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Market Structure and Competition in the US Food

Industries

Implications for the 2012 Farm Bill

Tina L. Saitone and Richard J. Sexton

This paper examines the potential impacts of several current initiatives to expand regulation of the food industries with the overall goal of increasing competition and commodity prices farmers receive. However, many of these initiatives will probably have the unintended consequence of raising consumer prices and lowering farmers’ prices while reducing the quality and variety of food products available to consumers. Some of this paper’s conclusions include:

1) Congressional initiatives to “manage supply” would be detrimental to US interests: A dairy supply-management program proposal has been introduced in both houses of Congress and is a candidate for consideration in the 2012 Farm Bill. This program would increase consumer prices, increase milk production costs, and diminish US competitiveness in dairy products in the world market.

2) Policies that restrict contract provisions are likely to be counterproductive: Policies that restrict contract provisions, such as the proposed Grain Inspection, Packers, and Stockyards Administration regulations, are likely to backfire because they inhibit markets’ ability to provide the product quality and variety consumers seek.

3) Most processing and retailing firms have an overarching incentive to maintain steady, long-run supplies of farm production to operate their facilities at full capacity: This incentive motivates them to pay competitive prices and resist exploiting short-term market power. Government intervention to promote capacity utilization and reduce market power is therefore unnecessary at best and may well create inefficiencies and increase rather than lower food production costs.

4) Modern food markets increasingly demand product quality in a wide variety of dimensions: Vertical markets from farm to retail have become increasingly coordinated, mostly through contracts, to solve information problems and enable farmers and food processors to meet consumers’ quality demands. Restricting the scope of contracting, as recent proposed regulations would do, is therefore likely to harm both consumers and farmers.

5) The introduction of genetically modified, or transgenic, seeds has led to dramatic increases in concentration in seed markets for major crops, like corn, cotton, and soybeans: Antimonopoly and competition policies should be guided by the objective of maximizing total private incentives for transgenic innovation, not intentionally or unintentionally limiting technical innovation.

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