In recent years, farmers have received an ever-decreasing share of the retail dollar, even during recent spikes in food prices. Some have argued that concentration in the food industry — the increase in the economic power of the largest firms — is the cause. Although it might be a factor, there are numerous other market influences to consider, such as government policies, technological changes, and customer demand. To sort it all out, Rep. Herb Kohl (D-WI) and Sen. Chuck Grassley (D-IA) asked the Government Accountability Office to parse the economic research and determine how much of the recent rise in food prices could be attributed to market concentration.
A few days ago, the GAO released their report. Before revealing their findings, here's some brief background on the concentration situation.
Highlights of the GAO report on food industry concentration
Concentration has been increasing since the early 1980s in many sectors of the food economy. The first chart shows the combined market share for the four largest firms (sometimes called "CR4," or the "concentration ratio" of the top four companies) for three segments of the meat industry — steer and heifer slaughter, hog slaughter, and broiler production (chickens raised for meat). Steer and heifer slaughter companies underwent significant consolidation in the late 1980s and early 1990s, and has been fairly steady since then (it almost rose even higher in early 2009 when JBS proposed to buy National Beef. The deal fell through, thanks in part to scrutiny from the Department of Justice's antitrust branch.). Since the early 1980s, the top four firms in hog slaughter and broiler production have been steadily increasing their market share.
The next chart shows two dairy sectors and two grain-related sectors. Not surprisingly, the concentration in the breakfast cereal market — an area where grocery store shelf-space is limited and inversely proportional mammoth advertising budgets are thus crucial — is quite high, over 80%, until 2002 (the latest date for which data is available). Concentration in the other three sectors has been increasing, and was moderately high in 2002. In the case of fluid milk, however, there are large regions where concentration is higher than the national figure of 50%, as I'll discuss below.
"So?": The GAO shrugs
To satisfy the congressional request, the GAO reviewed several dozen peer-reviewed economic studies and talked to 10 experts about the effect of consolidation in several markets. The studies they looked at do not demonstrate that concentration has an adverse affect on either commodity or retail food prices. In the markets studied, concentration either does not appear to create undue market power for the large firms. In other words, a few companies might have a very large market, but for one reason or another they don't seem able to manipulate it unfairly to their advantage — or it leads to efficiencies that benefit the retail consumer or farmer. For example, bigger companies can take advantage of economies of scale to offer lower prices: they might have less overhead per unit of production, or lower employee expenses, or more favorable purchasing agreements, and so on.
However, it's important to note that isolating the effects of concentration — or technology or consumer preference — in a complicated and evolving economic system like the food industry can be difficult.
I have no reason to doubt the GAO's work, nor to doubt the quality of the economic studies, but the conclusion that "concentration is probably a good thing" doesn't sit well with me. One reason might be that, in my focus on the "long tail" of the food system — the local food movement, farmers markets, animal producers with small herds or flocks — I've seen evidence that market concentration is causing economic hardships.
With the nation's dairy farmers experiencing one of the worst crises in memory, the market power of large dairy companies is being identified as a source of trouble. Over at Grist, Tom Laskawy writes about how the combination of one company's dominance of the New England fluid milk market (currently about 70%) and the Chicago commodities market are driving down the price paid to milk producers, while retail prices remain relatively stable. Sen. Bernie Sanders (I-VT) has called on the anti-trust division of the Department of Justice to look into the matter. (The rise in imported milk protein concentrates are also a stress on domestic dairy farmers, as Elanor explained back in March.)
A report from Food & Water Watch called "Where's the Local Beef: Rebuilding Small-Scale Meat Processing Infrastructure" claims that concentration in the meatpacking industry is damaging ranchers with small herds or flocks. For example, some large packing companies buy the animals under contract a long time before slaughter at a very favorable price, thereby reducing the number of animals that need to be purchased at auctions or on the open market. Prices on the open market can be seen by competitors and current or potential suppliers; contract prices, in contrast are confidential. Therefore, as more of a market is covered by contracts, competition can weaken, since companies don't have to compete between each other for producers: when everything is secret, producers can't choose between companies for the best price.
Concentration also reduces access to slaughter and processing services: between 1998 and 2007, Food & Water Watch reports, the number of slaughterhouses dropped by about 20%. Consequently, small farmers and ranchers have to travel much farther now to find a facility that will process their meat (which puts significant stress on both the animals and the staff), and sometimes instead rely on illegal alternatives, as the Ethicurean's Bonnie reported in this Mother Jones article.
So, although it is certainly possible that concentration creates overall "benefits," I suspect that when the GAO economists talk about "benefits from efficiency," they are referring primarily to the price paid by the consumer or farmer. They're not considering environmental damages created as the concentrated market evolves, or whether new farmers are discouraged from entering the field, or the pressure on farmers to "get big or get out," or the effect on local food economies of, say, closing down local slaughterhouses to make "more efficient" (and riskier) regional super-slaughterhouses.
The economic experts the GAO consulted expect that concentration will continue to increase in the near future. To protect consumers and suppliers from undue harm, oversight and enforcement of existing anti-trust regulations also needs to increase.
More information about market concentration can be found in the Heffernan Report (a project partially sponsored by the National Farmers Union) and at the USDA's Grain Inspection, Packers and Stockyards Administration (their reports have table after table of meat processing statistics). Over at Grist, there is a post about concentration in the seed industry, and here at the Ethicurean is a post on how the processed tomato business is highly concentrated among a small number of farms and a small geographical region.