Discussion Papers
No. 1 / August 2006 / English Version
Concentrated Market Power
and Agricultural Trade
by Sophia Murphy
2 Concentrated Market Power and Agricultural Trade – Sophia Murphy
Contacts:
Heinrich Boell Stiftung, Hackesche Hoefe, Rosenthaler Str. 40/4, D-10178 Berlin
Tel: ++49-(0)30-285-34-187
E Mail: haas@boell.de
Misereor, Mozartstr. 9, D-52064 Aachen
T: ++49-(0)241-442-192
E Mail: kolmans@misereor.de
Wuppertal Institute for Climate, Environment and Energy, Doeppersberg 19, D-42103 Wuppertal
T: ++49-(0)30-28095493
E Mail: wolfgang.sachs@wupperinst.org
tilman.santarius@wupperinst.org
This paper does not necessarily represent the views of the before mentioned organizations.
About the Author:
Sophia Murphy, British and Canadian, currently living in Australia, is Senior Advisor at the USbased
Institute for Agriculture and Trade Policy (IATP) and an internationally recognized expert
in food and trade issues. She has over fifteen years experience in international economic policy,
working for NGOs in Canada and the USA, and with the United Nations in Geneva. She has a
Bachelor in Politics, Philosophy and Economics (Oxford) and a Master in Social Policy, Planning
and Participation in Developing Countries (London School of Economics).
IATP on the web: www.iatp.org
EcoFair Trade Dialogue Discussion Paper No. 1 3
Preamble
This paper is written as a discussion paper within the framework of the project
“EcoFair Trade Dialogue. New Directions for Agricultural Trade Rules”
(www.ecofair-trade.org).
The EcoFair Trade Dialogue is an international project carried out by the Heinrich
Böll Foundation in cooperation with MISEREOR and moderated by the
Wuppertal Institute. The overall aim of this project is to enrich the debate on the
reform of the current regime of global agricultural trade through the development
and advancement of forward looking guidelines and instruments, taking the
concepts of ‘food sovereignty’ and ‘sustainable agriculture’ as reference points.
Since the beginning of 2005 the EcoFair Trade Dialogue has brought together a
group of 11 ‘experts’ on agriculture and trade issues from around the world, the
so-called Expert Panel, to exchange views, work intensively together and make
innovative and feasible proposals for a profound reform of the international
agricultural trade regime. During 2006 a series of stakeholder dialogues in
different regions of the world are being conducted to bring additional expertise to
the process, and ground the group’s proposals in local and regional experiences. A
concrete and coherent reform proposal that responds to the 21st century’s social
and ecological challenges for global agriculture is envisaged as the outcome of the
project at the end of 2006.
The Eco-Fair Trade Expert Panel has identified market power as one of the
obstacles preventing the emergence of fairer, more ecologically sound trade rules
for agriculture. The paper focuses on the role of trade, investment and competition
rules and their role in the problem of concentrated markets. It concludes with
some recommendations for policy change and organizing to confront the
imbalances of power.
The author would like to thank Biswajit Dhar, Robert Taylor, Bill Vorley and Ben
Lilliston for their comments on a draft of this paper. My thanks, too, to the EcoFair
Trade Panel members, in particular Hannes Lorenzen and Tilman Santarius,
for their ideas, comments and support. The author of course bears all
responsibility for any errors in the paper. As this is a discussion paper of a
preliminary character, comments and contributions to the discussion are expressly
sought. Please send them to smurphy@iatp.org.
4 Concentrated Market Power and Agricultural Trade – Sophia Murphy
Content
Executive Summary ____________________________________________ 5
1 What Is Market Power and Who Has It? ___________________________ 9
2 Dimensions of Market Power ___________________________________ 12
2.1 Measures of Concentration _________________________________ 13
2.2 Standards________________________________________________ 14
2.3 Horizontal and Vertical Concentration _______________________ 14
2.4 Contract Agriculture and Global Commodity Chains ___________ 15
2.5 Brands, Information and the Culture of Transnational Food _____ 17
2.6 The Politics of Market Power _______________________________ 18
3 Market Power and the Public Interest: Farmers, Farm Workers and
Consumers __________________________________________________ 19
3.1 Farmers _________________________________________________ 22
3.2 Farm Workers ___________________________________________ 24
3.3 Consumers_______________________________________________ 25
4 Trade, Competition and Investment: the links to market power ________ 27
4.1 Trade ___________________________________________________ 27
4.2 Competition______________________________________________ 31
4.3 Global Competition Rules? _________________________________ 33
4.4 Investment_______________________________________________ 34
5 Conclusion __________________________________________________ 35
References ___________________________________________________ 40
EcoFair Trade Dialogue Discussion Paper No. 1 5
Executive Summary
This paper is written to provide information and analysis on concentrated market
power in agricultural markets, from input providers through producers, to
processors and retailers. The EcoFair Trade Dialogue has identified concentrated
market power as one of the obstacles preventing the emergence of fairer, more
ecologically sound trade rules for agricultural commodities and food.
Market power is the ability to affect price (setting buyer prices above and/or
supplier prices below open market levels), to reduce competition (for example, by
keeping out new entrants) and to set standards for a sector of economic activity.
Market power in agriculture is not new: in grain trading, for example, four of the
top five firms today dominated the market 100 years ago, too (Cargill,
Continental, Bunge and Louis Dreyfus). It was farmers organizing in the face of
concentration in the grain trade that led to many of the features of agriculture that
are typical in industrial countries today, including: farmer-owned co-operatives
that engage in trading commodities and sometimes processing them; publicly
mandated state-trading enterprises with a monopoly on aspects of agriculture
including food and commodity purchases, distribution and exports (e.g., the
Canadian Wheat Board or Indonesia’s BULOG); and, domestic support programs
that set a price-floor for commodities to counter the power of commodity buyers
to drive prices below the cost of production.
Farmers are inherently disadvantaged in the market: they are numerous, while
processors are few (one mill can grind the wheat of many farmers); individual
farmers’ production decisions have no effect on price (they are too small
individually to make prices rise by reducing acreage or head of livestock); they
must find capital up-front for an uncertain harvest several months hence (in the
case of fruit trees or livestock, even several years); and, it is expensive to store
harvested production, leaving most producers trying to sell their crops at the same
time. The larger the market, the more difficult these circumstances become. A
bigger market means more growers competing with each other. Although there
should also be more buyers potentially, the vast majority of farmers lack the
storage and capital needed to get their goods to distant markets, so they are left
selling locally, to middle-men (and women) who now have more suppliers to
choose from.
If market power is not new, it has today important new characteristics, reflecting
the wider global economic trends that marked the end of the 20th century.
Technological innovations in the areas of transport and communications, for
example, have revolutionized food production, processing and distribution. New
economic drivers have emerged, causing some of yesterday’s dominant firms,
6 Concentrated Market Power and Agricultural Trade – Sophia Murphy
particularly in commodity trading and food processing, to face difficult challenges
in trying to stay relevant and profitable. The most significant new drivers are
supermarkets—their newly established dominance is particularly strong in
Europe, but supermarkets are rapidly consolidating distribution and retail markets
on every continent.
A second big driver, also with considerable market power, are the firms that
provide agricultural inputs such as seeds, pesticides and agricultural chemicals of
all kinds, now reinvented as Life Science companies. These firms, such as
Monsanto and Syngenta, are focused on discovering and patenting genes of all
kinds to use in developing plants with new attributes (tolerance of herbicides or
drought, for example, or increased nutritional content). The commercial seed
industry is not yet highly concentrated at the global level because most farmers
continue to plant seed saved from previous harvests. However, industrial
agriculture depends absolutely on commercial seeds—many of them hybrids that
produce sterile seeds—and commercial seeds are increasingly common.
Commercial seed markets are also heavily concentrated. For example, Monsanto
controls 41 percent of the global market in commercial maize seed and 25 percent
of global soybean seed. This process is privatizing what has been part of the
commons for millennia: knowledge on what seeds, plants, growing techniques and
animal breeds suit particular growing conditions or meet human needs, from
drought resistance to nutritional value and medicinal applications.
Market power in agricultural production, processing and distribution both shapes
global trade and investment rules and is shaped by those rules. The steady
downward pressure on tariffs, for example, has opened up markets in ways that
favour companies in a position to do business on a global scale. The strong policy
push away from government interference in markets, whether in the form of
commodity boards, quantitative restrictions on imports, export taxes, price
stabilization policies, production incentives (or restrictions), production subsidies,
or capital controls, has changed markets for farmers the world over.
Farm organizations have welcomed some of these changes. For example, a
number of commodity boards had no voice for producers and many governments
deliberately set prices below market rates to subsidize urban consumers or to
increase profits from exports for the state (and, worse, for the private gain of the
officials who controlled the board). Yet the abolition rather than reform of these
boards has often created new problems. In many poorer countries, the private
sector lacks the capital and know-how to provide for the services that commodity
boards once offered, services such as low-interest credit, subsidized inputs, a
guaranteed buyer at a stable (albeit often low) price, or access to markets that
individual producers could not reach on their own. Transnational agribusiness
might enter these newly opened markets, but have no interest in serving the needs
EcoFair Trade Dialogue Discussion Paper No. 1 7
of the whole country; areas that are close to airports and ports or big urban centres
might see new investment, but much of the country is left out of the change.
Market power is also shaping agriculture independently of trade and investment
rules. The emergence of private standards, set by industry without reference to
government, such as Europe’s Eurepgap (developed by the Euro-Retailer Produce
Working Group), has a profound impact on who can sell their produce where. No
matter the tariff or public standard, if a product does not make it to a supermarket
shelf, or a processor’s factory, there are few other marketing options available to
the seller. This is the market access that ultimately counts, whether in domestic or
export markets. The fewer the companies in control of that access (whether
commodity brokers, food processors or supermarkets), the fewer options
producers have on where to sell their production.
The challenges presented by today’s levels of corporate concentration do not
invite easy answers. Those concerned to protect and promote Eco-Fair Trade for
agriculture need to pursue a number of avenues. The following paper considers a
variety of policy options, in some cases raising more questions than are answered.
There is a widely acknowledged need for increased transparency in national and
international markets about the scale and diversity of the largest food companies.
With the exception of the food retail sector, for which relatively good information
is available for many regions, there is little transparency on such questions as, for
example, how much of the world wheat trade is handled by Cargill, and how that
global figure breaks down by region. Nor do we know how much of world
agricultural trade is in fact an intra-firm transfer within a multinational company.
