Author: Michael Sykuta

Who Earns the Food Dollar?

Part 2 on the Farmers’ Share of the Food Dollar (see Part 1 here).

The ag value chain involves a wide array of participants to get food products from ground to grocery store–or increasingly, from research to restaurant. Every dollar spent on food has to be divided between all the different players. As the number of participants grows, and as more value is added at different stages of the value chain, the percentage of food dollar going to any one group is likely to decline.

This is why the farmers’ share of the food dollar has been on the decline for, well, pretty much the past century at least.

Sen. Elizabeth Warren and, more recently, Sen. Bernie Sanders have proposed aggressive antitrust enforcement of “Big Ag” companies—whether farm input companies like Bayer or early-stage processors like JBS or Tyson in the meat industry. The Senators claim that cracking down on these big companies will be beneficial for farmers and increasing farmers’ share of the food dollar. In my previous post, I explained why those arguments are wrong. In fact, those arguments are not even consistent with the data being used to justify the claims.

To really understand why farmers’ share of the food dollar has declined, one has to understand how—and where—value is created in the value chain. More specifically, one has to understand how value is added to the agricultural products that farmers produce. And how existing farm sector institutions work to make farmers’ share lower than it might otherwise be.

A recent (March 2019) McKinsey & Co. article titled “A Winning Growth Formula for Dairy” illustrates this value creation story. The article describes the challenge facing dairy company executives globally, and particularly in the U.S. Dairy farmers have been struggling with low raw milk prices resulting from continued over-production of milk relative to demand for dairy products. You would think large dairy companies would be bathing in profits with the cost of their primary input depressed—even below the cost of production, according to some farmer groups. And yet, return on invested capital in the dairy industry (ROIC; i.e., the economic value generated by their businesses) has been declining because growth in revenue and margins has not kept pace with an increasing cost of capital. The reason? Consumption of milk and dairy products in the U.S. has been on a long-term decline.

The authors go on to explain that dairy executives are faced with the challenge of how to create new value opportunities in the face of more milk being produced than there are uses for currently. New product development. New market development. These are expensive investments with uncertain outcomes. But that is where the value is being created for raw milk—not at the farm gate. In fact, one might argue that the value being created by dairy processors is in spite of having to overcome the value decreasing activities of dairy farms that, collectively, are overproducing.

This problem is not unique to the dairy industry. Whether corn, meat proteins, wheat, or any number of other agricultural commodities, agricultural producers are increasingly reliant on processors and refiners to transform producers’ crops into products consumers are willing (or required) to buy, and in a form consumers desire. It is not at all surprising, therefore, that more and more of the food dollar is being captured by firms beyond the farm gate. That’s where value is being added. That’s where more of the food dollar is being earned.

Why Sen. Warren is Wrong on Trust-busting Big Ag

Several Democratic presidential candidates courted rural voters in Iowa at last weekend’s Heartland Forum. Both Sen. Amy Klobuchar (D-MN) and Sen. Elizabeth Warren (D-MA) decried the plight of farmers, with Warren promising trust-busting policies to break up Big Ag. But Warren’s call for aggressive antitrust is more populist politics than sound economic policy.

Warren claimed that, “A generation ago, 37 cents out of every food dollar went into a farmer’s pocket. Today, it’s 15 cents. And one of the principal reasons for that has been concentration in agribusiness. You’ve got these giant corporations that are making bigger and bigger profits for themselves, for their executives and for their investors, but they’re putting the squeeze on family farms.” But there are several problems with that argument.

