Review of Agricultural Economics 251. Analyses. Studies

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1 Review of Agricultural Economics 251 Features Commentary Applied Analyses Case Studies Downloaded from at Pennsylvania State University on September 17, 2016

2 Review of Agricultural Economics Volume 22, Number 1 Pages Cargill s Acquisition of Continental Grain s Grain Merchandising Business Marvin Hayenga and Robert Wisner This article examines the advantages and concerns raised from the proposed October 1998 Cargill acquisition of Continental Grain Company s grain merchandising business. The world s largest grain exporter acquiring the second largest exporter raised concerns about potential loss of competition, but also may make these firms with excess capacity more effective in competing for a larger U.S. share of the world market. The analysis below done in December 1998 was based on the quickly available and relevant data to provide information to industry, academic, and government analysts which might prove useful in debating the pros and cons of this acquisition. Subsequently, the July 1999 Department of Justice proposed consent decree and rationale for its settlement with Cargill is summarized, followed by some issues for the reader to consider. Cargill s proposed purchase of Continental Grain s grain merchandising business would join the world s two largest grain and oilseed exporters. Many farm organizations, others in the industry, regulators, and policy makers have expressed concerns about the proposed acquisition. This paper describes the businesses and market volumes involved and the locations where potential losses of competition from their combination may be important or insignificant, and discusses increases in efficiency or effectiveness that might be expected from the combination. Several strategic locations important in the grain merchandising business were selected for more in-depth analysis due to their influence in the export or river terminal marketing systems, and the futures markets. We emphasize interior barge loading locations on the Illinois [the delivery location for the Chicago Board of Trade (CBOT) corn and soybean futures markets beginning in 2000], Mississippi and Ohio rivers, futures market delivery locations currently Marvin Hayenga and Robert Wisner are professor and university professor of economics, Iowa State University, respectively.

3 Cargill s Acquisition 253 at Chicago, Toledo, and Kansas City, and high-volume export locations on the East and West coasts. The information collected comes from government, trade publications, and industry sources. Sources of data are camouflaged where necessary to preserve confidentiality. We offer pros and cons on the issues raised by farmers, industry members, government policy makers, and regulators, hopefully in a non-judgmental way, to stimulate an informed dialogue. Antitrust Review Procedures Combining two major competitors in the U.S. and world grain merchandising industry will prompt market power concerns by policy makers, the Secretary of Agriculture, and others that will involve data submission to the relevant antitrust agencies. The review (and subsequent challenge or approval) is done by the U.S. Department of Justice and similar agencies in other parts of the world where both companies extensively do business. U.S. antitrust law bars transactions that are likely to have substantial anti-competitive effects (Azcuenaga). The unifying theme of the Department of Justice (DOJ) and Federal Trade Commission (FTC) merger guidelines is that mergers should not be permitted to create or enhance market power or to facilitate its exercise. Market power to a seller is the ability to maintain prices above competitive levels for a significant period of time. The relevant agency (for the food industry it usually is the Department of Justice jurisdiction) assesses whether the merger would significantly increase concentration and result in a concentrated market, properly defined and measured. Second, the agency assesses whether the merger, in light of market concentration and other factors, raises concern about potential adverse competitive effects. Third, it analyzes whether entry by new competitors will be timely, likely, and sufficient either to deter or to counteract the likely shortterm anti-competitive effects. Fourth, it assesses any efficiency gains that cannot reasonably be achieved by the parties through other means. Typically, the focus of agency review in the United States is determining (a) the relevant market for analysis, (b) the share of the market controlled by the companies involved, (c) the measures of market concentration before and after the acquisition (small changes are usually considered more important in highly concentrated markets; large changes are relatively less important in unconcentrated markets), and (d) the ease and speed of entry by potential competitors. At the same time, efficiency gains and other trade-offs to possible reductions in market competition are examined. Efficiencies are most likely to make a difference in merger analysis when the likely adverse competitive effects, absent the efficiencies, are not great. Downloaded from at Pennsylvania State University on September 17, 2016 The Industry and Market Setting The food and agricultural sector has experienced rapid consolidation since 1980, as it mirrored others in the U.S. economy in the merger and acquisition wave. The farm production transition toward fewer, larger, more sophisticated operations was joined by similar consolidation of volumes in the hands of fewer, larger firms in the farm input, food processing, wholesaling, service and retailing industries, and grain merchandising industry.

