Tag: antitrust

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.

 

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?

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.

Innovation trends in agriculture and their implications for M & A analysis

This is a repost from the Mergers in Ag-Biotech blog symposium over at Truth on the Market. If you’re interested in more perspectives on the topic, I encourage you to read the other posts there.  If you’d like to comment, please do so on the TOTM version so it’s part of the general discussion.

The US agriculture sector has been experiencing consolidation at all levels for decades, even as the global ag economy has been growing and becoming more diverse. Much of this consolidation has been driven by technological changes that created economies of scale, both at the farm level and beyond.

Likewise, the role of technology has changed the face of agriculture, particularly in the past 20 years since the commercial introduction of the first genetically modified (GMO) crops. However, biotechnology itself comprises only a portion of the technology change. The development of global positioning systems (GPS) and GPS-enabled equipment have created new opportunities for precision agriculture, whether for the application of crop inputs, crop management, or yield monitoring. The development of unmanned and autonomous vehicles and remote sensing technologies, particularly unmanned aerial vehicles (i.e. UAVs, or “drones”), have created new opportunities for field scouting, crop monitoring, and real-time field management. And currently, the development of Big Data analytics is promising to combine all of the different types of data associated with agricultural production in ways intended to improve the application of all the various technologies and to guide production decisions.

Now, with the pending mergers of several major agricultural input and life sciences companies, regulators are faced with a challenge: How to evaluate the competitive effects of such mergers in the face of such a complex and dynamic technology environment—particularly when these technologies are not independent of one another? What is the relevant market for considering competitive effects and what are the implications for technology development? And how does the nature of the technology itself implicate the economic efficiencies underlying these mergers?

Before going too far, it is important to note that while the three cases currently under review (i.e., ChemChina/Syngenta, Dow/DuPont, and Bayer/Monsanto) are frequently lumped together in discussions, the three present rather different competitive cases—particularly within the US. For instance, ChemChina’s acquisition of Syngenta will not, in itself, meaningfully change market concentration. However, financial backing from ChemChina may allow Syngenta to buy up the discards from other deals, such as the parts of DuPont that the EU Commission is requiring to be divested or the seed assets Bayer is reportedly looking to sell to preempt regulatory concerns, as well as other smaller competitors.

Dow-DuPont is perhaps the most head-to-head of the three mergers in terms of R&D and product lines. Both firms are in the top five in the US for pesticide manufacturing and for seeds. However, the Dow-DuPont merger is about much more than combining agricultural businesses. The Dow-DuPont deal specifically aims to create and spin-off three different companies specializing in agriculture, material science, and specialty products. Although agriculture may be the business line in which the companies most overlap, it represents just over 21% of the combined businesses’ annual revenues.

Bayer-Monsanto is yet a different sort of pairing. While both companies are among the top five in US pesticide manufacturing (with combined sales less than Syngenta and about equal to Dow without DuPont), Bayer is a relatively minor player in the seed industry. Likewise, Monsanto is focused almost exclusively on crop production and digital farming technologies, offering little overlap to Bayer’s human health or animal nutrition businesses.

Despite the differences in these deals, they tend to be lumped together and discussed almost exclusively in the context of pesticide manufacturing or crop protection more generally. In so doing, the discussion misses some important aspects of these deals that may mitigate traditional competitive concerns within the pesticide industry.

Mergers as the Key to Unlocking Innovation and Value

First, as the Dow-DuPont merger suggests, mergers may be the least-cost way of (re)organizing assets in ways that maximize value. This is especially true for R&D-intensive industries where intellectual property and innovation are at the core of competitive advantage. Absent the protection of common ownership, neither party would have an incentive to fully disclose the nature of its IP and innovation pipeline. In this case, merging interests increases the efficiency of information sharing so that managers can effectively evaluate and reorganize assets in ways that maximize innovation and return on investment.

Dow and DuPont each have a wide range of areas of application. Both groups of managers recognize that each of their business lines would be stronger as focused, independent entities; but also recognize that the individual elements of their portfolios would be stronger if combined with those of the other company. While the EU Commission argues that Dow-DuPont would reduce the incentive to innovate in the pesticide industry—a dubious claim in itself—the commission seems to ignore the potential increases in efficiency, innovation and ability to serve customer interests across all three of the proposed new businesses. At a minimum, gains in those industries should be weighed against any alleged losses in the agriculture industry.

This is not the first such agricultural and life sciences “reorganization through merger”. The current manifestation of Monsanto is the spin-off of a previous merger between Monsanto and Pharmacia & Upjohn in 2000 that created today’s Pharmacia. At the time of the Pharmacia transaction, Monsanto had portfolios in agricultural products, chemicals, and pharmaceuticals. After reorganizing assets within Pharmacia, three business lines were created: agricultural products (the current Monsanto), pharmaceuticals (now Pharmacia, a subsidiary of Pfizer), and chemicals (now Solutia, a subsidiary of Eastman Chemical Co.). Merging interests allowed Monsanto and Pharmacia & Upjohn to create more focused business lines that were better positioned to pursue innovations and serve customers in their respective industries.