Computer models that attempt to predict the likely outcomes of various trade
negotiations are severely hampered in their assumption of perfect markets, when
most commodity markets are characterized by very imperfect competition.
Governments need urgently to review their national competition strategies to
ensure both producer and consumer interests are addressed and that more than just
efficiency outcomes are considered. Recent decisions related to competition have
focused on consumer interests, which is a vital dimension of the issue. Yet that
has focused debate on final price and efficiency rather than on other important
concerns, including the impact of market power on equity (how are costs and
benefits shared) and on price stability (especially for producers, price stability is
an important factor in determining capacity to invest and innovate rather than
pursue low-return, risk-averse behaviour). Governments need also to consider the
impact of market structures on employment: if maximizing efficiency in an
agriculture sector means widespread rural unemployment, then governments have
to consider whether alternative employment is available in other economic
sectors, or whether they can afford the dislocation and poverty that the loss of
agricultural jobs entails.
8 Concentrated Market Power and Agricultural Trade – Sophia Murphy
In thinking through solutions, governments and policy advocates will also need to
return to the question of how to manage investment and competition at the global
level. Ideas include creating minimum standards of private sector behaviour (to
meet environmental requirements, to ensure labour and producers are fairly
treated, to protect against price-gouging, and so on). Dilemmas include where to
hold such talks—the WTO does not have the mandate, nor the level of trust
required by all parties; the UN Conference on Trade and Development arguably
has a stronger mandate, but is considered irrelevant by a number of the more
powerful developed country governments. Yet the existing extent of global
economic integration makes this discussion urgent. The paper also looks at the
need to foster farmer organizing in developing countries, albeit cognizant of
developed country experiences, where some farmer-based co-operatives have
evolved into multinational agribusinesses with little regard for their original
stakeholders.
There is no simple answer to the challenges raised by concentrated market power.
The paper explores the challenges and the Eco-Fair Trade Panel welcomes debate
to further clarify our thinking on this important issue.
The paper is structured as follows. It
1. defines market power and offers some examples of the firms that hold
this power in some sectors of the food and agriculture system.
2. considers in more detail some of the elements of market power,
including vertical and horizontal concentration, size, branding, access to
information and political influence.
3. explains why the dominance of agri-business in agricultural markets is
of concern to public policy, looking at farmers, farm workers and
consumers.
4. reviews how trade, competition, and investment rules interact with and
reinforce market concentration.
5. concludes with some ideas of possible solutions.
EcoFair Trade Dialogue Discussion Paper No. 1 9
1 What Is Market Power and Who Has It?
“We are the flour in your bread, the wheat in your noodles, the salt on your fries.
We are the corn in your tortillas, the chocolate in your dessert, the sweetener in
your soft drink. We are the oil in your salad dressing and the beef, pork or
chicken you eat for dinner. We are the cotton in your clothing, the backing on
your carpet and the fertilizer in your field” (Cargill corporate brochure 2001).
Market power is the ability to affect price, to reduce competition and to set
standards for a sector of economic activity. Market power is the ability to set
customer prices above competitive levels (seller power) and/or the ability to set
supplier prices below competitive levels (buyer power). Market power
undermines competition. A firm with market power can increase its profits at the
expense of its suppliers or customers or both. Market power is not the same as
monopoly power. A monopoly exists when only one firm sells a particular good
or service in a market. Monopolies (and monopsonies, when only one firm buys
the good or service on offer) are easily identified; market power is more complex
and not always so obvious.
The quote from Cargill above describes a company with significant market power.
Cargill, privately owned and operated since 1865, has the largest terminal
capacity of any company in the U.S. Along with its operations in the United
States, Cargill can handle 23.9 million bushels of grain exports in Canada and
24.6 million bushels in Argentina and Brazil. Cargill alone exports 42 percent of
the corn that leaves U.S. shores (and the U.S. supplies some two thirds of the
world market). Cargill is among the top three beef producers in the United States,
and plays an important role in poultry production. It owns and operates a
worldwide transportation business, with ships, trucks, barges and railcars, as well
as grain elevators for storage. Cargill owns NatureWorks, a company that
produces plastics from plant based sugars that competes with oil-based polymers
used in plastic wrap, disposable cups and cutlery, and as filler in pillows and
mattresses. Sales and other revenues (gross income) has grown steadily and
remarkably over the past five years and now exceed US$ 70 billion:
Cargill Sales and Other Revenue in Millions of US $
2001 48,631
2002 50,398
2003 54,390
2004 62,907
2005 71,066
10 Concentrated Market Power and Agricultural Trade – Sophia Murphy
Cargill’s website offers a second list of activities that expands still further the
scope of the company’s market power, “With … a long history of trading in
global financial and commodity markets, Cargill is a proprietary investor,
alternative asset manager, broker-dealer and provider of risk management
products and services.” (www.cargill.com 2005). In other words, Cargill is not
just about selling and processing commodities—goods—but is also all about
services: banking, loans, investment, currency deals, risk insurance, shipping and
more. Market power is not the same as just size; there are big firms that do not
have much market power. In Cargill’s case, however, its scale and range of
activities is an indicator of the kind of advantages Cargill has over many smaller
and less diverse rival firms. Cargill illustrates one important dimension of market
power in the agricultural sector: it offers a one-stop-shop for the farmer (or buyer)
that makes it easy to do business with.
Cargill is one of several enormous firms in the commodity trading and processing
sectors, alongside other giants such as Archer Daniels Midland (ADM), Bunge
and Louis Dreyfus. Other sectors of the food and agriculture system show similar
patterns of concentrated market power. The Action Group on Erosion,
Technology and Concentration—the ETC Group—monitors concentration in the
seed industry. Their data shows that the top 10 multinational seed firms control
half of the world's commercial seed sales (ETC Group, Communiqué No. 82
2003). Although the commercial seed market is still relatively small (most
farmers, especially those in developing countries, continue to save seed from
previous harvests), commercial seeds are nonetheless very significant in the
world’s total food output, because most industrial agricultural production relies on
them.
The ETC Group found that one dominant seed firm, Monsanto, now controls 41
percent of the global market in commercial maize seed and 25 percent of the
global soybean seed market. Monsanto also sold the seed for 88 percent of the
total area planted in genetically engineered crops worldwide in 2004. The growing
importance of gene technology in the development of new seeds makes market
power in this sector particularly troubling. It is a sector, like pesticides, fertilizers
and farm equipment, where farmers were historically self-reliant (for example,
saving seed or using crop rotation and manure from their farm animals to maintain
the health of the soil) but if they have adopted industrial farming techniques, they
are now entirely dependent on buying inputs from the market. In 2002, 10
companies controlled 80 percent of the US$ 27.8 billion global pesticide market
(ETC Group, Communiqué No. 83 2003). Bioengineered seed usually comes with
what the seed companies call a “technology package,” which dictates how seeds
are to be planted and crops cared for—this package, like the seed, is patented and
farmers must both pay a royalty to use the technology and know-how in the
package, and commit not to use the techniques without first buying the company’s
seeds.
EcoFair Trade Dialogue Discussion Paper No. 1 11
The top ten seed firms worldwide (by value of sales) are shown in the chart
below. Seminis, Monsanto’s latest acquisition, is a leading fruit and vegetable
seed firm based in California, with sales in 150 countries.
World's Top 10 Seed Companies (ETC Group Communiqué No.82 2003)
[Based on 2004 seed sales and measured in US$ millions]
1. Monsanto (US) + Seminis (US) (bought by
Monsanto 3/05) pro forma = $2,803
2. Dupont/Pioneer (US) $2,600
3. Syngenta (Switzerland) $1,239
4. Groupe Limagrain (France) $1,044
5. KWS AG (Germany) $622
6. Land O' Lakes (US) $538
7. Sakata (Japan) $416
8. Bayer Crop Science (Germany) $387
9. Taikii (Japan) $366
10. DLF-Trifolium (Denmark) $320
11. Delta & Pine Land (US) $315
Perhaps the most dramatic development in market power in the food system,
however, has been the emergence of food retailers as dominant players, reaching
back downstream to contract with farmers and shaking up many of the businesses
that used to play the intermediary role as processors or procurers. Grain traders
such as Cargill have been powerful players in agricultural commodity markets for
well over a century. Four of the top five grain traders today were dominant at the
turn of the 20th century (Cargill, Continental, Bunge, and Louis Dreyfus). Retail
power is a much newer phenomenon. In the ten years since Wal-Mart first started
to sell food, it has emerged as the world’s largest grocery store, with 45 percent of
its phenomenal sales coming from groceries. Wal-Mart is five times bigger than
Cargill in both sales and profits, with total sales in 2005 worth US$ 321,547 (45
percent of this was in groceries).
In 1992, the five largest U.S. supermarket chains controlled 19 percent of grocery
sales. By 2005, conservative estimates put that number at 28.7 percent (Planet
Retail 2006, p. 4) Wal-Mart came from nowhere in the mid-1990s, when it started
to sell food, to its position today as the largest global food retailer. In 2004, WalMart
was estimated to have 6.1 percent of the global grocery market; almost three
times as much as the nearest rival, the French-owned Carrefour, which had 2.3
percent (M + M Planet Retail, cited in Vander Stichele et al. 2005, p. 53). In the
U.S., where the food retail market is nothing like as concentrated as it is in
Europe, Wal-Mart had 15.7 percent of U.S. grocery sales in 2004, some four times
more than its nearer competitor, Kroger, at 3.8 percent.
12 Concentrated Market Power and Agricultural Trade – Sophia Murphy
Companies that sell their products through supermarkets are now dealing with
companies as or more powerful than they are. Planet Retail (a group that monitors
developments in the retail sector worldwide) cites U.S. Securities Exchange
Commission filings that show the following percentages of firms’ sales to WalMart:
Dial Corp. (28 percent), Clorox (25 percent), Revlon (21 percent), Procter
& Gamble (17 percent), Energizer (17 percent), General Mills (14 percent),
Gillette (13 percent), Kellogg (13 percent), Kraft (12 percent) and Sara Lee (12
percent) (Planet Retail 2006, p. 4). The emergence of food retailers is rapidly
changing power relations in the food system and is creating its own set of
challenges and shifts in market power.
The level of concentration in grocery distribution varies across continents.
Researchers Vander Stichele et al say in 2003 the top 30 retailers had 19 percent
of the market in Asia and Oceania, 29 percent of the market in Latin America and
69 percent of the market in Europe (Vander Stichele et al. 2005). The trend lines
are similar across all continents, including those parts of Africa where the
research has been done—supermarket chains, usually but not exclusively
headquartered in Europe or the U.S. (in Africa they are based in South Africa), are
replacing local food shops in all continents, bringing the capital and know-how to
deliver a variety of food to consumers in one place.