4 254 Review of Agricultural Economics In the late 1960s and 1970s, the world grain market grew rapidly as incomes improved globally, and previously closed markets became major customers for grain. The U.S. grain infrastructure expanded rapidly to provide the necessary storage, rail, barge, and ocean freight distribution system. In the 1980s and 1990s, the export market tumbled as the economies of the former Soviet Union and important Asian customers had problems that sharply reduced U.S. grain and oilseed exports. Argentina, Brazil, and Western Europe became major exporters in the late 1980s, reducing the U.S. share of world exports, resulting in substantial excess capacity and low profits for merchandisers most dependent on exports. The various stages of the grain and oilseed marketing system involve numerous transactions. Grain sold by a farmer to a local elevator and ultimately destined for export may have several changes of ownership, with prices established several times at different locations, at rail terminals, river terminals, and export terminals. Grain may be diverted from that distribution stream by competitive bidding from livestock producers, feed companies, and corn or soybean processors along the way. A sizable number of competing merchandisers may own relatively few facilities like country grain elevators and barge or ship loading facilities, but still have active competitors (paper traders) buying and selling grain at various stages of the merchandising system. With excess capacity, paper traders use facilities owned by others (acquired on a competitive bid basis) for storing, blending, loading, and unloading. Their operating costs often are low, and paper traders have been effective competitors. Their effectiveness, however, depends on excess capacity in the marketing system. With concentrated ownership of facilities, these participants would be much less effective if increased exports were to strain the capacity of the system. The players in the grain merchandising system have changed greatly over the last twenty years. Only three of the largest grain companies in 1981 show up on the 1998 top ten list. Three farmer cooperatives are now part of the top ten, versus two in Some regional cooperatives have grain merchandising joint ventures with other corporations e.g., Cargill, ADM. Cargill reports that its grain merchandising storage capacity is 345 million bushels, and its other processing, subsidiary, and joint venture storage capacity (excluding The Andersons marketing joint venture in Ohio) brings its total storage capacity to 463 million bushels. Combined capacities of Cargill and The Andersons are exceeded only by ADM. Possible Price Discovery Concerns Price discovery takes place at each stage where ownership changes hands. The interaction of supply and demand in each local or regional area, in turn, is influenced by supply and demand conditions at locations closer to the domestic or export customer. Price reporting by government agencies and interactions of buyers and sellers provide a transparency in the price discovery process among the merchandisers, and ultimately to farmers. The Chicago and Kansas City Boards of Trade and the Minneapolis Grain Exchange play significant roles by providing corn, wheat, and soybean futures contracts which are used to manage price risks for farmers and grain merchandisers at all stages of the system. All three have delivery areas that

5 Cargill s Acquisition 255 involve Cargill and Continental elevators. The futures markets are a major source of market information, and are global price-discovery mechanisms, exerting major influence on the price and margin structure in the grain industry. The Companies Cargill, Inc. is the largest private company in the Forbes magazine 1998 listing of private companies in the United States, and Continental Grain Company was fifth largest on the list. These rankings are for the entire companies, which include very large livestock production, feed company, and financial operations for Continental Grain, and extensive livestock production, meat processing, feed, poultry, steel, shipping, and other business enterprises for Cargill. Only the Continental grain storage, transportation, export and trading operations, with offices and facilities in thirty countries (in North and South America, Europe, the Middle East, Africa, and Asia) are involved in the acquisition, with customers in over 100 countries. Cargill has grain merchandising offices and facilities in forty-three countries. In the United States, it has 243 grain facilities; the industry leader ADM through ownership or joint ventures has 669 facilities, according to Milling and Baking News. Estimated average profit per dollar of sales was less than 1% overall for Cargill s combined businesses in 1998, and even less for Continental Grain, though these are only for one year, and may not be representative. Cargill reported losses in fourth quarter, For its and fiscal years, Cargill reported profits of less than 2% of sales. In the United States, Cargill indicates Continental s assets include eighty-three grain handling facilities, which will add seventy-three new locations to their current 243, and ten facilities where Continental and Cargill elevators currently coexist close to each other. Cargill and Continental are important in other countries as well. For example, a Cargill Argentina press release indicates the combined operations would account for about 25% of Argentine corn wheat and soybean exports. They are significant competitors in most areas of U.S. grain production, along with such trading companies and merchandisers such as Peavey, ADM, Bunge, Louis Dreyfus, Zen Noh, Cenex Harvest States, Tradigrain, Farmland, AGP, Nidera, Mitsui, Marubeni, Mitsubishi, Kanematsu, Glencore, Oriac, Itochu, CAM, A.C. Toepfer, and Seaboard. Why Did Continental Grain Sell? Industry speculation is that Continental excelled in very large volume bulk export trading, but had not diversified enough into the value-added processing to compete effectively in a market environment where export volumes have been sharply reduced. To compete effectively by restructuring their operations at this late date would require too much capital and too much risk. Continental s storage capacity declined significantly over the last ten years, while Cargill, ADM, and Peavey expanded. Downloaded from at Pennsylvania State University on September 17, 2016 Why Did Cargill Buy Continental? Cargill expects the acquisition to contribute to its ability to compete in a rapidly changing market. The expansion will contribute to knowledge acquisition

