Concentration and Power in the Food System

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Philip H. Howard. Concentration and Power in the Food System. London: Bloomsbury, 2016

If you bought any margarine recently, you probably bought it from Unilever or ConAgra, which together control 68% of U.S. sales. The label might have said Promise or I Can’t Believe It’s Not Butter, but what you can believe is that those are made by Unilever. Or it might have said Parkay or Blue Bonnet, but you can bet your bonnet those are made by ConAgra. In many parts of our food system, we have an illusion of more competing brands than there really are.

Forty of the world’s five hundred largest companies by market capitalization are in the food business. They include such firms as Nestle, Coca-Cola, Anheuser-Busch, PepsiCo and Unilever in packaged foods and beverages; Walmart, McDonald’s, Starbucks, Costco and Woolworths in food retailing; and Bayer, BASF, Caterpillar, DuPont, Monsanto and Dow in agricultural inputs. Nearly half of these forty companies are headquartered in the United States.

Howard describes the food system as “an hourglass-shaped system, with a large number of farmers at the top, an even larger number of people who eat food at the bottom, but a much smaller number of firms in the middle that control how food is moved from producers to consumers.”

Capital as a mode of power

Howard’s book offers a perspective on the food system that is a little different from that of mainstream economics. Most economists think of capitalism as a mode of production, where an increase in economic concentration usually represents an increase in the efficiency of production. Bigger companies win out because of economies of scale: they can produce or distribute the most at the least cost, which is good for consumers. Howard is skeptical of this conventional wisdom:

Mainstream economists tend to view concentration as unproblematic, due to a strong abstract belief in economies of scale, despite insufficient empirical evidence to support these supposed efficiencies (Johnson and Ruttan 1994; DiLorenzo 1996). Consumers are often claimed to benefit from synergies and lower transaction costs that are expected to result from mergers and acquisitions (Farrell and Shapiro 2001). Because of their organizational complexity, however, many large firms actually encounter diseconomies of scale and experience a loss of efficiency with increasing size.

I would have appreciated a more detailed discussion of the research bearing on this crucial point.

What Howard stresses is not the efficiency that may come with larger size, but rather the power. Even if a dominant firm can operate more efficiently, it doesn’t necessarily have to pass the benefits on to consumers or workers. The more it dominates the market, the more it can use its market power to keep prices high and wages low.

Howard bases his perspective especially on Jonathan Nitzan and Shimson Bichler’s perspective in Capital as Power. In this view, corporations are primarily seeking to increase their capitalization. “Technically this is calculated as the firm’s current share price multiplied by the number of shares outstanding, but it can be viewed as an estimate of the future stream of earnings in present values while adjusting for perceived risks.” Increasing capitalization “requires active efforts to restructure markets and society in ways that increase their power, including encouraging increased consumption of their products and sabotaging potential alternatives, particularly those that would allow people to be more self-reliant.”

This perspective takes us beyond economics narrowly defined and into the realm of political economy or economic sociology. It is interested not only in the workings of the economy itself, such as pricing mechanisms, but the workings of many interconnected institutions, especially the interaction between economic organizations and agencies of government. Being big enough to influence government policy for their own benefit is one of the main reasons corporations want to accumulate power.

Impacts of economic concentration

Americans have long believed in the benefits of market competition and worried about the domination of markets by a small number of large corporations. In practice, we have outlawed monopolies but tolerated quite a bit of oligopoly. The most obvious result of oligopoly is the ability of the largest firms to negotiate from strength when setting prices. Their aim is usually to keep the prices of their products high, those of their suppliers low, and the price of labor (wages) low as well. Their methods are usually subtle enough to avoid being charged with illegal price-fixing:

In order to raise consumer prices, it is not necessary for executives to gather in one room and conspire to achieve these markups. When just a few firms control a large share of the market, they can simply indicate their intention to raise prices, and the others will benefit by following suit, a strategy that is called price signaling (Baran and Sweezy 1966). Oligopolistic firms can more easily pressure each other to avoid price wars that would lower their profits. The result is an unwritten rule that rivalries based on advertising, product differentiation, and reducing labor costs are expected, but competing on price is unacceptable.

Another likely result of oligopoly is a reduced incentive to innovate, since companies facing less competition may be able to retain market share without bearing the costs and risks of innovating. Concentration limits choice and makes consumers more dependent on a few companies, even if their products are not as advanced as they could be.

Oligopolistic firms are also in a stronger position to impose costs on society such as environmental damage or threats to human health. These are very big issues in the production and consumption of food.

Feedback loops

The capitalist food system is very dynamic, with complex feedback loops affecting whether and where firms can continue to increase market share. Positive feedback reinforces the power of the dominant firms. “As they increase their power they accrue even more advantages, which then reinforce their ability to restructure society.” Big firms become even bigger through reinvesting profits in internal growth, acquiring other companies through mergers and acquisitions, demanding more favorable prices for goods and labor, or obtaining government subsidies.

However, positive feedbacks:

…are unlikely to continue indefinitely and some may already be approaching limits or asymptotes that threaten to undermine the stability of the entire system (Bichler and Nitzan 2012). As firms move closer to these limits, the negative feedbacks increase, which require more force to counter, further accelerating the feedbacks.

One kind of negative feedback is social resistance in the form of public opposition to low wages, high prices, environmental damage, or unhealthy foods. There are also natural limits, such as “dwindling supplies of fossil fuels, key fertilizers, pollinating species, water, and fertile soil, as well as increased possibilities of climate change, severe weather, pests, and disease.” Clearly these can be threats to the market share of particular firms, at least in the short run. What remains to be seen is whether they will force a reorganization of the food system that undermines the concentration of capital itself. Howard would no doubt welcome that, but he does not argue strongly that it will happen.

Howard devotes an entire chapter to one noteworthy form of resistance, the organic food movement. In 1990,Congress authorized the U.S. Department of Agriculture to develop standards for organic foods. After about ten years of study, USDA published a standard that limited the organic label to foods free of genetic engineering, irradiation, sewage sludge, synthetic pesticides and fertilizers, growth hormones and antibiotics. The standards were not as strict as many organic producers wanted, but they did define a market that companies such as Whole Foods could see as an opportunity. They capitalized on it (literally), while food co-ops that had sprung up by the thousands in the 1970s declined to only a few hundred. Big companies adopted some healthier practices in at least a part of their operations. But they also worked behind the scenes to keep standards weak, while dominating the market to the detriment of small producers and marketers with higher standards. The latter were caught between the desire to maintain their standards and the economic incentives to give up and sell out to larger companies. Some have rejected the organic label itself as no longer meaningful and worked to develop more demanding forms of certification.

While acknowledging that “challenges to…negative impacts on human health, the environment, animal welfare, and labor practices…have experienced some successes,” Howard concludes that “resistance to dominant food and agricultural firms’ efforts to increase their power may have changed some of the strategies they use but…failed to reverse trends toward increasing their market share.”

Later posts will examine different parts of the food system in more detail.

Continued

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