Will Agribusiness Plow Under The Family Farm?

Rampant consolidation has caught Washington's attention

When John R. Whitaker, a family farmer in southeast Iowa, took lambs to market a few years ago, he would see four or five buyers bid for them. These days, he says, he's lucky to get two. The story is much the same in grains, he says, where a handful of companies make up the market in many spots around the Farm Belt. Such concentration in agriculture, Whitaker frets, is putting a big squeeze on already beleaguered farmers; he believes his lambs would fetch better prices if more buyers were competing. "It's not our hides it's coming out of," says Whitaker. "it's deeper than that."

Now, with an Oct. 2 deal to take private the nation's No.1 meat packer, IBP Inc., farmers like Whitaker are about to have even more to worry about. The deal, in which a private equity fund controlled by Donaldson, Lufkin & Jenrette Inc. would buy IBP for $2.4 billion, will nearly double the stake that grain processor Archer Daniels Midland Co. has in IBP to 22%. The result, say critics, will be a vertical integration that will dangerously increase the power of ADM, which has previously been found guilty of price-fixing. With strong positions in both the feed and slaughtering sides of the business, farmers could get stuck in the middle. Says Senator Paul Wellstone (D-Minn.): "They may be cheering this deal on Wall Street today, but hard-pressed family farmers are not cheering one bit."

Farmers and farmland economists argue over whether consolidation is the force behind the record-low prices farmers fetch for commodities ranging from wheat to hogs. Indeed, bumper crops and weak global demand seem far more at fault. But few dispute that concentration in the Farm Belt would raise alarm bells in other industries. In the beef business, for instance, the nation's four largest packing companies, including IBP, account for about 81% of cattle slaughtering, up from 72% a decade ago and 36% in 1980, according to the U.S. Department of Agriculture.

Now, a parade of big deals could increase those concentrations. In hog processing, for example, just four firms control 56% of the market--up from 34% in 1980. Smithfield Farms Inc., a Virginia outfit with $5.2 billion in revenues, took the No.1 spot in hog processing in mid-1999 by buying Carroll's Foods of Warsaw, N.C. Then it strengthened its hand with its January 2000 purchase of Murphy Family Farms, a leader in supplying hogs. It came within a whisker last year of taking over Tyson Foods' pork group, but couldn't come to terms. The company argues that such concentration is good because it keeps consumer prices low. "We think it's wholesome," remarks Smithfield spokesman Jerry Hostetter.

JAIL TERMS. For farmers and ranchers--especially small ones with little market power--such deals raise the specter of anticompetitive practices. Price-fixing, an ugly issue that led to recently stiffened jail terms for a couple of former ADM executives, is far easier when fewer players are in the business. For smaller players, the result of reduced competition could be higher costs for feed and supplies and, arguably, lower prices for their goods. "I've seen what happens if you don't have competition: It's deadly," says Neil E. Harl, an economics professor at Iowa State University who runs an international center that helps former Soviet bloc economies move toward free markets.

Big agribusiness take note: There are plenty of folks in Washington who couldn't agree more with Harl. Agriculture Secretary Dan Glickman calls current levels of concentration "worrisome," and says that Congress should take a hard look at laws governing agricultural mergers. "I'm not sure our existing antitrust laws are very suitable to deal with these problems," says Glickman. Already, reviews by antitrust officials at Justice are getting stiffer: The department required substantial divestitures when it allowed Cargill, the nation's No.1 grain processor, to acquire the grain business No.3 player, Continental Grain Co., in 1999.

Agribusiness leaders are bracing for a fight. A spokesman for ADM denies that the IBP buyout would amount to a vertical integration, claiming the two companies don't impinge on one another's operations. He adds that ADM regards its stake as just an investment, even if the company has a seat on IBP's board. A spokesman for IBP insists the company will not be vertically integrated after going private. "IBP will still depend on independent farmers and ranchers to supply it," he adds.

For now, big agribusiness players seem only to have eyes for one another. But given the Farm Belt furor over the deals--and Washington's growing concerns--that may be about to change.

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