RS20562: Merger and Antitrust Issues in Agriculture

Jerry Heykoop and Alejandro E. Segarra

Agricultural Policy Analysts
Resources, Science, and Industry Division

Updated January 10, 2001

Summary

A sustained period of low farm prices has generated legislative interest in the effect of concentration and consolidation on U.S. agriculture. Questions have been raised about the federal government's role in pursuing cases of unfair competition or violations of antitrust laws. Legislative interest has risen because, while regulations target business practices, important issues associated with concentration and consolidation may not be adequately addressed by existing antitrust laws. Recent reviews by Congress have dealt with issues such as: (1) the adequacy and employment of existing federal antitrust statutes to protect farmers against anti-competitive practices; (2) the extent to which mergers influence farm prices and their impact on farmers and consumers, and (3) the appropriate role of the federal government in regulating agroindustry. This report briefly describes the federal statutes and agencies involved in antitrust regulation and reviews proposals offered in the 106^th Congress to restrict mergers in agriculture.

Background and Statutes

The changing structure of the agriculture sector, particularly with respect to mergers between major grain companies and concentration in the livestock sector, is seen by some as a cause of persistent low farm prices. Concentration and consolidation in the agriculture and food sectors have brought up questions about the federal government's role in pursuing cases of unfair competition or violations of antitrust laws. The major statutes involved in agriculture are:

Packers and Stockyards Act, 1921 (7 USC §181 et seq.) administered by the U.S. Department of Agriculture's Grain Inspection Packers and Stockyards Administration (GIPSA). Contains financial protection, prohibits unfair, unjustified discriminatory and deceptive practices, and prohibits activities that might adversely affect competition.

Capper-Volstead Act (7 USC §§291-292) administered by USDA. Confers limited exemption from antitrust liability to allow farmers to join together in collectively marketing or processing commodities they produce. USDA may file complaints against cooperatives that engage in a monopoly or restriction of trade to such an extent that the price of the commodity is unduly enhanced.

Sherman Act (15 USC §§1-8) and Clayton Act (15 USC §12 et seq.) administered by the Department of Justice (DOJ) and Federal Trade Commission (FTC). Prohibits certain activities, including mergers and acquisitions, that deny market access or suppress competition. USDA has no role, but may be called on by DOJ for expertise.

Hart-Scott-Rodino Act (15 USC §18a). Requires notification of proposed mergers or acquisitions that meet certain size requirements. Notifications are submitted to both DOJ and FTC to determine the need for further the merger review.

Basis of Antitrust Enforcement

The goal of antitrust regulations is to protect competition for the benefit of consumers. Regulations are not intended to keep existing competitors (producers) in the market, but rather to protect them from unlawful anti-competitive behavior: "When the antitrust agencies ­Federal Trade Commission and the Antitrust Division of the Department of Justice­ review mergers, they do so with an eye to protecting competition for the benefit of consumers. They pay considerable attention to market definition ­over how large a market the merged firm might exert market power, and what competitors it faces in that market­ so that the effects of a merger are evaluated in the proper context."⁽¹⁾

The three types of unlawful anti-competitive behavior are usually involved:

Collusion is a violation of Section 1 of the Sherman Act. Collusion occurs when separate firms agree among themselves not to compete with each other, but instead join forces against their consumers or their suppliers.

Monopolization or Attempt to Monopolize is a violation of Section 2 of the Sherman Act. There are several ways to monopolize, including the use of predatory practices and/or exclusionary conduct.

Mergers or acquisitions that are likely to substantially lessen competition in a market are a violation of section 7 of the Clayton Act. Merger law has a different focus than collusion and monopolization in that it does not require proof that anti-competitive conduct already has occurred. The principal focus is not on the conduct of the merging parties, but on whether the merger would change the market structure to such a degree that competition likely would be substantially lessened. The remedy DOJ seeks for a merger that violates the Clayton Act is to seek to stop the merger, or to insist that it be modified to remove the cause for antitrust concern (e.g., divestitures).

Antitrust Issues in Agriculture

Although many issues associated with concentration and consolidation, such as job loss, change in ownership structure, and other quality-of-life issues, are not addressed by antitrust laws, it is these quality-of-life issues that often are the driving force behind calls for stronger regulations and law enforcement in agriculture. Within agriculture, issues involve the loss of rural lifestyles, the disruption of farming families, and the continuing trend of fewer and larger farms coupled with the loss of smaller farms. Nevertheless, antitrust enforcement does not encompass the broader range of possible economic and social effects that may be associated with mergers. Such effects result not only from mergers, but from many other forces as well, including technological change, deregulation, and international competition. Some have argued that mergers may be more a symptom of broad change in the economy than a cause. Others similarly argue that concentration/consolidation is occurring in response to external factors, including international competition. They suggest that policies that are best for dealing with these changes include promoting full employment and macroeconomic stability, developing a skilled and well-trained work force, providing adequate unemployment insurance and other safety net programs, and helping communities adapt to economic change.⁽²⁾

Agencies Regulating and Enforcing Antitrust Statutes

Key agencies involved in administering antitrust law provisions that affect agriculture are: GIPSA and the DOJ.

