Address by
Douglas Ross
Special Counsel for Apiculture
Antitrust Division
U. S. Department of Justice

 

 

I appreciate the opportunity to discuss the role that the antitrust laws play in the agricultural marketplace. In the last few years, agricultural producers and others have expressed concern about competitive conditions in the agricultural marketplace, about the impact on farmers of particular mergers and acquisitions, and about levels of concentration in agriculture generally. We know that the agricultural marketplace is undergoing significant changes, including major advances in technology and productivity, an increasingly global marketplace, changes in business relationships between producers and packers/processors, and in many sectors, a trend toward consolidation.

As recent actions by the Antitrust Division demonstrate, we hear the concerns being expressed and take them very seriously. By any measure, the Division has been spending a significant amount of time, energy, and resources on agricultural issues recently. During the past two years atone, the Antitrust Division has challenged four mergers that would have affected agricultural markets:

the proposed acquisition by Monsanto of DeKalb Genetics Corporation, which would have significantly reduced competition in corn seed biotechnology innovation to the detriment of farmers;

the proposed acquisition by Cargill of Continental's grain business, which would have significantly reduced competition in the purchase of grain and soybeans from farmers in various local and regional markets;

the proposed acquisition by New Holland of Case, which would have significantly reduced competition in the safe of tractors and hay tools to farmers; and

the proposed acquisition by Monsanto of Delta & Pine Land, which would have significantly reduced competition in cotton seed biotechnology to the detriment of  farmers.

During the same period, the Antitrust Division also criminally prosecuted companies that had fixed prices for products purchased by farmers -- lysine and vitamins -- and secured numerous criminal convictions arid the highest fines in antitrust history. These enforcement actions demonstrate that the Antitrust Division is committed to enforcing the antitrust laws in the agricultural marketplace.

As part of the Division's continuing focus on agriculture, at the beginning of this year, Assistant Attorney General Joel Klein created a new position of Special Counsel on Agriculture to report directly to him and to work exclusively on agricultural matters. When he appointed me to fill the position, Assistant Attorney General Klein asked that I draw upon a quarter-century experience in antitrust and litigation at the state and federal levels to focus full-time on the agricultural marketplace and to provide him assistance and advice to supplement the Division's ongoing antitrust enforcement efforts. Mr. Klein has also personally traveled to the Midwest twice in the last year to visit with large groups of farmers, to hear their concerns directly and to improve everyone's understanding of how the antitrust laws operate and how the Division works to protect competition under them. Over the last several years, other Division officials have met with individual farmers and agricultural organizations and testified at hearings here in Washington and in the field as well to hear these concerns and to explain how the Division's mission to enforce the antitrust laws applies in the agricultural sector.

The role of the Antitrust Division in the midst of the changes faced by the agricultural marketplace is narrow but important: we enforce the antitrust laws. We are not regulators. We do not have the power to restructure any industry, any market, or any company, or stop any practice, except to prevent or cure specific violations of the antitrust laws that we can prove in court. When we bring an action, the court decides whether the antitrust laws are being violated in the particular instance, and whether the remedy we are seeking fits the violation. The court's decision depends on the particular facts in evidence. Therefore, we bring an enforcement action in court only when we are in possession of factual evidence that gives us good reason to believe that the antitrust laws have been violated.

There are three basic kinds of violations of the antitrust laws. First, the antitrust laws prohibit conspiracies to deny market access or otherwise suppress competition. It is a violation of section 1 of the Sherman Act for separate firms to agree among themselves not to compete with each other, but instead to join forces against their consumers or their suppliers. Second, section 2 of the Sherman Act prohibits the use of predatory and/or exclusionary conduct to acquire or hold on to a monopoly in a market, making it illegal for a firm to monopolize or attempt to monopolize a market. Third, section 7 of the Clayton Act prohibits mergers and acquisitions (referred to collectively hereafter as "mergers") that are likely to substantially lessen competition in a market.

The antitrust laws protect competition in the agricultural sector of our economy just as they do in other parts of the economy. The antitrust laws are based on the notion that competitive market forces should play the primary role in determining the structure of our economy. Both consumers and producers are the beneficiaries of antitrust enforcement and effective competition among producers of goods and services at all levels in the production process. Consumers benefit because that competition leads to better quality, more innovation, and lower prices. Producers who seek to supply products and services benefit because antitrust enforcement and effective competition enable them to do so free from anticompetitive interference. This is why it is often said that the antitrust laws protect competition, not competitors.

