JOHN M. NANNES
SUBCOMMITTEE ON ANTITRUST, BUSINESS RIGHTS, AND COMPETITION
SEPTEMBER 28, 2000
Good afternoon, Mr. Chairman and members of the Subcommittee. I am pleased to have the opportunity to discuss issues relating to antitrust enforcement in the agricultural marketplace.
We know that the agricultural marketplace is undergoing significant change. Farmers are adjusting to challenges in international markets, major technological and biological changes in the products they buy and sell, and new forms of business relationships between producers and processors.
In the midst of these changes, farmers have expressed concern about the level of competitiveness in agricultural markets. Farmers know that competition at all levels in the production process leads to better quality, more innovation, and competitive prices. They know, too, how important antitrust enforcement is to assuring competitive markets. Enforcement of antitrust laws can benefit farmers in their capacity as purchasers of goods and services that allow them to grow crops and raise livestock and also in their capacity as sellers of crops and livestock to feed people not only in our country but also throughout the world.
The Antitrust Division takes these concerns seriously and has been very active in enforcing the antitrust laws in the agricultural sector. During the past two years alone, the Antitrust Division has challenged a number of significant mergers that would have affected agricultural markets, such as:
During the same period, the Antitrust Division also criminally prosecuted companies that had fixed prices for products purchased by farmers -- lysine and vitamins -- and secured numerous criminal convictions and the highest fines in antitrust history.
These enforcement actions demonstrate that the Antitrust Division is committed to enforcing the antitrust laws in the agricultural marketplace.
In our conversations with farm groups, we have found that farmers are especially concerned about the potential impact of mergers and acquisitions ("mergers"). Farmers are concerned that mergers will limit the number of sellers of seed, chemicals, machinery, and other equipment from whom they have to buy and will limit the number of customers for crops and livestock to whom they can sell. For this reason, I think it may be helpful today to start with a discussion of the Antitrust Division's merger enforcement program, with particular emphasis on recent merger enforcement actions that the Antitrust Division has taken in the agricultural sector.
A. Merger Enforcement Standards
The antitrust laws prohibit the acquisition of stock or assets if "the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly." This enables us to arrest anticompetitive mergers in their incipiency, to forestall harm that would otherwise ensue but be difficult to undo after the parties have consummated a merger. Thus, merger enforcement standards are forward-looking and, while the Antitrust Division often considers historic performance in an industry, the primary focus is to determine the likely competitive effects of a proposed merger in the future.
The Antitrust Division shares merger enforcement responsibility with the Federal Trade Commission ("FTC"), with the exception of certain industries in which the FTC's jurisdiction is limited by statute. The agencies jointly have developed Horizontal Merger Guidelines that describe the inquiry they will follow in analyzing mergers. "The unifying theme of the Guidelines is that mergers should not be permitted to create or enhance market power or to facilitate its exercise. Market power to a seller is the ability profitably to maintain prices above competitive levels for a significant period of time." Merger Guidelines § 0.1.
We ordinarily seek to define the relevant markets in which the parties to a merger compete and then determine whether the merger would be likely to lessen competition substantially in those markets. In performing this analysis, the Antitrust Division and the FTC consider both the post-merger market concentration and the increase in concentration resulting from the merger. The Antitrust Division is likely to challenge a transaction that results in a substantial increase in concentration in a market that is already highly concentrated, although appropriate consideration will be given to other factors, such as the likelihood of entry by new competitors, that could affect whether the merger is likely to create or enhance market power or facilitate its exercise.
In most instances, the Antitrust Division is concerned about the ability of the merging companies to raise above the competitive level the price of the products or services they sell. Of course, it is also possible that a merger will substantially lessen competition with respect to the price that the merging companies pay to purchase products. This is a matter of particular concern to farmers, who often sell their products to large agribusinesses. For a while, there seems to have been some uncertainty about whether the antitrust enforcement agencies take this possibility into account when analyzing mergers. In fact, the Merger Guidelines specifically provide that the same analytical framework used to analyze the "seller-side" will be applied to the "buyer-side":
Merger Guidelines § 0.1. Thus, the Antitrust Division reviews mergers to determine not only whether they pose a competitive threat to persons buying goods or services from the merged entity, but also -- as demonstrated by the Cargill/Continental case -- whether they pose a competitive threat to persons selling goods or services to the merged entity.
While most of the mergers that the agencies review involve horizontal competitors, the agencies also have guidelines on non-horizontal mergers that address the circumstances in which a vertical merger -- a transaction between companies at different levels in the production and marketing process -- may be challenged.
The Antitrust Division and the FTC use a clearance process to work out which agency will review a particular merger. The primary determinant is agency expertise about the product or service at issue, so that a merger will usually be reviewed by whichever of the two agencies is most knowledgeable about the relevant product or service.
We take concentration into account from the beginning of our review. In determining whether or not to conduct an investigation, we consider the pre-merger and post-merger concentration level in the affected markets. In those industries already characterized by high concentration levels, there is a substantially increased likelihood that a proposed merger will be subject to a formal -- and often quite extensive -- antitrust investigation.
