- Antitrust Enforcement in US Agriculture Markets: The Obama Administration Plants Seeds for Increased Enforcement
- December 31, 2009 | Authors: Michael P. Daly; Scott P. Perlman
- Law Firm: Mayer Brown LLP - Washington Office
Three recent events indicate that the Obama Administration plans an increased focus on competition issues affecting US agriculture markets. First, on August 5, 2009, the US Department of Justice (DOJ) and the US Department of Agriculture (USDA) announced an unprecedented series of joint public workshops intended “to explore competition issues affecting the agricultural sector in the 21st century and the appropriate role for antitrust and regulatory enforcement in that sector.”1 Second, speaking before the Organization for Competitive Markets on August 7, 2009, Deputy Assistant Attorney General Philip J. Weiser affirmed that the priorities for DOJ’s Antitrust Division include “competition issues affecting agriculture.”2 And finally, on September 19, 2009, Assistant Attorney General Christine A. Varney, in a statement made during a US Senate Judiciary Committee field hearing examining competition in the dairy industry, declared that “ competition issues affecting agriculture have been a priority¿since she was confirmed last spring as Assistant Attorney General for the Antitrust Division.”3
Both Varney and Weiser further highlighted the recently-announced public workshops and promised a “careful examination” of the level of competition in US agricultural markets. Taken together, these events represent the first broad brushstrokes of the Obama Administration’s plan for a more robust antitrust enforcement program targeting what it views as potentially anticompetitive forces in agriculture markets.
Brief History of Recent DOJ Enforcement Initiatives in Agricultural Markets
According to Weiser, DOJ’s “interest in competition issues affecting agricultural markets is longstanding.” Recent developments, however, appear to have increased the government’s interest in potential competitive issues in these markets. While technological advances have produced additional “efficiencies” in some areas, Weiser noted that “this technological revolution and accompanying market developments have facilitated the emergence of large firms that produce agricultural products, along with challenges for new firms to enter this market.” Indeed, in the last decade, the Antitrust Division has evaluated a number of mergers and acquisitions in the agriculture industry and has intervened, at times, in order to protect against anticompetitive concerns.
Weiser used a recent proposed merger in the beef industry to highlight DOJ interest in, and scrutiny of, transactions in the agriculture markets. In February 2009, the Antitrust Division publicly welcomed the announcement that JBS and National Beef Packing Company had abandoned their proposed merger.4 DOJ opposed the merger on the ground that it “would have combined two of the top four U.S. beef packers resulting in lower prices paid to cattle suppliers and higher beef prices for consumers.” In fact, as Weiser noted, DOJ had actually filed an antitrust lawsuit in US District Court in Chicago on October 20, 2008, to block the proposed acquisition. After months of litigation, and following the announcement that the transaction was being abandoned, DOJ reiterated that it “remains vigilant in protecting competition in the beef industry.”
DOJ’s opposition to the JBS/National Beef Packing merger was one of several enforcement actions against agricultural mergers brought during the Bush Administration. In May 2007, for example, DOJ announced that it was requiring Monsanto Company and Delta & Pine Land Company (DPL) to divest a significant seed company, multiple cottonseed lines, and other valuable assets in order to proceed with their $1.5 billion merger.5
Explaining that the acquisition of DPL by Monsanto “would have caused higher prices to U.S. farmers for traited cottonseed,” the Antitrust Division filed a civil lawsuit in US District Court in Washington, DC to block the proposed transaction. According to the complaint, the combined company would have “dominated the traited cottonseed market in the United States, with nearly 95 percent of all cottonseed sales in the high-value cotton-growing regions of the MidSouth¿and the Southeast.” DOJ also claimed that the merger would probably have deterred “efforts to develop traits that would benefit U.S. cotton farmers.” DOJ concluded that the significant divestitures and licensing changes obtained through this enforcement action would ensure “that cotton farmers benefit from competition to develop and sell high-yielding cottonseed with the most desirable traits.”
In an earlier suit filed in 2002, DOJ challenged the merger of Archer-Daniels-Midland Company (ADM) and Minnesota Corn Producers, LLC (MCP).6 DOJ opposed the acquisition as it was initially proposed because it “would have substantially lessened competition by reducing the number of independent competitors in the corn wet milling industry to four and making coordination among the remaining firms more likely.”
To proceed with the proposed $634 million transaction, DOJ required ADM and MCP to dissolve a joint venture with a competing corn wet miller. The Antitrust Division explained that the DOJ-required dissolution of the joint venture would “ensure that purchasers of corn syrup and high fructose corn syrup continue to receive the benefits of competition -- lower prices.”
Another example of DOJ’s focus on competition in agriculture markets can be found in its eventual approval, in 2000, of Cargill, Inc.’s, acquisition of Continental Grain Company’s worldwide grain trading business.7 In opposing the transaction as it was initially proposed, DOJ explained that it “would have eliminated an important competitor for the purchase of crops from U.S. farmers and other suppliers such as independent elevator operators.” DOJ approved the transaction after Cargill agreed to “divestiture of grain elevators held by either Continental or Cargill in each of the nine geographic markets where DOJ believed the consolidation would give grain companies the power to artificially depress prices and to prevent opportunities for manipulation of Chicago Board of Trade corn and soybean futures prices.”
