- PHIL HOWARD
Concentration and Power in the Food System
BY PHIL HOWARD
As you know, there's a tendency in many industries to move away from markets characterized by many small firms towards concentrated markets that are characterized by just a few large firms. This trend is also occurring in food and agricultural industries. You can think of markets as a spectrum, with competitive markets on one end, and monopolies on the other. What's becoming more common is an oligopoly, or what some people call a shared monopoly, with the appearance of some competition.
This can be a problem because institutional economists suggest that when four firms control 40% or more of sales, it results in an environment that's very conducive to price signaling. If one large firm announces that they're going to raise prices, the other firms will find it to their benefit to follow suit. They don’t even need to gather in one room, although that does occur as well.
Markets dominated by fewer and larger firms result not just in increasing economic power, but also in the greater ability of firms to shape and reshape society to their benefit. Walter Adams was a chair of the economics department at Michigan State University, and then briefly served as president of the institution in the late 1960s. I'd never heard of him until I'd been at Michigan State for several years and came across his work—my colleagues in the economics department have never heard of him. With his former student, James Brock, he wrote the book, The Bigness Complex, where they pointed out that very large firms have the power to, (1) infiltrate government agencies with influential decision-makers drawn from the industries ostensibly being regulated, (2) coerce society to accede to its demands through threats to shut down facilities or to relocate them elsewhere, (3) obtain government bailouts, when collapsing giants are considered to be too big and too important to be allowed to fail—and note that this second edition of the book came out in 2004, before the massive bailouts of Wall Street in 2008, (4) obstruct technological advance, and (5) manipulate the alternatives from which society is allowed to choose.
For food systems, this results in many negative impacts, including locking in industrial pathways that are unsustainable, and a vicious circle of power concentrated into fewer and fewer hands. You may have heard the analogy of an hourglass, which comes from one of my advisors, Bill Heffernan, at the University of Missouri. He explained that in the US, we have about 2 million farmers producing food at the top of that hourglass and about 300 million people who eat food at the bottom. But in between is a much smaller number of firms that control how that food gets from farmers to everyone who eats, and the middle of the hourglass is getting smaller all the time. Even if there were no negative impacts of this outcome, it's not democratic to have a very small number of people making most of the decisions about what we eat.
The big question is what can we do to slow or even reverse these trends? There are two broad strategies. One is to address the political system that facilitates this narrowing of the hourglass. The challenge here is that as these firms have become bigger, they’ve become more politically influential, and very effective at challenging any efforts to reduce their power.
Another strategy is to create alternatives to these huge firms, which results in essentially two opposing trends: you have this dominant trend towards concentrated markets on one end, but you also have a counter-trend, where new alternatives are being created and ownership diversity is increasing, though often in just very tiny niches.
In other words, you have this dynamic where there is increasing power, which may lead to resistance, which in turn, may lead to creating alternatives—these alternatives may bypass the hourglass-shaped food system as a result. But the challenge here is that some of the most successful of these end up being copied or acquired by those dominant firms, and just absorbed back into the hourglass. This process of co-optation may unintentionally reinforce the power of these firms even more.
We will need multiple strategies to address these challenges, not just one, but many of these trends are hidden. Therefore, I suggest the key component of both strategies will be to increase the awareness and visibility of these trends.
I will illustrate these dynamics with four examples: seeds, beer, meat processing, and organic processing. I’ll describe how the hourglass is narrowing, how alternatives are being created in response to some of the negative impacts of these trends, the efforts by big firms to co-opt those alternatives, as well as responses that seek to increase the visibility of these alternatives to create more barriers to their co-optation.
I mentioned the narrow middle of the hourglass, but farmers face another bottleneck when buying inputs. At the global level, we now have just a few firms that are incredibly dominant in each of the key input sectors, such as farm machinery and animal pharmaceuticals. Many of these firms are dominant in multiple sectors, such as agrichemicals and seeds. The acronym CR4 refers to a “concentration ratio” of four firms, which is the sum of the market shares that these firms control. Four of five input sectors exceed the 40% threshold, and this is at the global level, not just a national level. Fertilizer is the input industry that is under this threshold at 33%, but this is at the global level, so when you look at specific fertilizer categories or national markets the CR4 is typically much higher.
