A Fair Deal for Farmers

Raising Earnings and Rebalancing Power in Rural America

 

By Zoe Willingham and Andy Green, Center for American Progress

May 7, 2019

 

The Center for American Progress is an independent nonpartisan policy institute that is dedicated to improving the lives of all Americans, through bold, progressive ideas, as well as strong leadership and concerted action. Our aim is not just to change the conversation, but to change the country.

 

Introduction and summary

 

Almost every step of America’s food supply chain has grown more concentrated in the past few decades. From manufacturers of agricultural inputs such as pesticides and equipment to commodity buyers and meat processors, growing corporate power has left relatively small farms and ranches vulnerable to exploitation at the hands of the oligopolies with which they do business. Recent mergers and acquisitions continue the relentless trend toward increasing corporate concentration across many agricultural markets. This report examines two key markets—for corn and soybean seeds and for hogs—and finds evidence that market concentration has resulted in considerable corporate market power, to the detriment of America’s farmers.

 

For example, the share of the corn seed market that is controlled by the four largest biotech companies has risen from 50.5 percent in 1988 to 85 percent in 2015. (see Figure 2) Meanwhile, the increase in the price of corn and soybean seeds has outpaced increases in yield. Moreover, spending on research and development (R&D) in the sector seems to be slowing, and farmers face diminished choice in seed.1 Between 1995 and 2011, the cost of purchasing seed to plant one acre of soybeans and corn increased 325 percent and 259 percent, respectively, while yield per acre only increased 18.9 percent and 29.7 percent, respectively.2

 

Hog farmers face increasing processor buyer power resulting from the twin trends of increasing concentration and the prevalence of production contracts. As of 2015, 66 percent of all hogs were slaughtered by the four largest meatpackers, up from 34 percent in 1980.3 Meanwhile, 63 percent of hogs were raised under contract with processors, and only 2 percent of hogs were sold in the cash spot market.4 (see Figure 5) The rest were raised on packer-owned and -operated lots. With only a handful of processors with which they can do business, hog farmers have little choice but to enter into contracts that compensate them through opaque and often manipulatable pricing formulas that saddle farmers with burdensome terms and quite often large levels of debt.

 

The resulting impacts on farmers’ ability to share in the fruits of their labor are severe. Indeed, agricultural economists who modeled farmer and consumer welfare under various degrees of market power among buyers note that even a modest departure from a perfectly competitive market can result in a 30 percent decrease in farmer surplus.5 The increasing difference between the price paid to hog farmers and the wholesale price of pork is consistent with the hypothesis that processors are benefiting from market power, in part at the expense of farmers’ livelihoods. (see Figure 6)

 

Similar challenges exist across American agriculture and ranching. It is not surprising then that small and midsize farmers struggle to keep their operations running and make ends meet. Indeed, real net farm income for intermediate farms—defined as family farms operated by someone whose primary occupation is farming and with annual gross cash receipts of less than $350,000—has seen little improvement over the past two decades.6 As of 2017, more than 40 percent of midsize farms—defined as family farms with gross cash receipts between $350,000 and $1 million—had an operating profit margin of less than 10 percent, placing them at high risk of financial problems, according to the U.S. Department of Agriculture (USDA).7

 

While a wide range of economic forces—from volatile international trade relations to climate change to technological upheaval—put economic pressure on America’s farmers, the impact of monopoly power on farmers can no longer be ignored. Like millions of workers whose wages have been stagnant in recent decades, farmers are quite simply not receiving a fair share of the returns from their labor. With 1 in 5 rural counties dependent on farming, and a rural poverty rate 3.5 percent higher than in urban areas, rural America cannot afford depressed farm earnings.8

 

The analysis in this report aims to shed light on the impact that corporate concentration and the subsequent decline in competition in agricultural input and commodity markets have had on farm families and their communities. This report concludes with a set of specific recommendations that aim to increase competition; empower farmers to secure their fair share; and protect farmers from an array of unfair, deceptive, and abusive practices in these markets. These recommendations include:

 

·         Restoring competition in agricultural markets: Reviving strong antitrust enforcement across the agricultural sector is the starting point for protecting farmers and ranchers. Specific steps include a temporary moratorium on mergers in the agriculture sector, a statutory cap on concentration in various agriculture markets, and more broadly restoring the powerful tools of antitrust enforcement that have been eroded over the past four decades. Antitrust enforcers must also take affirmative steps to break up monopolies and monopsonies, while federal policy should proactively support the growth of new competitors.

