DJ WSJ(9/23) Federal Prosecutors Probe Food-Price Collusion
(From THE WALL STREET JOURNAL)
By John R. Wilke
Federal prosecutors have opened separate criminal probes into possible
price-fixing by major egg producers and California tomato processors, the
latest in a series of U.S. investigations of alleged collusion in food and
agriculture.
The investigations, which have not been previously reported, add to concerns
that beyond the rising cost of fuel and feed, a hidden factor may be driving
food prices higher: collusion among farmers, food processors or exporters.
A Justice Department official confirmed that it had opened investigations
into tomatoes and eggs. Federal agencies already are pursuing criminal or civil
inquiries in markets including fertilizer, cheese and milk, examining whether
suppliers worked in league to manipulate prices. The Justice Department said it
had also opened a probe last year into the citrus-fruit industry.
Higher food prices have become a hot issue in the presidential campaign and a
rising source of anxiety in the global economy. In part, prices have climbed in
response to rising world demand in places such as China and India, as well as
drought and energy costs. But years of unrestrained consolidation among food
producers may have had an impact as well, diminishing competition in many
markets.
“When big guys get bigger, it makes collusion easier,” said Peter Carstensen,
a University of Wisconsin law professor who has testified in Congress on
competition in the food industry.
Under U.S. law, it’s a crime for competitors to collaborate on production or
prices. However, many farm groups and cooperatives are allowed to work together
under antitrust exemptions such as the 1922 Capper-Volstead Act. The act, one
of a web of loopholes carved out over the years, was originally meant to help
small farms bargain with big processors. Egg and tomato producers say their
cooperation is shielded by these exemptions. In stepping up enforcement in
food, prosecutors are signaling a new willingness to test these exemptions’
limits.
In the tomato-industry probe, a federal grand jury in Sacramento, Calif., has
issued subpoenas, and Federal Bureau of Investigation agents are interviewing
executives of big California tomato processors, lawyers close to the case said.
The officials are trying to determine if dominant processors of tomatoes for
canning, ketchup, salsa and sauces conspired to fix prices, these people said.
The tomato probe grew out of an investigation into allegations that a
consultant to a big processor, SK Foods Inc. of Lemoore, Calif., was working
with SK to bribe buyers at six major food companies to pay inflated prices for
tomato paste and chili peppers. In wiretaps and raids carried out as part of
the bribery probe, investigators found evidence of the wider price-fixing
conspiracy, according to FBI documents filed in federal court in Sacramento.
A lawyer for SK Foods declined to comment on the bribery case or collusion
inquiry but said the company is cooperating with investigators. The lawyer,
Brian Maschler, said SK and other processors disbanded their industry
organization, the California Tomato Export Group, in May shortly after the FBI
raided several tomato processors. He said that while its members believed the
group was exempt from antitrust law, “we wanted to avoid even the appearance of
anything improper.”
Tomatoes are among the big price gainers in the past year, notwithstanding
this summer’s scare — false, it turned out — that fresh tomatoes could be
tainted with salmonella. Tomato prices rose 16% in the year ending in August,
while food prices overall rose about 6%, according to the Bureau of Labor
Statistics.
In an unrelated probe, the three largest U.S. egg processors also have
received grand-jury subpoenas. The criminal investigation is focused on the
pricing and marketing of egg products, such as liquid and powdered eggs,
lawyers and industry executives said.
Golden Oval Eggs LLC, Michael Foods Inc. and MoArk LLC, a unit of Land
O’Lakes Inc., have each confirmed that they received subpoenas, sent by the
U.S. Attorney in Philadelphia, covering the years 2002-08. Golden Oval said it
is cooperating with the U.S. inquiry; MoArk also is cooperating and noted that
it sold its egg-processing business but remains in fresh eggs.
A Michael Foods executive also declined to comment and said the company is
responding to the government’s requests. Michael Foods of Minnetonka, Minn., is
the world’s largest egg processor, with 2007 sales of $1.6 billion. Its
products end up in hundreds of prepared foods from pasta to pancake mix.
The Justice Department wouldn’t disclose how it believes processors
manipulated the prices of egg products. There’s no indication that the
department is looking into the larger market for fresh eggs, where prices have
increased more than 40% in a year.
But producers of fresh eggs have coordinated their efforts to raise prices,
according to industry participants and a Wall Street Journal review of industry
documents.