A number of industries are subject to industry-specific regulatory requirements and standards. For example, the meat-packing industry is regulated by USDA's Grain Inspection, Packers and Stockyards Administration. While the antitrust laws play an important role in helping keep markets competitive, they will never address all of the complex issues facing American agriculture in this time of change. That is why the government continues to focus on a broad range of agriculture policy issues.

  1. Merger Enforcement

Producers are especially concerned about the potential impact of mergers. The concern is that mergers will either limit the number of sellers of seed, chemicals, machinery, and other equipment from whom they have to buy, or that mergers will limit the number of buyers of crops and livestock to whom they can sell. Let me begin, then, with a discussion of the Antitrust Division's merger enforcement program, with particular emphasis on recent merger enforcement actions that the Antitrust Division has taken in the agricultural sector.

    A. Merger Enforcement Standards

The antitrust laws prohibit the acquisition of stock or assets if the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly. This enables us to arrest anticompetitive mergers in their incipiency, to forestall harm that would otherwise ensue but be difficult to undo after the parties have consummated a merger. Thus, merger enforcement standards are forward-looking and, while the Antitrust Division often considers historic performance in an industry, the primary focus is to determine the likely competitive effects of a proposed merger in the future. The remedy we seek for a merger that violates the Clayton Act is to sue to stop the merger, or to insist that it be modified to remove the cause for antitrust concern.

    B. Conducting Merger Investigations

Merger reviews require a careful analysis of the markets involved. The Antitrust Division analyzes mergers pursuant to Horizontal Merger Guidelines developed jointly by the Department of Justice and the Federal Trade Commission, with whom we share merger enforcement responsibility, except for certain industries in which the FTC's jurisdiction is limited by statute. The analysis is aimed at determining whether the merger is likely to create or increase market power, or to facilitate the exercise of market power, in any market. Market power is the ability of a firm to raise the price charged to customers - or to lower the price paid to suppliers - a small but significant amount without that move being defeated by counteractive competitive responses by other competing firms moving in to take away those customers or suppliers.

Before we get to that analytical step, however, we usually determine the scope of the product markets and geographic markets that would be affected by the merger. This is an important first step in our analysis - until we know the size and shape of the market, we cannot know how big any firm's market share is, for example. The scope of a market is generally defined by the smallest geographic area in which a hypothetical firm, assuming it faced no competition for its product in that area, could make a small but significant change in price stick. Usually, we are looking at that arm as a seller, and determining the smallest area within which the firm's customers would be unable to thwart the firm's inflated pricing by going outside that area for their buying needs. But, as our Merger Guidelines expressly note, we also look at the firm as a buyer, and determine the smallest area in which sellers to the firm would be unable to thwart the firm's depressed prices by selling to others outside that area - that is, because it would be economically impractical to travel or ship outside that area.

A decision as to the dimensions of this area can sometimes be reached by examining recent buying and selling patterns in the marketplace. But the decision can also depend on a variety of other, more subtle factors, because the ultimate question is not how far the buyers and sellers have traveled or shipped in the past, but how far they could or would travel or ship in response to anti competitive price changes.

Once we have defined the market, we turn to the question of market concentration and how it would be affected by the merger. There is no automatic threshold of market concentration that will always result in a determination that a merger would violate section 7 of the Clayton Act. Other factors also play an important role in analyzing the impact of the merger - such as other structural features of the market that make anticompetitive effects more likely or less likely; and the ease or difficulty of entry into the marketplace by new competitors who could neutralize any anticompetitive potential.

    C. Recent Agriculture Merger Actions

1. Monsanto/DeKalb. Two years ago, the Antitrust Division investigated Monsanto's proposed acquisition of DeKalb Genetics Corporation. Both companies were leaders in corn seed biotechnology and owned patents that gave them control over important technology. We expressed strong concerns about how the merger would affect competition for seed and biotechnology innovation. To satisfy our concerns, Monsanto spun off to an independent research facility its claims to agrobacterium-mediated transformation technology, a recently developed technology used to introduce new traits into corn seed such as insect resistance. Monsanto also entered into binding commitments to license its Holden's corn germplasm to over 150 seed companies that currently buy it from Monsanto, so that they can use it to create their own corn hybrids.

