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Report to the National Farmers Union
Consolidation in the Food and Agriculture System
Report prepared by Dr. William Heffernan Department of Rural Sociology,
University of Missouri, Columbia, Mo. With the assistance of Dr. Mary
Hendrickson, Dr. Robert Gronski University of Missouri-Columbia
February 5, 1999
Introduction
The organizational structure of the national/global food system is dynamic.
New firm names emerge, often the result of new joint ventures, and old names
disappear. But underlying these changes is a continuing concentration of
ownership and control of the food system.
These structural changes are so
strong that they often undermine the desired and expected outcomes of much of
the agricultural policy developed over the past couple of decades. These
structural changes, often referred to as "the industrialization of
agriculture," have progressed to the point that some agricultural economists
now refer to the agricultural stage of the food system as "food
manufacturing." No longer can agricultural policy be discussed apart from
the food system, because major engines of change that are impacting
agriculture and muting the impact of agricultural legislation come from the
larger food system. As one who has been studying the changes in the structure
for over three decades, I am delighted the Congress has chosen to include a
dialogue on the structure of the food system as part of the agricultural
policy debate. Concentration of the food system must be a part of that
debate, if the policy is to address some of the problems faced by farmers and
the relatively few remaining rural communities that still depend heavily on
an agricultural base.
One often hears the statement that agriculture is changing and we must adapt
to the changes. Few persons who repeat the statement really understand the
magnitude of the changes and the implications of them for agriculture and for
the long-term sustainability of the food system. It is almost heresy to ask
if these changes are what the people of our country really want or, if they
are not what is desired, how we might redirect the change. The changes are
the result of notoriously short sighted market forces and not the result of
public dialogue, the foundation of a democracy. Neither are the changes the
result of some mystical figure or an "invisible hand."
For well over a decade, several of us at the University of Missouri have been
reporting the concentration ratios of the largest four processors of most of
the major commodities produced in the Midwest. We liken the food system to an
hour glass in which farm commodities produced by thousands of farmers must
pass through the narrow part of the glass that is analogous to the few firms
that control the processing of the commodities before the food is distributed
to millions of people in this and other countries.
We focus on the largest four processing firms because the economic literature
in the mid-1980's indicated there was general agreement that if four firms
had 40 percent of the market, that market was no longer competitive. We
realized that this selection was somewhat arbitrary, but it has provided a
useful benchmark. When we began collecting the data in the mid-1980's, this
information was relatively easy to obtain in trade journals, government
reports, annual reports from corporations and other secondary sources. Over
time, this information has become more difficult to obtain. Trade journals
have come under pressure to not publish some of this information and
government agencies often say that to reveal the proportion of a market
controlled by a single firm in such a concentrated market is revealing
proprietary information.
I once appeared on a panel to discuss the concentration of the beef sector
with three others. Each of us had a different percentage of the market
controlled by the largest four beef slaughtering firms. We agreed on the
largest four firms and their ranking, and differed only slightly on the
percentage of the market the four controlled. The range of difference was
only about six percent and probably not really significant because we all
agreed the top four had at least 75 percent of the market. Yet as a social
scientist, I am uneasy about such differences. Differences of this magnitude
can (and should) raise questions about the legitimacy of such research We
work hard to get these numbers and I'll defend the trends we highlight from
the data, but I cannot defend each percentage.
The fact that these "CR 4
Tables" (see tables attached to this report [below]) have become popular indicates
that most people have not found information on market share to be very
accessible. In a democracy where we expect the citizens to be involved in
setting national policy, it is absolutely necessary that they have accurate
information on some of the major drivers of change. At times I have appeared
publicly with persons from some of the firms listed in our tables. My initial
comment is that if my data differ from the data of the representative of the
large firms, the audience must accept the data from the firm because primary
data always trump secondary data and I only have access to secondary data.
The public must have better data. I would urge Congress to seek better data
and make it available to the public as it begins to debate the relationship
between concentration and agricultural policy and rural issues.
Data in the table indicate that four firms control over 40 percent of the
processing of the major commodities produced in the Midwest. In addition, a
few firms appear in the list of the top four processing firms for several
commodities. For example, ConAgra is on the list of top four processing firms
for beef, pork, turkeys and sheep, as well as seafood, a commodity not listed
in the tables. This year it has slipped to fifth place in broiler production
and processing. The data also begin to suggest the vertical integration in
the food system. For example, Cargill ranks in the top four firms producing
animal feed, feeding cattle and processing cattle.
The data do not reveal the extent of vertical integration in the food system
in the United States or the complex web of interactions among the top firms.
This data cannot even attempt to address the global nature of the food
system. In an effort to communicate the complicated interaction between the
firms and reveal the structure of the food system, we have attempted to
diagram some of the formalized working relationships between the dominant
firms in the global food system. This information does not begin to exhaust
the list of mergers, joint ventures and side agreements. We have only
scratched the surface. These data are exploratory, but suggest the type of
information needed to understand the concentration of the global food
system.
We have already noted the difficulty of getting information in this country.
Getting global information is far more difficult. To understand the U.S. food
system, one must understand the global food system; to understand the global
food system, one must understand the operations of the major global firms
such as Cargill, ADM, and ConAgra. Cargill has operations in 70 countries and
is a privately held firm. How do we get all of the necessary information? We
have exposed the tip of the iceberg, but exposure only indicates the type of
information needed to understand the global food system.
The major concern about concentration in the food system focuses on the
control exercised by a handful of firms over decision-making throughout the
food system. The question is who is able to make decisions about buying and
selling products in a marketplace. The focus of economic power is usually
placed on the individual firm and its market share. For some of the global
firms, this is still somewhat appropriate. However, decision-making can also
be exercised through the various relationships in which a firm is involved
even if it does not hold a majority share. The changing nature of the food
system suggests that relationships among the firms are becoming much more
complex and much more important. In the past, most of the global grain firms
were family-held operations that tried to maintain low visibility and were
quite secretive about their transactions. These firms operated in one or two
stages of the food system and in a very few commodities. Today the system is
becoming much more complex starting with involvement in biotechnology,
extending through production, and ending with highly processed food.
