The Antitrust Review Of The Americas 2014

The US agriculture and food market has become increasingly concentrated in several sectors and across multiple levels. This market structure, along with the potential for decreased competition, has been an impetus for several recent private and government antitrust actions. As is often the case, these types of antitrust actions are not only costly to defend but can also, if successful, lead to substantial damages or conduct restraints on the defending parties. Concentration and coordination is expected to continue to increase, leading to fewer independent entities as they are replaced by larger retailers, processors and producers. For those not prepared for an increasingly concentrated and coordinated agribusiness market, there will likely be more litigation and government enforcement risk, expense and exposure.

Market structure and competition in US agribusiness

Market concentration

Concentration is a measurement of the aggregate market share of the firms in a market to reflect the extent to which sales or purchases are controlled by the largest firms in the market.1 Economists argue that concentration can have two opposing impacts on US agriculture and food products. On the one hand, high levels of concentration can contribute to market power, susceptibility to coordination among competitors on the same or different market levels and less than competitive prices for agricultural products or foods;2 on the other hand, concentration can contribute to economies of scale, greater efficiencies and lower prices.3

While historically the focus of concentration analyses in agriculture has been on processors and producers, the emergence of national food retailers makes them particularly relevant. At the national food retailer level, the shares of the four largest firms4 increased from 16.8 per cent in 1992 to 50 per cent in 2009.5 Moreover, the average four-firm concentration in 2006 for 229 US metropolitan areas was 79.4 per cent, which reflects relatively high concentration in many local consumer markets.6 The expansion of the few largest retailers drove much of this increased concentration during the most recent years.7

At the national processor level, a small number of companies account for a large and growing proportion of purchases or sales in each of the five major agricultural sectors (beef, pork, poultry, dairy and grains), which account for almost 90 per cent of the market value of food-related agricultural products sold by US farms.8 In the beef sector, the market share of the largest four processors firms increased from 41 per cent in 1982 to 79 per cent in 2006.9 In the pork sector, the market share of the four largest firms increased from 36 per cent in 1982 to 63 per cent in 2006.10 For the poultry sector, the four largest firms accounted for 57 per cent of the processing market in 2006, compared to 27 per cent in 1982.11 In the dairy sector, the shares of the four largest fluid milk processors increased to 48.7 per cent in 2002,12 following the combination of the two largest processors.13 Finally, in the grains sector, the four largest processor shares in 2006 ranged from 46 per cent to 69 per cent depending on the grain, compared to a range of 34 per cent to 86 per cent in 1982.14

This increased processor concentration is primarily the result of industry consolidation. Virtually every major agricultural sector has experienced recent combinations of significant market participants. For example, in 2007, JBS, an international beef processor, combined with Swift & Co to create the largest US beef processor, with about 30 per cent of the market,15 and this combination pushed the four-firm concentration to over 80 per cent for beef processing.16 Also in 2007, Smithfield Foods, then the largest pig producer, processor and packer, acquired rival Premium Standard Farms, resulting in Smithfield holding more than 30 per cent of the US pig processing market17 and increasing the four-firm concentration to 67 per cent by 2010.18 Similarly, in 2001, Dean Foods and Suiza Foods, then the two largest fluid milk processors, combined to create a national processor, named Dean Foods, with at least 34 per cent of the fluid milk processing market.19

At the producer level, farms have increased in size over time, although they remain small relative to retailers and processors. About 90 per cent of the 2.2 million US farms generated sales of less than $250,000 in 2007, while a few large farms (12 per cent of the total) account for 84 per cent of the value of US agriculture production.20 However, meaningful increases in producer level concentration have occurred in the form of larger farmer cooperatives. Since 2000, the number of cooperatives has fallen by nearly 50 per cent but cooperative turnover has steadily increased, topping $170 billion in 2009.21 This is the result, in part, of cooperative mergers, such as the formation in 1998 of Dairy Farmers of America (the DFA) through the merger of four regional dairy cooperatives.22 This merger helped boost the four-firm concentration for dairy cooperatives to 57 per cent.23 By 2008, dairy cooperatives had increased their share of US farm milk marketing to 83 per cent, with 79 per cent of the milk produced marketed by the largest cooperatives.24

Vertical coordination and integration

In addition to increased concentration, the US agriculture and food market has experienced increased vertical coordination and integration across the marketing chain. Vertical coordination is the synchronisation of successive stages of production and marketing, which, in agriculture, often includes quantity, quality and timing of produce. Vertical integration is when a single firm controls two or more successive stages of vertical coordination.25

Contracts between processors and producers governing the production and sale of produce have recently become widespread, and the share of the agriculture market subject to them has increased. In 2008, 40 per cent of US agriculture...