·         Guaranteeing a fair share for farmers: Farmers must be empowered to receive a fair share of the fruits of their labor. Policymakers must implement alternative tools such as pricing models that guarantee farmers a percentage share of the ultimate returns on their commodities, as is the case today in some agricultural markets such as that of wine grapes. Alternative bargaining models can also be deployed to help farmers and workers receive a fair return, including farmer fair share boards made up of farmers, workers, and processors to facilitate farmer and worker collective bargaining with large buyers over commodity prices.

·         Codifying contract reform to protect farmer rights: The dramatic trend in many agricultural markets toward production under contract, rather than the sale of product on the spot market, means it is essential that contracts be regulated to protect farmers from unfair, abusive, and deceptive practices by large buyers. Farmers must also be empowered to better protect their interests under the law when they suffer violations of their rights.

·         Creating an Independent Farmer Protection Bureau (IFPB): America’s independent farmers deserve to have a dedicated, independent champion fighting for their interests against highly concentrated agribusiness. Modeled after the Consumer Financial Protection Bureau, which was created to protect consumers from the predatory financial practices that helped cause the 2008 financial crisis, an Independent Farmer Protection Bureau should be empowered to investigate and stop abuses of market power; protect farmers’ contract rights under laws such as the Packers and Stockyards Act; combat anti-competitive practices in seed and other input markets; and more. The IFPB should have backup authority to review and block mergers in markets that affect farmers.

 

The agricultural sector is vitally important to America’s economy and society. Two million American families still operate farms and ranches, and farm output contributed $164.2 billion to the United States’ gross domestic product (GDP) in 2018.9 Nationally, food is the third-largest household expenditure, comprising nearly 13 percent of monthly household expenses, and all told, farming and agricultural processing employs 4.6 million Americans.10 Therefore, the economic health of the agricultural sector and the food system is crucial to America’s economy. Restoring agriculture as a pathway to a decent, independent living will begin the process of rebuilding rural America.

 

The changing structure of America’s food system ...

 

Rising concentration in input markets ...

 

Growing buyer concentration and prevalence of contracting ...

 

Relatively decentralized production ...

 

Two key agricultural markets highlight the issue of concentration ...

 

Case study: Corn and soy seed ...

 

Case study: Hogs

 

Pork production is centered in the Midwest, which accounts for about two-thirds of all hog sales in the United States.72 Four of the top five hog-producing states are located in the American heartland: Iowa, Minnesota, Illinois, and Nebraska.73 Due to its recent structural transformation from a competitive cash market to one shaped by a handful of integrated processors, the pork industry has garnered the attention and concern of a growing number of advocacy organizations.

 

Hog production and processing look a lot like the broiler (chicken) industry today, notable for its highly concentrated processors and widespread use of contracts. In contrast to corn and soybean seed farmers, who face higher input prices, reduced quality, and fewer choices from the monopoly power of large companies, hog farmers face monopsony power—the ability of buyers to suppress the prices paid to producers. This not only holds down the prices that hog farmers get for their product, but affects the entire nature of their operations. The increase in concentration in meatpacking and proliferation of production contracts have put hog farmers in a financial bind similar to that of broiler producers—forcing them to take on burdensome debt, accept low prices derived from opaque formulas, and assume risky liabilities.74

 

Since 1985, the hog industry has grown much more concentrated, with the four-firm share of hog slaughter increasing from 33 percent to 65 percent in 2008.75 The DOJ has long failed to vigorously enforce antitrust laws in the hog industry. In 2007, the department greenlighted a merger between Smithfield Foods and Premium Standard Farms, which together operated three of the four packing plants in Virginia, North Carolina, and South Carolina, creating a local monopsony.76 Despite already high levels of concentration, the DOJ permitted the Brazil-headquartered meat processor JBS to purchase Cargill’s pork processing holdings in 2015, increasing JBS’s share of the market from 11.6 percent to more than 20 percent.77 Today, the four biggest pork integrators account for 66 percent of America’s hog slaughter.78

 

However, national concentration levels obscure regional markets that may be much more concentrated. Hog farmers face several constraints when finding prospective buyers. Namely, after hogs reach market weight, farmers have a limited time to sell before the hogs deteriorate in quality and gain or lose weight, reducing their value. Furthermore, hogs are expensive to ship. It costs about $300 to transport 200 hogs 100 miles, and each mile traveled means increased mortality, decreased quality, and weight loss.79 As a result, the market for live hogs is geographically very limited, and buyers have significant leverage over farmers desperate to sell a rapidly depreciating product. Focus on estimates of national concentration levels ignores the reality that hog farmers face highly concentrated regional markets for their products. For example, after JBS’ acquisition of Cargill’s pork processing operations, the Iowa Farmers Union projected that the top two firms would buy and slaughter 82 percent of Iowa hogs.80 In the case of hogs and other bulky, perishable commodities, national concentration measures provide inadequate estimates of market power.

