The Market Power Problem
BARGAINING CO-OPS
HELP FARMERS AVOID
‘RACE TO THE
BOTTOM'
By Alan Borst, Ag Economist
Cooperative Programs
USDA Rural Development
n 2006, agricultural
economist Dr. Richard
Levins, Professor
Emeritus at the
University of
Minnesota, summed up the basic
market power policy problem facing
farmers: “Market power happens when
either a buyer or seller gets big enough
and powerful enough that it can play
the people on the other side of the
bargaining against each other and,
therefore, move the prices in favor of
them.”
Most farmers will realize that they
are usually on the wrong side of that
equation, Levins said in an address to
the National Farmers Organization in
2006, as reported in the Jan. 12, 2006,
issue of Brownfield. “With
consolidation, buyers continue to get
bigger, and farmers end up competing
with each other.” Even with average
farm size increasing, it is not nearly
enough to offset the increasing
concentration among buyers.
“Farmers need to act together to
pool enough product for the market
that they can negotiate a fair price,” he
said. Otherwise, it’s a race to the
bottom and the person with the lowest
price makes the sale.
“The end result of economic power
is that those who have such power are
able to earn profits that are not
available to those who do not have it,”
Levins continued. “In our present food
system, farmers are too often the ones
lacking economic power. Of all the
economic sectors of our food system,
farmers are universally regarded as
being the most competitive among
themselves. In a world of giants,
however, such competition works
against farm income.”
Cooperative bargaining
One organizational option for
growers is to organize bargaining
cooperatives for negotiating prices and
contract terms. Cooperative bargaining
associations operate in many U.S.
agricultural sectors, especially dairy and
fruit and vegetable markets. These
associations of growers negotiate terms
of sale with processor-buyers of their
raw product.
Bargaining associations are covered
by the same limited exemption from
federal and state antitrust laws as other
agricultural cooperatives, as provided by
both the Capper-Volstead and Clayton
Acts. The Agricultural Fair Practices
Act of 1967 was adopted for the
purpose of protecting bargaining
association members from buyer
discrimination. Beyond these federal
acts, several states have passed even
stronger laws on bargaining association
rights.
These laws have enabled bargaining
associations to form and negotiate
effectively in the face of buyer
resistance. Agricultural bargaining
associations began to operate during the
1950s, and their growth phase lasted
into the 1980s. In states with stronger
laws, however, bargaining associations
have continued to develop.
Oregon bargaining initiatives
A good example of this is in Oregon,
where the state department of
agriculture has been authorized to
supervise negotiations between
producers and buyers for several
agricultural sectors.
One important limitation faced by
bargaining co-ops is that they have had
to meet with buyers individually.
Antitrust laws prevent more than one
buyer from jointly meeting with the
cooperative. This is important, because
buyers will resist any agreement that
might put them at a competitive
disadvantage with other buyers. Only
by jointly negotiating can buyers be
assured of the same contract terms.
Buyers can only be permitted to
jointly negotiate terms of trade with the
bargaining association when two legal
conditions are met. First, the statute
authorizing this bargaining process
must clearly identify the anticompetitive
conduct that is being immunized — price setting, in this case.
Second, the bargaining process must
include the active supervision of a state
agency. Under this “State Action”
immunization, Oregon has authorized
supervision of bargaining for various
types of grass seed, Dungeness crab,
pink shrimp and blackberries.
Oregon grass seed
During the early 1990s, the price for
perennial ryegrass seed was declining
and fluctuating wildly. Growers did not
know how much acreage they should
plant or what price they could
reasonably expect. In 1994, they
responded by forming the Perennial
Ryegrass Bargaining Association
(PBRA). For the rest of the 1990s, the
cooperative bargained with individual
seed dealers.
The structure and conditions of the
market within which an association
exists will influence its success in
achieving its objectives. During the
1996-98 period, growers secured high
prices. Then a market glut resulted
when a major dealer with a large
inventory of seed declared bankruptcy.
Growers also over-produced because
of a lack of profitable alternative crops.
These factors, combined with increased
international competition, caused the
ryegrass market to crash.