2 Dimensions of Market Power
In agriculture, market power is often concentrated at the point a firm turns a
commodity into a comestible good. Millers have more market power than wheat
growers; coffee roasters command greater profits than coffee farmers; and, so on.
Market power in agriculture looks like an hourglass: a large number of farmers at
the base sell to a small number of processors and distributors and supermarkets in
the middle, who sell to a very large number of consumers at the top. In this
pattern, agri-business firms often have dependent suppliers (suppliers with
nowhere else to sell their production) and dependent buyers (if you need corn,
soybeans or wheat, four firms sell the overwhelming majority of production
globally). That hourglass creates a series of challenges for policy-makers in
agriculture; it has to be worked with and understood (not ignored, as it is in so
much free market rhetoric) for policy outcomes to be successful.
EcoFair Trade Dialogue Discussion Paper No. 1 13
2.1 Measures of Concentration
Economics has several ways of measuring market power. One common measure
is the concentration ratio (CR), which measures the share of the market controlled
by the largest firms (typically the top 3, 4 or 5). A CR4 (meaning the share of the
top four firms) of 40 percent or less is generally considered to be a competitive
market. The weakness of the CR as a measure is that it does not indicate if there is
any movement among the top firms measured (number one might slip to fourth
place, but the CR could be unchanged). Nor does the CR say whether the top
firms are among 100s in total, or just two other firms. The partial snapshot can be
misleading. Still, the CR does provide a useful, if rough, measure.
By way of illustration of market power in agriculture using a CR measure,
consider the following: in 2005, CR3 for Australian supermarkets was 89 percent;
the CR3 for soy oil refining in Brazil was 86 percent; the CR4 for fungicides and
insecticides in Brazil was over 90 percent; and CR4 for most agricultural
commodity processing in the U.S. ranges from 50 percent to 83 percent
(Heffernan/Hendrickson 2005).
Another measure of concentration is the Herfindahl-Hirschman (HH) index,
which is the sum of the squares of the market share of each firm in the industry. A
sector composed of 100 equal-sized firms will generate an index of 100. If there
are only four equal-sized firms, the HH index will be 2,500. With only one firm in
the market, a straightforward monopoly, the HH index is 10,000. The higher the
index, the more concentrated is market power in the sector. The slaughter of steers
and heifers in the U.S. has reached an HH index of 1800, high enough for the
Department of Justice to consider the sector “highly concentrated” (O´Brien 2005,
p. 8).
The HH index is seemingly simple but relies on some difficult judgment calls,
including the need to define the parameters of the industry. For example, should
the soy industry be considered as a whole (seeds, trade in soybeans, soy
processing, sales of soy cake and oil) or should one product—soy oil—be
considered in relation to other vegetable oils, with which it competes? Even when
the scope of the market is clear, a high index is not always proof of market power
because the few firms in the market can face competition from outside: they have
the market today, but it is possible that if they over-charge or make a bad
investment, other firms will be in a position to move in and challenge the firm’s
market dominance. If the barriers to market entry are low, a competitive market
can be maintained with relatively few firms. Despite the complications, it is
important to be able to measure concentration to measure trends and change in the
sector, and to give the problem a tangible form.
14 Concentrated Market Power and Agricultural Trade – Sophia Murphy
2.2 Standards
Market power gives the transnational agribusinesses the ability to determine who
has access to markets and, increasingly, to determine standards on a private basis,
without the aegis of governments. For instance, Nestlé and Parmalat between
them forced at least 50,000 dairy farmers out of business in Brazil when they
bought out milk cooperatives in the 1990s and changed the standards for handling
and storing milk prior to purchase (Development Policy Review cited in AAI
2005). Hygiene standards are essential, of course, because consumers must be
protected from spoiled merchandise. However, once Parmalat established its
market dominance through acquisition of local firms and cooperatives, the firm
insisted that farmers wishing to sell them milk install their own refrigeration units
on farm, a prohibitive capital cost for many farmers, and a cost that was not
justified by their output as small-scale producers.
Few market dominant firms show much interest in setting standards together with
farmers. Farmers will often need government support, perhaps in the form of
legislation, to ensure there are fairly dealt with. Including among the standards
some requirements such as local content is one way to address farmers’ concerns.
The Pick ‘N Pay supermarket chain in South Africa has been more deliberate than
many retailers to look for local suppliers—for instance, the supermarket has a
contract with growers in the Eastern Cape where Pick ‘N Pay tells the farmers
what seed varieties to plant and how to grow the squash in return for providing a
well paid and guaranteed market for three years (Fritschel 2003). FAO and others
are working on different versions of GAP (good agricultural practices)-based
standards, to explore their potential to improve sustainable and equitable practices
that would empower farmers. For now, most of the standards are set by retailers or
processors, and are made with an eye to consumers and food safety concerns,
rather than to farmers’ preoccupations or sustainable resource use.
2.3 Horizontal and Vertical Concentration
Agricultural markets today are characterized by both horizontal and vertical
concentration. Both are elements of market power. Horizontal concentration
means that only a few firms dominate a given point in a production chain: the
commercial seed market, heavy farm machinery, and most commodity processing
are examples of horizontally concentrated markets. The CR numbers cited earlier
reflect horizontal concentration—other examples are Cargill and ADM, who
between them export 40 percent of all U.S. grains, or the top five U.S. cattle
slaughter houses, which share 88.7 percent of the market.
Vertical concentration means that the same firm or few firms dominate more than
point on a production chain. For example, Cargill has joint ventures with
EcoFair Trade Dialogue Discussion Paper No. 1 15
Monsanto to provide genetically engineered seeds, is one of a handful of globally
dominant grain traders, and is among the top three or four producers of U.S. beef
and poultry, businesses that buy large amounts of processed grain to feed to the
animals. Cargill has power at many stages of the food production chain, which
magnifies its power at every point along that chain. Poultry in the United States
has long been produced in so-called captive supply chains. Ninety percent of U.S.
chicken is produced in a vertically integrated chain, where a firm contracts with a
poultry grower and provides everything—chicks, feed, veterinary services,
vaccines—and buys the chickens (those that make the grade, at least) at the end.
This model is spreading across South-East Asia, particularly under the auspices of
the CP Group, a Thai-based multinational.
Concentration at a given point in the food system can fuel concentration up and
downstream from that point. Many factors come together to create profound
structural change when a new market power, such as a well-capitalized
multinational like Nestlé, enters a market. The new entrant is likely to buy up
small local firms and farmer-owned cooperatives if they exist, which can increase
efficiency but at the expense of competition. A more centralized, consolidated
supplier or processor will generally prefer to deal with more centralized
retailers—supermarkets—than the varied marketing outlets of a traditional
market. Similarly, as buyers, a larger firm is unlikely to want to deal with
hundreds of suppliers, so the channels available to producers to sell their products
generally constrict. While economic efficiency goals are met in this process, other
important economic objectives—such as job creation, wealth distribution and
balanced regional growth—all suffer.
2.4 Contract Agriculture and Global Commodity Chains
Two other emerging phenomena in agricultural production have important
implications for the market power of transnational agribusiness: contract farming
and global commodity chains. Contracts have a mixed record. On the one hand,
contracts tend to reflect producers’ lack of market power in relation to buyers. The
terms of the contract can leave the producer liable for losses, can lock in a lower
than fair price for production, and can make the overall market much less
transparent, by turning exchanges on an open market into proprietary commercial
information. Price discovery, an essential element of a functioning free market,
disappears with contracts, particularly if they cover more than one stage of
production and processing.
In principle, farmers are quite open to contracts because their biggest risk is an
uncertain price, so locking in a price and a market in advance is a huge asset, even
if it means forgoing the chance of a windfall should prices be high at harvest or
16 Concentrated Market Power and Agricultural Trade – Sophia Murphy
slaughter time. Yet contract agriculture in the United States (and in many
countries, developing countries, too) has a poor record. Hog and chicken
production in the U.S. is dominated by contracts that do not serve producers (nor
the wider public) well: the farmers raising the animals barely earn enough to make
ends meet, animals are kept in appalling conditions, and concentrated production
leads to human and environmental health problems, as well as problems for the
animals themselves. Often contracts are written such that farmers continue to bear
the risk of low prices, with options for the buyers to pay less if market prices are
down when it comes time to sell. Farmers typically also run all the risk of poor
quality produce or insufficient production, whether due to neglect or weather or
other causes.
Contracts offer a tool with important potential, but that cannot work without
mediation to ensure that the stronger party does not abuse the weaker one (in this
case, the agribusiness firm exploiting the producer or agricultural worker).
Contracts offer the chance for government to play a role in structuring the
relationship between producer and the buyer, a chance that can be used to counter
market power imbalances and to promote desired public policy goals, such as
incentives for better environmental stewardship or penalties for poor
environmental practice. Contracts could offer a number of important protections
to farmers: they can include clauses that share risks between the producer and the
buyer, they can lock in a price which protects the producer from a volatile spot
price on the open market, and they can improve transparency in the often opaque
world of commodity transactions.
Global commodity chains are increasingly common in all aspects of economic
life. Agriculture is no exception. Much as clothing might be made from U.S.
cotton, sewed into garments in China or Central America and then sold anywhere
in the world, so food has become increasingly globalized as well. Supermarkets
for well-to-do consumers increasingly offer out of season foods, for example, by
sourcing from around the globe. Traditional commodities, too, are going global.
For example, soy grown in Brazil might be milled into cake in the E.U. and then
re-exported to a country in Asia as animal feed, while the soy oil is sold to a
European food processor.
Analysts generally describe global commodity chains as buyer-driven and
supplier-driven. Buyer-driven chains are one of the forces behind the push to
liberalize markets through bilateral, regional and multilateral trade deals. The
focus is on trade: the buyer looks where in the world it can source the products it
needs, at the right price, of the right quality and close enough to the processing
facility or final market to make financial sense. The buyer sources products
wherever the price and quality are right and ships them to where there is a market
to buy the final good. A supplier-driven chain is one where the market power lies
with the producer or, for a retailer, perhaps with a commodity broker or food
EcoFair Trade Dialogue Discussion Paper No. 1 17
processor; these are less common in agriculture. Supermarkets are an important
and growing force as the drivers in buyer-driven chains, particularly in
horticulture, but for other foods as well.