Increasingly, these firms are developing a variety of different alliances
with other players in the system. Acquisition is still a common method of
combining two or more firms, but mergers, joint ventures, partnerships,
contracts, and less formalized relationships, such as agreements and side
agreements, are also utilized.
We will use the concept "cluster of firms" to represent these new economic
arrangements. We have chosen to organize the information around the emerging
clusters of firms that control the food system from gene to supermarket
shelf. The term "alliance" is frequently used to suggest the "seamless
system" which describes the emerging, fully vertically integrated food system
from gene to shelf. Within this emerging system, there will be no markets and
thus no "price discovery" from the gene, fertilizer processing and chemical
production to the supermarket shelf. The only time the public will ever know
the "price" of animal protein is when it arrives in the meat case. As this
system evolves, even the price of the livestock feed and its ingredients,
such as the corn, will not be known to the public, because like today's
broilers the product will not be sold. The firm owns the chick and sends it
to their processing facility from which it emerges, perhaps in a TV dinner.
However, the prices along the line of production are never discovered until
the chicken is sold to the consumer.
In a food chain cluster, the food
product is passed along from stage to stage, but ownership never changes and
neither does the location of the decision-making. Starting with the
intellectual property rights that governments give to the biotechnology
firms, the food product always remains the property of a firm or cluster of
firms. The farmer becomes a grower, providing the labor and often some of the
capital, but never owning the product as it moves through the food system and
never making the major management ,decisions.
The system is still evolving and it is not yet possible to determine how many
clusters may evolve, but experiences in other economic sectors, like the auto
industry, suggest we seldom see monopolies evolve. Even at the global level,
where there are no anti-trust regulations, oligopolies, not monopolies, tend
to emerge. We are predicting the development of four or five food clusters,
because the number of clusters will be heavily influenced by the number of
firms who have access to the intellectual property rights. The underlying
assumption here is that biotechnology will be accepted by most nations of the
world, an assumption that may not be valid, because this acceptance is still
in question in some countries.
We will make this assumption here because the monopoly power that accompanies
the intellectual property rights that leads to control of the gene pool will
be most difficult for any new or emerging cluster to obtain. We are certainly
open to a critique of our starting point. Disagreeing with our point of
departure for the sake of organizing the data should not influence the
relevance of the data we use to describe the evolving system.
The Food Chain Clusters
Cargill/Monsanto
Monsanto is one of the leading biotechnology firms. The joint venture between
Monsanto and Cargill announced in 1998, clearly established one of the
clusters. Cargill had already established its own food chain over the past
several years by planned acquisitions. It was one of the largest seed firms
in the world with seed operations, including research operations, in
twenty-three countries of the world. However, Cargill did not have access to
biotechnology and the new genetic products it would produce. As the Wall
Street Journal (9/29/98) pointed out, "most seed companies have either
aligned themselves with, or been acquired by, crop-biotechnology juggernauts
such as Monsanto Co., DuPont Co. and Dow Chemical Co." Thus, they sold their
international seed operation to Monsanto and their domestic seed operation to
AgrEvo, a Berlin-based joint venture between Hoechst and Schering (Wall
Street Journal 9/29/98). Cargill then formed a joint venture with Monsanto,
the company that had the intellectual property rights to develop the genes
and had a very comprehensive array of seed firms (Knight-Ridder/Tribune
7/28/98).
Perhaps most importantly, the Cargill/Monsanto cluster is now in the process
of obtaining control of the "terminator gene" that can be inserted into
plants to cause all of their seeds to be sterile. No longer will Monsanto
have to depend on access to farmers' fields for collection of tissue samples
to make sure farmers do not keep any seed from one year's crop to plant the
following year. Use of the terminator gene will mean that all crop farmers
must return each year to obtain their seed from seed firms, just as corn
producers have done for the past half-century.
There are two points to be made from the above scenario. The first point is
that the reorganization of the food system is very dynamic and new
technologies and other changes coming from outside the system can greatly
disrupt the plans and organizational structure that a firm or cluster has
developed. The second point is that a firm the size of Cargill has access to
such large sums of capital that it can usually acquire whatever assets are
necessary to survive. In addition, they are recognized as such formidable
firms in the system that they can easily find other partners eager to join
with them because the new partner is also eager to remain an active player in
a food chain cluster. The Cargill/Monsanto cluster brings together giants in
their respective stages of the food system. They needed each other to be a
part of a complete cluster. They have a complete food chain, but they realize
that very few clusters will survive so they continue to actively pursue other
firms through acquisitions, joint ventures or other arrangements to increase
their economic power.
The most recent proposed acquisition is the grain merchandizing division of
Continental Grain. This acquisition brings with it almost 70 inland grain
elevators and seven export terminals (Wall Street Journal, 11/10/98). The
acquisition of Continental's grain division would appear to be relatively
inconsequential if one examines the elevator capacity in bushels or the
number of facilities, two items that are often used as indicators of "point
of first purchase of grain" (purchase of grain directly from farmer). In
certain regions of the country, such as along the Illinois and Ohio rivers,
Cargill's acquisition does limit a farmer's choice to either Cargill or ADM.
The largest four firms (Cargill, ADM, Continental Grain and Bunge) only have
24% of the elevator capacity in bushels and 39 % of the facilities.