Fresh-egg farmers acted together through a series of export shipments,
organized by United Egg Producers, an industry cartel whose 250-plus members
include virtually all of the nation’s big egg producers. By removing a small
fraction of eggs that would have been bound for U.S. sales and arranging
instead for their export, United Egg helped tighten domestic supply and drive
up the price of eggs across the country, according to newsletters and other
documents that United Egg sent to its members.
After three years without significant exports, United Egg shipped nearly 100
container loads, or 24 million dozen fresh eggs, to Europe and the Middle East
at the end of 2006 and early 2007, industry participants say. Each member was
required to provide a share of the sale, prorated by flock size. The orders
were sold at below the prevailing U.S. price for fresh eggs, United Egg said.
The industry group itself credited the campaign with helping to boost
domestic egg prices, which rose more than 40% in the next year. Gene Gregory,
the Georgia-based group’s executive director, said export orders amounted to
less than 2% of industry output. “But it is amazing how one or two percent can
have an effect on the rest of your domestic price,” he said.
Egg prices began to soften in March 2008. United Egg put together another
export order. It sent 100 container loads, this time to buyers in Japan and
Iraq, again selling them at well below the domestic price. U.S. egg prices shot
up again in the summer. United Egg says it is in the process of shipping 120
more container loads.
The U.S. Agriculture Department’s chief economist said that while higher feed
costs have played a part in lifting egg prices, the primary causes for price
DJ WSJ(9/23) Federal Prosecutors Probe F… - Part 2
rises through 2007 and into 2008 were limited production and tight supply.
“In 2007, table-egg producers cut production,” a decision that predated the
run-up in feed costs, the Agriculture Department economist, Joseph Glauber,
said in congressional testimony in May. “In 2007, the wholesale price for a
dozen Grade A large eggs in New York averaged $1.14 per dozen, 43 cents higher
than the previous year,” Dr. Glauber testified.
The exports followed a previous effort by United Egg to limit supply by
pressing members to cut the size of their flocks. In 2004, according to members
and internal documents, the group pressed its members to increase the sizes of
their hen cages, a response to the growing number of producers advertising
“cage free” eggs and the threat by some states to introduce new
animal-treatment rules.
But bigger cages also mean farmers can keep fewer hens in the same space.
United Egg warned its members not to build additional cage capacity to make up
for these flock reductions, according to its internal newsletters. Producers
that raised flock size risked being removed from United Egg’s “animal-care
certified” logo program.
Mr. Gregory, the United Egg executive, said that the program “was not done to
raise prices. We phased in these cage-size restrictions over several years to
avoid market disruptions.”
Before United Egg’s export initiative and the industry’s flock reductions,
the egg industry had a boom-and-bust history of profit and overproduction.
The industry leader, Cal-Maine Foods Inc., of Jackson, Miss., has enjoyed
sharply higher share prices and profit in the past two years. In the year ended
July 28, it reported that higher egg prices helped push net income to $152
million, from $37 million a year earlier. Its shares traded as high as $48.80
in August. Cal-Maine shares have slipped recently, to $40.36, still well above
the August 2006 price of $7.42.
“Greece had its Golden Age . . . and now the U.S. egg industry is having its
turn,” Watt’s Egg Industry newsletter boasted in its February edition. “Egg
prices have soared at historic highs through months in which producers usually
hold on for dear life.”
United Egg says its collective actions, including exports handled by a United
Egg affiliate, are shielded from antitrust law under the Capper-Volstead Act.
But its efforts to raise U.S. prices could lead to new scrutiny of exemptions
from Congress and regulators.
Farmers are a powerful political voice, and the exemptions aren’t likely to
be repealed. But the latest food-industry investigations show that antitrust
enforcers are increasingly willing to challenge the co-ops they allege have
overstepped the spirit of the law. A presidentially appointed commission last
year raised questions about whether such exemptions still efficiently served
the purpose of helping small farms.
“Some of these exemptions have outlived their usefulness” given vast changes
in the economy, said David Wales, competition chief at the Federal Trade
Commission, which shares antitrust enforcement with the Justice Department.
Without referring to a specific case, he added: “If businesses are going to use
one of these narrow exemptions to engage in anticompetitive conduct, we’re
going to take a hard look at that.”
DJ WSJ(9/23) Federal Prosecutors Probe Food-Price -2-
Investigators are also looking into alleged efforts by the Dairy Farmers of
America to restrict competition, lawyers close to that case say. The big dairy
cooperative is also under investigation by federal regulators for alleged
manipulation of cheddar-cheese futures prices in the Chicago Mercantile
Exchange.
The Justice Department official declined to comment on the dairy industry.
The dairy cooperative says it hasn’t violated antitrust law and is cooperating.
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