6 256 Review of Agricultural Economics and transfer from an enlarged global presence and a broader base of international grain origination. Cargill hopes to compete more effectively and keep a large share of the Continental volume, capturing economies of scale through increased volume without equivalent increases in the costs. Cargill also expects to reduce costs by dedicating some facilities to specialized products and increasing operating efficiencies. Its joint venture with Monsanto for production and marketing of value-added specialty grains and oilseeds will require greater global capacity to handle segregated grain flows. Continental already is in the identitypreserved grain market, with half its international feed customers converted to high oil corn. Cargill expects to better serve the producer by enhancing productivity, and passing some cost savings on in the form of better prices to suppliers and customers. It also plans to offer more price risk-management alternatives, advice, financing, and related services to farmers. The anticipated efficiencies will have to be quantified for consideration by the Department of Justice. Less tangible benefits identified by Cargill also could influence the firm s competitiveness in domestic and world markets. Greater access to major global suppliers and customers may offer improved market intelligence. That is a key to effective trading in a high-risk environment. Concerns A concern expressed by some farmers, politicians, and industry participants is that Cargill bought Continental to remove a major competitor in the export market, and to increase its merchandising margins. The ability to control more facilities and larger grain volumes might adversely influence competition, and the transparency and effectiveness of the price discovery process. Other possible issues are similar to those raised in the Microsoft case, such as: Will the merger force other merchandisers and processors to conform to Cargill grain merchandising standards? Will the merger lead to exclusive marketing arrangements with Cargill, thus excluding or penalizing those who attempt to do business with other merchandisers? Will Cargill bundle products or terms into its merchandising arrangements, such as requiring its buyers and suppliers to use Cargill transportation or Cargill risk-management tools? Will Cargill control so much grain at various stages of the system that fewer negotiated prices and price reports are available to keep the price discovery system transparent? This article deals with only a few of the most important issues, but hopefully will lay the groundwork for subsequent study of other issues. Relevant Facts How much will the acquisition change the number and size of competitors in the U.S. grain marketing system? We examine the Cargill and Continental grain elevator storage capacity, barge and ship loading capability, and volumes handled at each stage of the system by Cargill, Continental, and major competitors. Other factors influencing whether the acquisition might change the competitive landscape significantly also are considered. For the overall market position of Cargill and Continental and their overlaps in the United States, we used the April 1998 USDA Farm Services Agency database on off-farm grain storage capacity by locations.

7 Cargill s Acquisition 257 Cargill indicates the combined grain merchandising businesses accounted for 3% of the 10,500 U.S. commercial grain storage facilities (6 7% of commercial storage space). The combination also would represent 20% of river terminal elevator capacity, 35% of U.S. grain and oilseed exports, and 10 13% of grain coming off farms (8 10% Cargill, 1 2% Continental Grain). The U.S. grain markets are a well-integrated national system. Farmer cooperatives originate much of the grain from farmers. Both cooperative (such as Farmland, Harvest States, Land O Lakes) and non-cooperative grain companies (like Cargill, Continental, ADM, ConAgra, General Mills, Louis Dreyfus, Zen Noh) make direct purchases from farmers and trade commodities at many stages of the distribution process. These firms arbitrage small differences in grain and freight prices to make profits that are a small percentage of sales revenues. In a 1979 study, Thompson and Dahl found that highly correlated corn price changes in five diverse U.S. locations suggested that the pricing behavior was like that found in perfectly competitive markets. A more recent (1997) study by Good et al. shows high soybean price correlations between the Gulf and most Midwest locations (over 0.85 for daily price changes), and correlations for corn prices for similar locations between 0.5 and This is one indication, though not conclusive, that various areas within the United States are part of a national market. Exports Cargill estimates the two firms accounted for 35% of U.S. grain and oilseed exports last year. Industry sources using Department of Commerce (Pier Import Export Reporting Service) data for May 1997 October 1998 calculate that Cargill and Continental Grain in total accounted for 14.5 and 13.1%, respectively, of export shipments of wheat, corn, soybeans, sorghum, barley, and oats. These data were based on bills of lading filed with U.S. Customs. Secretary of Agriculture, Dan Glickman, in a letter to the Department of Justice, estimated that the combined Cargill Continental Grain operations accounted for 42% of corn export volume, 31% of soybeans, and 19% of wheat exports in fiscal These numbers were based on grain inspected by USDA for export last year. GIPSA-USDA provided data on the shares of export volume in fiscal 1998 by the leading firms and the share accounted for by the leading four firms in each location (summarized in table 1). These data treat Cargill (excluding The Andersons) and Continental Grain as separate firms, so the acquistion would increase the shares by the top four firms. At many locations, there was a very large export share accounted for by a few firms. Nationally, 81% of corn exports were accounted for by the top four firms, which include Cargill, Continental, ADM, and Zen Noh. Note that this does not necessarily mean that the grain was owned by those firms; they may have provided ship-loading facilities for a fee for another competitor in the market. Also, some other competitors may have sold grain for export to a Cargill subsidiary. The same top four firms accounted for 65% of soybean exports, while a different set of largest firms provided a much lower share (47%) of wheat exports. 1 The most concentrated export locations include the Atlantic Coast, the Pacific Northwest, and the very large volume Gulf ports. Examining the firms involved Downloaded from at Pennsylvania State University on September 17, 2016