The importance of the merger becomes more obvious when the data show that the
four firms control almost 60% of the port facilities. The Cargill acquisition
of Continental would mean that Cargill "would control more than 40 percent of
all U.S. corn exports, a third of all soybeans exports and at least 20
percent of wheat exports." (Grainnet, 12/1998). At the global level, the
merger combines what was reported at the start of the decade to be the
largest two global grain traders (Knight-Ridder/Tribune Business News,
11/10/98). The emergence of ADM as a major global grain trader came through
the acquisition of parts of Louis Dreyfus (originally a joint venture
involving ADM leasing elevators) and Pillsbury (a part of Grand Metropolitan,
a British firm that merged with Guiness). Bunge was third for a time, but a
joint venture to share wheat handling facilities between ConAgra and Farmland
Industries and the alliance between Cenex-Harvest States directly to ConAgra
(through Peavey), and indirectly to Farmland, has reduced the number of
global grain traders during the past decade.
The pressures causing a firm like Cargill to continue to seek to enlarge its
cluster is perhaps best summarized in a quote from the Wall Street Journal
(11/10/98 p. A3): As grain handlers go, Continental Grain is at a big
disadvantage because it doesn't have the facilities to mill and refine crops
into higher-value products, such as flour and high-fructose corn syrup. When
U.S. exports slow, as they have this year [1998], Continental Grain can't
shift crops to domestic uses in the same way that Cargill and
Archer-Daniels-Midland Co. can. Cargill and Archer-Daniels are major grain
processors.
For Cargill, a deal with Continental Grain would increase the number of its
grain-gathering facilities all along the Mississippi River and in important
exporting ports such as New Orleans. In 1996, Continental Grain operated 70
inland grain elevators and seven export terminals. It isn't clear whether
Cargill would close some overlapping operations. Cargill's interest in
Continental Grain follows several moves by Archer-Daniels of Decatur,
Illinois, to increase its grain-storage capacity through joint ventures and
acquisitions. Industry officials said Archer-Daniels can top about 500
million bushels of grain world wide. A pact with Continental Grain would
allow Cargill to directly access more grain than Archer-Daniels currently
can. Continental was also feeling the pressures of a changing food system.
According to the Wall Street Journal (11/11/98, pA10), Continental CEO Paul
Fribourg was convinced that his company could not continue as a grain handler
because of competitors expanding into "the more-profitable businesses of
milling and crop biotechnology." In fact, the company considered merging with
a commodity processor before selling the business to Cargill. The deal raises
some interesting questions. What does ContiGroup, the remainder of
Continental, plan to do for access to grain for feeding its hogs, cattle and
poultry and where does it plan to get its cattle slaughtered? Does ContiGroup
feel it can add to its processing capacity to meet its growth projections and
compete with Smithfield, IBP, ConAgra and Cargill and the clusters it is
joining? Is there some side agreement that has not yet been made public which
will include ContiGroup within the Cargill/Monsanto cluster? What happens to
the alliances Continental had with Harvest States (Tacoma Export Marketing
Co.), Optimum, a joint venture with DuPont/Pioneer, ContiPasz, a feed company
in Poland, and its venture with Quincy Soybean Company, now owned by ADM?
Industry analysts suggest one of the reasons Cargill needs more facilities is
to position the company as a major grain trader as identity-preserved
products come on line. Those promoting value-added opportunities for farmers
have suggested that small, single facility firms, like new generation
cooperatives, might find a niche in the handling of identity-preserved
products because the big grain traders could not or would not come into such
small markets. With the additional facilities Cargill has just acquired, it
is in position to utilize a facility in the center of a farming region that
could produce the new product and contract with surrounding farmers for the
product. Cargill could use marketing contracts or production contracts much
like it does in the poultry sector.
Reports suggest Cargill paid about one billion dollars for Continental (Wall
Street Journal, 11/11/98 p. A10). That is only about half of their 1998
income. Cargill could buy two operations the size of Continental's global
grain division with one year's earnings. That is economic power. There is
freedom of entry into the global food system for those firms that can match
that level of purchasing power. Cargill's corporate goal is to double in size
every five to seven years that it says it has achieved for the past 40 years.
Since the major firms in these clusters expect to make at a 20 percent return
on their equity, the Cargill goal is very similar with other such firms.
ConAgra,
With diversified interests ranging from "farm gate to dinner plate," a
ConAgra subsidiary can be found along most links of the food chain. ConAgra
is one of the three largest flour millers in North America and ranks fourth
in dry corn milling in the U.S. The company produces its own livestock feed
and ranks third in cattle feeding and second in cattle slaughtering. It ranks
third in pork processing and fifth in broiler production and processing. In
its 1997 Annual Report, ConAgra explained that its United Agri Products (UAP)
business is a leading distributor of crop protection chemicals, fertilizers
and seeds in the U.S., Canada, Mexico, Chile and U.K. UAP is moving into new
markets around the world, such as through a joint venture with Zeneca
Agrochemicals (now AstraZeneca) in the Cape region of South Africa which will
establish a base for UAP growth on the African continent. ConAgra's annual
report also noted that UAP is a leader in the distribution of new
biotechnology products, principally seeds. As part of ConAgra, UAP identifies
new applications for biotechnology in the food industry and provides links to
other ConAgra companies, which can capitalize on the application potential
for consumers.
In the handling and transportation of grain, ConAgra owns about 100 elevators
and 1,000 barges and 2,000 railroad cars. ConAgra's grain trading company,
Peavey, is ranked third in ownership of U.S. covered barge fleet. American
Commercial Barge Lines, Inc., is number one, followed by Artco, a company
owned by Archer Daniels Midland. According to the trade journal Feedstuffs
(9/95), these top three controlled 53% of the nation's covered barge fleet.
Despite ConAgra's long history of being a company from "seed to shelf", we
are unsure of the direction of their food chain cluster, although hints are
to be found in their annual report. One indication is ConAgra's Agri
Products division teaming with DuPont in a group of joint ventures, about a
dozen developmental businesses.
According to a New York Times article (10/30/97), ConAgra's range of
expertise may make it especially attractive to potential business allies like
DuPont. For example, DuPont has relied heavily on ConAgra for the initial
commercialization of its new high-oil corn. Once United Agri Products found
farmers to grow the corn under contract, ConAgra's chicken operations bought
the grain.