2. Cargill/Continental. Last year, the Antitrust Division comprehensively reviewed the proposed purchase by Cargill of Continental's grain business, which resulted in a suit to challenge the merger as originally proposed. The merger affected a number of markets. The parties were buyers of grain and soybeans in various local and regional domestic markets and also sellers of grain and soybeans in the United States and abroad. We carefully looked at all of the potentially affected markets and ultimately concluded that the proposed merger could have depressed prices received by farmers for grain and soybeans in certain regions of the country; we were also concerned that the transaction could have had anticompetitive effects with respect to certain futures markets.

To give you a sense of the thoroughness with which the Division investigated all the potentially affected markets and sought relief in those markets in which we concluded that the transaction was competitively problematic, consider, as the responses to the nearly 100 comments explain, that a team of about 20 attorneys, economists and paralegals reviewed over 400 boxes of documents furnished by the parties in response to formal requests we made; deposed the parties' executives; reviewed relevant economic and legal literature; consulted with officials of USDA, CFTC and state attorney general offices; and interviewed over 100 farmers, farm organization officials, agricultural economists, grain company executives, and other individuals with knowledge of the industry and competitive conditions.

To resolve our competitive concerns, Cargill and Continental agreed to divest a number of facilities throughout the Midwest and in the West, as well as in the Texas Gulf. The nature of the relief demonstrates the individualized attention that we paid to local and regional markets. We insisted on divestitures in three different geographic markets where both Cargill and Continental operated competing port elevators: (I) Seattle, where their elevators competed to purchase corm and soybeans from farmers in portions of Minnesota, North Dakota, and South Dakota; (2) Stockton, California, where the elevators competed to purchase wheat and corn from farmers in central California; and (3) Beaumont Texas, where the elevators competed to purchase soybeans and wheat from farmers in east Texas and western Louisiana.

We also required divestitures of river elevators on the Mississippi River in East Dubuque, Illinois, and Caruthersville, Missouri, and along the Illinois River between Morris and Chicago, where the merger would have otherwise harmed competition for the purchase of grain and soybeans from farmers in those areas. The Illinois River divestitures (and an additional required divestiture of a port elevator in Chicago) also prevented the merger from anticompetitively concentrating ownership of delivery points that have been authorized by the Chicago Board of Trade for settlement of corn and soybean futures contracts.

In addition, we required divestiture of a rail terminal in Troy, Ohio, and we prohibited Cargill from acquiring the rail terminal facility in Salina, Kansas, that had formerly been operated by Continental, and from acquiring the river elevator in Birds Point, Missouri, in which Continental until recently had held a minority interest, in order to protect competition for the purchase of grain and soybeans in those areas.

This relief assures that farmers in the affected markets will continue to lave alternative buyers to whom to sell their grain and soybeans. Our proposed consent decree is still pending before the court under a Tunney Act proceeding in which the court makes the final determination that the decree is in the public interest. In February, the Department filed its responses to public comments, providing a window on the investigation we conducted and the answers to numerous comments on our proposed decree. The case demonstrates that the Antitrust Division will challenge mergers that threaten competitive harm to sellers of goods and services.

3. Case/New Holland. Last November, the Antitrust Division filed a complaint challenging the proposed merger between New Holland and Case Corporation because of our concern that the transaction would lead to higher prices for certain types of machinery purchased by farmers. The parties manufactured and sold four-wheel and large two-wheel drive tractors (the Versatile and Genesis lines, respectively) that are used by farmers for a variety of applications, including pulling implements to till soil and cultivate crops -- part of the nation's $1.5 billion market for agricultural tractors. They also manufactured and sold a variety of hay and forage equipment, including square balers and self-propelled windrowers -- part of the $250 million U.S. market for hay tools. The Antitrust Division concluded that the transaction would significantly lessen competition and lead to higher prices and lower-quality products.

The parties agreed to significant divestitures in order to address our concerns. Those divestitures included New Holland's large two-wheel-drive agricultural tractor business, New Holland's four-wheel-drive tractor business, and Case's interest in a joint venture that makes hay and forage equipment.

4. Monsanto/Delta & Pine Land. Most recently, Monsanto abandoned its proposed acquisition of Delta & Pine Land Co., after the Antitrust Division indicated that it was prepared to sue to prevent consummation of the transaction. The Antitrust Division concluded that the merger, which would have combined the two largest cotton seed companies, would have anticompetitively harmed farmers raising cotton.