First, the farmer’s share of the food dollar is a pretty worthless measure of how well-off farmers are in the food economy. From an economic perspective, it is completely meaningless. In response to the perennial reactions by farmers’ lobbies to the USDA’s “Farm Dollar” report in 2018, Jayson Lusk provided a nice example of how focusing on farmers’ share of the food dollar actually can lead to very poor conclusions. Even more to the point, Gary Brester, John Marsh and Joseph Atwood demonstrate what agricultural economists have long understood:

“[S]ome have argued that decreases in FS (farmer share) statistics…are indicators of anti-competitive behavior in the food processing industry. Agricultural economists have long noted that such relationships cannot be justified on theoretical grounds. … We have empirically demonstrated that FS statistics and, by construction, farm-to-retail marketing margins, are not reliable measures of changes in producer surplus (welfare)… Consequently, these data should not be used for policy purposes.”

Brester, et al., “Evaluating the Farmer’s-Share-of-the-Retail-Dollar Statistic,” 34 Journal of Agricultural and Resource Economics 213 (2009)

Second, even if one could make any reasonable inferences from the farmers’ share numbers, they do not support the story Warren is trying to sell. While farmers’ share of the food dollar has declined over the past 24 years, the decline is not near as big as Warren suggests: from 16% to 12% of the real (2009) dollar value of domestic food sales, as shown in the nearby Table 1. But a closer look at the numbers reveals what is driving the overall decline: when people eat away from home, the share of the dollar that goes to the farmer is much smaller, because more of the dollar is going to the people that add additional value by processing and preparing the food away from home. And eating away from home has become more and more prevalent.

Table 1: Farmer Share of Total Domestic Food Dollar, 1993-2016

Truth be told, the microcosm of food eaten at home or away from home illustrates the larger issue: as consumers choose foods that have been further processed and prepared, more of the dollar goes to the people that add the additional value in the form of preparedness, packaging, convenience, etc., that consumers value. That’s why, over the last century, the farmers’ share of the food dollar has dropped from near 50% to only 12%.

But what about the big bad ag companies that Warren blames for this problem? Doesn’t the consolidation of Big Ag share some of the blame? Warren blames mergers of companies like Bayer-Monsanto on the farm inputs side or large multinationals like JBS on the farm output side for squeezing farmers’ share of the food dollar. What about them?

As it turns out, firms in the farm inputs industry (like Bayer or Corteva (the offspring of Dow-Dupont)) and firms in the food processing industry (like JBS or Tyson) also have seen their share of the food dollar decline, as shown in the nearby Table 2. For farm inputs, the share has dropped over 40%, even more than the farmers’ share; and food processing companies’ share has dropped over 20%, almost as much as farm shares. Not even the banking industry, another of Warren’s favorite regulatory targets, has seen an increase in its share of the food dollar. In fact, the only food industry segments experiencing any appreciable increase in food dollar share are retail sales and food service–again, where more of value-adding convenience and food preparation are being contributed.

Table 2. Share of Domestic Food Dollar by Industry Segment, 1993-2016

Antitrust is currently seeing a lot of renewed interest in political circles because big, bad corporations make easy populist political targets. And it may be true that increased concentration in some industries could stand more antitrust scrutiny, possibly even in agriculture. But broad antitrust enforcement is a very blunt, and potentially dangerous, policy tool that shouldn’t be invoked carelessly. Nor with as little understanding of an industry as Sen. Warren appears to have of the food system.

 

Race, College Admissions, Harvard & Opportunity Costs

Reading this article in the Chronicle of Higher Education about the on-going affirmative action lawsuit against Harvard, this line (buried deep in the article) jumped out at me:

An applicant’s race, they [Harvard admission officials] said, can help, but not hurt, his or her chances of admission.

Earlier in the article, the author pointed out that Harvard has 37,000 applicants for 2019, 8,200 with perfect GPAs, 2,700 with perfect verbal SAT scores, but only 1,700 spots to offer entering students.

If you’re a student of opportunity costs, you immediately see the problem: It is impossible for an applicant’s race to “help, but not hurt,” the applicant’s chance of admission to Harvard.

If one applicant’s race helps that student’s chance for admission, it reduces the number of slots remaining available for other applicants. If an applicant’s race does not help them, their chances of admission–all else equal–are lower because there are fewer slots available. In other words, it’s hurts the chances of “not helped” applicants because there is a limited number of total slots.