2.5 Brands, Information and the Culture of Transnational Food
Market power can be exercised through brands – a dominant firm such as Nestlé
or Kellogg can rely on consumer demand to ensure their products are available in
retailers globally. Most supermarkets in the U.S. receive relatively slim margins
of profit on their food sales. Instead, the supermarkets rely on sales volume and
charge food processors to display their products. Smaller, lesser-known brands
tend to be lost on the bottom shelf, while larger firms display their goods
prominently. However, with a household brand such as Nestlé instant coffee or
Pepsi Cola, supermarkets are obliged to carry stock simply to meet customer
demand—this is one reason firms invest in advertising and brand recognition.
Market power also results from access to or control of information. This could be
the power to withhold information or simply knowing more than the competition.
For example, Cargill is a privately-owned firm with limited obligations to disclose
its finances and operations, yet it is one of the world’s largest agribusinesses with
control over a considerable share of the world’s food. More generally, researchers
consistently remark on how little information on corporate size and behaviour is
readily available to those attempting to document global food and agriculture
trends. On the other hand, with operations in more than 160 countries, Cargill and
the other dominant commodity traders are privy to a great deal of information
about prevailing market needs and trends that the competition finds hard to match.
Holding a dominant position on information is a powerful way to keep new firms
from entering the market.
Recent court cases, films and books on the food system have also highlighted the
question of agribusiness’ role in determining diets and nutrition choices.1
Some
activists have made the analogy with the tobacco industry, claiming that the
widespread use of hydrogenated fat in fast food and processed food, with the
associated presence of trans-fatty acids, makes food companies responsible in part
for the explosion in obesity rates in developed and, increasingly, developing
country societies, too. Agribusiness’ use of aggressive marketing techniques
aimed at children, their sponsorship of fast food and vending machines in schools,
and their use of gimmicks such as selling 50 percent more soft drink for only 10
extra cents (it costs them a fraction of that to add more sugar water) or a second
hamburger for less than half the price of the first (again, at a considerable profit)
1
For example, the film Super Size Me (www.supersizeme.com) and the book Fast Food Nation by
Eric Schlosser.
18 Concentrated Market Power and Agricultural Trade – Sophia Murphy
have all contributed to a culture that ignores most of what we know about healthy
eating. Tim Lang and Michael Heasman make a few larger health-related points in
their book, Food Wars, including the loss of exercise due to driving to a
supermarket once a week rather than walking to a local row of shops every day or
two (Lang/Heasman 2004). It has now become commonplace for fast food
restaurants to give away toys related to the latest hit children’s film or for
breakfast cereals to promote their range with cut-outs of movie characters on their
boxes or gifts to send away for. These are all techniques to link certain foods
(rarely healthy foods) with culturally popular icons.
2.6 The Politics of Market Power
Market power extends well beyond economics. Typically, a firm with market
power is not just able to influence price, but also the policies and laws that govern
the market in which the firm operates. For example, banks and insurance firms are
influential in setting banking law, just as oil and gas firms influence energy
policies. In agriculture, the organizations that represent interested groups,
including farmers, are also part of the policy-setting process in many countries. It
is inherently more difficult, however, for farmers to organize into a single political
voice. In most countries, differences in land ownership, access to capital,
proximity to markets and other factors make farmers a disparate group.
Sometimes the number of farmers makes political organizing difficult; if over 50
percent of the labour force is engaged in agriculture, then no single political
organization is likely to be able to reflect all views. In many countries, two or
more major farm unions co-exist, and each will often take quite different positions
on agricultural policies, including trade.
Transnational agribusiness does not face these handicaps: they are far fewer in
number and have clearer (if not entirely consistent) interests. The U.S. Center for
Responsive Politics reports that for the 2003-2004 election cycle, 274 Political
Action Committees (PACs) made contributions on behalf of agribusiness in the
U.S., for a total of USD 17,148,603. Sixty-eight percent of this money went to
Republicans (for the most part, whichever party controls the House of
Representatives will get the majority of PAC funding in that cycle) (Center for
Responsible Politics 2006). Political influence also comes in the shape of what is
termed the “revolving door;” government officials in sensitive posts, including the
vast majority of recent Secretaries of Agriculture (the highest government post
related to agricultural policy) come with a background in agribusiness, and
generally return to agribusiness when their term of office is over. This mix of
politics and economic interest is then evident both in the laws that are passed, and
in the failure of government to implement existing legislation that was passed to
protect producer or consumer interests.
EcoFair Trade Dialogue Discussion Paper No. 1 19
Consider the Packers and Stockyards Act, a piece of U.S. legislation passed in
1921 to address the specific antitrust issues related to the livestock industry. The
U.S. Department of Agriculture (USDA) is responsible for implementation of the
act, through a specially created office called the Grain Inspection, Packers and
Stockyards Administration (GIPSA). A March 2006 Government Accountability
Office (GAO) report highlights the failure of GIPSA to implement adequately the
Packers and Stockyard Act.2
The report points out that despite the
recommendations of an earlier GAO report, in 2000, GIPSA continued to fail to
do an adequate job to ensure fair competition in the USD 90 billion livestock
market. The report says, “Overall, it appears that as GIPSA officials responded to
the prior OIG [USDA Office of Inspector General] and GAO reports, they did so
in a manner than prevented, rather than facilitated the desired actions and results”
(GAO 2006). Critics such as agricultural economist Peter Carstensen have
testified on these failings to Congress. During Senate committee hearings before
the passage of the 2002 farm legislation, Carstensen said, "They [GIPSA] have
the authority, but they are simply not using it to create rules," and GIPSA lacks
"enforcement capacity and organization" (Schuff 2001).
USDA’s failure to respond to the comments and criticisms comes at a time when
very rapid change in the livestock industries, particularly hogs and cattle, have
precipitated law suits from producers and widespread concern among local and
state governments about the economic and ecological effects of vertical
integration, contract-based production and the resulting concentrated livestock
operations. Working conditions, the lack of transparency in livestock markets, the
concentration of profits for the operators of the feedlots at the producers’ expense
are just a few of the concerns that have been raised by public interest groups and
livestock farmers. Yet USDA denies that concentration is an issue and has failed
to provide GIPSA—the agency responsible for enforcing the law in this area—
with the resources it needs to do its job.
3 Market Power and the Public Interest:
Farmers, Farm Workers and Consumers
Most sectors of the worlds’ economies are under transformation due to
globalization, whether we live in Mali or Mexico or Monaco. Why should food be
any different? Is this pattern of growing economic consolidation and integration
really a problem? The members of the Eco-Fair Trade Panel believe there are
2
Until recently, the GAO was called the General Accounting Office. GAO is an arm of Congress
charged with monitoring federal government programs and spending.
20 Concentrated Market Power and Agricultural Trade – Sophia Murphy
problems associated with these trends, problems that can and should be addressed.
Agriculture is distinct from other productive sectors (as most economic sectors are
different from one another). Agriculture is different economically; its market
failures are not like those that affect manufacturing, not least because land—a
major input for production—is not mobile. The textile industry can shift from the
U.S. or Italy to China or Bangladesh, because capital is now able to buy and build
the necessary factories, and labour is available everywhere. But no amount of
trade liberalization will move arable land from the U.S. to China or Bangladesh.
While world population growth has stabilized, the world’s population is still
growing, and some 852 million people are still seriously undernourished.3
We
need to husband the planet’s arable land and we have to use that land where we
find it.
Food and agriculture is distinct in other ways. Food is fundamental to human
survival, and is tied into some of people’s oldest and most important rituals,
religious beliefs, and cultural practices. The developments in bio-technology have
highlighted the precious and yet disappearing technologies and know-how
associated with agriculture around the world. Plants used for centuries in
medicines, to preserve food or to add nutritional elements for instance, are today
being patented for their unique genetic properties. Rapid and unpredictable
changes to our environment are also highlighting the importance of traditional
knowledge around seed varieties. Industrial agriculture is focused on a few
specific traits, particularly yield per acre of a specific crop, or varieties with a long
shelf-life and relatively uniform appearance. This focus has led to a dramatic
reduction in the number of plant and animal varieties that make up the human
diet. Yet historically, coping with uncertain weather and varying inputs, farmers
kept a variety of seeds available and planted their crops with a view to avoiding
undue risk. A new appreciation for this approach, together with new measures of
productivity that focus on total yield of all foods from a given acre rather than just
the yield of a particular plant variety, are changing our assessments of production
agriculture. This new thinking also challenges some of the key elements of
corporate control, including industrial farmers’ high level of dependence on
external inputs and globalized markets, which are narrowly focused on a tiny
fraction of the foods that are cultivated and available for human consumption.
Economically and ecologically viable agriculture depends on husbanding
resources: the world needs the capacity to grow more food than is consumed, to
keep some amount of food in storage in case of unexpected shortfalls (the FAO
recommends three months of usual consumption), and for prices to be predictable
enough that those who live in poverty are sure of adequate access to a nutritious
diet. However, large international grain traders and processors, as well as input
suppliers, seek to promote systematic over-production of raw materials. Input
3
FAO estimates that in 2000-2002, 815 million undernourished people lived in developing
countries, 28 million in countries in transition and 9 million in industrialized countries.
EcoFair Trade Dialogue Discussion Paper No. 1 21
suppliers want to sell as much of their products as possible, while processors want
the surplus not for storage but for sale, to keep prices low and costs down.
Agribusiness has campaigned actively against public storage schemes because
they tend to reduce price volatility and the scope for profit through trading
commodity futures. This is one of the areas where food as a public interest
conflicts with food as a commodity and economically profitable area of activity
and governments must intervene to balance the different demands that result, and
to be sure that effective and efficient markets do not become a substitute policy
objective for the far more complicated issue of guaranteeing the human right to
food, today and in the future.
Employment and economic growth in industrial countries’ agriculture has moved
off-farm: today, the money is in developing new varieties and even new species,
processing, expanding retail and restaurant outlets, and increasing the variety of
foods available. This has not been all bad for the public interest, of course: the
need for labour has been cut dramatically by the adoption of industrialized
production systems, which has released people for more remunerative
employment in industry. Overall, the process has contributed to national economic
growth. A greater variety of foods is available at more affordable prices compared
with a century ago, while hygiene standards have improved.
For developing countries, however, whose food and agriculture systems are
undergoing similar changes much more quickly than those of developed countries,
and with far fewer public resources available to manage the changes, there are
important policy questions to address. These include the vital issue of
employment. Especially when there is no pull from an industrial sector that needs
workers for manufacturing or service jobs, governments need to consider if value
can be added to agriculture in ways that keep and create jobs and investment in
rural areas. Especially when much of the investment is external, governments
need to direct and regulate investment to ensure that national development
priorities are served, not just the interests of the investors.