8 258 Review of Agricultural Economics Table 1. Export market shares by top four firms in Fiscal Top Port Volume Top Four Volume Top Share Percent Top Four Companies National Exports (All Ports) mil. m. tons mil. m. tons Corn 35,862,622 29,022, ADM, Cargill, Continental, ZenNoh Wheat 25,922,437 12,068, Cargill, Columbia Grain, Peavey, United Grain Soybeans 22,402,723 14,531, ADM, Cargill, Continental, ZenNoh Mississippi River (New Orleans) Corn 28,382,994 25,549, ADM, Cargill, Continental, ZenNoh Wheat 5,784,891 3,976, ADM, Cargill, Continental, Peavey Soybeans 17,606,377 13,320, ADM, Bunge, Cargill, ZenNoh Texas Gulf Corn 427, , Cargill, Farmland, Houston Public, JacintoPort Wheat 7,222,742 6,221, Cargill, Continental, Farmland, Houston Public Soybeans 919, , Cargill, Continental, Farmland Atlantic Coast Corn 76,432 76, Cargill, GA Port Authority Wheat 485, , Cargill, GA Port Authority Soybeans 626, , ADM, GA Port Authority Great Lakes Corn 1,398,552 1,147, Andersons, Cargill, Continental, Harvest States Wheat 1,891,249 1,744, AGP, Cargill, Harvest States Soybeans 1,904,852 1,349, AGP, Andersons, Harvest States, Peavey PNW Corn 5,577,223 5,577, Cargill, Continental, Peavey Wheat 10,537,933 8,680, Cargill, Columbia Grain, Louis Dreyfus, United Grain Soybeans 1,345,287 1,345, Cargill, Continental, Peavey Source: United States Department of Agriculture: Grain Inspection, Packers and Stockyards Administration.

9 Cargill s Acquisition 259 at each location, and the changes in storage, loading capacity and market shares from the acquisition may provide useful insights into competitive implications. Table 2 summarizes the GIPSA-USDA ship loading facility data for April A firm s share of storage capacity or loading capacity is likely to be highly correlated with share of volume handled, but not perfectly. The shares (or length of the rivers selected) will change slightly if the geographic definition differs from ours. Our analysis discloses that the acquisition will have little or no impact in Duluth and Toledo, but will remove the only remaining grain elevator competitor in Chicago (a long-time declining market). Chicago and Toledo appear to be dominated by Cargill facilities or joint ventures. The acquistion raises questions about the current CBOT futures contracts because these are the only effective delivery points for On the low-volume East Coast, Cargill is the primary exporter in Virginia ports, unchanged due to the acquisition. In the Pacific Northwest, Cargill s share of capacity will be near 50%, up slightly with the addition of one Continental elevator. Several other competitors remain. In the Louisiana and Texas Gulf, Continental only has a small share of capacity, 9 and 11%, respectively. Combined with Cargill s 21% share in the Texas Gulf and 29% in the Louisiana Gulf, this may not be viewed as a significant change with the acquisition. There are several competitive private and public Texas (e.g., Port of Houston, Port of Corpus Christi) ship-loading terminals. In the combined Louisiana and Texas Gulf port area, Cargill accounts for 36% of shiploading storage capacity after the acquisition, versus 26% before. Low-cost barge transportation makes make the Louisiana Gulf ports more attractive destinations for most Corn Belt states than the Texas Gulf. Even so, the Gulf ports are competitive with each other, as well as with East Coast and Great Lakes ports for European export business. In serving Asian markets, the Gulf ports often compete directly or indirectly with PNW ports. Thus, shares by leading firms in a regional area may not fully reflect their potential impact on competition and Table 2. Largest ship loadouts Daily Ship % of Storage % of Name Loadout (Bushels) Total (Bushels) Total Downloaded from at Pennsylvania State University on September 17, 2016 Cargill Incorporated 6,924, ,449, Other 4,206, ,704, Cenex Harvest States Coop 655, ,518, Continental Grain Company 2,690, ,061, Archer Daniels Midland 3,160, ,232, General Mills Corporation 640, ,369, Conagra Incorporated 1,380, ,451, Bunge Corporation 800, ,523, Louis Dreyfus 250, ,895, Total 20,705, ,202,000 Source: GIPSA, USDA.