Relationships that exist between the food chain clusters also complicate any
kind of explanation of the food system. For example, ConAgra and ADM formed a
joint venture in mid 1998 to operate the Kalama grain expor facility in
Washington State. The new company, owned 50-50 by the two giants, is known as
Kalama Export and operates one of the most efficient export facilities on the
West Coast. The facility was built by ConAgra and operated under its auspices
from 1983 until the joint venture formed. In another grain-based alliance,
ConAgra and Farmland Industries have linked together to improve both
companies' services to farmers and grain marketing and export activities. The
new alliance will consist of two entities, Concourse Grain and Farmland
Atwood. Concourse Grain will operate two ConAgra export elevators and two
Farmland elevators (one export, one interior) and will market wheat
originated by the two companies. This alliance will enable domestic and wheat
customers to access multiple classes of wheat, and international customers to
be served from multiple U.S. export points. Prior to these grain ventures,
ConAgra created a joint venture with Harvest States Cooperatives in 1994 to
operate three elevators in Iowa and two export grain terminals in Louisiana.
The 50-50 partnership, called HSPV, was expected to improve efficiency and
flexibility in grain origination, shipment and handling of grain exports for
both Harvest States and ConAgra's grain export company, Peavey (Feedstuffs
9/12/94).
ConAgra follows the processing of food farther down the food chain than
Cargill and ADM, ultimately selling abeled food items that most consumers
would recognize such as Armour, Monfort, Swift, Butterball, Healthy Choice,
Peter Pan Peanut Butter, Hunt's, and many others. It currently ranks second
behind Philip Morris as the leading food processor in the U.S. In its 1998
Annual Report, ConAgra noted 18 consecutive years of earnings per share
growth at a compound rate of 15 percent. Fiscal 1998 sales totaled $23.8
billion and fiscal 1998 operating profit, $1.6 billion. Chief executive Bruce
Rohde, who succeeded Philip Fletcher in September 1997, has set a goal of
making ConAgra the world's largest and most profitable food company by the
year 2005. This means passing not only Philip Morris, but also world-leader
Nestle of Switzerland.
ConAgra's growth during the 1990s has been accomplished through a strategy of
acquisitions, divestitures and adding value to their products. Under the
leadership of Philip Fletcher, the company's practice was to have 80 100
acquisition candidates in screening at all times. ConAgra was able to report
in 1998 that it had acquired or created joint ventures with approximately 150
companies during the past 10 years.
Novartis/ADM
Novartis is a Swiss firm formed by the merger of CIBA-Geigy and Sandoz in
late 1996. According to their 1997 Annual Report, the company has
agribusiness operations in 50 countries worldwide. Their "agriservices" are
primarily in crop protection chemicals, seeds and animal health. The merger
of the two large chemical firms - plus the acquisition of Merck in 1997 -
puts Novartis in the leading position in the global agrochemical field with
sales of $4 billion in 1997 (Chemical Week, 5/21/97). This left Monsanto (not
including its recent buying spree), Zeneca (a British firm that recently
merged with a Swedish firm to create AstraZeneca) and DuPont all vying for
second place in the global agrochemical field. In 1997, Europe Chemical News
(4/28/97) estimated that Novartis had 15% of the global agrochemical market.
Moreover, the company "has the largest R & D budget in the life sciences
industry" according to their own press release in May 1997. Their emphasis on
R&D is also reflected in their collaboration with the University of
California-Berkeley, where they recently signed a 5-year $25 million research
agreement to work "in all areas of functional genomics related to
agriculture, including gene-library construction, sequencing, mapping and
bioin-formatics." (Chemical Market Reporter 11/30/98)
The Novartis/ADM connection is established through Novartis joint venture
with Land O' Lakes to develop specialty corn hybrids for the food and feed
markets. Novartis purchased a 50% interest in Wilson Seeds Inc., a subsidiary
of Land o' Lakes. The joint venture will also acquire genetics from Sturdy
Grow Hybrids, already in a venture with Novartis to introduce a white corn
hybrid with the Bt trait (PR Newswire, 10/14/98). Land O' Lakes=20 maintains
an alliance with Growmark (energy products) and recently took over
Countrymark, a major eastern Corn Belt cooperative, both of which are in
joint ventures with ADM. The link between Novartis/ADM is somewhat tenuous
because Countrymark did not include their grain marketing division in the
joint venture, a division that is already in a grain joint venture with ADM.
However, the point is that the Novartis/ADM cluster, unlike Monsanto/Cargill,
is really predicated on relationships with farmer cooperatives.
Though some might dismiss this Novartis/ADM connection as insignificant, one
must raise the question of what these relationships could indicate in the
future as firms jockey for position in these food chain clusters. First, ADM,
with its vast network of processing facilities, lacked access to farmers, a
problem the firm remedied through a long-standing joint venture with Growmark
and the more recent ones with Countrymark, Riceland, and United Grain
Growers. The Growmark and Countrymark joint ventures, for instance, give ADM
access to 50% of the corn and soybean market region, and 75% of Canada's corn
and soybean market region (Feedstuffs 8/12/96). The 42% share ADM gained in
United Grain Growers - a former cooperative that is now publicly owned with
major stakeholders also being the Alberta and Manitoba wheat pools - gives
ADM widespread access to farmers in western Canada.
For the cooperatives who lacked the muscle of large firms in downstream
processing - as in the case of Minnesota Corn Processors, a new generation
wet corn milling cooperative that sold a 30% non-voting share to ADM - ADM
offered a far-flung global network in which to sell their grain. No one put
it more succinctly than the president of Harvest States, who said when the
Cenex-Harvest States merger was announced, that "agriculture cooperatives
must operate today 'in a land of giants' where capital and scale 'are
absolutely necessary'=BC in a market where corporate multinationals rule."