Grain Inspection, Packers and Stockyards Administration

GIPSA, an agency within USDA, has primary regulatory authority over meat packers and grain processors. Its authority to regulate packers and stockyards is found in the Packers and Stockyards Act, 1921 (PSA). GIPSA does not have antitrust authority directly. Rather, its role is to maintain fair competition regulations. Specifically, the PSA (7 USC §192) makes it unlawful for a packer or poultry dealer to:

1. Engage in or use any unfair, unjustly discriminatory, or deceptive practice or device.
2. Give undue/unreasonable preference/advantage to persons or localities.
3. Apportion supply among packers in restraint of commerce (creating a monopoly).
4. Trade in articles to manipulate or control prices, or to create a monopoly.
5. Conspire to apportion territory, or sales, or to manipulate or control prices.

The PSA authorizes GIPSA to investigate alleged violations in the livestock sector, except poultry. Cases in the poultry sector are handled by DOJ, and GIPSA does not have regulatory oversight. Procedurally, PSA violators are served "cease and desist"orders and fines may be imposed. If a packer/dealer disregards a cease and desist order or refuses to pay fines, GIPSA may refer the case to DOJ, which can enforce the order/fine through court action. In its Annual Report for 1999, GIPSA stated that most violations of PSA are corrected voluntarily by the individuals or firms when the violation is brought to their attention. Except for serious violations, disciplinary action tends to be the last resort, and is imposed only after substantial efforts for compliance have failed.

Department of Justice

As mentioned above, DOJ has authority to prosecute anti-competitive violations of PSA upon referral by GIPSA. DOJ also has authority to review merger proposals and halt them or require divestitures. Under current law, parties to a merger must notify government antitrust agencies under certain conditions. The agency then has a specified amount of time to review the merger during which DOJ may request needed information. If a suit is filed, the agency usually asks a federal judge for a preliminary injunction against the merger. At this point, merging companies take one of three courses of action: drop the merger, prepare to go to court to fight the lawsuit, or negotiate with the agency in an attempt to restructure the merger to alleviate the government's concerns. Negotiation often is in the interests of all parties, because going to court is expensive, time-consuming, and risky.⁽³⁾

In reviewing potential antitrust cases, the primary issue is maintaining competition and not necessarily competitors. That is, DOJ might approve a large merger if competition is not reduced, while it may prevent a small merger if it is likely to reduce competition.

Examples of Agricultural Sector Mergers Reviewed by Regulators

Cargill-Continental Grain. The two companies reached an agreement, in October 1998, for Cargill to acquire Continental Grain's commodity marketing operations. After DOJ review, the merger received final approval in June 30, 2000 (Civil Case No. 99-1875 (GK). In approving the merger, DOJ required the divestiture of 10 elevators in seven states. Divestitures were to take place within five or six months, with the acquirer subject to DOJ approval as well. In most cases, merger policy focuses on monopoly power, but this case focused on monopsony power ­the power to dictate purchase prices.

Case-New Holland. Case, headquartered in Racine, Wisconsin, and New Holland, headquartered in Amsterdam, the Netherlands, announced in May 1999, their plans to merge. The two companies manufacture agricultural equipment (tractors and implements), construction equipment, and provide financial services. The DOJ and the European Commission cleared the merger for a November 12, 1999, closing, with divestitures of product lines in the United States and plants in Canada, Britain, Italy, and Germany. In its merger approval, DOJ ordered Case and New Holland to divest interests in specific tractor and implement manufacturers and a plant in Canada where the tractors are made. DOJ said the Case and New Holland businesses it ordered sold are interests in which both companies compete directly and would have decreased competition and led to higher prices for farm machinery.

Biotechnology: Monsanto-DeKalb. When Monsanto acquired DeKalb (both are seed companies), DOJ required a spinoff of gene technology to the University of California-Berkeley. In another case, ADM was found to be in collusion in conjunction with the international lysine (feed additive) market and received a $100 million fine, which was the largest corporate fine in history at the time. DOJ actions in this field have intensified and it continues to closely scrutinize the biotechnology sector. The most recent case in the biotech industry involves an antitrust suit against the seed companies Seminis Vegetable Seeds Inc. and LSL Biotechnologies for entering into an agreement for the production of long-shelf-life tomatoes, and which allegedly reduced competition in the development and sale of vegetable seed. Seminis is the world's largest producer, developer, and marketer of vegetable seeds.