In essence, Dow-DuPont is following the same playbook. Although such intentions have not been announced, Bayer’s broad product portfolio suggests a similar long-term play with Monsanto is likely.

Interconnected Technologies, Innovation, and the Margins of Competition

As noted above, regulatory scrutiny of these three mergers focuses on them in the context of pesticide or agricultural chemical manufacturing. However, innovation in the ag chemicals industry is intricately interwoven with developments in other areas of agricultural technology that have rather different competition and innovation dynamics. The current technological wave in agriculture involves the use of Big Data to create value using the myriad data now available through GPS-enabled precision farming equipment. Monsanto and DuPont, through its Pioneer subsidiary, are both players in this developing space, sometimes referred to as “digital farming”.

Digital farming services are intended to assist farmers’ production decision making and increase farm productivity. Using GPS-coded field maps that include assessments of soil conditions, combined with climate data for the particular field, farm input companies can recommend the types of rates of applications for soil conditioning pre-harvest, seed types for planting, and crop protection products during the growing season. Yield monitors at harvest provide outcomes data for feedback to refine and improve the algorithms that are used in subsequent growing seasons.

The integration of digital farming services with seed and chemical manufacturing offers obvious economic benefits for farmers and competitive benefits for service providers. Input manufacturers have incentive to conduct data analytics that individual farmers do not. Farmers have limited analytic resources and relatively small returns to investing in such resources, while input manufacturers have broad market potential for their analytic services. Moreover, by combining data from a broad cross-section of farms, digital farming service companies have access to the data necessary to identify generalizable correlations between farm plot characteristics, input use, and yield rates.

But the value of the information developed through these analytics is not unidirectional in its application and value creation. While input manufacturers may be able to help improve farmers’ operations given the current stock of products, feedback about crop traits and performance also enhances R&D for new product development by identifying potential product attributes with greater market potential. By combining product portfolios, agricultural companies can not only increase the value of their data-driven services for farmers, but more efficiently target R&D resources to their highest potential use.

The synergy between input manufacturing and digital farming notwithstanding, seed and chemical input companies are not the only players in the digital farming space. Equipment manufacturer John Deere was an early entrant in exploiting the information value of data collected by sensors on its equipment. Other remote sensing technology companies have incentive to develop data analytic tools to create value for their data-generating products. Even downstream companies, like ADM, have expressed interest in investing in digital farming assets that might provide new revenue streams with their farmer-suppliers as well as facilitate more efficient specialty crop and identity-preserved commodity-based value chains.

The development of digital farming is still in its early stages and is far from a sure bet for any particular player. Even Monsanto has pulled back from its initial foray into prescriptive digital farming (call FieldScripts). These competitive forces will affect the dynamics of competition at all stages of farm production, including seed and chemicals. Failure to account for those dynamics, and the potential competitive benefits input manufacturers may provide, could lead regulators to overestimate any concerns of competitive harm from the proposed mergers.

Conclusion

Farmers are concerned about the effects of these big-name tie-ups. Farmers may be rightly concerned, but for the wrong reasons. Ultimately, the role of the farmer continues to be diminished in the agricultural value chain. As precision agriculture tools and Big Data analytics reduce the value of idiosyncratic or tacit knowledge at the farm level, the managerial human capital of farmers becomes relatively less important in terms of value-added. It would be unwise to confuse farmers’ concerns regarding the competitive effects of the kinds of mergers we’re seeing now with the actual drivers of change in the agricultural value chain.

Occupational Licensing & Antitrust: Legal Licensing or Occupational Cartel?

Occupational licensing is an interesting phenomenon. Governments (state and local) create certification boards (typically made up of industry participants) that set licensing standards and qualifications for persons wanting to work in those occupations. Ostensibly, these restrictions are intended to correct for the information asymmetry between consumers and professionals, where consumers may not be able to assess the quality (or ability) of the professional independently before hiring them. Think medical associations for doctors and bar associations for lawyers at the state level, or licensing for plumbers and electricians at the local level.

But occupational licensing also serves as a way of restricting competition in a profession by limiting the number of people who are able to provide the goods or services under the board’s purview. And as we know, reducing supply in the market increases the prices consumers pay (and the professionals receive). For instance, a medical board may limit the number of doctors who will be “board certified” in a given year. A private investigator licensing board may set standards to reduce the number of licensed (and legal) PIs. Or a state dental board might prohibit non-dentists from performing teeth-whitening services in competition with dentists.

That last one is the basis of a case coming before the US Supreme Court next week. The US Federal Trade Commission (FTC) brought antitrust charges against the North Carolina Board of Dental Examiners for conspiring to restrain competition in the teeth whitening business. The Dental Examiners board asserts they are exempted from antitrust law under the “state action doctrine.” The Supreme Court is being asked to determine if–and under what circumstances–state occupational licensing boards are exempt from antitrust laws. Eric Fraser offers a nice preview of the arguments in the case over on SCOTUSblog.

This could be an important case for licensing boards across the country. It should be fun to watch and interesting to see how the Court delineates the lines of necessary government oversight and the degree to which an overwhelming public interest needs to be justified.