The Antitrust Division and the FTC have an array of investigatory tools from which to choose in conducting such an investigation. Parties to most mergers meeting certain size thresholds must provide the agencies with advance notice and observe a waiting period before consummation, during which time the reviewing antitrust agency may obtain relevant information and conduct an investigation. In circumstances in which such notice is not required, the reviewing antitrust agency has other statutory powers for obtaining information.
If the reviewing antitrust agency concludes that the merger is not competitively problematic, the investigation will end and the parties then are generally free to proceed with the merger. However, if the reviewing antitrust agency does not fully resolve its competitive concerns, the agency will identify the nature of its competitive concerns and the parties will have an opportunity to address them. Unless the parties can convince the agency that suit is not warranted, the agency will prepare to file suit to challenge the transaction as originally proposed. Sometimes the parties make a proposal to address the competitive concerns that the reviewing antitrust agency has identified; for example, a merger between multi-product firms may raise competitive concerns with respect to only a subset of their products, in which case divestiture may solve the competitive problem, allowing the parties to proceed with the rest of the merger. There are times, however, when the merging parties' proposed changes to the merger are not enough to solve the problem, in which case the reviewing antitrust agency will challenge the merger and likely seek a preliminary injunction to prevent consummation of the merger while it is being challenged.
As a result of the clearance process with the FTC, the Antitrust Division has investigated the preponderance of mergers affecting agriculture, with a prominent exception being grocery store mergers, which are usually reviewed by the FTC. In the past two years, the Antitrust Division has objected to four significant proposed mergers in agriculture-related industries that we concluded would adversely affect farmers. Each of those transactions was important in its own right, and collectively they demonstrate the Antitrust Division's commitment to enforce the antitrust laws in this vital segment of our economy.
In addition to our merger enforcement program, the Antitrust Division has moved aggressively to prosecute companies that engage in price fixing or allocation of customers. Such conduct willfully subverts the operation of free markets and can cause serious economic harm. It virtually always results in inflated prices to purchasers or depressed prices to suppliers; indeed, that is the very purpose of such conduct.
The key to such illegal conduct is an agreement among competitors. It is not enough for us to show that competitors charged the same or similar prices for a product or service. The Antitrust Division must prove that the competitors agreed upon prices or price levels, or upon the allocation of customers or markets, although we may be able to rely upon circumstantial evidence in order to do so. A company convicted of violating the antitrust laws is subject to substantial fines, and an individual convicted of violating the antitrust laws is subject to fine and imprisonment.
In the past few years, the Antitrust Division has prosecuted a number of cases and secured convictions and multi-hundred-million-dollar fines in various industries that have involved products purchased by farmers. Two prosecutions deserve particular mention.
The Antitrust Division also investigates other forms of business behavior that may have anticompetitive effects. Such conduct may constitute an illegal restraint of trade or unlawful monopolization or attempted monopolization. Conduct that may raise competitive issues of particular interest to farmers include strategic alliances between agribusiness companies, joint ventures among suppliers, and misuse of intellectual property rights.
The Antitrust Division is conducting a number of civil investigations in which we are considering whether conduct is having an anticompetitive impact upon farmers. It we determine that such is the case, we can and will seek appropriate relief under the antitrust laws. Just two weeks ago, for example, the Antitrust Division filed suit to challenge a non-compete agreement between developers of long-shelf-life-tomato seeds because we concluded that the agreement was interfering with the development of new seeds for use by American farmers.
The Antitrust Division has taken additional steps to assure that it is receiving the information necessary to make the best-informed judgments with respect to agricultural antitrust issues.
Last year, the Antitrust Division (and the FTC) entered into a memorandum of understanding with the Department of Agriculture to assure that the agencies would continue to work together and exchange information relating to competitive developments in the agricultural marketplace. As part of this cooperation, the Department of Agriculture has provided significant assistance and expertise in the various agricultural industries that have been the focus of investigation. The Antitrust Division also works with other relevant federal agencies on specific matters of common interest. For example, the Antitrust Division worked closely with the Commodities Futures Trading Commission during the investigation of the Cargill/Continental merger.
Finally, earlier this year, Assistant Attorney General Joel Klein appointed Doug Ross as special counsel for agriculture. This is a newly created position that reports directly to the Assistant Attorney General. In this position, he is assigned to work exclusively on agricultural issues. He has over 25 years of law enforcement experience, both in and outside the Antitrust Division, and has met with and spoken to a number of farm groups both here in Washington and in farm states to explain to them how the antitrust laws work and to ask for their help in bringing relevant information to our attention. Among his particular qualifications for the position is his long-time association with the National Association of Attorneys General. The Antitrust Division has often worked with state attorneys general in trying to ascertain the potential impact of agricultural transactions on local farmers, and his assignment to agricultural matters on a full-time basis ensures that this process will be intensified.
Mr. Chairman and members of the Subcommittee, the Antitrust Division understands the concerns that have been expressed about competition in agricultural markets. We take seriously our responsibility to assure that the antitrust laws are enforced no less vigorously in agricultural markets than in other markets to which those same laws apply. We believe that our record of antitrust enforcement in this important sector of the economy demonstrates that commitment.
I would be happy to respond to whatever questions the Subcommittee may have.