Extension Communications
3614 Administrative Services Building
Ames, Iowa 50011-3614
(515) 294-9915
1/21/99
Contacts:
Marvin Hayenga, Department of Economics, (515) 294-6348
Robert Wisner, Extension Economics, (515) 294-6310
Elaine Edwards, Extension Communication Systems, (515)
294-5168
Cargill's Purchase of Continental Grain's Merchandising Business has Pros, Cons
AMES, Iowa -- Many farm organizations, other participants in the industry, regulators and policy makers have expressed concerns about Cargill's acquisition of Continental Grain's Grain merchandising business. Iowa State University agricultural economists Marvin Hayenga and Robert Wisner recently completed a paper on the proposed acquisition.
"The largest grain exporter acquiring the second largest exporter has raised some concerns regarding potential loss of competition, but also may make these firms with excess capacity more efficient and effective in competing for a larger U.S. share of the world market," said Hayenga. "This paper pulls together the relevant data and provides some analysis as the pros and cons of this acquisition are debated."
The complete paper is available on the world wide web on the ISU Extension Homepage at http://www.exnet.iastate.edu or at http://isufarmeconomyteam.org under Current Information.
This quick study by Hayenga and Wisner offers the following insights:
* Concerns regarding loss of competition are prompted by Cargill's acquisition of its largest competitor in grain exporting. Together, they account for roughly 35 percent of U.S. corn, soybean and wheat volume, with a higher corn export market share.
* The grain and oilseed markets are national in scope, for U.S. antitrust analysis, and international in scope as well.
* Most port elevator facilities are relatively concentrated with a small number of owners, though the largest-volume locations like the Gulf have a large number of competitors. The "dying" Chicago grain export elevator business declined from two competitors to one due to the acquisition. This could be a temporary problem due to its still being a Chicago Board of Trade (CBOT) delivery point until the end of 1999. Next year, the new CBOT corn and soybean futures contracts will be in use. Another delivery point --Toledo -- is dominated by a Cargill/The Andersons joint venture. This still may be a problem for the CBOT wheat contract in 2000. A new CBOT wheat contract had not yet been approved in mid-January, but was expected to retain Chicago, Toledo and St. Louis as warehouse delivery locations.
* Most river terminal locations were affected very little by the Cargill acquisition. The Northern Illinois River, the new CBOT delivery location for corn, now will have two firms accounting for more than 80 percent of the barge-loading elevator storage capacity after the acquisition. Excess capacity by smaller elevator competitors, other processor, feed company, etc., competitors in the market and ease of entry might ease concerns about excess market power in this regional market. The CBOT may need to expand its corn and wheat delivery areas to avoid perception of risk of manipulation by the largest companies there.
* Since there are numerous competitors buying grain from farmers in most areas, the acquisition in most cases probably will make little difference in local competition for farmers' grain.
* The better utilization of excess capacity and likely cost reductions in the grain merchandising system 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 potential efficiency gains and improved ability to serve the changing demands of farmers and customers make Cargill and the U.S. grain merchandising industry more effective competitors in the rapidly changing world market? Or will the further consolidation of the industry into fewer hands in important export and river terminal markets reduce competitiveness significantly in this very important marketing system? Some economists have argued that there are many competing uses and markets for grain in the United States and overseas to keep markets sufficiently arbitraged.
"The dynamic changes in the world seed and grain production and marketing system which have been occurring and appear on the horizon (related to biotechnology) are likely to transform the system from the 'commodity' orientation to a specialty (value-added trait) product system over the next decade or two," said Hayenga and Wisner.
The acquisition raises other questions, the economists said. Is it likely to play a useful role in positioning this company and the U.S. industry as a more efficient and effective competitor for U.S. farmers' grain, and for customers in the U.S. and world markets? Does it harbor some limitations on industry competitiveness in the short run which need to be remedied before the acquisition is approved by the U.S. Department of Justice?
"We hope the data and analysis provided here will contribute to an informed dialog and debate," the authors said.
ml: imajor, isufarm
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