People's Democracy

Jayati Ghosh

IT is no secret that the United States, like most other developed economies, provides large subsidies to its farming sector. It is also no secret that these subsidies have not really been reduced after WTO was formed, and that despite the GATT Agreement on Agriculture, farm subsidies in most of the OECD countries are now back to pre-GATT levels.

What has been a relatively well-kept secret, however, is that these subsidies have not really benefited farmers so much as they have contributed to greater profits of the giant corporations that now control the distribution and marketing of food products. This is marked in the US, which is particularly striking because the US economy is widely cited as one with relatively low marketing margins among developed countries.

At first glance, this appears hard to accept. After all, expenditure on food in the US has been rising at a significant rate over the past decade. And this has been combined with subsidies of various types which have circumvented the GATT restrictions by using "Green Box", restructuring and other provisions to provide subsidies which are now as high a proportion of the final value of output as they were in the late 1980s.

The paradox can be explained in terms of the widening margins going to marketing and distribution. The share of this in total value added in the total food expenditure in the US has gone up dramatically sine 1980. This can be gleaned from index numbers of total food spending and farm receipts in the US, in terms of current US dollars. When charted they show that while total food spending has ballooned, farm receipts have barely risen even in current price terms, and the gap between them has increased most strikingly over the 1990s.

Obviously, this is even more marked in terms of real values. In constant price terms (that, calculated at 1982-1984 real US dollars) between 1970 and 1999, consumer food spending increased by 30 per cent, the marketing bill rose by 54 per cent, and farm value actually declined by 21 per cent. Much of this process was due to specific trends of the 1990s. US consumers spent $618.4 billion on food in 1999 (excluding imports and seafood), up 37 percent from the amount spent in 1990.

Between 1990 and 1999, marketing costs rose 45 percent and accounted for most of the 37-percent rise in domestic consumer food spending. In comparison, the farm value of food purchases climbed only 13 percent between 1990 and 1999.

The higher marketing costs not only raised consumer food expenditures, but also increased the share of expenditures attributable to marketing. In 1999, marketing costs accounted for 80 percent of total consumer food spending, with farm value accounting for the remaining 20 percent. In comparison, the marketing bill accounted for 76 percent of 1990 consumer expenditures and farm value 24 percent.

While these figures are cited in current dollars, the story is similar when they are adjusted for inflation. Between 1990 and 1999, marketing costs rose 14 percent, while consumer food expenditures climbed 8 percent in real dollar terms. Meanwhile, the farm value of food purchases dropped 11 percent.

A look at the more disaggregated data shows that this broad tendency of divergence between farm values and retail prices is evident in all the major food subsectors. Consider the case of meat products. Until the mid-1980s, not only did the two indices move together, but farm value changes tended to be more than retail prices. From 1986 onwards, that pattern has been reversed. And from 1990, farm values have been declining quite sharply even as retail prices have continued to rise. By the late 1990s, the gap between the two was enormous.

Very similar trends are evident for poultry and for dairy products, the only difference being that in the 1990s in these two subsectors farm, values do not decline as in meat products, but remain broadly stagnant. Similarly for fresh fruits and fresh vegetables. However, the point about the latter two is that there is less scope for further and further processing in these, and therefore the discrepancy between retail price and farm value may be more reflective of increases in marketing margins rather than actual changes in the degree of processing.

Most mainstream analysts have attributed this to shifting tastes and patterns of demand, reflecting not only Engels Curve type changes but also changing work participation rates of women. Thus, consumers bought a larger volume of food, value-added processing and packaging of at-home foods increased, spending at restaurants and fast food outlets grew, and prices for marketing inputs rose. A changing workforce — comprising more working women and more two-income households — meant that busy consumers of the 1990's demanded quick, easy-to-prepare convenience foods. The strong economy of the late 1990's raised incomes and allowed more consumers to pay for highly processed convenience foods.

It is typically suggested that all of these factors were the dominant contributors to the jump in food spending during the 1990's. Certainly, they played a role, but there were other important changes in production organisation which were probably even more significant. This is discussed in more detail below, after a look at the detailed trends.

In fact, this is not something that can be explained only or even dominantly by changes in levels of processing, changed consumer tastes and preferences, etc. Clearly, something else has been going on. And that other process, which has operated to increase the share of value accruing to the distribution, is the increasing corporatisation of food production and concentration of agro-industries, especially in the US but also in the rest of the world.

The process of concentration of industry is one that has affected virtually all productive sectors in the world economy. It is just as evident in the food processing and marketing sector, which was already a more concentrated sector at the beginning of the decade of the 1990s. As a consequence, a handful of large companies now handle, control or are involved in some way in almost all aspects of production and distribution of food. In the US, where the process of corporatisation of agriculture is not only well advanced but has accelerated over the 1990s.

Consider the companies that now control certain important food sectors in the US economy

* in grain trade and processing: Cargill (which swallowed Continental, the second-largest grain trader), Archer Daniels Midland (ADM), ConAgra.

* in beef packing and distribution : IBP, ConAgra, Cargill (as owner of Excel).