10 260 Review of Agricultural Economics prices. Because export market concentration is much higher than at early stages in the grain marketing system, this is a relevant market issue that will have to be carefully examined by the antitrust authorities. River Barge Terminal Locations Our analysis considered storage and barge loading capacity on the Illinois, Ohio, Upper Mississippi, and Missouri rivers. On the Upper Mississippi, Cargill s addition of Continental modestly increases its storage capacity (including joint ventures) share to near 30%, from 22% previously. USDA data on the upper and lower sections of the Illinois River are summarized in tables 3 and 4. On the Illinois River, company shares vary depending upon whether the entire river (delivery area for the CBOT soybean contract) or the Northern part (above Pekin, for the CBOT corn contract) is considered. Also, whether the very large Chicago Continental facility and the Cargill Burns Harbor facility are included as river barge loading locations affects the Illinois River shares. The Chicago facilities are higher cost operations and rarely load barges. ADM is the largest firm, with approximately 36% of the storage space on the entire river. ADM s northern Illinois River share is 49%. Cargill s acquisition will bring its capacity share from 20% to 27% for the entire river, and for the northern Illinois River from 21% to 31%. 3 Consolidated Grain and Barge is a large competitor in the lower Illinois River (32% of entire river storage), and has three facilities above Pekin. Cargill s acquisition might not appear problematic in this area if ADM were not so large. These two large players in the futures market delivery area may prompt close examination by the DOJ. An additional issue is whether to focus only on the barge-loading firms as the competitors. Shouldn t the area s feed and processing market participants also be considered? If the concern is about competitive margins at an important export market conduit, or potential influence on CBOT deliveries, handling costs, and futures prices, then a narrow drawing of the relevant market may be warranted. Otherwise, considering other competitors for grain could dilute the estimated degree of concentration, perhaps substantially. Potential competition as reflected by the speed and cost of adding new barge loading and/or storage capacity also would warrant study, to determine whether potential market power of large firms could be quickly defused. Table 3. Barge loadout Illinois River Storage,% of Name Bushels Total Archer Daniels Midland 11,942, Cargill Incorporated 6,612, Consolidated Grain & Barge 10,358, Continental Grain 2,278, Other 1,537,

11 Cargill s Acquisition 261 Table 4. Barge loadout Northern Illinois River Storage,% of Name Bushels Total Archer Daniels Midland 7,604, Cargill Incorporated 3,189, Consolidated Grain & Barge 2,262, Continental Grain 1,628, Other 732, CBOT Delivery Locations Some say consolidation in Chicago is a symptom of a dying market, and that excess capacity is forcing consolidation. Broader competition for corn, wheat, and soybeans is present than shown by the few ship or barge loading facilities in the Chicago, Toledo, and St. Louis CBOT delivery areas. These may not be a problem from an overall competition standpoint, just as a futures delivery-point issue for The CBOT has changed delivery specifications effective with contracts for 2000 and beyond, shifting to barge shipping certificates at approved locations on the Northern Illinois River (corn) and the Illinois River to St. Louis (soybeans). Proposals for changes in the CBOT wheat contract that would still rely on warehouse delivery are pending. One industry source characterizes the new delivery locations and specifications as a very liquid market with few barriers to entry. However, the 80% share of storage capacity by two firms (and probably a higher share of volume) in the Northern Illinois River prompts a more thorough look at the situation there. Expanding the corn contract delivery area to the entire Illinois River, adding the upper Mississippi when it was not frozen, or similar changes to reduce concentration in ownership of barge loading facilities (or barges, not considered here) may warrant consideration. Potential Competition Grain moving to the Illinois River probably originates primarily from areas close to the Illinois River or from points further East. The Mississippi River is close on the West, and would intercept grain from that direction unless the Mississippi is closed for the winter. Uncooperative fringe competitors on the Illinois River which currently have substantial excess capacity might circumvent short-run margin enhancement by the largest firms there. Alternatively, the Illinois River could be bypassed to go to the Mississippi at a small marginal freight cost, except in the winter. Other alternatives, at some added cost, might involve moving grain by truck or rail to lower Illinois River competitors, or using more expensive rail shipment to the Gulf if local processors or feed users did not provide effective competition. Such actions may be sufficient to keep the market arbitraged and result in little or no margin enhancement. At least one competitor of Cargill and ADM contends the river market is too fluid to allow squeezes to occur. In the intermediate run, capacity could be added by building truck-barge or rail-barge-loading facilities at relatively low cost, or adding storage facilities with Downloaded from at Pennsylvania State University on September 17, 2016