(Feedstuffs 11/24/97) ADM's own partner, Growmark's CEO Norm Jones, commented
that the joint ventures with ADM positioned Growmark and
Countrymark in the global agricultural industry, which represents the
onlyexpansion possibility for most cooperatives. (Feedstuffs 8/12/96) ADM has
also used joint ventures with cooperatives such as Goldkist and Ag Processing
Inc. (AGP) in the feed business. A spokesperson for Consolidated Nutrition
(ADM's joint venture with AGP) said that cooperatives "recognize the
importance of partnerships as instruments to be competitive in an industry
consolidating as substantially as the feed industry." (Feedstuffs 12/22/97)
The Novartis/ADM connection is also important because Novartis - while a
truly global and powerful company with substantial sales in chemical, seed,
animal health and human nutrition products - lacked access to further
processing in either grain commodities or food products. Novartis will need
ADM's grain handling and processing web to be able to guarantee producers
using their seed stock a downstream market. ADM, on the other hand, lacked
access to biotech and needs Novartis' genetics, seed stocks and chemicals. As
spokesman Martin Andreas of ADM said in a Feedstuffs interview (1/12/98) "
'If you're not plugged into the global market today,' a company will have
limited opportunity to prosper. . . . An international network 'is critical
[and] if you are not tied into an international system, then you are not a
traveler.' "
Novartis' genes, seeds and chemicals compliment ADM's far-flung grain
collection and processing network, created through the aggressive pursuit of
joint ventures and alliances in Europe and Latin America. ADM's stake in A.
C. Toepfer, one of the world's largest grain trading firms, and Dwayne
Andreas' claim that "my partners in the EU are 12 of the biggest farmers'
cooperatives in the world" allowed ADM to process 45% of the commodities
entering Eastern Europe from the West in 1993. ADM has also pursued joint
ventures and acquisitions in Latin America in the last few years. Just their
purchase of parts of Glencore's holdings in Brazil and Paraguay generated a
4% increase in their share of the world's soybean trade (Feedstuffs 6/9/97).
Moreover, they maintain joint ventures in a variety of different commodity
processing and feed operations in Brazil, Paraguay, Bolivia and Mexico - and
these are the alliances that are mosteasily documented. ADM has also advanced
into the Chinese market through its oilseed refining, feed and broiler
processing operations, where ADM is the junior partner with the Chinese
government and a local processor. In discussing China's dilemma of balancing
the need for food security or economic security, Martin Andreas,
ADM's spokesman, commented "It means that China is resigned to importing
food and paying for it with products made from their overabundant supply of
cheap labor." (Journal of Commerce 2/17/98)
While ADM appears to be firmly networked at the commodity processing level,
what is not so apparent is how they are going to substantially enter branded
food products - as ConAgra has done - or production and processing in the
livestock sector. ADM's venture into production and processing of livestock
has been undertaken through their joint venture with AGP, Consolidated
Nutrition, which has sow production on line, as well as ADM's steady increase
of its stake in IBP, the largest U.S. beef packer and second largest U.S.
pork packer. Although data are not readily available, IBP appears to have
contracts with large feeding operations to guarantee captive supplies of beef
- and some pork although not as widespread as beef contracts.
In a more
surprising move, ADM has chosen to decrease its holdings in Pilgrim's Pride
to 6.4%, a firm in which they had an almost 20% stake in 1992 according to
Feedstuffs (7/13/92), at the same time they maintain a broiler processing
plant in China. IBP has also moved into the Chinese market, bringing a fully
integrated pork production and processing facility on line in 1997 (IBP
Annual Report). We are not sure what this means in terms of the food chain
cluster for beef, pork, turkey or broilerproduction and processing. Are
Smithfield and Tyson poised to join this chain? Or will they move somewhere
else while ADMpursues its relationship with IBP?It is clear that we have only
scratched the surface of the Novartis/ADM/IBP cluster. Data are very
difficult to obtain, particularly reliable data about global operations. For
instance,who are ADM's EU cooperative partners, besides the ones we have
listed? How do ADM's operations in China impact farmers in the United States?
What role does ADM's own brokerage firm, among the top 40 largest in the US,
play in currency and grain futures trading, particularly when ADM is a major
grain handler and processor in Europe, North and South America and Asia?
Finally, the development of feed additives and other derivatives from wet
corn milling remains a fascinating and potentially lucrative market as shown
by Cargill's interest in entering the additives market through joint ventures
with firms like Degussa. ADM is quite powerful in the production of lysine
and citric acid - as evidenced by their recent legal troubles in the U.S. and
EU in regards to both products and is gaining ground in such new products as
Vitamin E and soy isoflavones. The key question, which none of the major
cluster firms has yet addressed, is what happens with further processed
branded food products and supermarket sales? Novartis has their Gerber baby
food, ADM has Haldane foods in Britain and their continuing production of
Harvest Burger vegetarian alternative for Worthington Foods in the U.S., and
IBP acquired institutional processor and supplier FoodBrands Inc. However,
none yet have the presence of ConAgra - or Philip Morris for that matter - on
the shelf or in the cooler in supermarkets. These questions still remain and
are particularly relevant to public policy debates.
Moving Beyond the Data
There are a host of major players in the food system which are not included
in our three food chain clusters. Some have already begun to form alliances
and others are still acting in a rather individualistic manner. Most likely,
some of these will join together to form new food chain clusters, while
others may join the clusters we have identified. Pioneer and Mycogen can form
the anchor for other chains. Firms like American Home Products, DuPont, Dow,
AstraZeneca, and Aventis, a recent joint venture of Rhone-Poulenc and
Hoechst-Schering, are likely to join a cluster, as are some of the fertilizer
firms. Bunge, a major grain trader, and some major animal production and
processing firms like Tyson, Perdue, Smithfield and its alliance members
Carroll's Foods and Murphy Family Farms, might well develop a working
relationship.