* in cattle feed : Cargill, Cactus Feeders, ConAgra.

* in pork processing : Smithfield, IBP, ConAgra, Cargill.

* in hog raising : Smithfield (the largest pork processor has bought the largest and second-largest hog producers, Murphy Family Farms and Carroll's Foods), Cargill, Seaboard.

* in biotech and seeds: Monsanto, Cargill, DuPont/Pioneer, Novartis, Aventis.

* in supermarkets: Kroger, Albertson's, Safeway, AHOLD (Giant), Winn-Dixie, Wal-Mart.

The repetition of a few names confirms the point that, as in some other interconnected industries, a few diversified firms are positioned on many sides of the market at once. Increasingly, the process of mergers and acquisitions are connected through a complicated system of "strategic alliances" and cross-ownership.

Thus, Smithfield, the world's largest hog producer and pork processor, recently bought a 6.3 percent stake in its rival company IBP, the second-largest pork processor. ADM already owned a 12.2 percent share of IBP. This kind of cross-ownership is likely to continue, as IBP itself is now to be acquired in a friendly takeover by the Wall Street brokerage firm Donaldson, Lufkin & Jenrette (which was recently bought by Credit Suisse First Boston). Cargill and Monsanto have a complex and elaborate web of joint ventures that runs from fertiliser and seeds to grain and raising cattle, hogs, turkeys and chickens, then on to the butcheries and packing plants.

According to one recent estimate (William Grieder in the Nation, November 20, 2000) this means a frightening degree of concentration sector by sector. Four firms control 82 percent of the beef packing industry, 75 percent of delivery of hogs and sheep, and half of chickens. Major supermarket chains are now concentrated regionally within the US, though not nationally. Four firms hold 74 percent of market control in ninety-four large cities; experts anticipate a new merger wave that could swiftly increase that percentage while doubling the four firms' overall national concentration up to 60 percent.

It is not just that the "consumers" so beloved of mainstream economic theory are adversely affected by these levels of concentration and effective monopoly. It is also precisely this kind of market leverage that has given the large companies a pricing advantage over farmers and ranchers. And it is this which explains the rising spread between the prices received by farmers and livestock breeders, and the retail prices, that is so evident from the charts.

Thus, companies regularly exploit this market leverage, and the degree of control created by vertical integration of breathtaking dimensions, to depress market prices for independent, relatively small producers. In some cases the control is direct. Thus, owning feedlots, or (an increasingly common practice) signing output contracts with individual farmers for poultry, hogs, cattle and even grain and soyabean, gives the processing companies access to their own captive supplies.

Even when there is no such overt control, the ability of marketing giants to hold their own private stores of livestock or grain or oilseeds means that they no longer have to rely on the traditional auction based purchases in the open market to provide most of their supply. This has affected the auction markets as well, rendering the prices for farmers lower and more volatile.

The recent crashes in world trading prices have speeded up these processes. Two consequences of this are now clear. One, is that it drove many American farmers into rushing to accept whatever new technology offered cost cutting or output increasing effects. Thus, farmers sought more capital-intensive cultivation, and Monsanto and other companies were also easily able to persuade farmers to adopt their genetically modified seeds for corn and soyabean in particular. The other impact of the price collapse is that it has driven many farmers many more farmers into accepting the status of contract producer growing crops of livestock under fixed-price contracts with the corporations.

This model is eerily reminiscent of the process of forced commercialisation in Indian agriculture over the nineteenth century, when small farmers were incorporated into a global economy through a process of debt engagement or through contracts of purchase where the ultimate buyer (say, for example, the opium or indigo planter) also offered inputs such as seeds and other working capital and bound the formerly independent producer into a subservient relationship.

Of course, in the US this process is occurring in an already capitalist agriculture which is highly sophisticated in terms of techniques and production organisation. For that reason, it also bears similarity with the pattern of organisation in contemporary major industrial sectors in

developed economies. Here a large corporation - say Nike or Benetton - organises a complex but disparate and shifting network of affiliated producers, subcontractors and distributors, who all adhere to its brand standards.

This entire process has been dramatically described as follows :

Growers are surrounded now on both sides - facing concentrated market power not only from the companies that buy their crops and animals, but also from the firms that sell them essential inputs like seeds and fertiliser. In the final act of unfettered capitalism, the free market itself is destroyed." (William Grieder, "The last farm crisis", The Nation, November 20, 2000)

American farmers are effectively being incorporated into a peculiar collectivisation of agriculture, where those in control are large multinational companies operating all the way along the value chain. And it is this model of growing corporatisation of agricultural and agro-processed commodity production which is being upheld as an example for other countries, and which is effectively being pushed on to a whole range of developing countries such as India.

In fact, the current Indian government has already shown that it is very much in favour of such a trend, and has provided further incentives to strengthen such a process in the recent Annual Central Government Budget as well as in the latest Exim Policy.

The effects of such a policy on American farmers, who are already quite well off, and financially and politically strong, are now apparent. But this process is likely to be much more devastating in terms of its impact on Indian cultivators, a majority of whom are already operating at the margin of subsistence.