12 262 Review of Agricultural Economics barge loading at new locations. Industry sources suggest that a new truck-barge loader, with minimal storage capacity, could be operating in about four months at a cost of $2 3 million, provided environmental permits are not a problem. Thus, there is potential ease of entry of new competitors. Grain Origination Off-farms Cargill reports that the two companies accounted for 10 13% of grain coming off farms last year (8 10% Cargill, 1 2% Continental Grain). This was from 3% of the 10,500 U.S. commercial grain storage facilities and 6 7% of commercial storage space. The GIPSA-USDA data on U.S. off-farm storage capacities at all locations indicate ownership is not highly concentrated, and farmer cooperatives have a large influence. Table 5 summarizes all grain storage by company. Summary and Overview This study of the relevant and readily available data for the U.S. market offers the following insights: Concerns about loss of competition are prompted by the Cargill s acquisition of its largest grain export competitor, creating approximately a 35% share of corn, soybean, and wheat export volume, with a higher corn export market share. The grain and oilseed markets are national in scope, for U.S. antitrust analysis, and international as well. Table 5. Largest U.S. grain storage firms Storage,% of Name Bushels Total Other 5,090,191, Cargill Incorporated 439,868, Archer Daniels Midland 412,398, Conagra Incorporated 181,332, Bunge Corporation 158,567, Continental Grain Company 55,402, Cenex Harvest States Coop 133,386, Farmland Industries 118,819, Riceland Foods Incorporated 98,201, The Andersons Incorporated 78,547, General Mills Corporation 65,793, Consolidated Grain & Barge 57,241, Central Soya 52,013, The Scoular Company 30,061, MFA Incorporated 25,168, Topflight Grain Cooperative 13,920, Louis Dreyfus 4,668, Total 7,115,578,954 Source: GIPSA, USDA.

13 Cargill s Acquisition 263 Ownership at port locations is relatively concentrated, though largest-volume locations like the Gulf have a substantial number of competitors. The dying Chicago grain market declines from two competitors to one due to the acquisition. This could be a temporary problem until new CBOT corn and soybean contracts take effect for 2000, but may be a continued problem for wheat. Most river terminal locations were affected very little by the Cargill acquisition. The Northern Illinois River, the new CBOT delivery location for corn, will have two firms accounting for over 80% of the barge loading elevator storage capacity after the acquisition. Excess capacity by smaller elevators, competing processors or feed companies, and ease of entry may lessen concerns about excess market power in this market. The CBOT may need to expand corn and wheat delivery areas to avoid perception of risk of manipulation by the largest companies. Numerous competitors buy grain from farmers in most areas; the acquisition probably will make little difference in local competition for farmers grain. Better utilization of excess capacity and likely cost reductions in the grain merchandising are the primary efficiency gains that will have to be documented by Cargill in the antitrust review as offsets to any concerns regarding potential loss of competition. Will efficiency gains and improved ability to serve changing farmers and customer demands make Cargill and the U.S. grain merchandising industry more effective competitors in the rapidly changing world market? Or will consolidation of the industry into fewer hands at ports and river terminals reduce competitiveness significantly? Some economists (Good et al.) have argued that there are many competing uses and markets for grain in the United States and overseas to keep markets adequately arbitraged. Dynamic changes in the world seed and grain production and marketing system, and those appearing on the horizon (related to biotechnology), are likely to transform the system from a commodity orientation to a specialty product system over the next decade or two. Is this acquisition likely to play a useful role in positioning Cargill and the U.S. industry as a more effective competitor for U.S. farmers grain, and for customers in the United States and world markets? Or does it have shortcomings in competitiveness in the short run that need to be remedied before approval by DOJ? Hopefully the data and analysis provided here contribute to an informed dialog and debate. Downloaded from at Pennsylvania State University on September 17, 2016 The Sequel The Department of Justice Consent Decree and Rationale On 8 July 1999, nine months after the announced acquisition, and seven months after this study, the United States Department of Justice filed a civil antitrust complaint alleging that the proposed Continental acquisition would violate Section 7 of the Clayton Act. The Complaint alleged that if the acquisition were permitted to proceed, it would substantially lessen competition for grain purchasing services to farmers and other suppliers in a number of areas in the United States. Unless the acquisition was enjoined, many American farmers and