Taken as a whole, these enforcement actions. establish certain important propositions about our merger enforcement efforts in agriculture-related industries. The Antitrust Division carefully reviews agricultural mergers for their competitive implications. If a merger is likely to lead to anticompetitive prices far products purchased by farmers, the Antitrust Division will file suit (New Holland/Case). if a merger is likely to lead to anticompetitive prices for products sold by farmers, the Antitrust Division will file suit (Cargill/Continental). The Antitrust Division's concerns are not limited to traditional agricultural products, but extend also to biotechnology innovation (Monsanto/DeKalb and Monsanto/ Delta & Pine Land). And, while the Antitrust Division will consider proposed divestitures and other forms of relief that permit a merger to proceed as restructured, the Antitrust Division will not shrink from challenging a merger outright if it concludes that lesser forms of relief are not likely to address fully the competitive problems raised by the merger (Monsanto/ Delta & Pine Land).

  1. Sherman Act Section 1 Enforcement

In addition to our merger enforcement program, the Antitrust Division has moved aggressively to prosecute companies that engage in price fining or allocation of customers. Such conduct willfully subverts the operation of free markets and can cause serious economic harm. It virtually always results in inflated prices to purchasers or depressed prices to suppliers; indeed, that is the very purpose of such conduct.

The key to such illegal conduct is an agreement among competitors. It is not enough for us to show that competitors charged the same or similar prices for a product or service. The Antitrust Division must prove that the competitors agreed upon prices or price levels, or upon the allocation of customers or markets, although we may be able to rely upon circumstantial evidence in order to do so. A company convicted of violating the antitrust laws is subject to substantial fines, and an individual convicted of violating the antitrust laws is subject to fine and imprisonment.

In the past few years, the Antitrust Division has prosecuted a number of cases and secured convictions and multi-hundred million dollar fines in various industries that have involved products purchased by farmers. Two prosecutions deserve particular mention.

    1. Lysine. Beginning in 1996, the Antitrust Division prosecuted Archer Daniels Midland and others for participating in an international cartel organized to suppress competition for lysine, an important livestock and poultry feed additive. The cartel had inflated the price of this important agricultural input by tens of millions of dollars during the course of the conspiracy. ADM pled guilty and was fined $100 million, at the time the largest criminal antitrust fine in history. Two Japanese and two Korean firms also were prosecuted for their participation in the worldwide lysine cartel and were assessed multi-million dollar fees. In addition, three former ADM executives were convicted for their personal roles in the cartel; two of them were sentenced last year to serve two years in prison and fined $350,000 apiece for their involvement, and the other executive had 20 months added to a prison sentence he was already serving for another offense.
    2. Vitamins. Last year, the Antitrust Division prosecuted the Swiss pharmaceutical giant, F. Hoffmann-La Roche Ltd., and a German firm, BASF Aktiengesellschaft, for their roles in a decade-long worldwide conspiracy to fix prices and allocate sales volumes for vitamins used as food and animal feed additives and nutritional supplements. The vitamin conspiracy affected billions of dollars of U.S. commerce. Hoffman,La Roche and BASF pled guilty and were fined $500 million and $225 million, respectively. These are the largest and second-largest antitrust fines in history in fact, the $500 million fine is the largest criminal fine ever imposed in any Justice Department proceeding under any statute. Three former Hoffmann-La Roche executives from Switzerland and three former BASF executives from Germany agreed to submit to U.S. jurisdiction, to plead guilty, to serve time in a U.S. prison, and to pay substantial fines for their role in the vitamin cartel. These prosecutions are part of an ongoing investigation of the worldwide vitamin industry, in which there have been 18 prosecutions to date.

The Antitrust Division will prosecute companies for price fixing whenever and however we learn of it. The lysine and vitamin cases get publicity because of the prominence of the companies involved and the amount of commerce at stake, but we also successfully prosecuted two cattle buyers in Nebraska a few years ago for bid-rigging in connection with procurement of cattle for a meat packer, after asp investigation conducted with valuable assistance from the Department of Agriculture, which was investigating some of the same conduct under the Packers and Stockyards Act. In short, we have brought -- and will continue to bring -- charges against companies that engage in criminal behavior that adversely affects farmers.