Future Areas of Focus
DOJ’s recent communications give every indication that the Obama Administration intends to build on past enforcement efforts and to expand antitrust enforcement in agricultural markets. In announcing next year’s public workshop series, DOJ and USDA reaffirmed their strong belief that “a competitive agriculture sector is vitally important to producers and consumers alike.”8
Assistant AG Varney has noted that the workshops will “address the dynamics of competition in agriculture markets” by determining “whether changes in the marketplace, including increased consolidation and vertical integration, have generated efficiencies, or whether they have led to increases in monopoly or monopsony power.” The DOJ and USDA also hope the workshops will “provide an opportunity for farmers, ranchers, consumer groups, processors, the agribusinesses, and other interested parties to provide examples of potentially anticompetitive conduct” and to discuss “any concerns about the application of the antitrust laws to the agricultural industry.” The stated goals of the workshops are “to promote dialogue among interested parties and foster learning with respect to the appropriate legal and economic analyses of these issues, as well as to listen to and learn from parties with real-world experience in the agriculture sector.”
During his August 2009 address to the Organization of Competitive Markets, Deputy Assistant AG Weiser reiterated the goals of the DOJ and USDA workshops and observed that “the Antitrust Division is planning to look, in cooperation with the USDA, into the state of competition in agriculture markets.” While making clear that the list was still evolving and non-exclusive, Weiser identified five likely areas of focus during the upcoming workshop series: (i) “particular market segments,” (ii) “vertical integration,” (iii) “buyer power,” (iv) “other legal regimes” and (v) “transparency in the marketplace.”
In suggesting that DOJ would be focused on “particular market segments” during the workshops, Weiser specifically cited three such areas -- the seed industry (particularly corn and soybeans), the dairy industry and the livestock markets. With respect to the seed industry, he explained that DOJ will be “evaluating the emerging industry structure, exploring whether new entrants are able to introduce innovations, and examining any practices that potentially threaten competition.”
Relative to the dairy and livestock industries, Weiser noted ongoing questions about the state of competition in these markets. Similarly, Assistant AG Varney highlighted DOJ concerns regarding “unprecedented economic upheaval in the dairy industry.”
In discussing DOJ’s interest in “vertical integration,” both Varney and Weiser noted that “agriculture markets, including dairy, have become more vertically integrated over the last 15 to 20 years.” Varney explained that vertical integration occurs “when a manufacturer also participates in other parts of the supply chain, such as distribution of its products or supply of its inputs.” She provided an example in the dairy industry, describing a processor entering into exclusive agreements with a specific cooperative to buy raw milk.
While apparently accepting that such arrangements “can lead to greater efficiencies and savings for consumers,” Varney and Weiser shared a concern that under certain conditions, vertical integration “may alter the incentives of parties” and “can protect or facilitate the exercise of monopoly power.” Presumably, DOJ will use the upcoming workshop series to help identify and evaluate examples of such vertical integration arrangements in the agriculture industry.
Without citing specific examples of “buyer power” or monopsony power, Weiser explained that buyer power is “a form of market power and can disadvantage sellers¿.” Indicating a concern about markets in which buying power may be concentrated and sellers have limited options with respect to where they can sell, Weiser suggested that DOJ will use the workshop series to examine the competitive impact of buyer power in the agriculture industry.
Varney built upon Weiser’s comments in her remarks when she specifically noted that “a number of dairy producers are concerned about the exercise of what economists call monopsony power.” Varney acknowledged that “parts of the dairy industry have experienced extensive consolidation in recent years, with fewer processors and therefore fewer buyers of dairy products.” She noted the potential for an increase in the exercise of buyer power under these circumstances and promised to evaluate such developments in the dairy industry.
Weiser also explained that, in looking into the state of competition in agriculture markets, DOJ will also be examining the underlying regulatory regimes in this area. He identified the Packers and Stockyards Act of 1921 -- enacted as a result of an FTC investigation into the substantial control exercised by a handful of firms over the meat-packing industry -- as one particular piece of legislation worthy of review during the workshops. Weiser suggested that DOJ is “interested in learning whether the controls of the Act are relevant to the way businesses are run today and whether the law is being implemented effectively to promote competition.”
Although he did not offer any other specific examples of laws or “legal regimes” that should be reviewed, Weiser explained that DOJ is generally “interested in evaluating the impact of any regulatory regimes that may serve to protect particular producers at the expense of consumers.”
While Weiser’s list of five probable areas of workshop focus is not exclusive -- and probably will be expanded before the workshops begin in 2010 -- it is instructive. In his final point, Weiser touched on the nature of transparency in agriculture markets. In that context, it is notable that both Varney and Weiser affirmed their belief that “markets work better and attempted harms to competition are more likely to be thwarted when there is increased transparency to consumers and government about what is going on in an industry.” In the course of the upcoming workshop series, then, DOJ probably will aim to assess whether some parts of the agriculture business lack sufficient transparency.
During his 2008 presidential campaign, Barack Obama pledged to “reinvigorate antitrust enforcement.”9 Three recent events provide a first glimpse into the Obama Administration’s plan for a more robust antitrust enforcement program targeting agriculture. These include the announcement of a series of public workshops intended “to explore competition issues affecting the agricultural sector in the 21st century and the appropriate role for antitrust and regulatory enforcement in that sector,” as well as the public statements by two senior DOJ officials reiterating the DOJ Antitrust Division’s sharpened focus on “competition issues affecting agriculture.”
While the schedule for, and the results of, the 2010 public workshop series remain a question, it is clear that under the Obama Administration, the DOJ Antitrust Division plans to build on past enforcement efforts to become even more active in scrutinizing competitive behavior in agricultural markets. Companies in these markets that are considering transactions involving competitors or that would result in greater vertical integration are advised to follow closely both the upcoming workshops and the DOJ’s enforcement efforts. Doing so will enable them to better evaluate how DOJ’s increased enfor efforts may affect their business plans.