There are already relationships between many of these firms for which we have
not indicated a cluster and some of them have or have had relationships with
firms in the three clusters we have identified. Watching the clusters develop
by forming new relationships and breaking some of the old and speculating on
what other relationships might develop is like watching a chess match and
trying to anticipate the players' next moves. In this game, there can be four
or more winners. The system is very dynamic. However, a look at the list of
acquisitions and mergers during the past decade, or as we have shown within
the last five years, suggests far more names were lost as firms joined
another management unit than new names emerged. Many of these new names are
simply the realignment of existing firms.
The diagrams help to communicate three points. The first is that a very small
number of dominant food chain clusters appear to be emerging. Some are
organized around one or two dominant players as exemplified in the cases of
Cargill/Monsanto and ConAgra, which is only loosely connected to a
biotechnology firm. The Norvartis/ADM/IBP case suggests another method of
building a food chain cluster that is probably the path many of the major key
players not yet involved in a cluster will follow. At least during the
formative period, a dominant firm from the biotechnology area, one from the
grain trading and processing area, and one from the meat production and
processing develop a working relationship that is a bit more tentative than a
merger. We are not suggesting these relationships are set in stone, even
acquisitions can be sold. But the freedom of entry is restricted.
The second point is that the food system is becoming very complicated and
difficult to describe. The complication in describing the system results from
the fact that there is not a group of individualistic firms out there
competing with one another. We are especially interested in all the
relationships that exist within the clusters and those crossing from one food
chain cluster to another. Some of these are the result of firm A having a
relationship with firm B, and then developing a new relationship with firm C.
But some of the relationships crossing cluster boundaries are new. The whole
system is woven together by a host of working relationships between firms
and, at least for the short run, the system looks pretty fluid. One is left
asking the question: just how much competition is there in the system? We
know there are examples of rivalry between firms and in some cases the firms
are spending millions of dollars in court to settle their differences. Maybe
the society would benefit most if the differences were to be settled in a
competitive market! Knowing that Nippon Meats of Japan has a twelve to
fifteen year joint venture with Cargill producing broilers in Thailand makes
it hard to believe there are not some constraints in the competition they
exercise in this country as Nippon becomes a hog producer and processor in
United States. The third point is that as the food chain clusters form, with
major management decisions made by a small core of firm executives, there is
little room left in the global food system forindependent farmers. The
experts, even the leaders of cooperatives, are telling farmers they must give
up their independence and join an alliance. This is another way of saying
"give up your decision-making prerogatives to the food chain cluster if you
want to maintain an economically- viable farming operation." In most of the
livestock commodities, the production stage is integrated into the larger
food system. Ninety-five percent of the boilers are produced under production
contracts with fewer than 40 firms. Essentially, there is no price discovery
for chicken feed, day old chicks or live broilers. The food product does not
sell at these stages. Basically there is no national market for live
broilers. (There are niche markets emerging for range poultry and other
specialty poultry, but processing is emerging as a major problem.)
The production system is about the same >for turkeys and eggs. At the end of
low hog prices, which may last for at least another year, there will be few
independent hog producers remaining. The issue is not who can produce the
hogs the most efficiently. The issue is who has the deepest pockets and
market share. Even now, the issue of market access for producers who do not
have special relationships with feed or slaughtering firms has become
obvious. Twenty feedlots feed about half of the cattle in the US and these
are either owned by the slaughtering firms or have contracts with the
processing firms. Operators of "independent lots" tell us that they seldom
see buyers from more than one firm. Dairy farms are being consolidated,
leaving only the cow/calf sector out of the integrated system. The cow/calf
sector is the most highly subsidized sector of agriculture, subsidized by
non-farm income. The cow/calf producers without access to non-farm income are
facing economic hard times.
The movement toward increasingly differentiated products is bringing more
contracts into field crop production. Two recent technologies will hasten the
process of vertical integration in the crop sector. The first is
biotechnology and the terminator gene that places the farmer at the mercy of
the food cluster for seed to plant the crop. If the firms in the processing
stage of the cluster require specific genetic material and the farmer cannot
get that seed, he/she has no market access. The second technology is
precision farming's global positioning system. It is no longer necessary for
the farmer to have personal contact with their land and crop to make
appropriate management decisions. Most of the decisions can now be made in
the farmer's office. Any decisions that can be made without contact with the
land and the crop can be made in an office in a distant city. In the not too
distant future the person operating the corn planter will not know much about
the genetic material of the corn being planted - just like the broiler grower
does not know about the genetic stock of the birds he/she feeds. As the
"farmer" watches the big truck with the computer on board reading from a
satellite, he/she will not know much about the fertilize or chemical being
applied to the field - just like the grower does not know much about the feed
fed to the birds he/she cares for but does not own. The crop farmer will be
paid on a piece rate basis just like the grower.
Increasingly we hear about the need for only 20,000 to 30,000 farms in the
United States to produce for the global food system. The next question
becomes what is a farm? In business administration literature, firm usually
applies to a management unit. Traditionally the term farm has also referred
to a management unit. If the integrating firm becomes the management unit as
is implied in the case of broiler production, how many farms will there be in
the United States in the future?
Concerns about the Food System
Many different groups and individuals in this and other countries are raising
serious concerns about the globalizing food system. One concern focuses on
the consequences for rural communities of this restructuring.Today, most
rural economic development specialists discount agriculture as a contributor
to rural development. The major reason why agriculture contributes so little
to the community is because of the emerging structure of the food system. In
a family business, such as family farm, a family grain elevator, or a family
grocery store, the family subtracts its annual expenses from its income to
determine profits that are then allocated among labor, management and
capital. For the economic well-being of the family and the rural community,
it makes little difference how the profits are allocated among the three
costs of labor, management and capital. The local family spends much of the
"profit" in the local community. In addition, when the rural
communityretained all of income related to the three factors of production,
the funds circulated more in the community. Not just the family farms, but
all of the family businesses providing the agricultural infrastructure
contributed to the economic well-being of the community. In the past when
family businesses were the predominant system in rural communities,
researchers talked of multiplier effects of three or four. Newly generated
dollars in the agricultural sector would circulate in the community, changing
hands from one entrepreneurial family to another three or four times before
leaving the rural community. This greatly enhanced the economic viability of
the community. Large non-local corporations, whether hiring labor as wage
earners or piece rate workers as in the case of growers, see labor as just
another input cost to be purchased as cheaply as possible. The "profits" then
are allocated to return on management and capital and are usually taken from
the rural community. They go to the company's headquarters and are then sent
to all corners of the globe to be reinvested in the food system. One can ask
the question, why were agriculturally based rural communities, with an ample
natural resource base, more economically viable than mining based rural
communities which also had an ample natural resource base? The answer lies
primarily with the economic structure of the major economic base.