For the US market, Coca-Cola controls over one-third of the sales of soft drinks. For beer, AB InBev has 40% of the US market just by itself, and for salty snacks, Pepsi/Frito-Lay has 45% of sales. If you look at different market segments you begin to see a lot of the same names again and again. JBS and Tyson are dominant in beef, pork, and chicken processing. Cargill is number three in soybean processing and beef processing, and earlier this year, the US government approved an acquisition—Cargill, along with a joint venture partner, Continental Grain, was allowed to acquire the number three chicken processor Sanderson. Looking at those segments one at a time doesn't give you the full picture of how dominant they are in many categories.
It often appears as if we have many choices despite these trends. A typical supermarket in my area, for example, might offer 800 different varieties of wine, but what is much harder to see is that over 40% of sales are controlled by just the top three firms. And it's similar in some other categories, such as bread, where nearly half the sales in the US are from just two firms. Even much bigger industries or market segments, such as retailing, are becoming more concentrated. Walmart has 24% of retail grocery sales just by itself and the CR4 is 45%--this will rise if #2 Kroger is allowed to merge with #4 Albertson’s, as they recently proposed. Simultaneously with announcing the plan for this merger, Albertson’s announced a $4 billion distribution to shareholders which is currently held up by a court challenge by the grocery workers’ union. Fast food has a CR4 of 39%, very close to that 40% threshold, and keep in mind that about 11% of calories consumed in the US come from fast food.
The seedy mix of seeds and ag-chemicals
At the global level, dominant chemical firms have been acquiring hundreds of seed companies in recent decades. The four largest seed companies in the world are also chemical companies, with a combined share of more than half of commercial seed sales.
Not surprisingly, prices have increased in conjunction with this consolidation.
From 1996 to 2018, for example, corn and cotton seed prices in the US more than tripled.
We have seen this quite expected result of increasing prices, but we have also seen other impacts like lower rates of replanting and saving seeds, reduced seed diversity, and less innovation.
Seminis, for instance, was a seed company that was formed by a Mexican billionaire. He saw what was happening in commodity seeds like corn and soybeans and started buying up fruit and vegetable seed companies. To pay back the money borrowed to make those acquisitions, Seminis dropped the less profitable varieties of seeds from these catalogs, more than 2,000 of them. Monsanto eventually acquired Seminis, as well as a large Dutch fruit and vegetable seed company, De Ruiter, before Monsanto was acquired by the German seed-chemical giant Bayer. This resulted in one firm controlling well over 20 percent of fruit and vegetable seed sales globally.
Before it was acquired, Monsanto formed a holding company called American Seeds Incorporated. In just a few years, from 2004 to 2007, ASI acquired about two dozen Midwestern corn-soybean companies, although they kept these acquisitions pretty quiet. They wanted to access the locally adapted seeds that these firms offered and tie them to Monsanto’s patented, genetically engineered traits. Many farmers had no idea that these were now owned by Monsanto. Soon after, the number of seeds available started dropping, and eventually, a number of these brands were eliminated. If you look across all the big seed companies, more than 57 were eliminated due to consolidation, further reducing choices for these farmers.
One factor that is driving this consolidation is increasing intellectual property protections on seeds. Through court decisions and legislation over the years, it's become increasingly difficult for farmers to be able to legally save and replant their seeds. An example is the Bowman versus Monsanto decision of the Supreme Court in 2013. Vernon Bowman went to his local grain elevator, bought some soybeans, as people have done for decades, and planted them in his fields. He let Monsanto know he was doing this because he thought that after the first sale patents should not apply to the seeds that are harvested in the next generation. The Supreme Court, however, ruled that Monsanto's patent applied to anyone, in perpetuity. We've even seen farmers go to prison for saving and replanting soybeans.