In May 2001, an Oregon law was
enacted that authorized the Oregon
Department of Agriculture (ODA) to
convene the Oregon Ryegrass
Bargaining Council. The Bargaining
Council was composed of representatives
and various seed traders. Meetings
are held a few times each year to
consider inventories, market outlook,
seed quality and harvest estimates and
to establish price agreements.
Dealer involvement is voluntary,
with some consistently attending while
others do not.
Role of ODA
An ODA representative facilitates
the discussions; the parties consider
information collected from all available
sources, including dealers, growers,
seed cleaners, cooperative extension
services, USDA and others. The ODA
supervises and guides the negotiations
to prevent antitrust violations. The
department also reviews and approves
any price agreements. If the Bargaining
Council reaches an impasse in
negotiations, it may either ask the ODA
director for a suggested price (which
may be further negotiated) or suggest to
the director a price range from which
the director will set the price.
From 2001 to 2004, price
agreements were reached. An independent
accounting firm was hired, and
growers submitted their production
costs and dealers submitted their
inventory information. There were
some disagreements over the timing
and share of the crop to be negotiated.
In 2005, there was no initial price
agreement and negotiations reached an
impasse. The Bargaining Council
requested, and received, a price
recommendation from the ODA
director. ODA also recommended the
formation of Bargaining Council
subcommittees to address data, process
and market issues.
In 2006, negotiations also reached an
impasse due to disputes over yield and
crop size information. A pricing
agreement was eventually reached in
late September. Later that fall, the
Bargaining Council agreed to move up
the deadline for future negotiations in
order to allow growers to know the
price of contracted seed before
planting.
Since 2006, price agreements have
been reached. In 2008, dealers agreed
to a 2-cent storage/holding cost, with
acknowledgement that they would be
paid in January for seed sold after that
date. The payment was delayed due to
the downturn in the economy.
Ultimately, the growers agreed to waive
the payment for the 2008 crop. This
also applies to the 2009 agreement for
payment of seed sold after Jan. 1, 2010.
In response to the impasse caused by
confusion over yield and crop size, the
cooperative asked the Oregon field
office of USDA’s National Agricultural
Statistics Service to help the industry
gather data. This would be in addition
to information already compiled by
Oregon State University economists
and extension agents.
ODA expressed the need for better
information on grass yield and crop size
in order to be better able to judge price
fairness.
Serving their membership
The Bargaining Council has
standardized pricing and terms of trade
in the industry. The negotiated price
has occasionally been below the level
that would have covered members’ costs
of production, as it is in 2009. This has
been necessary when there has been a
price-dampening market glut.
The PBRA became the Oregon
Grass Seed Growers Association
(Oregon Grass) when growers of tall
fescue seed decided to join in 2008.
Oregon Grass currently has around 150
members. Member acreage now
represents about 45 percent of
perennial ryegrass and over 50 percent
of tall fescue production. Member size
varies, and includes some very large
growers. Some of these growers are also
vertically integrated, with their own
marketing division as a separate legal
entity. ODA reviews any concerns about
conflict of interest in the negotiations.
Oregon Grass has also expanded
markets for its members by marketing a
premium turf grass seed line:
Tournament Quality. This line has a
higher germination rate and contains
fewer contaminating weed seeds. It was
developed for over-seeding golf courses.
It has consistently sold for a premium
over regular ryegrass.
Even with the power of group
bargaining, 2009 is proving to be a very
bad year for the ryegrass industry.
“There’s just been a perfect storm of
negative factors that hit the industry,”
says William Young, a seed specialist
with Oregon State University.
“Housing starts have gone into a
stall, leisure dollars spent on activities
such as golfing are down, and even the
cattle industry is in the doldrums.” As a
result, prices as low as 52 cents a
pound were recently established, well
under the cost of production.
In addition to negotiations and
marketing its premium seed line,
Oregon Grass has been increasingly
involved in collecting information for
its members. By communicating with
grass growers from other areas — such
as Minnesota, Canada, Europe and
New Zealand — the association is able
to better learn of supply conditions. It
also networks with other seed dealers
and end users to get a more accurate
idea of market needs and trends.
