MPR: Farmers Concerned About Agricultural Mergers

Farmers Concerned About Agricultural Mergers
By Mark Zdechlik
March 15, 1999

Two of the nation's largest farmer-owned cooperatives, Minnesota-based Cenex Harvest States and Missouri-based Farmland Industries, say they're considering merging their grain businesses. They think consolidating could help them better market their members' products.

The move is part of a broader trend of agribusiness consolidation that's creating a handful of enormous conglomerates.

Cenex Harvest States and Farmland Industries are not strangers to each other's operations. The two gigantic cooperatives have been pooling their purchasing power to reduce the cost of fuel for their members. Now they want to expand the relationship to include grain marketing. Noel Estenson is the CEO of Cenex Harvest States, one of the nation's largest farmer co-ops based in St. Paul. Estenson says, like many other areas of agriculture, companies that sell grain are getting bigger and bigger. He says to compete in that market of ever-expanding heavyweights such as Cargill, co-ops like Cenex Harvest States and Farmland need to grow as well.

Estenson: Both of us bring a grain-marketing operation to the table. Farmland is over $10 billion and we're getting close to that and yet we are only one-fifth the size of Cargill, you know. So we just don't have the size of the mass. So both of us come to the table with grain-marketing operations and putting them together , we think we will be better able to compete.

And Estenson says it's important co-ops survive as an alternative to private companies, which return their profits to investors. Co-ops' profits are returned to their farmer owners.

A look at Cenex Harvest States shows just how fast the trend toward consolidation is moving. Before last summer Cenex and Harvest States were two separate co-ops. Cenex focused on supplying fuel and fertilizer to farmers. Harvest States marketed their grain. Both shared thousands of members, so a combination was a natural. Their merger gave members better purchasing power and consolidated a range of services from just one organization.

Cenex Harvest States is owned by farmers in the upper Midwest from Wisconsin to Washington State. Farmland Industries represents farmers in the nation's wheat belt - the southern plains states of Kansas, Missouri, Oklahoma, and Nebraska.

Although each co-op commands billions of dollars in revenues, agricultural economist Edward Lotterman, says, given the size of the competition, both stand to benefit from merging their grain operations.

Lotterman: Back 20, 30, 40 years ago, a lot of the grain trade was local and you could be a cooperative, serve your local members, and ship the occasional carload or truckload off to a terminal. Harvest States and Farmland both have been major players in terms of exports but, yet, to be a true global player you have to be a pretty big company.

Big enough means being able to support sales offices all over the world, and to employ global commodity-trade forecasters - both functions now critical to operating in a world marketplace. Even with revenues in the neighborhood of $10 billion each, Cenex Harvest States and Farmland argue they're too small to go it alone.

It's 12 noon, lunch time for about 130 dairy cows on the Hastings farm south of St. Paul that's been in Bill Sorg's family for more than 100 years. A conveyer belt delivers a sweet-smelling mixture of feed from a series of outbuildings to the dairy barn's long trough.

Sorg: That's alfalfa hayledge, it's probably 45 to 50 percent moisture.

In addition to the milking operation, Sorg and family have some cattle and they farm more than 2,000 acres of corn and soybeans. That his co-op - Cenex Harvest States - continues to get bigger, for Sorg, is a matter of necessity. If co-ops are to survive in a market dominated by giants like Cargill and Archer Daniels Midland, they too must be large.

Sorg: We need cooperatives and whatever we have to do to continue to exist is important, and if we can find benefits by combining forces rather than competing with each other, then I think that's what's necessary.

But Bill Sorg is concerned that fewer companies are dominating bigger portions of agribusiness. He says big business is leaving farmers with fewer options of from whom to buy fuel, seeds, feed and fertilizer and who to sell crops, livestock and milk to.

Sorg: They're looking to control it and, as they get so big, why, they will. I don't know how you turn that back. I think a lot of these things are getting to the runaway stage and they don't see any restriction coming, so they will go for the whole thing.

Take Minnetonka-based Cargill's proposed acquisition of New York's Continental Grain Company of New York. If approved, Cargill - already a company with more than $50 billion in annual revenue - will control ten percent of all of the grain produced in the United States. Cargill will export about one-third of all the grain that leaves the United States.

Democratic Senator Paul Wellstone and several other lawmakers have sounded alarm bells about consolidation in agriculture, and they've singled out the proposed Cargill-Continental deal. Wellstone says the argument that in order to compete globally, agribusiness needs to be dominated by a handful of conglomerates, is a cover story to mask efforts to eliminate competition.

Wellstone: Just look at the consequences of all of this. This isn't efficiency, this is a stacked deck. And these big conglomerates have the political muscle, they have the economic muscle and they draw up the tax laws to benefit them. We're supposed to have an economy which is based on competition. We don't have that any longer. These conglomerates have taken over and we now need anti-trust action.

The large companies claim their efficiencies benefit consumers. However, while the prices they pay farmers have plummeted, the cost to the consumer for a variety of groceries from milk to cereal, has not reflected plunging commodity prices.

In response to congressional concerns, the Justice Department is reviewing the proposed Cargill-Continental-Grain merger. Senator Wellstone says just as federal officials investigate Microsoft's computer empire out of anti-trust concerns, they also need to look closely at what's happening in agribusiness.

Wellstone: It's kind of like the beginning of the 20th century and they were saying what do we do with this new economy emerging in order to protect the consumers and producers. Finally you had people like Teddy Roosevelt who talked about the need for anti-trust action. Well now this new global economy and the ways in which multinationals have dominated, we have to figure out how the next kind of edifice or structure that protects our consumers.

But agricultural economist Edward Lotterman says even with the recent mergers, there remains significant competition allowing farmers and processors to choose who they want to do business with.

Lotterman: I'd be surprised if we saw this level of consolidation continue. I think we are sort of going through a wave of it now but that we will sort of have a break after this.

And Lotterman says if the giant companies begin to operate as though they have a monopoly by becoming expensive, inefficient and non-innovative; smaller companies will find opportunities to strip business from the conglomerates.

While farmer Bill Sorg thinks his co-op needs to grow to compete with the agribusiness giants, he'd prefer a marketplace of numerous small companies. He thinks the fewer players there are, the more vulnerable the entire industry becomes.

The Cenex Harvest States/ Farmland joint grain venture could be finalized within the next couple of months. If it is, it will take effect this fall. Some view the increased cooperation between the two co-ops as a signal they'll eventually agree to an all-out merger. Cargill and Continental had hoped to seal their proposed merger early this year but the Justice Department review is delaying those plans.

Mark Zdechlik covers business issues for Minnesota Public Radio. You can reach him at mzdechlik@mpr.org.

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