Articles Posted in Agriculture

Antitrust for Kids: Watch Out for Predatory Halloween…Pricing!!

October 19, 2023 | Bona Law PC

At Argo Elementary, a group of kids gathers daily at lunch to buy and sell candy. The trading activity is a longtime tradition at Argo and it’s taken very seriously—more like a competitive sport than a pastime.

Candy trading doesn’t end once a 5^th grader graduates from Argo. It continues across town at Chicago Middle School—but instead of lunch, candy trading happens there at the close of each school day. (The middle school had banned lunchtime trading due to several disputes that grew out of hand.)

Now here’s where it gets complicated, and nobody knows why it works this way, but the average lunchtime price at Argo determines the starting price for trades later in the day at Chicago.

For example: the average selling price for a candy bar on Monday, lunch at Argo is $2.50. Monday after-school prices at Chicago also will start at $2.50.

There are rules about what kind of candy can be traded—so that one trade can be easily compared to another (candied apples-to-candied apples) for purposes of determining who’s “winning.”

And sometimes kids—particularly the older ones at Chicago—place bets on what will happen on a particular trading day in the future, e.g., I bet prices will reach $3 or I bet no more than 50 candy bars will get sold this Friday.

That’s it by way of background. Here’s our story.

Arthur D. Midland (“ADM”) is 9. He is the link between Argo and Chicago. Each day, ADM leaves Argo Elementary when school lets out, walks to Chicago Middle, announces the “start-of-trade” Chicago price based on the lunchtime Argo price, and Chicago trading begins. (ADM’s mother allows this because ADM’s older brother (Midas) also trades at Chicago—so the two boys can watch each other.)

At the start of the school year, ADM contrived a very clever scheme. He bet Midas that, on Halloween, Chicago prices would be very low—as low as $1. Midas said, “No way! September prices are already at $2.50. If anything, prices will increase as kids go candy crazy in October. I’ll take that bet.”

So, for every candy bar sold at Chicago on Halloween for $1 or less, Midas would owe ADM $1. And for every candy bar sold at Chicago for more than $1, ADM would owe Midas $1.

With that bet front of mind, ADM became the primary candy seller at Argo, and as Halloween neared, he flooded Argo with candy and sold it intentionally at very low prices—50 cents for a Snickers! (ADM had the requisite inventory because he was an avid trick-or-treater and had saved all his Halloween candy from years past.)

Due to ADM’s scheme, Argo prices got so low that some kids packed up their candy and went home—refusing to trade there at all.

Well, Halloween finally came and, as you can imagine, ADM made a killing on the bet—100 candy bars were sold at Chicago on Halloween at less than $1, forcing Midas to pay ADM his entire savings. This more than compensated ADM for whatever losses he incurred for under-selling at Argo.

Once Midas realized ADM’s trick, he was furious. Didn’t ADM cheat? Midas assumed—as did all candy traders—that bets derived from candy sales would be based on real—not artificial—market forces.

Did ADM get away with it?

So far, no.

My Muse: For now, plaintiff Midwest Renewable Energy has survived a motion to dismiss its Section 2 monopolization claim against Archer Daniels Midland.

The claim is based on allegations of predatory pricing—basically that the defendant’s prices were below an appropriate measure of its costs and that the low prices drove competitors from the market allowing the defendant to recoup its losses. (For more on predatory pricing, read here.)

In the ADM case, Midwest alleges that ADM manipulated ethanol-trading prices at the Argo Terminal in Illinois to create “substantial gains” on short positions ADM held on ethanol futures and options contracts traded on the Chicago Mercantile Exchange. Because the Argo prices determined the value of the derivatives contracts, by flooding Argo with ethanol that ADM sold at too-low prices, ADM allegedly was able to win big on the derivatives exchange—recouping whatever losses it incurred on the underlying asset.

On its motion to dismiss, ADM argued that Midwest had not sufficiently alleged that ethanol producers had exited the market due to ADM’s low prices or that ADM subsequently recouped its losses in the ethanol market. (ADM classed these arguments as going to antitrust injury.)

The Court agreed that Midwest was required to allege both that rivals exited the market and that recoupment was ongoing or imminent, but the court ruled Midwest’s allegations sufficient to do so.

Specifically, Midwest had alleged that 12 ethanol producers had either stopped or decreased ethanol production—which is enough at the motion to dismiss phase. The court said whether that alleged “handful” of plant closures had a discernible effect on consumers is a fact-intensive analysis not susceptible to resolution on the pleadings.

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State and Federal Enforcers Pull Out All the Stops to Target Meat and Poultry in 2022

December 31, 2021 | Bona Law PC

Author: Aaron Gott

A couple years ago, clamor for antitrust scrutiny of the agricultural industry was growing apace. But then the pandemic happened. Demand bottomed out, processing plants shuttered and everyone feared an unprecedented virus-induced recession. The clamor disappeared. The National Pork Producers Council even won approval from the U.S. Department of Justice Antitrust Division (with some strings) to engage in a coordinated nationwide campaign to reduce output through mass culling.