The association has a fulltime lawyer
to help growers work out their
contracts. Oregon Grass has helped
growers to make wiser decisions in what
they plant, how they market and in
contract writing.
By working to reduce uncertainty for
their members and to better meet buyer
demand, the cooperative has helped the
whole industry. Non-member growers
have also benefitted from the
Bargaining Council’s information on
market conditions. The price
agreements have served as a benchmark
for all grass growers.
Growth of ODA-supervised
ag bargaining
ODA has also been authorized to
supervise negotiations with the
Dungeness Crab Bargaining Council
and the Blackberry Growers Bargaining
Council. Dungeness crab negotiations
began in 2003, while Blackberry
bargaining began in 2009.
Crab harvesters and processors were
unable to agree on a price and there
was a 21-day strike in 2002, which
caused the industry to miss the
important holiday season. During their
first ODA supervised bargaining in
November 2003, representatives of
fisherman associations and seafood
processors agreed to an opening price.
This certainty benefitted the entire
industry.
Blackberry growers have been
receiving prices that are nowhere near
covering their costs of production, and
they are hoping for better luck under
ODA-supervised bargaining.
This system of ODA-supervised
agricultural bargaining has been
successful in expanding the market
power of an increasing number of
producers and has enabled the
development of several time-sensitive
pricing forums. The various bargaining
councils organized under this system
have empowered their memberships
through education and provision of
better market information.
Ideally, good-faith bargaining is
enforced through some form of
mediation or arbitration provision that
is triggered when growers and buyers
are at an impasse in negotiations. The
ODA system provides a negotiating
forum with a state agency acting as a
facilitator or mediator.
But even this is somewhat limited in
scope, because not all dealers
participate and there is no arbitration
option. The director of the department
has authorities to encourage a
negotiated agreement. However, the
director is limited in setting a price
independent of the parties reaching a
negotiated agreement.
“There are no guarantees that
growers will get an outcome that is
ideal; and it is hard work,” says Brent
Searle, special assistant to the director
for ODA’s Mediation Program and
Price Negotiation Oversight. “The
process reflects supply-demand factors
and draws criticism from parties who
feel it interferes with a free market.
There are also struggles with the ‘freerider’
problem, because not all growers
or dealers participate, yet they enjoy
some of the benefits of the process
without joining in or paying fees. But at
the end of the day, I believe this unique
process has proven beneficial to
growers and dealers, provided more
stability in the industry and enabled
sharing of information that would not
otherwise be possible.”
Learning from potato bargaining
Oregon ryegrass growers have been looking at the
business model of potato bargaining co-ops in recent years.
The United Potato Growers of America has been a
successful, and growing, bargaining co-op that has served its
members by educating growers about how to become better
marketers and providing them the information they need to
make better business decisions (See “Rural Cooperatives,”
January/February 2009).
Potato growers used to just plant a crop and hope for the
best, but now the cooperative provides them with more
precise supply/demand information and the members meet
and decide on how many acres to plant.
Oregon ryegrass growers have been learning from the
United Potato Growers about gathering, analyzing and
disseminating market information, and letting it drive the
market.
Natural turf still preferred for sports
Despite its many advantages, natural turf spawned by
grass seed is facing competition from artificial turf, but it
remains the choice of most teams and organizations.
Oregon’s $510-million grass seed industry supplies seed
for about two-thirds of the world’s cool weather grasses,
according to the Oregon Department of Agriculture.
Some of these grasses are used for forage, but a majority
is targeted at turf – the essential ingredient for football,
soccer, baseball, golf and just about any other kind of
outdoor athletic activity.
Oregon’s turf seeds have been developed for more
than half a century to provide the durability and
regenerative capacity that create an ideal playing
surface.
The National Football League has generally stated a
preference for real grass. Of the 32 teams, only 12 have
artificial playing fields in their home stadiums. Only four
of the 30 Major League Baseball teams use something
other than turfgrass.
Currently, the new generation of artificial turf that uses
crumb-rubber in the base appears to be gaining
popularity at the collegiate level, although most colleges
and universities still play on real grass.
A year ago, Oregon grass seed farmers essentially
provided the natural playing surfaces for many of the
sports venues at the Olympic Games in Beijing, China.
