Is There Widespread Price Fixing in the Food Industry?

By G.L.C., on October 2nd, 2008

There have been concerns that, beyond the rising cost of fuel and feed, a hidden factor may be driving food prices higher: collusion among farmers, food processors, or exporters. Federal prosecutors have opened separate criminal probes into possible price-fixing by major egg producers and California tomato processors. This is the latest in a series of U.S. investigations of alleged collusion in food and agriculture. Prosecutors are already pursuing criminal or civil inquiries in the markets for fertilizer, citrus fruit, cheese, and milk, examining whether suppliers worked in league to manipulate prices.

Under U.S. law, it’s a crime for competitors to collaborate on production or prices. Price-fixing is a criminal violation that can bring stiff fines and sometimes prison terms for executives. In recent years, U.S. antitrust enforcers have aggressively pursued such cases. Although federal law bars competitors from collaborating when setting their prices, Congress has created antitrust exemptions, like the 1922 Capper-Volstead Act, intended to help small farm groups and cooperatives bargain with large food processors. There are also exemptions for exports. Egg and tomato producers say their cooperation is shielded by these exemptions.

Egg prices have increased more than 40% in a year. Fresh-egg farmers acted together through a series of export shipments organized by United Egg Producers, an industry cartel whose 250-plus members include virtually all of the nation’s big egg producers. By removing a small fraction of eggs that would have been bound for U.S. sales and arranging instead for their export, United Egg helped tighten domestic supply and drive up the price of eggs across the country.

Tomatoes are among the big price gainers in the past year despite the salmonella scare. In the tomato industry probe, the prosecutors are trying to determine if dominant processors of tomatoes for canning, ketchup, salsa, and sauces conspired to fix prices. The investigation comes after allegations that a consultant to SK Foods, Inc., a big processor located in Lemoore, California, was working with SK to bribe buyers at six major food companies to pay inflated prices for tomato paste and chili peppers. In wiretaps and raids carried out as part of the bribery probe, investigators found evidence of the wider price-fixing conspiracy.

The big dairy cooperative Dairy Farmers of America is under investigation for alleged manipulation of cheddar cheese futures prices in the Chicago Mercantile Exchange in an attempt to restrict competition.

This is an election year. Farmers are a powerful political voice, and the exemptions aren’t likely to be repealed. But the latest food industry investigations show that antitrust enforcers are increasingly willing to challenge the co-ops they allege have overstepped the spirit of the law. If businesses are going to use narrow exemptions to engage in anti-competitive conduct, the government must take a hard look at that.



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Exploitation of Farmers: We Are All at Fault

By Bhagwad Jal Park, on July 15th, 2008

Economics sometimes leads to great injustice and cruel realities. However, sometimes the way man is by his very nature leads to even greater ones. Our economy is growing at a tremendous rate. In India, the growth rate is 9%. Intuitively, this means that the output of the country is increasing by 9% every year.

But what is the quality of this output? The necessity to measure everything in currency has led us to believe that all output is equal. Is there such a thing as healthy and unhealthy output? Can a country have a lower economic growth rate and still be fundamentally stronger than a country that has a higher growth rate simply because of the type of growth it is having?

I say, yes it can. Let me take the example of India, where the difference is clearly visible. Being one of the most populated countries in the world, India’s need for food grains is tremendous. Because of it’s still rural nature, the large amount of open land, and its culture, 70% of India’s economy is agrarian. This is natural and healthy.

FarmerHowever, in recent years, the share of agriculture has been going down significantly. There was a time when the economy was 90% agrarian. This decrease is due to the rise of services, which are taking over a huge chunk of the produce of India.

Image Credit: Escape_to_Christel

I have no problem with this per se. What I do have a problem with is that the services are very much more profitable than agriculture. With far less work, a person like me (a writer), can earn literally 10 times more than a farmer – by working with 1/5th of the effort. Economics is such that because of the scarcity of writers like me, I earn more due to demand and supply, not because what I’m producing is 10 times more valuable than that of the farmer.

How is this justified? Likely, the farmers don’t even know that I’m living such an easy life while they break their backs to essentially feed me. The condition of farmers in India is pathetic. Large numbers of farmers commit suicide daily due to poverty and inability to pay off debts. They are killing themselves to feed people like me who don’t produce anything essential like food.

Cities in general produce very little of any real value. People are extremely busy working in the stock market, or sitting at a computer somewhere adding a minuscule amount of value to a probably useless value chain. They get paid far more than a farmer who toils day in and day out to produce something of value, which is bought from him at a pittance and used to fuel the people in cities.

FoodImage Credit: Stephanie Booth

For how long can this continue? Market economics dictates that sooner or later, the farmers will realize that a better living can be made in the cities and migrate to them. Then there will be a food shortage, and prices will rise until it is profitable to be a farmer once more.

Unfortunately, it doesn’t quite work that way. The prices of farm produce are not dictated solely by market forces. Instead of paying through my nose for the food that I eat, I’m paying much less than that. Prices are controlled by middlemen who force the desperate farmers to sell at lower prices.

The bottom line is that it’s just too unfair. The farmers are feeding the huge glutted cities, which hum and buzz and produce nothing of value, while they themselves are being exploited. How will this end? One can only hope that some day, we will begin to realize just how precarious our position is, and how grateful we must be to those who feed us.



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Agricultural Markets Ripe for Speculative Picking

By Mark Mahorney, on July 11th, 2008

Most people probably don’t realize (I didn’t) that the U.S. has a strategic grain reserve. Well had. It’s almost entirely depleted. The United States Department of Agriculture (USDA) operates the Commodity Credit Corporation (CCC) which, according to the USDA site, performs the following functions:

“The Commodity Credit Corporation (CCC) is a Government-owned and operated entity that was created to stabilize, support, and protect farm income and prices. CCC also helps maintain balanced and adequate supplies of agricultural commodities and aids in their orderly distribution.”

Some may recall that in the 90’s there was a big push to get the country off various forms of welfare including farming subsidies. A 1996 farm bill nixed government grain reserves and Farmer Owned Reserves (FOR), the latter of which was intended to geographically spread out the country’s grain reserves to protect against something unforeseen happening to the stockpiles. The reserves are just now running out.

Now that decision is looking to have been a very bad one indeed with this year’s corn crop caught in a perfect storm. One-hundred-year storms flooding the Midwest combined with an 8% reduction in acreage dedicated to corn will amount to a 10% hit on this year’s harvest. Then, too, there’s the rising demand from the ethanol distillers. In 2006, they used 20% of the corn crop, 27% in 2007, and the expectation is that ethanol will absorb somewhere around 40% of the 2008 crop. Though at $7 a bushel of corn, ethanol producers are losing money at today’s pump prices. Yet, since ethanol burns less efficiently than gasoline and requires special equipment, there’s little room to jack up the pump price without killing the market.

Corn is having a serious ripple effect out into the other grain markets and feed for livestock without putting much of a dent in the energy market. That’s got speculators and the hedge funds looking beyond the usual agricultural companies for ways to get in on the action.



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