14 264 Review of Agricultural Economics other suppliers likely would receive lower prices for their grain and oilseed crops, including corn, soybeans, and wheat. When the complaint was filed, the United States also filed a proposed consent decree ( Final Judgment ) that would permit Cargill to complete its acquisition of Continental s commodity marketing business. But divestitures and other relief were required that should preserve competition in grain purchasing services as it was prior to the proposed acquisition, and achieve all of the relief that the government would have obtained through litigation, but avoiding the time and expense of a trial. Key issues were the definition of the relevant product and geographic markets to determine whether and where concentration was too high. The DOJ found that the purchasing of wheat, corn, and soybeans each constituted a relevant product market. In determining geographic market, the DOJ defined the draw area for a country, river, rail, or port elevator as the geographic area from which the facility receives grain. Cargill and Continental operate a number of facilities with overlapping draw areas, and therefore compete with one another in a number of markets for the purchase of wheat, corn, and soybeans from the same producers or other suppliers. Many farmers and other suppliers located within overlapping Cargill/Continental draw areas depend solely on competition among Cargill, Continental, and perhaps a small number of other nearby grain companies to obtain a competitive price for their products. The areas in which these suppliers are located are referred to as captive draw areas that the DOJ determined were relevant geographic markets in separate sections of the country within the meaning of the Clayton Act. In its final response, the DOJ narrowed its definition of the draw area further, identifying it as a 20 to 30 mile radius beyond the nearest elevator where farmers normally market their grain. Attorneys involved in the case indicate the standard used for potential adverse economic effects on farmers was the ability to impose a non-transitory negative change of at least one precent in grain prices in the draw area. The overlapping and captive draw areas for competing Cargill and Continental facilities were defined essentially as regional markets surrounding the Continental elevators which were being acquired and the Cargill facilities in the same area. For example, in the Pacific Northwest, Cargill s port elevator in Seattle competes with Continental s port elevator in Tacoma for the purchase of corn and soybeans. The overlapping draw area for these facilities includes portions of North Dakota, South Dakota, Minnesota, Nebraska, and Iowa. Captive suppliers are located primarily in eastern North Dakota, eastern South Dakota, and western Minnesota. The complaint alleged that if Cargill were allowed to acquire the Continental facilities that purchase grain in these captive draw areas, it would be in a position unilaterally, or in coordinated interaction with the few remaining competitors, to depress prices paid to farmers and other suppliers. Transportation costs would preclude farmers from selling to other grain traders or purchasers from buying in sufficient quantities to prevent an anti-competitive price decrease. Producers of corn, soybeans, and wheat would not switch to an alternative crop in sufficient numbers to prevent a small but significant decrease in price, nor were processors or feedlots that purchase grain considered likely to constrain pricing decisions by grain trading companies because their purchasing decisions are based on factors