There are also many problems in developed country agriculture that give policymakers
pause. One of the most important for farmers is their shrinking share of
the food economy, leaving most of them dependent on non-agricultural income
sources (government transfers, off-farm jobs, etc.). Yet agricultural commodities
still have plenty of value. The world still needs wheat and rice and eggs and milk;
indeed, between a world population that continues to grow and the unmet need of
some 850 million of the people already here, actual demand is much greater than
is expressed by purchasing power in the market (and consequently in world
prices). Given the fragility of many existing production systems, as the soil and
water they rely on get steadily more scarce and more polluted, the 20th century’s
relatively plentiful food supply for large parts of the world could prove to be an
historical aberration rather than a new norm.
22 Concentrated Market Power and Agricultural Trade – Sophia Murphy
Agricultural markets need specific kinds of intervention to work properly. There
are inherent market failures: demand cannot make supply jump without quite a
significant time lag—at least one harvest—and the shortfall costs lives in many
cases, not just because of the possibility of outright starvation, but also because
human health is undermined by an inadequate diet. Historically, supply responses
to sudden increases in demand in agriculture over-compensate, so that the trend
lines show short-term price spikes followed by many more years of overproduction
and depressed prices. There are also a number of vital public policy
objectives that depend on a reliable and sustainably produced food supply. It is
not uncommon for governments to treat an adequate and reliable food supply as a
matter of national security (although depressingly few governments consider it
important to ensure that every household in the country has access to an adequate
and nutritious diet).
3.1 Farmers
The industrialization of the food system, including centralized and concentrated
retail power, poses specific challenges for small farmers, especially those living in
developing countries. Unless farmers are organized or operating very large farms,
they cannot provide the reliable supply and quality required by supermarkets. The
arrival of international supermarkets into local food markets in developed and
developing countries alike can contribute to the marginalization of producers in
the food system. Numerous accounts tell of farmers left dependent on unfair
contracts to sell their products (unfair because the producer assumes all the risk,
and may not get much of the final sale price), or excluded altogether as too small
or too far from the centre of distribution to be included in the system (Brown
2005).
There are opportunities for farmers to exploit with the arrival of supermarkets,
especially if they are organized into larger cooperatives. Consumers can be
prevailed upon to demand local content and fair prices for farmers. If the
government provides an adequate legal framework, contracts also offer the
potential for risk sharing between producers and buyers, and remove some of the
price uncertainty that can lead to unsustainable debt levels for small growers.
Sadly, the dominant pattern to date is of exploitation rather than cooperation.
The drive toward trade liberalization has exacerbated conflicts between groups
that at one time saw their policy interests as aligned: farmers, and commodity
traders and processors. Farmers want the highest possible price for what they
grow. Traders both buy and sell, making money from high volumes and, if they
can, cornering a particular market. High commodity prices can interfere with
traders’ objectives; high prices do not hurt immediate profits, but they can slow
EcoFair Trade Dialogue Discussion Paper No. 1 23
down trading and cut into the profits made on each transaction. As commodity
traders and processors become vertically integrated, their interests shift again.
High grain prices become a net cost for them if they are adding value to
commodities through companies that feed livestock or make processed foods.
At the margin low prices may reduce production but on the whole, agricultural
markets do not self-adjust easily. The first land to go out of production is the
marginal land with the lowest per acre yields. Farmers generally cannot afford to
miss a year’s crop or to absorb the cost of maintaining idle land (and storing
equipment that depreciates annually). The pattern over the past century in
developed countries has been a simultaneous dramatic reduction in the number of
people living directly from production agriculture and increased overall yields,
with the amount of land in production staying relatively unchanged. Individual
farmers cannot affect overall supply through their production choices because
they do not grow enough to affect total supply in the market, even locally, let
alone at the global level. Economic logic thus dictates that farmers maximize their
production whether prices are high or low. High prices bring new producers (and,
especially, new land) into production, but low prices are slow to push existing
producers out, or to reduce production. The opportunity costs of exiting are high
because there is no quick way back in and because most agriculture takes years to
show a return. Agriculture is not a sector for quick profits.
Concentrated market power is an important reason for the erosion of farm income.
Agribusiness is able to pull profits “downstream,” away from the farmer and
towards the highly processed foods tailored to facilitate middle-class consumers’
lives, and “upstream” towards ever more elaborate technologies to maximize onfarm
production, including hybrid and genetically engineered seeds; expensive
herbicides, pesticides and fertilizers; global positioning systems to determine how
much of which input goes where on the farm; computer chips that control how
much feed each cow can get from the trough; and, so much more. Although these
technologies often increase output, they also increase farmers’ need for capital,
and increase their dependence on a wider economic system in which their main
source of revenue—the sale of agricultural commodities—is not worth enough to
pay for the inputs. From a public policy perspective, the wider implications of this
are significant because the result is to drain money out of the wider rural
economy, not just to reduce on-farm profitability. Concentrated market power
undermines the viability of the local economy.
On the other side, the demands of processing to conform to an increasingly
centralized and highly regulated food distribution system (increasingly dominated
by a few retail firms in most continents) reduces the number of farmers that can
hope to share in the greater profits that accrue to selling a more finished product
to a wealthy consumer base. Indeed, the majority of farmers in the world cannot
afford even something as simple as on-farm storage for their crops, nor can they
24 Concentrated Market Power and Agricultural Trade – Sophia Murphy
afford to hold back production at harvest time in the hopes of higher prices later in
the year.
The mounting costs of more complex input and storage needs are affecting
farmers in the South, too: it does not take hundreds of thousands of dollars of
investment for a farmer to find his or herself with high input costs relative to final
sales price. The growing problem of a cost-price squeeze (increasing costs
coupled with diminishing returns) is one of the principal reasons given for the
recent spate of farmer suicides in India, and is an important reason for rural to
urban migration in many parts of the world. At the household level, farmers are
often better off with lower output and lower cost technologies, which create fewer
environmental problems for them long-term and which generate higher net
income levels for them by eliminating production costs.
3.2 Farm Workers
Farm workers are a vital and ignored part of production agriculture. There are an
estimated 450 million waged agricultural workers worldwide (here and the
following paragraphs indebted to Hurst/Termine/Karl 2005). With globalization,
their numbers are increasing: small and subsistence farmers are losing their land
or are working to supplement family income, while farm holdings on average are
growing larger, generating more demand for hired help. Some of this
transformation translates into migration across borders: many of the workers that
in a sense subsidize U.S. agriculture (subsidize because pay and working
conditions are poor compared to national averages and many national labour laws
do not apply to agriculture) are migrants—legal and illegal—from Mexico and
Central America, where they have left their farms in desperation for the promise
of paid work in the United States. Other countries and regions experience similar
patterns of migration from rural areas to urban centres, but also to rural work in
wealthier neighbouring countries.
Agricultural workers are among the poorest in their societies, earning sometimes
less than half the wages prevailing in industry. Over 70 percent of the children
who work worldwide are employed in agriculture. Increasingly, agricultural
workers are women and they are almost always paid less than men for the same
work. The newer sectors in agriculture in the South, such as cut flower and
horticultural exports, employ large numbers of women.
One of the effects of globalization, concomitant with reducing the number of
farmers around the world, has been to increase the numbers of farm workers. As
production trends have shifted away from direct corporate ownership of
plantations to arrangements with sub-contractors, and sometimes direct contracts
EcoFair Trade Dialogue Discussion Paper No. 1 25
with producers or producer organizations, farm workers find themselves working
in increasingly informal conditions where organizing to improve conditions is
harder than ever. The pressure on food processors and retailers to keep costs
down—the competition they face among themselves—translates into strong
downward pressure on wages for workers. Agricultural workers, who are among
the least organized, least educated and otherwise least advantaged workers in the
world, bear the brunt of this pressure. These differences are only intensified when
the diversity of agricultural workers are taken into account—those with some
land, but who need to hire out their labour to make ends meet; those who are
landless; women workers, who often face discriminatory legal and social
conventions that make their working situation more precarious, whether as
farmers or labourers; and, children (more children work in agriculture than any
other sector worldwide).
3.3 Consumers
A large part of the political appeal of liberalized agricultural trade lies in its
promise of securing access to a large choice of cheap food for consumers. Access
to a world market should offer better protection against bad weather or other
disasters that can disrupt local production and protect consumers from sudden
price spikes. However, the concentration of market power in global commodity
and food retail trade in developed—and increasingly in developing—countries
undermines the promise benefit of cheaper food. Before governments finalized the
WTO Agreement on Agriculture, economists predicted that prices of agricultural
products on the world market would increase slightly after the implementation of
the agreement. Instead, many world prices for agricultural commodities fell
precipitously after implementation, following a brief but severe price spike for
wheat and some other staples in 1996. Overall, the post-AoA price environment
for commodities is more volatile that the decades that preceded it. According to
the FAO, the underlying downward trend for agricultural prices, a trend that
persisted for decades, has stabilized since the mid-1980s, to be replaced with more
volatility but no clear trend line (FAO 2004).
Declines in commodity prices, however, are not readily translated into lower
consumer food prices. In Europe, the competition among supermarkets has
prompted a degree of food price deflation (at the expense of producers). In
developing countries, however, a number of factors have prevented liberalization
policies delivering cheaper food. Many developing countries have seen their
dependence on imported food increase—food they must pay for with scarce
foreign exchange, with currencies that have depreciated considerably under the
monetary policies of structural adjustment. Some countries had programs to
26 Concentrated Market Power and Agricultural Trade – Sophia Murphy
provide staple foods at subsidized prices that have now been dismantled, leaving
poor consumers paying more than they did in the open market.
Mexico provides a dramatic example of higher consumer prices coupled with
economic deregulation and liberalization. Maize prices for local farmers declined
from about 1300 pesos per ton in 1982 to just under 600 pesos per ton in 1998.
Yet the retail price of a tortilla increased by almost 500 percent between 1994 and
1999. While a large part of this was due to inflation that followed the peso crisis
of 1998 and the elimination of government subsidies for consumers, prices still
increased by 279 percent in real terms (that is, factoring in the overall economic
inflation rate of 173 percent that prevailed at the time). This almost three-fold
increase in prices occurred as the price farmers received for their corn went down
by almost half (Nadal 2000, pp. 34-36). Global coffee markets offer another
example of collapsed commodity prices, this time at the global level,
accompanied by increasing prices for the consumers who buy lattes in upscale
coffee shops and fresh roasted beans in their local supermarket.
