"I think a major concern about the future health of the agricultural sector is tied up here," says Economist Neil Harl, "so it's probably, at least in my view, the most important issue; maybe even more important than price and income policy."
There are a variety of economic forces at play that have allowed the pace of consolidation to accelerate. Chief among them is the vapid price for farm commodities. In addition, the largest companies are seeking out bigger profits by bundling services -- on the one hand selling to farmers inputs like seed, fertilizer, and risk management options, while on the other hand controlling vast segments on the output side, like processing and packaging.
"And so what we have," according to Harl, "is this towering concentration on the input side and towering concentration on the output and processing side. And here are producers in nearly perfect competition, as we refer to it in economics, without very much economic power, without very much market power..."
Consolidation in the livestock industry is the most visible example of concentration in agribusiness. Four companies control 70 percent of the cattle slaughter in the U.S. Four packers handle 60 percent of the hog kill.
"At LMA, we've received numerous accounts of packer intimidation, market manipulation, and anti-competitive trade practices," says Nancy Johnson of the Livestock Marketing Association. "These exhibitions of market power are very real to the producers and livestock markets struggling to survive in a market controlled by a shrinking number of agri-business conglomerates."
The primary complaint against the companies is the lack of price transparency. Critics argue that if producers knew what meatpackers paid for livestock, then farmers would have more leverage in bargaining with the processors.
In addition, they complain vertical integration has squeezed producers out of the good times. They claim that when market prices are high, the big packers slaughter more of their own livestock, reaping bigger profits and lowering demand for animals outside their control. When market prices fall, they accuse the packers of purchasing livestock from producers at artificially low prices.
With the recent pitch by the nation's largest hog producer, Smithfield Foods, for the country's largest meat processor, IBP Inc., the price prospects for independent producers grow dimmer.
"The challenge is how to assure meaningful competitive options for producers," Harl says. "We have to look at mergers differently, not just from the standpoint of the impact on the consumer but from the standpoint of the impact on producers ..."
USDA Secretary Dan Glickman this week issued rules requiring large cattle and swine packers to provide contract information, including pricing, for public release. USDA says the new reporting will deliver information on up to 95 percent of all cattle, boxed beef and slaughter hog transactions.
"By bringing this information into the public domain," Glickman says, "we are enhancing competition and ensuring more transparent market conditions, especially for smaller livestock producers. Everyone will now have access to the same information."
For months, critics had pushed USDA for just such a move. A General Accounting Office report accused the agency of incompetence in its investigations of anti-competitive practices in the livestock industry.
The big companies say consolidation is not the cause of low commodity prices. They say, rather, it's simple economics at work. They note that beginning with the collapse of Asian financial markets three years ago, U.S. farm exports have dropped by nearly 20 percent. In addition, consumers are spending less of their disposable income on food, down from 13 percent in 1981 to 10.8 percent in 1998.
There's also the question of consolidation at the retail level. Currently, the five largest food retailers control 42 percent of national sales. That figure is expected to rise to 60 percent within the next three years.
Such huge levels of concentration induce those who sell to retailers to get bigger so they have the economic leverage to battle for shelf space. This so-called "matching scale of forward players" overwhelms independent producers at the bottom of the food chain.
"So it just simply goes down the chain," Harl says, "everyone encouraged to get bigger to deal with the higher levels of concentration above them until you get down to the bottom, and there's the producer without much in the way of economic power."
"It's time for Congress to recognize the Freedom To Farm has become Freedom To Fail," Sen. Tom Harkin, D-Iowa, says. "It has failed. We need to write a new farm bill."
In Washington, there's pressure to act. Iowa Democrat Tom Harkin has introduced the Agricultural Producer Protection Act in the Senate. Among other things, the bill would prohibit secrecy clauses in contracts, allow producers three days to review and cancel production contracts, and establish a framework allowing farmers to form associations that could bargain with large agri-businesses.
Given the inelastic demand for raw commodities, permitting such countervailing power to farmers, according to some, is preferable to simply pouring billions more into the farm economy on an ad hoc basis. At the same time, an abrupt withdrawal of government payments almost certainly would lead to a downward spiral in land values, since so much of the federal aid is capitalized in cash rents.
"We learned about 70 years ago," says economist Harl, "it costs a ton of money to replace lost income once you let commodity prices fall because of the inelastic demand for the products. To march back up that demand curve, steep demand curve, takes a great deal of money..."