15 Cargill s Acquisition 265 other than small but significant changes in crop prices. Therefore, significant changes in concentration among grain trading companies were expected to have an anti-competitive impact upon prices received by farmers and other suppliers. In addition, Cargill and Continental compete to purchase corn and soybeans from grain sellers seeking to deliver these crops to river elevators on the Illinois River that, beginning in year 2000, are authorized as CBOT delivery points. These delivery points for corn and soybean futures contracts also were defined as a relevant product market within the meaning of the Clayton Act. The complaint reported that consolidating the Cargill and Continental river elevators on the Illinois River would give two firms approximately 80% of the authorized delivery capacity for settlement of CBOT corn and soybeans futures contracts. This concentration would increase the likelihood of price manipulation of futures contracts by those firms, resulting in higher risks for buyers and sellers of futures contracts. To preserve existing competition for grain purchasing services, the DOJ Cargill settlement required divestitures of several Cargill or Continental river elevators on the Illinois and Mississippi Rivers, rail terminals at Troy, Ohio and Salina, Kansas, and port elevators in the Texas Gulf, California, and Pacific Northwest. This relief was intended to maintain the level of competition that existed preacquisition, and ensure that farmers and other suppliers in the affected markets will continue to have effective alternatives to Cargill when selling their crops. To prevent manipulations of CBOT corn and soybean futures markets, divestitures were required of Cargill or Continental elevators along the Illinois River and in Chicago, Illinois, as well as providing one-third of one Cargill facility along the Illinois River to a new entrant pursuant to a throughput agreement. A Retrospective View Several questions arise which may be worth pondering. Were the required divestitures adequate, excessive, or inadequate? The required divestitures are nine of eighty-three facilities comprising 25% of Continental s capacity. Some argue that simple divestitures based solely on concentration in narrowly defined small competitive market areas are not enough that the trend toward consolidation needs to be addressed by totally stopping such mergers and acquisitions. Conversely, are the asserted geographic market areas really as small as defined by DOJ? If not, the market shares probably are overstated, and some required divestitures may not have been required if the case went to trial. Similarly, the artificial CBOT definitions of delivery areas for their contracts were simply accepted as relevant market areas. The reader should consider whether the required divestitures were sufficient, or whether the law itself or the DOJ merger analysis process ought to be reconsidered as some propose. The case study summarized above spotlighted most of the major issues in the Midwest dealt with by the DOJ. While the complexity of the data base resulted in a few facilities being missed and some modest measurement errors, the primary areas of concern and the issues to be dealt with were spotlighted and broadly transmitted to the media in a timely fashion to facilitate more informed input from interested parties while these issues were being studied and settlement was being negotiated by the Justice Department. Downloaded from at Pennsylvania State University on September 17, 2016

16 266 Review of Agricultural Economics Acknowledgments Other study participants were Kim Anderson, Oklahoma State University; William Wilson, North Dakota State University; and Roger Ginder, Iowa State University. Substantial data and assistance were provided by: GIPSA, FSA, and the Office of the Chief Economist, USDA; Commodity Futures Trading Commission; Chicago Board of Trade; Cargill and several other grain merchandising industry members. Todd Campbell and the Center for Agricultural and Rural Development, Iowa State University, provided very important analytical support. Journal Paper No. J of the Iowa Agricultural and Home Economics Experiment Station, Ames, Iowa, Project No. 3354, and supported by Hatch Act and State of Iowa funds. Endnotes 1 Other leading exporters of those grains included Zen Noh, Louis Dreyfus, Mitsui, Alfred Toepfer, ADM, Agrex, Garnac, Marubeni America, Tradigrain, Farmland, Harvest States, Bunge, Columbia Grain, Peavey, and Alliance, each with more than 1% of total exports. Over 100 additional companies were listed as exporters of smaller volumes in that period. 2 Perhaps the CBOT may need to shift their contract to the new delivery points in 1999, or negotiate a contract with Cargill and The Andersons which provides adequate safegaurds on space availability, etc., for anyone making or taking delivery under CBOT futures contracts in Chicago and Toledo during the next year. 3 If continental Chicago and Cargill Burns Harbor facilities were included, the Cargill Upper Illinois share would be 65% and ADM would be 25%; for the entire Illinois River, the Cargill share would increase to 50%, ADM would be 25%, and Consolidated Grain and Barge would be 22%. References Azcuenaga, M.L. Merger Law Enforcement in The Evolving Antitrust Environment. Remarks by Commissioner Azcuenga, Federal Trade Commission, before the CS First Boston 1995 East Coast M&A Conference, 12 May Competitive Impact Statement, United States of America vs. Cargill, Incorporated and Continental Grain Company. Case number 1:99CV01875 (GK) in the United States District Court For The District of Columbia, 23 July Good, D., S. Thompson, R. Hauser, and T.A. Hieronymus, Northern Illinois Waterway Delivery for Corn and Soybean Futures A Perspective, June, Grain & Milling Annual Special publication of Milling and Baking News. Kansas City MO: Sosland Publishing Co. Hayenga, M., and R. Wisner. Cargill s Acquisition of Continental Grain s Grain Merchandising Business. Staff paper No. 312, Department of Economics Iowa State University, January Thompson, S.R., and R.P. Dahl. The Economic Performance of the Grain Export Industry. Technical Bull , Minnesota Agri. Exp. Sta., University of Minnesota Horizontal Merger Guidelines [with 8 April 1997 revisions to Section 4 on efficiencies]. U.S. Department of Justice and Federal Trade Commission, 1997.