In the United States, commodity prices are such a small share of final food prices
that their respective prices change almost independently of each other. As the
economist Robert Taylor testified to the U.S. Senate Agriculture Committee in
1999, "Since 1984, the real price of a market basket of food has increased by 2.8
percent, while the farm value of that food has fallen by 35.7 percent.” Food prices
reflect prevailing inflation levels, while commodity markets are tied to supply,
input costs, and changes in demand. The failure of consumer prices to reflect
drops in commodity prices is in part due to the lack of competition within the food
processing and retail sectors. When commodity prices fall, dominant companies
can use their market power to increase profits rather than to lower prices for
consumers.
Local markets in developing countries are not usually as concentrated as they are
in developed countries. Yet even there, attempting to deliver cheap food through
deregulated markets often fails. Many of the world’s poorest consumers are also
food producers, either farmers or farm labourers. Their ability to buy the food
they and their families need depends on the price they can get for their crops, or
the wage they earn from farm work. Cheap food imports compete directly with
local producers, if not in the same crops, then in close substitutes (rice for millet,
or yellow corn for white maize, for example.)
Consumers suffer from some of the same disadvantages as farmers in the food
system. They are numerous and disparate, only powerful when united behind a
boycott, or what has been called a girlcott, where consumers are encouraged to
EcoFair Trade Dialogue Discussion Paper No. 1 27
buy a product that meets higher standards than the norm.4
In a sense, the fair trade
movement works on this principle, making consumers part of their campaign by
calling on them to pay more, and to demand more of retailers and processors, to
ensure that producers and workers get a fair share of the profits for their work.
While retail, processing and trading are increasingly global activities consumers
remain tied to local markets. When the U.S. dollar was strong in the late 1990s,
consumers in countries dependent on food imports from the U.S. paid more for
their food. International trade increases the choice of products available to
consumers but it does not necessarily deliver those products at low cost,
especially when translated into local purchasing power. Globalization also means
that consumer competition in the market increases. If a growing middle class in
South East Asia, say, wants to consume more meat, they will pay enough to divert
land into producing animal feed over staple foods for people; without public
intervention, the logic of the market will leave people in need of wheat and rice
hungry while corn and soy is grown to feed livestock.
4 Trade, Competition and Investment: the links
to market power
4.1 Trade
The expansion of global trade, the deregulation of capital markets, and the
technology that facilitates global communications and transportation have all
driven changes to international trade and investment rules. Changes to these rules
have in turn created and supported the expansion of new global commodity
chains, such as fresh flower and horticultural production in developing countries
to furnish developed country supermarkets. Older chains, such as coffee and
cocoa beans imported from developing countries for processing in developed
countries are evolving and changing with the new pressures of globalization, but
the changes have served to consolidate rather than shake-up traditional market
power imbalances (Vorley 2003).
New rules for agricultural trade are now under negotiation at the WTO, under the
auspices of the Doha Agenda, which was signed by member governments in 2001.
4
The word ‘girlcott’ has also been coined for boycotts with a feminist approach: Billie Jean King,
for example, suggested a girlcott of Wimbledon for the gross disparity between the prize
money awarded to the male and female champions.
28 Concentrated Market Power and Agricultural Trade – Sophia Murphy
Having adopted a framework and some disciplines for agricultural trade rules in
the Uruguay Round, WTO members are now trying to make the disciplines more
effective. The Doha Agenda in agriculture calls for more of the same: a final
deadline for the elimination of export subsidies (with tighter rules on other
programs that are used to support exports at public expense), more cuts to most
kinds of domestic support programs and more cuts to tariffs.
The Uruguay Round Agreement on Agriculture (AoA) rules were shaped by a
handful of then GATT members5
who were attempting to solve the problem that
over-production in some OECD countries created for other, mostly non-OECD
countries. In brief, the U.S. and E.U. failure to control supply was crowding
Australia, Brazil and Argentina out of export markets. Just three WTO members
spend more than 80 percent of the subsidies targeted by the AoA: the United
States, the European Union and Japan. Yet the WTO has 148 members (and more
lining up to join) and many of these members depend on agriculture for a
significant share of their economic activity. Many of these countries hoped the
AoA would create significant new trade opportunities for their agriculture sectors.
They were disappointed. It is now ten and a half years since the AoA came into
effect, yet global market shares of agricultural trade have hardly changed,
although they have edged narrowly away from Europe and towards the members
of the Cairns Group, a group of 15 or so countries, developed and developing,
with significant agricultural export capacity.
Why the failure? In part, there was a certain amount of bad faith (or smart
negotiating) by the developed country lawyers who drafted the rules. The
loopholes and exceptions for developed countries in the AoA rules are well
documented (Kwa 1998; Murphy 2001). The rules did not require actual cuts to
spending on domestic support and little new market access was created by the cuts
to tariffs that were made. Worse, by 2001, the United States and EU (and a
number of other members, too) stopped even notifying their spending on
agriculture to the WTO, so that other WTO members could not tell what actual
spending levels were. The outcome of several trade disputes, particularly the
complaint brought by Brazil and others against the use of subsidies to support
cotton production and processing in the U.S., suggest that U.S. spending, at least,
has exceeded permitted levels.
Yet the problem is more complicated than this argument suggests—more
complicated than WTO members can hope to fix with the Doha Agenda now
under negotiation. There are significant trade distortions and market failures in
international agricultural markets that have little to do with public subsidies or
5
The General Agreement on Tariffs and Trade (GATT) was signed in 1947. No formal institution
was created to oversee its implementation (and elaboration through successive trade rounds)
until the Uruguay Round, at which time a treaty establishing the World Trade Organization
(WTO) was included as one of the trade agreements.
EcoFair Trade Dialogue Discussion Paper No. 1 29
tariff barriers. Perhaps most seriously, some of the AoA rules actually prohibit or
make it more difficult for governments to provide necessary regulation and
oversight over their agricultural production. Measures to stimulate or limit
production are banned, for instance, although some existing programs are
grandfathered in, with strict provisions to limit any extension of their use. Given
the market failures inherent in agriculture, and the distortions created by the
market power of many multinational agribusiness companies, governments need
to intervene in markets to ensure that certain public policy objectives can be met,
including an adequate and culturally appropriate food supply, viable livelihoods in
the rural economy, adequate provision of support services to remote areas and a
balanced distribution of economic goods across the economy as a whole. Many
African countries need effective production incentives to reduce their dependence
on food imports they can ill afford, while elsewhere, production of a number of
crops, from corn to wheat to coffee, would benefit from more deliberate supply
management.
Transnational firms want the international movement of goods and capital
simplified because an increasing share of their business is carried out across
borders. As agriculture becomes more vertically integrated, more agricultural
trade becomes intra-firm (rather than between firms) and trade barriers make it
more expensive to do business. The rules now in place at the WTO support these
objectives, at the expense of producer, consumer and environmental interests, that
place a priority of greater price stability, managed production and safe and
sustainable production methods
The degree of concentrated market power in global agricultural markets is not
factored into the models and assumptions that inform the trade and agriculture
debate. This is a significant problem for policy-makers, who operate under false
assumptions as a result. For example, underlying the assumption that tariff
reductions will increase market access opportunities is an assumption that any
firm with a good product at a competitive price will be able to enter the new
market. In practice, however, many agricultural markets are governed by contracts
that shut out producers or firms without contracts. Tariffs matter but are not the
most important determinant of what goods get to be sold where at a given price.
According to the dominant ethos at the WTO, trade liberalization is better than
regulation, and more trade is better than less. In practice, however, there is a real
risk that liberalizing trade and ignoring competition policy can lead to replacing
border protections with cartels. When increased trade encourages anti-competitive
behaviour, then much of trade’s potential to benefit development is eroded.
Private transnational companies can replace publicly monopolies, bringing capital
and know-how but reducing the possibility of realizing public policy goals.
30 Concentrated Market Power and Agricultural Trade – Sophia Murphy
Agriculture is not the only area of the Doha Agenda that is likely to affect food
and agriculture, and market power within the food system. The GATS (services)
negotiations, mentioned earlier, are particularly important. Food distribution,
particularly the growing market power of supermarkets, is strongly affected by
service laws. Access to credit and financial services, and access to infrastructure,
especially water and energy, is of vital concern to producers, and to ensuring an
economically viable and ecologically sustainable food system (Reichert 2005).
Transnational agribusiness firms wield considerable power at the WTO. They
fund lobby groups active in Geneva. They are part of many national delegations
simultaneously because of their extensive presence in so many countries around
the world. The firms are also present to lobby in their own right. In a country such
as the U.S., there is a lot of interchange between private business and the public
sector. For example, it was a former Cargill Vice-President, Dan Amstutz, who
drafted the original AoA text, while a member of the U.S. trade representative’s
office. More recently, after a period back in private agribusiness, Amstutz was
appointed by the Bush Administration as their senior advisor on agriculture in
post-invasion Iraq.
Rufus Yerxa, U.S. ambassador to the GATT during part of the Uruguay Round
(1989 to 1993), served for a time as a lawyer for Monsanto, joining the firm in
1998. He is now a Deputy Director-General at the WTO, responsible (among
other things) for overseeing the negotiations within the Trade-Related Intellectual
Property Rights Council on whether firms should have to disclose the source of
the germ plasm they patent when developing new biotechnologies. This push to
enforce disclosure, pushed by India, Brazil and a few other developing countries,
together with Norway, is a proposal that the biotechnology industry is resisting
strongly (and with them, the governments of the countries where bio-engineered
seeds are most widespread, including the U.S., Canada, and Argentina). The
current special agriculture negotiator at the Office of the U.S. Trade
Representative, Richard Crowder, came to the post from his job as chief executive
officer of the American Seed Trade Association (ASTA).
The ease with which agribusiness executives move in and out of government
office in many countries is problematic. In part there is the risk they will put the
public interest behind promoting the interests of former (and often future)
colleagues. More generally, there is a problem that their background and
experience is too much of one kind, while the experience of small farmers, or
farm worker unions, or consumers concerned about food safety is too rarely
represented in the higher echelons of government administrations. Trade policy
has far-reaching implications, and the Uruguay Round agreements extended those
implications deep into domestic policy-making in most spheres of economic life.
Trade policy should never have been the sole domain of exporters and importers,
working with trade officials. Today more than ever, those officials must be
EcoFair Trade Dialogue Discussion Paper No. 1 31
accountable to protect the wider concerns of agriculture, especially the public
interest in a sustainable, just and safe food system.