The Harvard admission officials’ comment could only be true if there was no limit on the number of students offered admission. With no admissions cap, admitting one more student with “Attribute A” would have no consequence for the admission of applicants without “Attribute A.” Capping admission makes slots a scarce resource, which means there is an opportunity cost of offering a slot to any one person in the form of fewer remaining slots for others. Consequently, any criteria that advantages one (group of) applicant(s) necessarily hurts the chances of an applicant not matching that criteria–including race.

So in Harvard’s case, if race helps anyone, it must hurt others. By definition. Because opportunity costs.

More Evidence Against the Common Ownership Problem

“The U.S. stock market is having another solid year. You wouldn’t know it by looking at the shares of companies that manage money.”

That’s the lead from Charles Stein on Bloomberg’s Markets’ page today. Stein goes on to offer three possible explanations: 1) a weary bull market, 2) a move toward more active stock-picking by individual investors, and 3) increasing pressure on fees.

So what has any of that to do with the common ownership issue? A few things.

First, it shows that large institutional investors must not be very good at harvesting the benefits of the non-competitive behavior they encourage among the firms the invest in–if you believe they actually do that in the first place. In other words, if you believe common ownership is a problem because CEOs are enriching institutional investors by softening competition, you must admit they’re doing a pretty lousy job of capturing that value.

Second, and more importantly–as well as more relevant–the pressure on fees has led money managers to emphasis low-cost passive index funds. Indeed, among the firms doing well according to the article is BlackRock, “whose iShares exchange-traded fund business tracks indexes, won $20 billion.” In an aggressive move, Fidelity has introduced a total of four zero-fee index funds as a way to draw fee-conscious investors. These index tracking funds are exactly the type of inter-industry diversified funds that negate any incentive for competition softening in any one industry.

Finally, this also illustrates the cost to the investing public of the limits on common ownership proposed by the likes of Einer Elhague, Eric Posner, and Glen Weyl. Were these types of proposals in place, investment managers could not offer diversified index funds that include more than one firm’s stock from any industry with even a moderate level of market concentration. Given competitive forces are pushing investment companies to increase the offerings of such low-cost index funds, any regulatory proposal that precludes those possibilities is sure to harm the investing public.

Just one more piece of real evidence that common ownership is not only not a problem, but that the proposed “fixes” are.

Calm Down about Common Ownership

“Calm Down about Common Ownership” is the title of an article Thom Lambert and I published in the latest (Fall 2018) issue of Regulation. The article is a condensed version of our full paper, “The Case for Doing Nothing About Common Ownership of Small Stakes in Competing Firms,” which I posted about in May.

While I’ve not been posting here much in the past few months, Thom and I have written a series of blog posts at Truth On The Market about the perceived problem of common ownership (specifically by institutional investors) across competing firms, and the problems both with the alleged antitrust harms and the proposed “fixes”. Those posts both summarize and expand upon some of the arguments and issues in our paper. To make it easier to find them, I’ve listed them below in chronological–and logical–order:

This issue of common ownership and whether antitrust authorities should deal with it is currently a fairly hot topic. In fact, today the Federal Trade Commission (FTC) is opening up its Hearings on Competition and Consumer Protection in the 21st Century. which include the topic of common ownership. Thom and I submitted comments in advance of the hearing based on our paper. Next week I’ll attend a debate forum on the issue with other scholars (including some aggressive pro-enforcement folks we take to task in our paper), regulators, and members of the investment community. It should be an interesting time.

Isn’t there a Chinese curse about that?

Handbook of the Economics of Wine

Today I received my copy of Volume 2 of the Handbook of the Economics of Wine, edited by Orley Ashenfelter, Olivier Gergaud, Karl Storchmann and William Ziemba. Volume 2 contains chapters (essay, papers) regarding reputation, regulation, and market organization issues in the global wine industry. It includes a paper I published with a former MS/JD student, Gina Riekhof, on “Politics, Economics, and the Regulation of Direct Interstate Shipping in the Wine Industry“, which originally appeared in the May 2005 issue of the American Journal of Agricultural Economics.