Before I leave collusion, I should mention an important exception to the prohibition against agreements to restrain competition, found in the Capper-Volstead Act. This law allows producers of agricultural commodities to form processing and marketing cooperatives - in effect to engage in joint selling at a price agreed to by the producer members of the co-op, subject to certain limitations enforced in the first instance by USDA.

III. Monopolization and Attempts to Monopolize

The Antitrust Division also investigates other forms of business behavior that may have anticompetitive effects. Monopolization and attempts to monopolize are violations of section 2 of the Sherman Act. For various reasons, this type of antitrust violation occurs less commonly than collusion, but it is also a serious willful subversion of the free marketplace. An example of monopolization or attempt to monopolize would be a dominant company in the market attempting to drive its competitors out of business by interfering with their ability to engage in the business. This might be attempted by the clearly dominant firm refusing to buy from producers who sell to any of its competitors, or refusing to ship with transportation companies who ship for any of its competitors, or refusing to sell to distributors or retailers who handle the products of any of its competitors - if the dominant company in question had enough market power that these refusals would have anticompetitive effects. Monopolization does not require proof of an agreement among two or more firms; one firm can illegally monopolize by itself.

But it is important to understand that monopolization cannot be proved just by showing that a firm has engaged in restrictive conduct: The law also requires proof that the firm has a monopoly - and that requires an extremely high market share all to itself - and that it engaged in the restrictive conduct in order to acquire or maintain the monopoly. Or, in the case of attempted monopolization, it must be proved that the firm has a "dangerous probability" of acquiring a monopoly as a result of the restrictive conduct. And to prove "dangerous probability," the courts generally require, for starters, that the firm involved in the restrictive conduct already have a very large market share. And even a large market share might not be enough, if other facts indicate that the restrictive conduct involved is unlikely to succeed in creating a monopoly.

Just as important, section 2 monopolization cannot be proved just by showing that the market is highly concentrated. Under our antitrust laws, a firm may lawfully have a monopoly - even 100 percent of the market - as long as the firm has not acquired or maintained that monopoly through the kind of restrictive conduct I described a minute ago, but rather, in the words of Judge Learned Hand, "by virtue of superior skill, foresight and industry." So both elements - very high single-firm market share, plus conduct to exclude competition - must be proved. One or the other by itself is not enough.

IV. Coordination with USDA

The Antitrust Division maintains close contact with the USDA's Grain Inspection, Packers and Stockyards Administration (GIPSA). GIPSA does not have authority to enforce the Sherman and Clayton Acts, although it does have authority to consider competition concerns as part of its authority under the Packers and Stockyards Act; that authority, by the way, extends beyond conduct that violates the antitrust laws. And if GIPSA uncovers conduct that it believes may violate the antitrust laws, it has authority to refer the matter to us for investigation and enforcement. We and GIPSA share information with each other on a regular basis. I have already mentioned two examples: the assistance that led to a criminal prosecution for bid rigging at a Nebraska cattle auction, and the Cargill/Continental merger investigation. Other examples include GIPSA's providing us useful market information during our investigations into the lamb industry a few years ago, as well as during our investigation into other recent mergers. We have consulted with GIPSA in connection with its investigation of federal cattle procurement practices, and helped advise GIPSA in shaping and overseeing recent economic studies of agricultural market concentration issues. Last summer, together with the Federal Trade Commission, the Antitrust Division and USDA signed a Memorandum of Understanding Relative to Cooperation With Respect to Monitoring Competitive Conditions in the Agricultural Marketplace that ensures that they will continue to share information as appropriate and "confer regularly... consistent with applicable confidentiality restrictions, to discuss law enforcement and regulatory matters related to competitive conditions in the agricultural marketplace."

Conclusion

When someone from the Antitrust Division speaks about our work, we try to make clear to everybody that if they have any information that they think is relevant to our enforcement activities, we want to hear about it. As a law enforcement agency, we treat conversations with us in confidence. If the information leads us to conclude that the antitrust laws have been violated, we will take appropriate enforcement action. The Antitrust Division takes seriously its responsibility to protect the marketplace - including the agricultural marketplace - against anticompetitive conduct and mergers that substantially lessen competition. As I hope I have made clear, the Division has a record of acting in this important sector when the antitrust laws are violated.

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