Others. In the area of meatpacking, Excel attempted to acquire Beef America. However, when DOJ announced an investigation, the transaction went no further. Joel Klein, who is Assistant Attorney General, DOJ, Antitrust Division, cited the Excel case as an example of how DOJ stops anti-competitive behavior without much outside attention. Other recent merger proposals in the meat packing industry have attracted the attention of regulators, such as the competing merger proposals between meat packer IBP (the country's largest beef producer and second-largest pork producer) and either hog producer Smithfield Foods or poultry giant Tyson Foods. Many feel that any one of these possible mergers will be reviewed extensively for antitrust concerns by the DOJ and GIPSA.

Mergers in the railroad industry are also important to the transportation of agricultural commodities. In 1999, Burlington Northern Santa Fe (BNSF) (Fort Worth, Texas) and Canadian National (CN) (Montreal) announced plans to merge under the name North American Railways, Inc. The Surface Transportation Board (STB), which has jurisdiction over rail mergers, placed a 15-month moratorium on rail mergers intended to give STB time to develop improved regulations for dealing with mergers. The STB is expected to scrutinize the proposed merger more extensively than earlier mergers.⁽⁴⁾

Legislation

Proposals to restrict mergers and increase federal regulation of the agriculture industry were offered in the 106^th Congress. At issue were: (1) the adequacy and employment of existing federal antitrust statutes to protect farmers against anti-competitive practices; (2) the extent to which mergers influence farm prices and their impact on farmers and consumers, and (3) the appropriate role of the federal government in regulating industry.

Several bills were introduced in the 106^th Congress addressing agriculture concentration and antitrust issues. For example, S. 1854 proposed changes to antitrust laws by increasing transaction threshold from $15 to $35 million for pre-merger and acquisition notice requirements. Such a change would affect all mergers, not just those within agriculture. One proposal (S. 1984) would have created a permanent a position within the Antitrust Division of DOJ with responsibility for agricultural antitrust matters. Another bill (S. 2411) proposed increased power for USDA to pursue antitrust cases, to review mergers, and to require large agribusinesses to file certain information with USDA. Others (e.g., S. 2252 and H.R. 2829) would have extended GIPSA's investigation authority to poultry dealers. S. 2252 would have given USDA authority to review and challenge a merger and grant USDA expanded authority to prohibit anti-competitive practices in agribusiness. Late in the term, S. 3243 proposed plain language and anti-retaliatory requirements in agricultural contracting. It is expected that several of these measures would be reintroduced in the 107^th Congress.

Structural changes were also proposed by bills (S. 1738 and H.R. 3324) to ban packer ownership of animals intended for slaughter. Others, such as H.R. 3159 would have imposed an 18-month moratorium on mergers and acquisitions between large agribusiness firms.

A recent report by the General Accounting Office (GAO) determined that GIPSA lacks the staff, the budget, and the expertise to investigate anti-competitive behavior in the livestock industry.⁽⁵⁾ Among GAO's recommendations were calls for an earlier integration of attorneys in the planning and review of investigations, and for closer consultations between GIPSA, DOJ, and the Federal Trade Commission during investigations. A proposal to require USDA to implement, within one year, GAO's report recommendations for improving the administration of the Packers and Stockyards Act was signed into law on November 9, 2000 (The Grain Standard and Warehouse Improvement Act of 2000 P.L. 106-472).

Footnotes

1. ^(back)Economic Report of the President, February 1999, p. 39.

2. ^(back)For a further discussion on legal issues dealing with antitrust, please see CRS Reports 95-116A: General Overview of United States Antitrust Law, and RS20241: Monopoly and Monopolization ­ Fundamental But Separate Concepts in U.S. Antitrust Law.

3. ^(back)MacDonald, J. September 1999. "Cargill's Acquisition of Continental Grain: Anatomy of a Merger." Agricultural Outlook, p.21-24. USDA, ERS.

4. ^(back)For further discussion on railroad mergers, please see CRS Report 97-98 E: Rail Mergers: Background and Selected Public Policy Issues.

5. ^(back) U.S. Government Accounting Office. September 21, 2000. Packers and Stockyards Programs: Actions Needed to Improve Investigations of Competitive Practices. GAO Report RCED-00-242.