“In all likelihood, any kind of world-class athletic event
played or contested on grass is done thanks to Oregon
grass seed,” says Dalton Hobbs, assistant director of the
Oregon Department of Agriculture. “We can point with
pride to the Rose Bowl in football, World Cup soccer
competition, golf championships like the U.S. Open and
The Masters – these are events played on a turf product
that has Oregon written all over it.”
USDA, Justice Dept. to hold workshops
to explore ag competition, antitrust issues
Agriculture Secretary Tom Vilsack and Attorney
General Eric Holder announced Aug. 5 that USDA and
the Department of Justice (DOJ) will hold joint public
workshops in early 2010 to explore competition issues
affecting the agriculture industry in the 21st century.
These sessions will also focus on the appropriate role
for antitrust and regulatory enforcement in the ag
industry. These are the first joint USDA/DOJ workshops
ever held to discuss competition and regulatory issues
in the agriculture industry.
Workshops will address the dynamics of competition
in agriculture markets, including buyer power (also
known as monopsony) and vertical integration, among
other issues. They will also examine legal doctrines and
jurisprudence and current economic learning, providing
an opportunity for farmers, ranchers, consumer groups,
processors, agribusinesses and other interested parties
to provide examples of potentially anticompetitive
conduct.
The workshops will also provide an opportunity for
discussion for any concerns about the application of the
antitrust laws to the agricultural industry.
The goals of the workshops are to promote dialogue
among interested parties and foster greater
understanding of legal and economic analyses of these
issues, as well as to listen to and learn from parties with
real-world experience in the agriculture sector.
“It is important to have a fair and competitive
marketplace that benefits agriculture, rural economies
and American consumers,” said Secretary Vilsack. “The
joint workshops between the DOJ and USDA will allow
a dialogue on very important issues facing agriculture
today.”
“Maintaining a robust agricultural sector is crucial to
the strength of the American economy and to who we
are as a nation,” added Attorney General Holder.
“Through the dialogue established in these workshops
and, ultimately, through our actions, we are committed
to ensuring that competition and regulatory actions
benefit all American consumers and businesses."
While some of the workshops may be held in
Washington, D.C., others will be held in other parts of
the country. USDA and DOJ are soliciting public
comments from lawyers, economists, agribusinesses,
consumer groups, academics, agricultural producers,
agricultural cooperatives and other interested parties.
“For the first time ever, farmers, ranchers,
consumers groups, agribusinesses and the federal
government will openly discuss legal and economic
issues associated with competition in the agriculture
industry,” said Christine A. Varney, assistant attorney
general in charge of DOJ’s Antitrust Division. “This is an
important step forward in determining the best course
of action to address the unique competition issues in
agriculture.”
USDA and DOJ are interested in receiving comments
on the application of antitrust laws to monopsony and
vertical integration in the agricultural sector including,
the scope, functionality and limits of current or potential
rules.
USDA and DOJ are also inviting input on additional
topics that could be discussed at the workshops,
including the impact of agriculture concentration on
food costs and the effect of agricultural regulatory
statutes or other applicable laws and programs on
competition. Other potential topics include patent and
intellectual property issues affecting agricultural
marketing or production, and market practices such as
price spreads, forward contracts, packer ownership of
livestock before slaughter, market transparency and
increasing retailer concentration.
The public and press are invited to attend the
hearings. Additional information about the date, time
and location of the workshops will be provided at a later
date. Interested parties should submit written comments
in both paper and electronic form to the Department of
Justice no later than Dec. 31, 2009. All comments
received will be publicly posted.
Two paper copies should be addressed to: Legal
Policy Section, Antitrust Division, U.S. Department of
Justice, 450 5th Street, N.W., Suite 11700, Washington,
D.C. 20001. The Department's Antitrust Division is
requesting that the paper copies of each comment be
sent by courier or overnight service, if possible. The
electronic version of each comment should be
submitted to agriculturalworkshops@usdoj.gov. Detailed
agendas and schedules for the workshops will be made
available on the Antitrust Division's web site at
www.usdoj.gov/atr.