4.2 Competition
Open competition is the bedrock of capitalist economics. In an open market,
prices provide signals to buyers (and sellers) about what price they should charge
(or pay). In a perfect market, open competition among firms ensures that
consumers are given as much of and as good a product as it is possible to make at
the price they are willing to pay. In return, firms are assured that if they can do the
best job on price and quality, they will have customers; they will not be kept out
of the market by the vested interests of established firms.
Neo-classical economics recognizes a number of threats to competition. On the
supply side, the archetypal threat to competition is monopoly, the condition in
which a single supplier of a product sets the price by controlling its supply.
Oligopoly, the situation of a few suppliers sharing the market to the exclusion of
newcomers, similarly prevents demand and supply from reaching proper
equilibrium. Oligopoly power is not as effective as monopoly power at setting
prices independently of demand, but it is harder to monitor and can prove more
harmful to a well-functioning market than monopoly power. On the demand side,
monopsony and oligopsony describe an industry with a single or a few buyers,
respectively. These situations, too, result in less than optimal results for others in
the market.
There are situations when a monopoly or monopsony can serve the public interest.
They sometimes offer a so-called “second-best solution”, where an open market is
not possible so a monopoly has to be tolerated. For example, a publicly or
privately-owned and operated company is likely to have a monopoly on providing
water because the cost of laying water and sewage pipes does not warrant more
than one company having the contract. Governments have developed specific
laws to regulate these situations to ensure the firm with the monopoly position
does not abuse its market power, for example by over-charging. There is no
competition in such a case, but some of the benefits of competition can be
stimulated through other means.
Where it works, competition protects economic efficiency, optimizes the use of
resources, and encourages innovation. Competition also promotes socially
desirable goals, by redistributing wealth and stopping the emergence of
monopolies. However, it is difficult to determine an ideal level of competition.
Fragmented markets are often inefficient, and most goods are more expensive to
produce if they are made by a large number of different firms rather than by a
32 Concentrated Market Power and Agricultural Trade – Sophia Murphy
few, because economies of scale favour large-scale production. Competition
issues grow more complicated when borders are opened. Most countries, even if
they enforce relatively strict competition laws at home, are lax about enforcing
competition rules on their companies operating in foreign markets. U.S. firms,
already operating in an internal market of close to 300 million people, are likely to
dwarf even a monopoly in a small market such as Iceland or Canada.
Consider the Canadian Wheat Board (CWB), with a monopoly on sales of all
wheat and barley grown in Canada’s Western provinces. The CWB supplies just
over 20 percent of the world wheat and barley markets. Yet Cargill, Bunge and
ADM all sell more wheat than the CWB. Rather than restricting competition, the
CWB monopoly is shoring up some degree of competition at the global level in a
very concentrated market. Although its competitors argue the CWB is tradedistorting,
the most likely result of abolishing the CWB monopoly on wheat and
barley exports from Western Canada would be to reduce by one the already tiny
number of firms trading those grains at the global level. Competition would be
reduced, and the remaining firms would all be focused on short-term profits with
no mandate (or obligation) to consider broader public policy interests.
As an example of the potential for abuse, consider the role of Archer Daniels
Midland (ADM) in fixing prices for feed and food additives. In May 2006, the
European Court of Justice upheld a European Commission Euro 43.9 million fine
against ADM for their role in a price-fixing and market-allocating cartel on lysine,
an important amino acid added to animal feed. The cartel operated between at
least 1990 and 1995, involving ADM, Ajinomoto Co. Inc., Kyowa Hakko Kogyo
Co. Ltd., Sewon Corp. and Cheil Jedang Corp. Although none of the firms
involved was headquartered in Europe, EU feed buyers had paid the rigged price
and the cartel had materially harmed their customers. In 1996, the U.S.
Department of Justice fined ADM the highest ever criminal antitrust fine (USD
100 million) for their part in the lysine and a citric acid cartel. The cartel operated
globally, with the companies agreeing in advance not to compete with each other
in given markets, as well as agreeing on what price to charge. The famous tag-line
from the case, attributed to ADM executives, was: “The competitor is our friend
and the customer is our enemy."
Much of the discussion of competition policy reflects a preoccupation with
protecting consumers against the power of organised production. Indeed, much of
the argument in support of deregulation and opening markets is premised on the
welfare gains to be had by lowering prices for consumers. Recent U.S. antitrust
case law has focused on efficiency outcomes almost to the exclusion of any other
antitrust concern (O´Brien 2005, p. 7). However, for agriculture, both in history
and with the emerging dominance of retailers as a major power in agricultural
markets, the effects of market power upstream, on farmers in particular, should
also be of central concern.
EcoFair Trade Dialogue Discussion Paper No. 1 33
It is essential for states to legislate and implement proper competition laws. This
means enforcing existing law where it exists, such as the Packers and Stockyards
Act in the United States, and developing new law to reflect the changed nature of
today’s globalized companies. When circumstances seem to justify monopolies or
oligopolies, particular attention must be paid to ensuring sound regulation. There
is no point hoping that laws based on the assumption of perfect competition will
work in oligopolistic markets. It is clear that in the name of efficiency gains from
economies of scale, transnational agribusinesses have already grown to an
alarming size, enabling them to undermine proper market functioning. One of the
complications of liberalizing trade is that it can create stronger conditions for
competition in a local market as new entrants arrive, but it can also consolidate
market power as some firms become global players (MacLaren/Josling 1999, p.
2).
According to the UN International Fund for Agriculture and Development
(IFAD), without government intervention private sector development occurs but is
likely to be “unbalanced in geographical terms, inequitable in socio-economic
terms, and could even further exacerbate poverty for some rural people” (IFAD
2001). The responsibilities of governments include creating and enforcing the
conditions that markets depend upon to work efficiently and fairly, such as
providing open and universal access to information and prohibiting collusion
among firms.
National competition laws are vital (and often absent, especially in developing
countries) but no longer sufficient to manage global competition challenges—
some thought has now to be given to protecting competition in global food and
agriculture markets.
4.3 Global Competition Rules?
One of the obvious ways to manage market power is to regulate competition. This
now needs an international dimension, for competition law to keep up with the
rapid spread of trade liberalization and globalized production and markets. Yet the
discussion of competition issues at the WTO was effectively shut down by public
protest. The reason for the public outcry was that the competition issues raised by
EU and U.S. firms were motivated by their wish to bid on contracts in (especially
larger) developing countries. Instead of a discussion on how to protect
competition in the face of concentrating market power in global markets, the
competition agenda promoted by the EU and some other WTO members was
about advancing the interests of global firms. A wide-range of civil society
organizations made the case against this agenda, and many developing countries
blocked the attempt to open negotiations for a WTO deal in this area. For now,
34 Concentrated Market Power and Agricultural Trade – Sophia Murphy
competition is a topic for a working party at the WTO but not a subject for
negotiation.
This was a hard-earned victory for civil society organizations. Still, civil society is
left with the challenge of how to confront competition issues at the multilateral
level. Globalization has made the need to tackle these questions more acute than
ever. With fewer barriers to trade, the challenges for competition regulation have
only increased, and discussions at UNCTAD that do not result in binding rules
will not be adequate to tackle the scale of the issues we now face, although it
would be a good place to start exploring issues in a less confrontational
atmosphere than the WTO.
4.4 Investment
Among the many factors that account for concentrated market power in
agriculture is investment. In a globalizing economy—where transportation,
communications, and capital flows are all facilitated by new technologies and
laws—investment is a major driver of economic change and a major determinant
of economic power relations.
For example, investment by agribusiness firms and supermarkets has a powerful
impact on what crops are grown where in what kind of farming systems. The
dominant global grain traders—Bunge, Cargill and ADM—have all invested very
heavily in Brazil over the past decade, building export terminals (with
considerable help from public funding sources), mills and other processing
facilities, and generally increasing their capacity to handle production coming
from the rapidly expanding acreages of Brazilian soybeans. This investment
drives further planting and contributes to the investment that is now relieving one
of the biggest barriers to the development of large areas of Brazil’s land: the lack
of transportation and processing infrastructure to bring commodities to market.
The push by a number of developed (and a few developing) countries to make
investment a part of the Doha Agenda of trade negotiations failed. Although the
Uruguay Round included the Agreement on Trade-Related Investment Measures
(TRIMs), the WTO still has little oversight on investment. The dynamic was not
unlike that the surrounded the debate on competition issues, but was much higher
profile (and probably much better understood). The reluctance of most developing
countries—and a strong contingent of civil society organizations—to discuss
investment at the WTO again related to the kind of proposals that were made,
which were about giving foreign firms rights in domestic economies without any
discussion of related obligations. Under NAFTA’s investment provisions, Canada,
the U.S. and Mexico have seen foreign firms extracting large payments from
EcoFair Trade Dialogue Discussion Paper No. 1 35
governments when the firms deem legislation passed since NAFTA to undermine
their actual or potential profits, even if the laws are passed in the public interest
(banning the use of dangerous chemicals, for instance). Such experiences have
bred caution.
A number of aspects of the ongoing negotiations on services at the WTO, under
the framework of the General Agreement on Trade in Services (GATS), are
essentially about investment rights: rights of firms to establish themselves in
foreign countries, to acquire local companies, to secure work visas for foreign
personnel, and so on. There are even proposals that WTO members should be able
to comment on each others domestic legislation dealing with service regulation, to
ensure such regulation is “least trade restrictive” and does not curtail a foreign
firm’s right to compete in the local market with domestic firms.
While the direction of the investment-related proposals at the WTO has ensured
investment has little support as the subject of a new WTO agreement, it is clear
that some kind of multilateral framework for investment would be helpful, not
least to assert the need to protect the public interest from private greed. All firms,
local or foreign, need to be accountable for the impact of their investments. As
the role of foreign capital in agriculture grows—for the most part invested by
transnational agribusinesses, but in some cases invested by banks, retail
companies and other kinds of firms—so the need to hold that capital accountable
to groups other than stockholders in the firm grows, too. This is not a matter the
WTO is equipped to decide, at least not alone. Any multilateral investment
framework will need to be rooted in human and labour rights, multilateral
environmental obligations, and other norms that clarify limits and obligations on
investors, as well as providing them with a clear and predictable framework
within which to conduct their business.
5 Conclusion
Market power worries economists because it interferes with the distribution of
benefits from economic exchanges, usually in the interests of a few at the expense
of the majority. Market power also has political, legal, social and cultural
implications. Such responses as there are, are often partial: competition policy
focuses mainly on consumer interests, not producers’; legislation might tackle
anti-trust in one sector, but not all the sectors where a vertically integrated
company works; rules to break-up domestic cartels through deregulating the
economy might open up new competition problems if foreign companies enter
36 Concentrated Market Power and Agricultural Trade – Sophia Murphy
that are too big for small local firms to compete with. All this (and more) makes
market power difficult to challenge.