One response to this is the Open Source Seed Initiative, which involves a pledge placed on the packages of seeds that are for sale. The pledge says you can use the seeds any way you want, as long as you don't restrict others’ use of the seeds or their derivatives by patents or other means. There are few legal teeth behind this, but it is raising awareness of the problem of intellectual property protections on living organisms. There are more than 60 small seed companies that are partners in this initiative, which has been applied to hundreds of new seed varieties. When you buy seeds from these companies, you are assured that they are independent, but also that they are supportive of more freedom for farmers and gardeners to save and exchange seeds. There are similar efforts in a number of other countries, including Kenya, Ethiopia, Germany, and India.
The next industry is beer. Back in 1959, Pabst tried to acquire Blatz, another Wisconsin brewer. This would have resulted in a combined national market share of 4.5%. Regulators from the US government opposed this action, and it went all the way to the Supreme Court. In 1966 the Supreme Court undid that acquisition, stating the concern that it would “lead to greater and greater control of the industry into fewer and fewer hands.” Of course, that is the current situation, as just one firm accounts for 40% of the US market.
So what changed? That's a long story, but the short version is, in 1980, Ronald Reagan was elected, and he appointed heads of regulatory agencies with a mandate to be much more permissive in terms of antitrust action. At the same time, judges were being indoctrinated by University of Chicago economists and lawyers. These judges went on junkets, or all-expenses-paid trips, to places like Arizona and Florida to play golf. While there, they would attend seminars promoting the idea that mergers and acquisitions were great for consumers because they were always more efficient, and would always result in lower prices for consumers. More than two-thirds of federal judges had participated in these junkets by the 1990s.
By 1992, the Department of Justice developed a threshold that if four firms controlled 80% of sales or less, that market was not considered “highly concentrated.” As long as no one firm had more than a 20% share, they were not particularly concerned if the CR4 was as much as 80%. And then in 2010, they raised that threshold even higher, so that four firms could evenly divide 100% of the market, and it was not considered highly concentrated!
Beer sinks to four dominant brewing companies
Not surprisingly, firms have been taking advantage of these changes, both in the US and in other parts of the world that have also adopted this more permissive approach. For beer, 54% of the volume for the entire world is now brewed by just four companies. About five years ago, Anheuser Busch InBev was already the number one brewer in the world, yet was allowed to acquire the second largest brewer, SABMiller, for more than $100 billion. Globally the dominant firms are continuing to expand and enter new markets, but in some places, like the US and Australia, they are beginning to lose some market share. As you probably know, much of this is due to the rise of craft beer.
The number of breweries in the US declined from more than 4,000 in 1873 to zero in 1920 due to Prohibition. After Prohibition ended in 1933 the number of breweries increased, but home brewing remained illegal until 1978. By that time, there were just 89 breweries in the entire United States—200 million people, but less than one hundred breweries! When home brewing was legalized, we started to see more craft breweries open. The numbers have increased even more rapidly in recent years, and by 2020 there were more than 9,000 breweries in the US.
At first, the big breweries ignored this trend. Then they started copying it. They introduced what some people call “faux craft” or “crafty” beers. These are products that look like and are priced like craft beer but are actually brewed in their giant facilities, such as Blue Moon and Shock Top. That strategy was quite successful for a while, but then sales started to slow down. The next step about a decade ago was to start acquiring formerly independent craft brewers. Nearly every large non-craft brewer that sells in the US market has since acquired a successful, formerly independent craft brewery.
A few years ago, I wanted to see how this played out on the retail shelves, so I visited 20 retailers where I live in Lansing, Michigan. I recorded the amount of space taken up by various craft beer brands and then decoded their ownership relationships. What I found was that for a typical retailer, about 40% of what I saw in the “craft beer” section had ownership ties to these big brewers. None of these were indicated on the labels or the brand websites.
One response is from the Brewers Association, which represents breweries the size of Boston Beer/Samuel Adams, and smaller. They have a little over 5,000 paying members. Any brewery that is eligible to be a member can now use its “Independent Craft” label. There are 3,000 breweries that now place this label on their packaging so that you can very quickly see that it's not owned by a big brewer.
Meat – juicy profit center with less for everyone else
The next industry is meat processing. The two largest meat processors in the world are JBS and Tyson, and they have made dozens of acquisitions of competitors in the last twenty years. Some of the amounts they paid were enormous, in the $3 billion or more range, and some as much as $7 billion.