Increasingly, our agriculturally based communities, like regions with major
poultry operations, are looking like mining communities. Increasingly, the
major decisions in the food system are being made by an ever-declining number
of firms, a growing number of which are involved in the food system clusters.
They are primarily concerned with maximizing their profits. That is the
purpose of such corporations.
ConAgra says its major mission is to increase the wealth of its stockholders.
But, these firms are in position to decide which people in the world will
eat. Their decisions are based on whether one has the money to buy food. We
hear a lot about the growing population of the world and how feeding the
increasing millions will provide great opportunities for farmers in the
United States. The problem is that much of the population increase is in the
"have-not" nations of the world, in countries where the people earn only a
few hundred dollars a year. These families cannot afford to buy imported
food! The global firms travel the world "sourcing" their products from>those
countries where they can get the product the cheapest and selling them into
the countries that will pay the most. This raises the question of whether the
countries with rapidly growing populations will be our farmers' customers or
their competitors.
One hears a lot about agri/food exports from the United States and the
potential benefits for our farmers. Much less attention is given to United
States food imports. On a dollar basis, the exports and imports have been
growing at about the same level for the past two decades.This means that on a
percentage basis, imports have been increasing more rapidly, because imports
started at a lower dollar value. For example, about one-third of the
vegetables consumed in this country are imported. The United States is also a
net importer of beef Issues of food quality and especially food safety are
also receivinincreased attention. Perhaps the bigger issue is whether the
global food system is sustainable. The production, processing and
distribution stages have all been built on cheap petroleum. Considerable
debate exists on when the world's petroleum resources will be depleted, but
most agree the price will begin moving up in the not-too-distant future. Will
the resulting price shocks cause the whole food system to restructure again?
Another question being asked, given the financial problems faced by some
nations, is: What would happen if the United States were to experience a
depression like that of the 1920's and 1930's? A depression is a major
disorganization of the economic system. Think for a moment what that would
mean in a system of "just-in-time delivery." Will food products get to the
stores on a regular schedule? Will my neighbor be able to get a replacement
engine from England for his new New Holland combine if it breaks down during
harvest? Will the seed, chemicals and fertilizer, coming from all parts of
the world, get to the farmer in time? A shutdown of the agricultural
production system for a few weeks can have quite different consequences than
shutting down an automobile assembly plant for the same amount of time. A
lengthy delay in agricultural production could mean the loss of the year's
crop.
The control of the animal genetics pool is also concentrating and the genetic
base for domestic animals is narrowing. For example, over 90 percent of all
the commercially produced turkeys in the world come from three breeding
flocks. The system is ripe for a new strain of avian flu to evolve for which
these birds have no resistance. Similar concerns exist in hog, chicken and
dairy cattle genetics. These are food issues and not just agricultural and
rural issues. The global food system is becoming more like many of the other
economic sectors. But food is different from all other goods and services
exchanged in the international market. Food is a human necessity and it is
needed on a regular basis. Those who control the global food system have the
ultimate in economic power.
As Dwayne Andreas, former chairman of ADM, said:
The food business is far and away the most important business in the world.
Everything else is a luxury. Food is what you need to sustain life every day.
Food is fuel. You can't run a tractor without fuel, and you can't run a human
being without it either. Food is the absolute beginning. (Reuters, 1/25/99)
One hears much about "niche markets" as new opportunities for farmers. Such
opportunities do exist. There is a major rebirth of farmers'markets, local
food routes, subscription sales and other forms of direct marketing between
farmers and consumer, with small processors involved when needed. As the
food firms get larger and cover wider geographic and cultural areas, they
leave behind a growing number of small markets they do not serve. The more
consumers learn about the ways their food is grown in far away places, the
more many of them are concerned with where their food is produced, who
produces it, and how it is produced. The structural vulnerability of the
emerging food system is called into further question when one remembers the
situation in the former Soviet Union. The Western world began to realize
there were major problems in the centralized food system of the former Soviet
Union when it was learned that small farm plots were producing a significant
proportion of the country's food. Large centralized organizations have
problems adapting to change. They commonly have problems with management,
with coordination, and with worker satisfaction.
These are good reasons to predict that the evolving system is vulnerable. It
will probably be restructured again in the future. A vulnerable food system
will most likely be "restructured" numerous times in the future - but at what
social and economic cost to whom? When "restructuring" occurs, some people
pay a very high price for the changes. It is highly questionable whether
society as a whole really benefits.
If the number of farms is reduced to about 25,000 in the next decade, there
will be many farm families who will be involuntarily removed from their land.
In the mid 1980's, Congress allocated funds for helping the families who
followed the advice of the experts and by doing so lost all of their assets.
These funds were used wisely and they helped many families during their
transition from the farm. The motto then was "We may not be able to save
every family farm, but we can save every farm family." Perhaps the policy
emerging from this dialogue on concentration in the food system can lead to a
new system that will save both. Just a quarter of a century ago, our
decentralized system of agricultural production was held up as a model for
the world.
The centralized food system that continues to emerge was never voted on by
the people of this country, or for that matter, the people of the world. It
is the product of deliberate decisions made by a very few powerful human
actors. This is not the only system that could emerge. Is it not time to ask
some critical questions about our food system and about what is in the best
interest of this and future generations?
