2) increased buying power on the part of retail grocers as a result of consolidation. Panelists disagreed over the existence and extent of grocers' buying power.

Federal Trade Commission (FTC) economists who have studied the issue found that increasing grocer concentration had not led to decreases in consumer welfare. Grocery organization representatives pointed out that the industry is highly competitive, has low profit margins, and performs well under traditional measures of providing consumer welfare; consolidated grocery retailers provide low prices (the average American spends 5% of income on food, as opposed to 15% for the average European) and increased choice of products for consumers.

Critics responded that the unique characteristics of the markets in the food supply chain, the peculiarities of the grocery business (margins determined by sales of 10,000-20,000 different items), and consumer demands for food result in the need for changes in traditional antitrust analysis. These include:

  • A new perspective on market share as an index of buyer power, because significant buying power results with as low as a 20% market share, rather than the much higher share recognized as an indication of monopoly power for sellers;
  • New measures of consumer welfare to include not just price and choice, but also food safety, nutrition, environmental externalities of food production, and access to grocery stores (avoidance of so-called "food deserts" in low-income urban neighborhoods and rural areas);
  • A closer look at the use of buying power to raise rivals costs and the viability of the "waterbed effect" (whereby a "power buyer" extracts a very low price which then induces the seller to charge a higher price to the buyer's rivals in order to compensate);
  • Asymmetrical information and lack of functional spot markets in sales of livestock and poultry by farmers to packers and processors;
  • Price "stickiness," where increases in farm prices are passed on to consumers immediately, but decreases in farm prices are not passed on or are passed on only after a significant lag.

At the grocery level, the panel disagreed as to the viability of these approaches. Grocery supporters rejected them, while grocery critics felt that some combination of them gave large grocers, or at least Wal-Mart, anticompetitive buying power. In livestock and poultry markets, attempts to apply these approaches revealed significant differences in beef, pork, and poultry markets which, in turn, would call for different economic analysis and a different calculus in assessing the need for any remedy.

An FTC economist on the food retail panel made a point of noting that antitrust enforcement was not necessarily constrained by the laws currently in place and the agencies' view on enforcement, but instead by the U.S. Supreme Court's interpretation of these laws. It is this interpretation that provides the framework for how agencies can proceed. For example, current antitrust law provides little basis for pursuing Wal-Mart for its large market share, when that share was attained through organic growth and not mergers.

These remarks prompted comments that it may be necessary to look outside traditional antitrust law to find ways to effect change. There was also discussion that current antitrust laws should be updated to reflect today's marketplace. The laws were enacted at a time when the market was vastly different, raising concerns that these laws are no longer relevant today. However, caution was also needed moving forward, in order to determine the proper recourse—to address the issues of buyer power and monopsony, while at the same time avoiding unintended consequences.

The final workshop in the series echoed many of the concerns heard at prior workshops from farmers. However, the buyer power issue had not been explored with any great depth at any of the prior workshops. Focus on buying power in this workshop was a fitting, albeit inconclusive, end to the workshop series.

Closing Remarks

In her closing remarks to the workshop, Assistant Attorney General for Antitrust Christine Varney stated, "The Antitrust Division emerges from these workshops better equipped to ensure that our nation's farmers, processors, and consumers reap the benefits of competitive agricultural markets. It is our role to enforce the antitrust laws and advocate for competition in the agricultural sector, and the stories we heard at the workshops confirmed the importance of these efforts." She also offered the DOJ's assistance as the USDA crafted the final GIPSA rules. She concluded her remarks by stating that while government does not have all the answers, it can play an important role in addressing the challenges facing rural America. There was no indication that the workshop series would result in a report or other publication on the findings of the series.

Next Steps

What happens now is a question that many people are asking. There is no indication that either DOJ or USDA plans to issue any type of report based upon the workshops. However, both agencies have said that they will be reviewing the information and issues raised at all the workshops as they determine the next steps to be taken to address issues of competition in agriculture. The industry will continue to wait and watch to see what direction the government is going to take.

In the meantime, there are several issues that we will be watching as we move into 2011 that may provide an indication of the government's focus and plan moving forward. These include:

  • A decision from DOJ regarding the ongoing investigation of Monsanto;
  • Any progress on reaching industry agreement on protocols for post-patent, generic competition in genetically modified seeds, of the sort suggested by Pioneer/DuPont, the American Antitrust Institute, and crop grower organizations;
  • Any action DOJ may take by way of investigation or merger enforcement that will reveal the analysis it will apply to the information it heard at the hearings; and
  • Congressional oversight of USDA's proposed GIPSA regulations, perhaps including a mandatory comprehensive economic analysis; and
  • USDA's release of a final GIPSA rule. USDA is just beginning to review the approximately 60,000 comments submitted regarding the proposed rule—many of which are now posted online. Vilsack has indicated that in addition to reviewing comments, the agency will conduct a cost-benefit analysis before any redrafting or submission occurs. Vilsack made these comments in a call with industry stakeholders just a few days after the final workshop. The call and Vilsack's comments were meant to reassure those with an interest in the proposed rules that USDA would not rush through the review process and that USDA would take a serious look at the proposed rules, as the workshops highlighted the differences between small and large producers and within other aspects of the industry as well. It is unlikely that we will see a final rule released before mid-2011.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.