JBS has been more active than Tyson both in the number of acquisitions and the geographic extent of these acquisitions. JBS started in Brazil as a small beef processor and then grew very quickly, acquiring other meat processors first in South America, and then on nearly every other continent. The firm hasn’t yet made acquisitions in Asia but does have alliances with some firms there. How was JBS able to leapfrog other dominant meat processors and make so many acquisitions? One factor that we knew years ago was that the firm had substantial support from the government of Brazil. JBS was about 25% owned by two government banks in exchange for very favorable loans. Even though it was one-quarter government-owned, JBS was allowed to be the largest legal donor to political campaigns in the country—they funded more politicians than any other firm, which gave them substantial political influence. Just a few years ago, however, we learned that JBS also made illegal payments or bribes, amounting to more than $220 million to 1,800 politicians—this was revealed via a government wiretap investigation into allegations of tainted meat. One of the top executives explained, in exchange for immunity, why they did it. He said, without the bribes, “it wouldn't have worked, it wouldn't have been so fast.” This gave the firm enormous advantages over competitors. By having subsidiaries in other countries, JBS could go around trade barriers that other Brazilian firms faced, such as restrictions on exporting beef to the European Union or China.
The founder of JBS and five of his six children—including two sons who admitted involvement in the bribery scheme—are all billionaires. The Tyson Foods heir, John Tyson, is also a billionaire. You may have seen a few years ago, he ran a full-page ad in the New York Times asking that safety regulations for workers in Tyson plants be reduced because the firm needed to “feed America,” although at the time Tyson was sending record exports of meat to China. The CEO of the WH Group, headquartered in China, is a billionaire as well. That firm acquired Smithfield, previously the world's largest pork processor, based in the US, with some very favorable loans provided by the government of China in 2013. Following a bonus of nearly half a billion dollars, in 2017, the WH Group CEO received $291 million in compensation, which is more than the CEO of Apple, Tesla or Facebook made that year.
At the same time that executives and major shareholders of these firms have been increasing their wealth, these firms have been reducing what they're paying to their suppliers and workers and increasing the prices they're charging to customers. In recent months we’ve seen record-high prices for beef, pork, and chicken in the US. These firms have used the excuse of “inflation” to justify these price increases, but have bragged to their shareholders that they’ve been able to raise prices much higher than any increase in their input costs, and are reporting record profits.
Even before recent price increases, most of the leading meat processors in the US were allegedly using a company called Agri Stats, Inc. to share data on their operations and coordinate their actions. By using this firm, they were able to drive up retail price increases and pay less to their suppliers and workers—they have paid hundreds of millions of dollars in fines and settlements in class action lawsuits as result.
Decreasing prices for livestock products contributed to the loss of farms in the US. From 1987 to 2017, for example, there has been a dramatic decline. For pork and dairy, there were about 200,000 farms at the beginning of this period, and just 50,000 farms at the end of this period, according to USDA data. The remaining farms have also rapidly increased in size as a result—for dairy, the average number of cows jumped from less than 100 to more than 1,300 during this period, and for pork, the average sales increased from 1,200 to more than 50,000 pigs.
To come back to JBS, this firm has nearly 100 brands globally as a result of its acquisitions. Among these include several organic brands and other apparent alternatives, such as grass-fed or pastured meat, as well as vegetarian or plant-based meat substitutes. Nearly all of the world’s largest beef processors are acquiring lab-grown or cellular meat and seafood startups. Although this technology is far from achieving commercial success, meat processing industry executives have admitted that this is a defensive strategy, and they will not allow anyone to disrupt their industry.
Cornucopia Scorecard on organic meat
One response is from the Cornucopia Institute—this organization has developed scorecards for several organic products, including poultry and beef. Although all of the brands on the scorecard are certified organic by the USDA, they differ widely in their approaches to meat production. The Cornucopia Institute has a rating of one to five on how ethical they rate the practices embodied in these products, helping consumers to better support those that are more aligned with their values.