CONCENTRATION OF AGRICULTURAL MARKETS
January 1999
William Heffernan, Robert Gronski, Mary Hendrickson
Department of Rural Sociology -- University of Missouri
Columbia, MO 65211 (573) 882-4563
e-mail: HeffernanW@missouri.edu
"CR4" is the concentration ratio (relative to 100%) of the top four firms
in a specific food industry. Fifth and
sixth top companies are occasionally shown as supplemental information.
BEEF PACKERS [CR4 = 79%]* Capacity/Day* | Plants* 1990 1995 1998
1. I B P Inc.38,800 13 72% 76% 79%
2. ConAgra Beef Companies 23,600 8
3. Excel Corporation (Cargill)21,800 5
4. Farmland National Beef Pkg. Co. 8,700 2
5. Packerland Packing Co. 4,750 3 CR5 = 83%
Source: *Beef Today (Nov-Dec 1998)
CATTLE FEEDLOTS*Head Office Capacity / Feedlots
1. Continental Grain Cattle Feeding Boulder, CO 405,000 / 6 lots
2. Cactus Feeders Inc. Amarillo, TX 350,000 / 6 lots
3. ConAgra Cattle Feeding Greeley, CO 320,000 / 4 lots
4. National Farms Inc. Kansas City, MO 274,000 / 7 lots
5. Caprock Industries (Cargill)Amarillo, TX 263,000 / 4 lots
Source: *Beef Today (Nov-Dec 1998)
NOTE: At end of 1998, the top 30 operations had pen space to feed 4.89
million head of cattle.
PORK PACKERS [CR4 = 57%]*1987 1989 1990 1992**
1. Smithfield (Gwaltney, Cudahy, Morrell, Lykes)
2. IBPInc.
3. ConAgra (Swift) **Packers & Stockyards Programs
4. Cargill (Excel) GIPSA, USDA; February, 1996
5. Farmland Industries
6. Hormel Foods CR6 = 75% (NYTimes, 1/7/99)
Source: *National Hog Farmer (March 1998)
# of Sows
PORK PRODUCTION In 1998* Production Base
1. Murphy Family Farms 337,000 NC, MO, OK, IL (14%)
2. Carroll's Foods 183,600 NC, VA, IA, UT (8%)
3. Continental Grain (inc. PSF)162,000 MO, NC, TX
4. Smithfield Foods 152,000 NC, VA, UT (7%)
5. Seaboard Corporation 125,500 KS, CO, OK (7%)
NOTE:The 50 largest producers (assuming their sows each produce 20 pigs a
year) market half of the pigs in the U.S.
Source: Successful Farming (October 1998)
BROILERS [CR4 = 49%]* *Weekly Production (mil.lb) CR4
1990 1995 1998 *1986 1990 1994 1998
1. Tyson Foods***74 90155 35% 44% 46% 49%
2. Gold Kist 24 45 55
3. Perdue Farms 24 42 47
4. Pilgrim's Pride 16 25 35
5. ConAgra Poultry 32 35 30
6. Wayne (Continental Grain) 11 20 25 CR6 = 58%
Sources: *Feedstuffs (Annual Reference Issues)
TURKEYS [CR4 = 42%]* Million lbs live*1988 1990 1992 1994 1996
1. Jennie-O Turkeys 891 31% 33% 35% 38% 40%
2. Butterball (ConAgra) 846
3. Wampler Turkeys 650
4. Cargill Turkeys 514
5. Shady Brook (Rocco)489 Sources: *Turkey World (Jan-Feb issues)
ANIMAL FEED PLANTS
1. Cargill (Nutrena)
2. Purina Mills (Koch Industries)
3. Central Soya
4. Consolidated Nutrition (ADM + AGP)
Sources: Feedstuffs, 10/28/91 and 2/21/94
MULTIPLE ELEVATOR COMPANIES [CR4 = 24%]*Control by Top Four:
1. Cargill Capacity in Bushels = 24%
2. ADM (ADM Milling Co.) Number of Facilities = 39%
3. Continental Grain Port Facilities = 59%
4. Bunge
Source: *1997 Grain & Milling Annual (Milling & Baking News)
FLOUR MILLING [CR4 = 62%]*Mills | Daily Capacity
1. ADM Milling Co 30 311,300 cwts **1982 1987 1990
2. ConAgra, Inc. 29 264,900 cwts 40% 44% 61%
3. Cargill Food Flour Milling 18 223,000 cwts
4. Cereal Food Processors, Inc. 9 82,900 cwts
Sources: *1997 Grain & Milling Annual; **Milling & Baking News, 12/1/92
DRY CORN MILLING [CR4 = 57%]Plants | 24hr. Grind
1. Bunge (Lauhoff Grain) 2 120,000
2. Cargill (Illinois Cereal Mills) 2 95,000
3. ADM (Krause Milling) 2 70,000
4. ConAgra (Lincoln Grain) 3 52,000
5. Quaker Oats 3 45,000
Sources: Corn: Chemistry & Technology (1989)
WET CORN MILLING [CR4 = 74%]*Plants
1. ADM 41977 1982 1987
2. Cargill 463% 74% 74%
3. A.E. Staley (Tate and Lyle) 4 (Census of Manufacturing)
4. CPC 3
Source: *Milling & Baking News, 1990 Milling Directory
SOYBEAN CRUSHING [CR4 = 80%]*
Plants/States
1. ADM 19 12 1977 1982 1987
2. Cargill 16 12 54% 61% 71%
3. Bunge 8 5 (Census of Manufacturing)
4. AGP 6 3
Source: *Feedstuffs (9/22/97)
ETHANOL PRODUCTION [CR4 = 67%]*
*mil.gal/yearlocations
1. ADM 750 IA, IL, ND
2. Williams Energy Services 130 IL, NE
3. Minnesota Corn Processors 110 MN, NE
4. Midwest Grain Products 108 IL, KS
5. Cargill 100 IA, NE
Source: *www.ethanolrfa.org/prodcap.html