It does, however, open the possibility of a broadly based coalition of public policy
interests to advocate for better rules. The concentrated market power of
transnational corporations and their dominance of the agricultural policy agenda at
both national and international levels has galvanized health workers, trade unions,
consumers, farmers, environmentalists, development NGOs, churches, human
rights groups, tax reform advocates and still others to take an interest in
agricultural policy reform.
The following ideas give a sense of the range of possible responses that are open
to governments, farmers and others. Much more work is needed to develop a clear
action plan that both counters concentrated market power and, where necessary,
develops legislation to work with it (and regulate it) where market power needs to
be endured.
1. Current WTO rules insist that governments complete questionnaires about any
state trading enterprises (STEs) operating in their country. This approach should
be expanded to include any company—private or public—with more than a given
percentage of the import or export market. The questionnaire would apply to local
companies in joint ventures with transnationals or operating as subsidiaries of a
transnational, if the larger entity’s size met the threshold requirement. This
information could be gathered by the WTO, or, alternatively, under the auspices
of the UN Conference on Trade and Development (UNCTAD), which has a longstanding
mandate to monitor restrictive business practices. A multilateral
institution—perhaps FAO or UNCTAD or a collaboration between the two—
could be charged to maintain a databank with comprehensive information on the
dominant actors in the global food system. The data should be accessible to the
public on-line, and the findings published periodically.
2. Supermarkets offer new opportunities to change public policy in the food chain,
even though they are also the source of multiple new challenges to maintaining
open and accessible markets for producers. Supermarkets are a point at which
consumers have power, opening up some interesting possibilities for advocacy.
For example, from the 1980s, European NGOs were able to effect successful
campaigns to get supermarkets to give shelf space to fairly traded products. Most
of the major supermarkets in Europe now carry fairly traded bananas, coffee, tea,
chocolate and a handful of other products. Similarly, the negative public reaction
in Europe to genetically modified foods persuaded a number of supermarket
chains to offer GMO-free products, and several made their in-store brand GMOfree.
A major contract with Carrefour (a global supermarket chain headquartered
in France) for GMO-free soybeans was awarded to Brazilian producers. Carrefour
was sourcing the soy on behalf of the livestock producers they contract with.
EcoFair Trade Dialogue Discussion Paper No. 1 37
3. Information and transparency are vital tools. Publicly provided support to
agriculture should extend to include access to information for producers and
consumers. For instance, governments should make available information on
prevailing market prices, so farmers know what price to ask for from the middlemen
and women who buy their goods at the farmgate. In Bangladesh, simple
measures such as providing a telephone in the village has enabled farmers to
determine crop prices in the nearest market town and thereby strengthen their
position in negotiations with middle-men. Consumers need to know where their
food comes from and what it contains. Pesticide levels or the presence of toxic
chemicals should be monitored and controlled.
4. It is necessary to increase transparency in the rule-setting process. Some
developing countries have made significant changes to their domestic policy
process to democratize trade-policy formulation. A number of countries—for
example, Uganda, Kenya, the Philippines and India—have created national
consultative committees to the WTO. These include business and NGO interests,
and sometimes farmers’ organizations, and provide a counterweight to the
pressure that comes from bilateral and multilateral aid donors, whose view is too
often too close to their domestic commercial priorities. Ugandan NGOs report that
a U.S. consular official checked in with the Ministry of Trade in Kampala on a
daily basis throughout the 3rd
WTO Ministerial Conference in Seattle, in
November 1999. By the time of the 4th
Ministerial (in Doha in November 2001),
the national consultative committee had been established and was able to meet
every day with the Trade Ministry as well.
This issue is important for the WTO Geneva as well. The WTO has made many
changes to its working style since the days of the Uruguay Round. While small
group meetings continue, an active effort is now made to at least include
representatives of any of the groups or positions that have emerged in the
negotiations. Still, nothing happens without the big powers being present, and a
number of the smallest members do not even have a mission in Geneva.
Transparency has improved markedly with the arrival of a number of civil society
organizations in Geneva, and because the significant differences among
governments make “leaks” a useful way to canvass support for one or other point
of view. There are nonetheless real challenges for WTO members to improve the
working of the system, legal and political, to ensure that trade rules are decided as
a part of wider multilateral policy, and in as open and inclusive a manner as
possible.
5. Collective action can help farmers to regain some of their autonomy around
input use and marketing. Work by RAFFA, an NGO working in Thailand, has
documented the costs of various production methods for rice farmers. Their
research shows the additional yields obtained by industrial agriculture are not
adequate to compensate farmers for the cost of buying the inputs that industrial
38 Concentrated Market Power and Agricultural Trade – Sophia Murphy
agriculture depends upon. Industrial methods deliver the highest yields but the
highest net income—which is of more interest to the farmer—comes from a
production system that relies on traditional seeds and organic inputs. The
promotion of traditional seeds grown with traditional organic techniques by
MASIPAG in the Philippines met with success, initially because farmers saved
the cost of purchasing expensive inputs. As yields recovered to conventional
levels, overall profits increased because of the greater diversity possible on the
farm. For example, farmers could use rice paddies that were no longer awash in
inorganic chemicals to raise fish, supplementing their families’ diets (Yap 1998).
Practical Farmers of Iowa, a membership group affiliated with Iowa State
University, conducted experiments that showed members how to save up to USD
80/hectare through a 50-60 percent reduction in chemical use without reducing
yields. Lessening farmers’ dependence on inputs is an important avenue for
challenging corporate control.
6. Public authorities need to subject mergers, acquisitions and inter-firm contracts
in agriculture to tighter review. The first requirement is access to information.
There is a dearth of information about the size and scope of large agribusinesses,
the market share they control, and the terms of their contracts. Contracts are
treated as proprietary information, making it very difficult to determine whether
contracts are fair and whether larger companies give each other disproportionately
favourable terms.
7. In the process of deregulating and liberalizing developing country economies,
the role of state-trading enterprises, once common in agricultural sectors in most
parts of the world, has come in for severe criticism. Yet, although imperfect, STEs
can potentially play a useful role in counteracting the market power of global
agribusiness. While STEs undoubtedly distort markets, they depend on
government mandates, and thus are subject to public interest law. This offers
countries an important entry point for stronger regulation of the market. A
strategy of reform, accountability and good governance is essential, given the
history of corruption and government manipulation of STEs in many countries.
However, structural adjustment programs and more recently pressure from trade
negotiations has led to the dismantling of many STEs, instead of reform.
The advantage of an STE, assuming (and it is a big assumption for some
countries) that adequate accountability can be ensured, is that they are more
readily used to meet public policy objectives than private agribusiness,
particularly if that business is foreign-owned and a dominant world player. For
example, STEs were often the only market for producers in remote areas of
developing countries; a government can insist that an STE provide this service in
exchange for its monopsony rights. A private investor, however, has no reason to
carry what might be a loss-making proposition and will be focused on the markets
where profits are more reliable. In many poorer developing countries, the lack of
EcoFair Trade Dialogue Discussion Paper No. 1 39
private capital is a significant handicap to establishing a strong local industrial or
agricultural sector. An STE can focus scarce capital where it is most needed, and
ensure at the same time that remote areas are not excluded.
The most important consideration is not whether a firm is publicly-held, privately
owned, or some kind of mix. Instead, the focus should be on the structure of the
market and the needs of the producers and consumers involved, to see what
solution might best meet public interest goals (including a productive and efficient
economic sector). Private and public firms can both distort markets; in some
cases, a market distortion may be well worth suffering because another need,
greater than efficiency, is thereby served.
8. Rules to regulate agricultural trade cannot hope to end market distortions if they
focus on government programs alone. Unless there is a concerted attempt to
consider the impact of vertical and horizontal concentration in global commodity
markets, the rules will not produce the benefits that more open markets promise.
Possible policies could include an international review mechanism for proposed
mergers and acquisitions among agribusiness companies that are present in a
number of countries simultaneously. The two companies may not be a significant
market power where the merger occurs, but their merger might significantly
diminish competition in a third country, where the two companies share a
dominant market position. The third country should have some recourse to protect
itself from such an outcome.
9. In April 2005, the International Institute for Sustainable Development
published their Model International Agreement on Investment for Sustainable
Development. The project is based on several observations, including that existing
investment agreements are framed on an outdated and unhelpful model, developed
in the 1950s and 1960s, when the focus was almost entirely on investor rights and
the protection of foreign capital. IISD also point out the bilateral nature of most
existing investment treaties, such that no multilateral “institutional home” was
been established, where comparisons among agreements could be made, lessons
learned and best practices for future agreements promoted. The WTO is not the
right place to consider a framework for multilateral investment rules but there is
an urgent need for more systematic consideration of the challenges raised by
investment patterns and to better equip developing countries to secure investments
that contribute to sound development. The existing ad hoc nature of the treaties
signed, particularly with their emphasis on investor rights rather than development
obligations on firms, is detrimental to fairer, more ecologically appropriate
agricultural trade.
10. Governments need to hold companies accountable for their behaviour. For
example, governments may choose to restrict inappropriate advertising or product
placement by food companies. The long-standing Nestlé boycott was led by civil
40 Concentrated Market Power and Agricultural Trade – Sophia Murphy
society organizations that objected to Nestlé’s strong promotion of its infant
formula in countries where access to clean water was limited and breast-feeding
was a much safer and healthier alternative to nourish infants. The new shift in
public policy in the U.S. to keep vending machines selling candy and soft drinks
out of public schools is another example of government intervention against
inappropriate corporate practice, again on public health grounds. Some school
systems have gone further, and are experimenting with catering services that
specialize in local produce, organically produced where possible.
It is not easy to get economic management right. Many governments, in
developed and developing countries, have long histories of intervention in
agricultural production and distribution. Some of these experiences have been
positive but many only served to create entrenched interests that captured the
benefits for a small elite. As with any law or regulation, agricultural policies can
only be as good as the authorities responsible, and they must be held accountable
by the people they govern. Good economic governance depends on strong
political institutions.
References
AAI (Action Aid International) (2005): Power Hungry: Six Reasons to Regulate Global
Food Corporations. South Africa.
Brown, Oli (2005): Supermarket Buying Power, Global Commodity Chains and
Smallholder Farmers in the Developing World. Human Development Report Office
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