Feds weigh complaints against large agricultural companies

By MATEUSZ PERKOWSKI

Capital Press

Due to their size and power, some agricultural firms have become prime targets for accusations of anti-competitive behavior.

Critics charge that they exert too much control over the markets for livestock, milk and crops and that a leading developer of crop technology has hindered competition in the seed industry.

Increased concentration in the farm industry has raised questions about violations of antitrust law, prompting the USDA and the U.S. Department of Justice to sponsor a series of joint workshops on the subject.

However, just because some companies wield a disproportionate amount influence doesn't necessarily mean they've broken the law, according to some legal experts.

"I can do anti-competitive things and not trigger any sort of antitrust violation," said Bill Gillon, an agricultural attorney in Collierville, Tenn., who tracks antitrust issues.

The scale, nature and effect of the behavior are key determinants in whether an antitrust violation has taken place, Gillon said.

If a company has outmaneuvered its rivals in the course of the competitive process, that's generally not illegal, said Geoffrey Manne, executive director of the International Center for Law and Economics think tank.

The predominant goal of antitrust law is to protect consumers from overpaying for products or otherwise being exploited, said Manne, who is also a lecturer at the Lewis & Clark Law School in Portland.

Antitrust violations are typically associated with a small number of suppliers who unfairly affect the market for a large number of buyers, he said.

"Usually, you find these problems on the seller side," Manne said.

It's not as common for a multitude of producers to be harmed by a limited number of buyers, which is why antitrust cases in agriculture have been comparatively rare, he said.

Antitrust law does allow sellers to shield themselves from buyer monopsony power -- basically, the reverse of monopoly power -- but that protection is offset by certain factors, Manne said.

With agriculture, safeguards for farmers are basically weighed against the potential consumer benefits of increased concentration in the industry, he said.

Efficiency and economy of scale are valid defenses in antitrust cases, as long as they may help consumers, he said.

Such arguments can also be applied in situations where the farmer is the consumer -- for example, in defense of a biotech developer accused of dominating the market for seed, Gillon said.

In the biotech industry, substantial amounts of cash are required for research into ways to spur productivity growth, he said.

"Big companies spending big money doing big research generate a lot of it," Gillon said.

Market concentration is also a contentious topic in antitrust cases, Manne said.

Government agencies like the Federal Trade Commission and Department of Justice often rely on a market concentration formula -- the Herfindahl-Hirschman Index -- to decide whether to file an antitrust case.

"It's very common in mergers," he said.

Private plaintiffs also rely on the index to bolster their claims in antitrust lawsuits, Manne said.

"It's not the totality of the evidence, but it's definitely a piece," he said.

The index is controversial because it attempts to strictly define a market, when in reality such boundaries are often ambiguous, he said.

For example, he said, does a pretzel producer compete only against other pretzel producers, or with all other snack food manufacturers?

Because so many factors are involved, determining whether an antitrust violation has occurred is often not a simple matter.

The question is ultimately decided by a court, based on how evidence in the case squares with legal principles -- and that's only if the allegations are made as part of a lawsuit and the company decides to defend itself, Manne said.

In cases where the federal government raises antitrust concerns, some firms prefer not to fight the allegations even if they disagree, he said.

For example, a mere request for information by the Federal Trade Commission has been enough to scare off companies from merging with one another, Manne said.

"It costs so much to comply," he said.

The potential outcome of the USDA and Justice Department's joint workshops remains unknown, perhaps even to the agencies themselves.

The meetings are intended to deepen the government's understanding of competition in agriculture and don't necessarily precede any specific action, said Christine Varney, assistant attorney general with the Justice Department's antitrust division, in a speech last year.

"We will approach the matters that come before the division and the upcoming workshops without any preconceptions and cannot promise any particular answers or results," she said. "I can assure you, however, that we are committed to a careful and comprehensive examination of the marketplace."

Herfindahl-Hirschman Index

The Herfindahl-Hirschman Index is used to gauge market concentration. The formula is based on the market share percentages of competitors within a market.

For example, in a market with four competitors of equal size, each would have a share of 25 percent.

By squaring the market share of each company -- 25 multiplied by 25, or 625 -- then adding all four numbers together, you'd arrive at an HHI of 2,500.

A market with an HHI of more than 1,800 is considered by the U.S. Department of Justice to be highly concentrated, while one with an HHI below 1,000 is considered to be not concentrated.

Anything in between is considered a moderately concentrated market.

If a transaction, such as merger, raises a market's HHI by more than 100 points, that indicates a shift in market share greater than 10 percent.

Such a change will "presumptively raise antitrust concerns" with the federal government, according to the Department of Justice.

-- Mateusz Perkowski