 

In tandem with increasing packer concentration, the portion of hog production occurring under marketing and production contracts has also increased dramatically. In 2017, 63 percent of hogs were produced under contract—nearly double the share of hogs that were contracted in 1996 and 1997.81 The price formulas defined in these contracts are often based on spot market prices, although, as noted below, they are complex, opaque, and often do not give the farmer much if any chance to control—or sometimes even observe—the pricing process.82 Usually, the livestock raised is itself owned by the integrator while contracts require the farmer to make burdensome capital investments to meet integrator requirements.83 While integrators offer short-term contracts, the producer must make a long-term financial commitment to specialized livestock production, increasing the relative power of the integrator over the farmer.

 

Hog contracts, by design, grant processors power over family farms. The prices in these contracts, even though based in theory on spot market prices, are derived from complex formulas that are not made public, sometimes even to the hog farmer. Moreover, when farmers attempt to band together to bargain for more favorable contracts, they risk retaliation from large integrators, a phenomenon that is well-documented in the broiler industry. Rural sociologist Mary Hendrickson has written extensively about how contracts ensnare farmers in a web of dependency on powerful firms. Without meaningful alternative buyers or safeguards that protect growers from extractive contract terms, Hendrickson argues that contract farmers are faced with “structural unfairness that constrains their basic liberties of fairness.”84 This power differential is exacerbated as most farmers now have few local alternative packers.

 

Additionally, the growth of captive supply—hogs that are owned by the processor throughout their lives—and industry consolidation has considerably thinned the cash market for hogs, sparking concerns about the integrity of market prices as viable price signals and opening the door to the abuse of buyer power. In 2016, just 2 percent of hogs were sold on the cash market, where live hogs are sold in a public market for immediate delivery, compared with more than 60 percent in 1994.85 The rest of production is captive supply, either contracted to outside growers or fed on company-operated feed lots. Thin spot markets are more susceptible to price manipulation because the average reported price is more sensitive to any one transaction and to big buyers moving in and out of markets on a weekly basis.86

 

There is a sizable body of evidence that shows that pork packers are using their size to exert market power and suppress commodity prices. The most significant study was commissioned by GIPSA and conducted by RTI International.87 This study, which relied on price data unavailable to the public, found that spot market hog prices varied by as much as 40 percent, and the differences were not fully explained by transportation costs, region, and quality of the product. This variability suggests that these markets are not functioning competitively. In fact, RTI concluded that there was buyer power in live hog markets, though they could not determine whether this market power was derived from the use of contracts. However, RTI International found that an increase of 1 percent in captive supply was associated with a nearly 1 percent decrease in spot market hog prices—a large effect when taking into account the thin margins under which many hog producers operate.

 

While the literature on this subject is not unanimous, several experts have drawn similar conclusions about the competitiveness of hog markets.88 Economists Xiaoyong Zheng and Tomislav Vukina have also found direct evidence of oligopsony in spot markets for hogs that resulted in suppressed commodity prices.89 Others have suggested that thinning markets may no longer provide reliable, competitive prices.90 Research has found that increases in contracting have led to higher price volatility and lower spot market prices, directly suppressing prices by reducing the demand for hogs on the spot market more than the supply.91

 

Because contracted hog prices are often based on spot market prices, monopsony’s effect is likely felt broadly by all hog producers.92 The magnitude of this market power is hard to measure, but agricultural economists John Schroeter from Iowa State University and Azzeddine Azzam from the University of Nebraska estimated that 47 percent of the farm-to-wholesale price spreads for pork were rents captured by powerful processors.93 This rent capture means that farmers only receive a small fraction of the sales price that consumers pay at the supermarket. For example, when a customer purchases a pound of bacon for $4.33, only about 69 cents of that price goes to the hog farmer.94

 

The winners and losers in a concentrated food system ...

 

Recommendations ... 

 

Restore competition to agriculture markets ... 

 

Guarantee a fair share for farmers and ranchers ... 

 

Implement contract reform to protect farmer independence and rights ... 

 

Create an Independent Farmer Protection Bureau ... 

 

Conclusion ... 

 

About the authors ... 

 

Acknowledgements ... 

 

Endnotes ... 

 

more, including tables, charts, infographics, links    

https://www.americanprogress.org/issues/economy/reports/2019/05/07/469385/fair-deal-farmers/