But now the clamor is back, and the meat and poultry industry appears to be a priority target for 2022.

In a December 21, 2021 letter to U.S. Secretary of Agriculture Tom Vilsack, a broad, bipartisan coalition of fifteen state attorneys general—from AG Keith Ellison in Minnesota to AG Sean Reyes of Utah—urged the USDA to use its powers under the Packers and Stockyard Act to counter rapidly increased concentration among meat processors, vertical integration, exclusive production arrangements, new sales and marketing practices, the emergence of third-party data services as key players in the market, and producer attrition. The letter also invokes the American Rescue Plan Act of 2021 as an opportunity establish a grant to fund state antitrust enforcement efforts in agricultural markets.

The letter did not come out of the blue or raise a novel new idea about using the Packers and Stockyard Act to further antitrust enforcement. Earlier this year, the USDA announced it would conduct rulemakings to address what it described as competition problems in the livestock markets. The coalition is telling USDA that the states agree and want to help, and that they definitely will help if the USDA gives them money to do so.

Around the same time that the USDA announced its plans, the U.S. Senate also held a hearing on concerns in the packing industry.

All this attention comes exactly 100 years after Congress passed the Packers and Stockyards Act. Let’s look at a little background before discussing these recent moves in more detail.

What is the Packers and Stockyards Act?

The Packers and Stockyards Act was passed in 1921 in response to a Federal Trade Commission study concluding that the livestock industry needed more competition. It is administered by the U.S. Department of Agriculture, Packers and Stockyards Division of the Agricultural Marketing Service. The act contains financial protection measures, and prohibits (1) unfair, discriminatory, and deceptive practices and (2) activities that might adversely affect competition. The act has been amended over the years to increase its scope and add additional regulatory powers.

The P&S Act applies to anyone engaged in the business of marketing livestock, meat, and poultry in commerce, which includes not just stockyards and processors, but also commission firms, auctioneers, dealers, buyers, brokers, wholesalers, and distributors. Notably, the act specifically excludes one important category of players: farmers and ranchers who buy livestock for feeding purposes or in marketing their own livestock for sale.

The P&S Act is enforced through administrative actions by the USDA and, on occasion, the USDA refers violations for civil or criminal enforcement by the U.S. Department of Justice through a U.S. Attorney’s office (rather than the Antitrust Division). Penalties and remedies include injunctive relief, business shutdowns, five-figure civil penalties, and additional fines and jail sentences for actions handled by the DOJ.

The Packers and Stockyard Act isn’t the only agriculture-specific antitrust law. Delve into an overview of the Capper-Volstead Act’s farm cooperative exemption next.

What USDA Regulatory Changes Have Already Occurred?

In December 2020, the USDA finalized a new rule addressing “undue or unreasonable preferences or advantages,” but this rule does not focus on core antitrust enforcement or the market concentration issues raised more recently. In fact, the rule was a long time in the making—it was mandated by Congress in the 2008 Farm Bill. It focuses on regulating conduct similar to price discrimination under the Robinson Patman Act. The USDA also put out new guidance on its enforcement policy regarding the rule in the form of a “frequently asked questions (FAQ)” document, which includes industry-specific guidance.

What USDA Regulatory Changes Might Occur in 2022 and beyond?

The USDA’s announcement focused on increasing its P&S Act enforcement efforts and new rulemakings. The proposed rulemakings would clarify key provisions of the law, define prohibited practices, eliminate “oppressive practices in chicken processing,” and reinforce its position that the agency need not demonstrate actual or threatened harm to competition to establish a violation of the act.

The state attorneys general have some additional recommendations:

They focus on the P&S Act’s anti-monopoly purpose in a push for the USDA to consider both horizontal and vertical competition implications and to conduct retrospective “academic” merger reviews.
They ask the USDA to consider additional reforms beyond those announced to include limits on alternative marketing arrangements that the attorneys general claim have led to “producers increasingly finding themselves at the mercy of the processors” and significantly reduced the number of independent producers in the market.
They ask the USDA to closely examine third-party data sharing in agricultural markets, which has already been the subject of private antitrust litigation. The letter asserts that these private, subscription-based data services are so granular that they could facilitate unlawful coordination or lead to market manipulation.

The U.S. Department of Justice Antitrust Division also announced it is working with the USDA and other agencies to fight “excessive concentration” and anticompetitive conduct in agricultural markets with a focus on ensuring the ability of small and independent farmers to compete. This could mean more aggressive merger reviews and stepped up civil and criminal enforcement efforts targeting conduct. In fact, the DOJ already teamed up with the USDA and other agencies to investigate the broiler chicken industry, leading to more than a dozen criminal indictments against companies and their executives. The DOJ also just challenged U.S. Sugar’s proposed acquisition of Imperial Sugar in November 2021.

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Can My Farm Cooperative Impose Production Restraints During Covid-19 Without Violating the Antitrust Laws?

