Concentration in the food industry not a concern, says new GAO report

istock_bigfisheatsIn 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.

concentration-data-from-report-gao-09-746r-from-the-gao

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.

concentration-data-2-from-report-gao-09-746r-from-the-gao

"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.

Further reading

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.

6 Responsesto “Concentration in the food industry not a concern, says new GAO report”

  1. Jason says:

    What a great site that you have here! I have a blog myself which inspires people. I would like to exchange links with you. You can contact me through email or by a comment on my site. Let me know if this possible. Keep up the good work! Jason

  2. ton c says:

    I Australia concentration is not bringing any benefits to the consumer,on the contrary prices charged by the Big Fish are in many cases their prices are more than twice the price charged by the small retailer.For example: same bread baked by the same bakery fetches a price of $ 1.00 at the small retailer but is $ 2.40 at the big supermarket same differences in coffee,meat, real cheese (non processed),fresh vegetables etc. - there is no justification for this but the greed and bad management by those firms and the unwillingness of government to interfere with those big firms policies.

  3. Heath Putnam says:

    "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."

    That doesn't make sense to me. E.g. a pork producer can call up multiple companies and see what contract price they are offering. Then he chooses. It doesn't matter whether or not the prices are "secret" - that's what the telephone is for.

    So long as there is competition, the producer ought to come out OK. To the extent that concentration reduces competition to the point that some participants can manipulate prices, that's bad - but just because there is concentration doesn't mean that there necessarily is a problem. E.g. if a market goes from having 200 buyers to 100 buyers, it won't necessarily be a less efficient market.

    Most farmers markets don't have much competition. It wouldn't surprise me if the typical farmers market is less efficient than the conventional market. E.g. I've seen a bunch of the cherry guys get together in the morning and fix prices. That works partly because there are so few of them allowed to sell at that market.

  4. Elanor says:

    Hi Heath,
    It's true that in an ideal scenario, a producer could call a bunch of companies and get a quote for a contract and compare. But my understanding is that it often doesn't work that way. (If it does for you, that's great.) Companies will often promise bonuses for performance factors such as efficiency or quality, so the producer won't actually know the price he/she will until the animals are ready for sale. Some contracts, I believe particularly in cattle, promise a certain premium over the open market price on the day of sale - but again, the producer won't know what the market price will be until the cows are ready to sell. (To make matters worse, in regions where one or two companies dominate the market and buy animals from both contract producers and their own "captive supplies," they can manipulate the open market price by choosing when to source from their contractors and when to source from themselves. There's a push by family farm groups to make packer ownership of livestock illegal for this reason.)

    Some contracts contain confidentiality provisions that prohibit the producer from discussing the terms of the contract with anyone, even a lawyer. That makes it harder for the producer to make informed decisions about the benefits or risks of the contract. Of course, that's a much bigger issue in regions dominated by one or two buyers - it affects the ability of producers to decide whether they're better off signing a contract or staying independent.

    Some of the best evidence that contracting doesn't work fairly is the wide range of prices producers are getting. There was a 2004 USDA study that showed a quarter of contract poultry producers making $0.26/head or more, while another quarter made $0.16/head or less. Contract hog producers received nearly as wide a range. And the researchers found that the range had almost nothing to do with the quality of the meat.
    Of course, if a few large firms dominate the market, most producers couldn't choose between buyers even if contract terms were made public. So concentration makes it all much worse.

  5. Heath Putnam says:

    "It’s true that in an ideal scenario, a producer could call a bunch of companies and get a quote for a contract and compare. But my understanding is that it often doesn’t work that way. (If it does for you, that’s great.)"

    The people that I know still in the hog business do things that way; they market their fat hogs by shopping them to a variety of processors That's one advantage to dealing in a commodity; there are multiple buyers ready to buy them, to agree to buy them in the future, etc. One issue is that most small producers can't produce the commodity (a trailer load of uniform fat hogs of the desired carcass quality) that a processor wants to buy.

    "Companies will often promise bonuses for performance factors such as efficiency or quality, so the producer won’t actually know the price he/she will until the animals are ready for sale."

    The flip side to it is that the buyer doesn't know exactly what quality of animals he'll be receiving, and he doesn't know how much cash to set aside for his purchase. Such terms exist because producers aren't able to produce completely uniform batches of animals. The fact that such terms exist isn't evidence that processors are evil. The alternative would be to have a livestock auction and auction off each animal. That alternative wasn't efficient; it didn't work well for producers or processors.

    I'd be interested in knowing how to find the 2004 USDA study on contract production.

  6. Taylor says:

    Interestingly, the USDA and US Justice Department just announced that they will be holding public workshops on concentration in the agricultural industry.

    Who knows what this will actually amount to, but it is the first public acknowledgment I have seen from the US government that ag. concentration might actually be a problem.

    To read the press release, go to: http://www.usdoj.gov/opa/pr/2009/August/09-ag-771.html