And it's not just the meat industry where this is occurring—in the organic food industry there are many other brands that have been acquired by the largest food firms in North America. Perdue, for example, has acquired half a dozen organic meat processing firms. Another example is WhiteWave, a spinoff of the conventional dairy giant Dean Foods, which previously acquired a number of dairy and dairy alternative firms in the organic sector. WhiteWave was later acquired by Danone (which controls the brand Dannon) of France for $12.5 billion. Last year, Danone announced that they were dropping the contracts of nearly one hundred small dairy producers in the Northeastern US because they would prefer to source from fewer and larger dairies elsewhere. (See article by Ed Maltby on p. ___) There is also the example of JAB Holding Company, which is controlled by the second wealthiest family in Germany and has been buying up a number of organic coffee and tea companies.
Organic Independents – Equal Exchange, Eden Foods
Several dozen nationally distributed organic processors, however, have made the decision to remain independent. This is important because they have resisted frequent, enormous buyout offers. It takes a strong commitment to continue to compete against some of the largest food processors in the world, which have the ability to spend massive amounts on advertising or to sell their products below cost for years in order to drive competitors out of business. Some of these independent organic processors are organized as cooperatives like Equal Exchange, while others have a strong commitment to organic principles, like Eden Foods in Michigan—they refuse to use the USDA label because it no longer represents their ideals.
I used to highlight the example of Clif Bar because the founder Gary Erickson wrote a book about his experience of nearly selling out. About twenty years ago he was offered $120 million to be acquired by Quaker Oats, which is a division of Pepsi. As the negotiations went along, more and more promises were watered down and he decided at the last minute to back out, but his business partner decided she wanted the $60 million. Erickson had to borrow this amount to buy her out and keep the company independent, and then scramble to pay it back. He's done a lot of good things since then, such as creating a foundation and funding organic seed breeding research at universities. Earlier this year, however, he changed course and sold the firm to Mondelez for $2.9 billion, so Clif Bar is longer independent.
Changes in the organic standards in recent years have led to a lot of dissatisfaction, and two changes in particular. About five years ago the USDA withdrew a proposed rule that would have tightened up the requirement for access to pasture for organic livestock. What we see now are giant, factory-scale dairies and egg producers, where livestock may never see the outdoors. Chickens may have tiny porches attached to football field-size facilities, but the birds never actually go out of doors. This is an enormous disadvantage for smaller producers, such as the dairy farmers who just lost their contracts with Danone. At about the same time, hydroponic produce was allowed to be certified as organic by the USDA—the US is one of the few countries in the world that currently allows hydroponic or soil-less produce to be labeled organic. These changes triggered a response, and there are now two labels that could be considered “beyond organic”: “Real Organic” and “Regenerative Organic Certified.” Producers that already meet the standards of USDA organic certification, they can now take some additional steps to qualify for these labels, such as avoiding hydroponic production and providing substantial access to pasture for livestock—with no additional fees involved in the case of Real Organic. The hope is that this will help consumers who are committed to a much higher level of standards than embodied in USDA Organic to be able to support these values.
Signs of increasing resistance
To recap, I've described the industry consolidation that's narrowing the hourglass-shaped food system, as well as some of the impacts of these changes. I've also discussed alternatives that are being created and efforts to make those alternatives more visible through pledges, scorecards and certifications. I touched on the need to change the political system that's narrowing the hourglass—this strategy was successful 100 years ago when a number of antitrust laws were passed and the trusts were broken up. I've also touched on some tactics that in the shorter term might slow the narrowing of the hourglass, such as reinvigorating the enforcement of existing antitrust laws, rolling back patents on living organisms, establishing stronger penalties for executives who violate laws, and preventing the watering down to voluntary standards.
There have been some important successes lately in areas where we haven't seen them before. Labor unions have formed at Amazon, Starbucks, Chipotle and Trader Joe's, for instance. It's encouraging to see that there is more and more resistance because it's going to take a lot more people, and a lot more organizing to address these trends. In the very short term, I expect we're going to see continued consolidation. In the longer term, however, there's a good chance that more of these efforts will succeed in reversing the narrowing of the hourglass.
Phil Howard is a member of the International Panel of Experts on Sustainable Food Systems, and a professor at Michigan State University. He is the author of Concentration and Power in the Food System: Who Controls What We Eat?