July 23, 2020 | Bona Law PC

Author: Aaron Gott and Nick McNamara

As the effects of the ongoing COVID-19 pandemic continue to ripple across all sectors of the economy, agriculture has been hit especially hard. The widespread closure of restaurants combined with the general hit on most Americans’ wallets has precipitated a massive demand shock, which in turn has sent the prices of agricultural products such as corn, soybeans, milk, and fresh produce tumbling. While this may be good news for consumers (at least in the short run), it does not bode so well for farmers, who in recent months have had to resort to dumping milk and culling herds of livestock—practices which are both wasteful and potentially environmentally harmful.

Can farmers work together to mitigate these issues by agreeing, prior to production, to set production caps so that prices may be stabilized, and waste avoided? The answer depends on whether such controls on output are covered by the Capper-Volstead Act’s antitrust exemption for farm cooperatives.

Under normal circumstances, a concerted agreement among horizontal competitors to restrict output is a per se violation of Section 1 of the Sherman Act. But the Capper-Volstead Act, enacted in 1922 amid populist fervor in the agricultural sector, provides a limited antitrust exemption to “[p]ersons engaged in the production of agricultural products as farmers, planters, ranchmen, dairymen, nut or fruit growers.”

You can read a more detailed primer on the Capper-Volstead Act here. But, in brief, the act allows agricultural producers to collectively process, prepare, handle, and market their products. Now, it is important to note again that the exemption applies only to agricultural producers, not processors. This past year, there has been a flurry of antitrust litigation against pork and beef processors who are alleged to have agreed to restrict output, among other things. As discussed in the primer, the Supreme Court has held that a cooperative cannot include processors because they do not fit into the category of “farmers, planters, ranchmen, dairymen, nut or fruit growers.” Thus, only those entities at the most basic level of the food supply chain get to enjoy the exemption.

For producers, the farm cooperative exemption has been interpreted by courts to include a blanket exemption from antitrust liability for price fixing, a practice which also normally incurs per se liability under Section 1 of the Sherman Act. No court has ever directly ruled on the question of whether the exemption applies also to output controls, but there are indications they might find output restrictions outside the narrow confines of the act.

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The Capper-Volstead Act Gives Farm Cooperatives a Limited Exemption from Antitrust Liability

October 29, 2019 | Bona Law PC

Author: Aaron Gott

The federal antitrust laws are a decisive proclamation that competition is the best policy—competition leads to better products and services, the greatest value at the lowest price. But, just like with anything else, there are exceptions. Congress and the courts have carved out numerous exceptions from antitrust liability—or as we’ll call them, exemptions. There’s an insurance exemption, a labor exemption, a baseball exemption, a state-action exemption, and many others. And they exist for a variety of reasons. Without the labor exemption, for example, union activity would be a felony. And we have a baseball exemption because, well, America likes baseball.

Today we’re going to talk about one important exemption for the agriculture industry: the farm cooperative exemption. Created by the Capper-Volstead Co-operative Marketing Associations Act (7 U.S.C. §§ 291–92), the farm cooperative exemption provides associations of persons or entities who produce agricultural products a limited exemption from antitrust liability relating to the production, handling, and marketing of farm products.

The farm cooperative exemption has some personal significance to me: I grew up across the street from one in my small Iowa town. And that co-op sponsored one of my little league teams.

At Bona Law, we regularly deal with antitrust exemptions. In fact, we have argued state-action exemption issues before the U.S. Supreme Court several times. As with any other exemption—and this is very important—the farm cooperative exemption is limited, disfavored, and narrowly applied. So it can easily become a trap. Like anything with antitrust, there are plenty of nuances and exceptions. We’re going to address some of those, but you should contact an antitrust lawyer if you really need to know whether the antitrust laws could apply, you’re being sued, or you want to consider suing.

The farm cooperative exemption allows a group of farmers—each of which is a competitor in the market—to come together and essentially act as one farmer. Through a cooperative, farmers pool their output together, agree on a price, and ultimately have more bargaining power in dealing with buyers—who historically were much bigger outfits than the individual farmers competing for their business.

The exemption also allows cooperatives to join together under a common marketing agency.

The exemption is overseen by the USDA, and the act gives direct oversight power to the Secretary of Agriculture. The secretary can, on his own volition, hold hearings, find facts, and issue orders to prevent cooperatives from monopolizing or restraining trade “to such an extent that the price of any agricultural product is unduly enhanced” as a result. But litigation—whether enforcement by the Department of Justice Antitrust Division or private civil lawsuits—is where a cooperative’s fate is usually decided.

Without the exemption, this sort of arrangement would be analytically indistinguishable from a price-fixing cartel, except that price-fixing cartels typically do not operate out in the open, since it is a serious felony. In fact, before 1922 when the act went into effect, farmers who acted together to market their products were sometimes prosecuted under the Sherman Act.

Conditions for the Antitrust Exemption

The Capper-Volstead Act establishes several conditions for the exemption to apply. There are two universal conditions:

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