The Handbook of the Economics of Wine is actually Volume 6 of the “World Scientific Handbook in Financial Economics Series”, and includes two volumes of its own. Volume 1, a copy of which I did not receive, is focused on issues of price, financing, and expert opinions. Not sure I’m going to shell out the cost to have Volume 1 on the shelf. But it does look like an interesting collection of articles. The Handbook has been a long time in the making. It’s nice to see it finally in print. Nice work, editors all.

The Case for Doing Nothing About Common Ownership

“Common ownership,” the case of investors owning shares in more than one company–specifically, in shares of companies that compete in the same industry–is currently a hot topic in the antitrust arena. In particular, the alleged effects of common ownership on industry competition are receiving a lot of attention.

Einer Elhague, in the Harvard Law Review, proclaimed “[a]n economic blockbuster has recently been exposed.” Eric Posner, Fiona Scott Morton and Glen Weyl, in the Antitrust Law Journal, assert that “the concentration of markets through large institutional investors is the major new antitrust challenge of our time.”  These claims are based on a handful of empirical studies claiming to have identified a causal relationship between the degree of common ownership and such competitive yardsticks as airline prices, banking fees, executive compensation, and even corporate disclosure patterns.

Of course, such a blockbuster antitrust challenge deserves an aggressive policy response, ideas for which both Elhague and Posner, et al., are more than happy to provide.

However, it’s not so clear that the problem is as big as suggested–if it exists at all. It’s also not clear that the proposed policy solutions would make anyone better off (except perhaps antitrust law “experts”)–and could possibly make many people worse off.

Thom Lambert and I recently posted a new paper that takes on both the claims of a major problem and the proposed solutions. In The Case for Doing Nothing About Institutional Investors’ Common Ownership of Small Stakes in Competing Firms, we explain the problems with the problem itself–both the theoretical logic and the empirical evidence–and the problems with the proposed policy responses.  Over the next several days we’re going to unpack those arguments over at Truth on the Market. Thom already made the introductory post that goes into a bit more detail on the issue.

If you’re interested, I encourage you to click over to TOTM and read the posts there. Once we’re done, I’ll post a summary and set of links to each of them here. For now, the abstract of our paper is available below:

Recent empirical research purports to demonstrate that institutional investors’ “commonownership” of small stakes in competing firms causes those firms to compete less aggressively, injuring consumers. A number of prominent antitrust scholars have cited this research as grounds for limiting the degree to which institutional investors may hold stakes in multiple firms that compete in any concentrated market. This Article contends that the purported competitive problem is overblown and that the proposed solutions would reduce overall social welfare.

With respect to the purported problem, we show that the theory of anticompetitive harm from institutional investors’ commonownership is implausible and that the empirical studies supporting the theory are methodologically unsound. The theory fails to account for the fact that intra-industry diversified institutional investors are also inter-industry diversified and rests upon unrealistic assumptions about managerial decision-making. The empirical studies purporting to demonstrate anticompetitive harm from commonownership are deficient because they inaccurately assess institutional investors’ economic interests and employ an endogenous measure that precludes causal inferences.

Even if institutional investors’ commonownership of competing firms did soften market competition somewhat, the proposed policy solutions would themselves create welfare losses that would overwhelm any social benefits they secured. The proposed policy solutions would create tremendous new decision costs for business planners and adjudicators and would raise error costs by eliminating welfare-enhancing investment options and/or exacerbating corporate agency costs.

In light of these problems with the purported problem and shortcomings of the proposed solutions, the optimal regulatory approach — at least, on the current empirical record — is to do nothing about institutional investors’ commonownership of small stakes in competing firms.