More price fixing scandals to come, expert saysWEST LAFAYETTE, Ind. -- The U.S. Department of Justice is investigating 30 price-fixing cases, and many of these involve food additives, feed supplements and vitamins, says a Purdue University professor.
John Connor, professor of agricultural economics and an expert on price-fixing cartels, says news about agribusiness price-fixing scandals will become more common in coming months. "We've entered an era when transportation and communication appear to facilitate global price fixing," he says.
In May, the Justice Department secured a $500 million fine against Roche Holding AG of Germany for fixing the prices of vitamins. Also this year, BASF AG of Germany paid a $225 million fine for price fixing of vitamins. In 1996, Archer Daniels Midland paid a $100 million fine for fixing the prices of feed supplements and food additives; also in 1996, Bayer was fined $50 million for fixing the price of food additives.
Connor, who was a witness for the Justice Department in the sentencing phase of the criminal price-fixing case against three former top Archer Daniels Midland executives, says the enormous fines and the threat of felony convictions of corporate officers will dissuade executives from organizing price-fixing conspiracies. Federal sentencing guidelines specify that the former ADM executives will receive three-year prison terms, if their appeals are unsuccessful.
"I think there's going to be a long-lasting deterrent," Connor says. "These companies will find out how much it hurts to have these huge fines, suffer public embarrassment, and see falling stock prices. The news about these cases will lead to greater awareness of these laws."
Price-fixing, a violation of federal antitrust laws, occurs when companies conspire to set an artificially high price for a product.
Connor says the nature of the food additive industry makes it easier to create price-fixing cartels, because the small number of companies makes it easier for them to organize and maintain a price-fixing conspiracy. "Many of the production processes are technologically advanced and make use of the latest biotechnology science," he says. "But to do this on a large scale requires a lot of resources, so there are just two, three, or four producers worldwide for each of these chemicals."
Price fixing of food additives also is easier because a small number of companies means that prices are negotiated via individual contracts, instead of on an open market. "It's the opposite of commodities such as corn and soybeans," Connor says. "You can't go to the newspaper and look up the price of lysine for that day. For soybeans you have a cash market and a futures market, and there's government reporting of prices. It's very difficult to fiddle with the prices when everybody knows what the real transaction prices are."
The recent establishment of international trade associations is a third major cause of price fixing. "Trade associations are often used as a cover for cartels," Connor says. "Even when they aren't set up for price fixing, the trade associations can reduce uncertainty, which can help establish cartels. The European Union has been facilitating the trade associations. These trade associations provide data about their industry to the association members, information such as the exact the size of the market and the growth rate of the industry. That information can lead to a cartel being established, because the companies can extrapolate pricing information from that."
Perhaps the best-known price-fixing scandal in American business involved Archer Daniels Midland, which was prosecuted in 1996 for illegally fixing the prices of lysine and citric acid. "The lysine price-fixing episode was one of the largest, best-documented and most important prosecutions in modern times under the Sherman Act of 1890," Connor says. "The lysine cartel was striking in its comprehensive, multinational dimensions."
Lysine is used as a nutritional additive in livestock feed. During the time of the conspiracy, ADM produced 54 percent of the nation's lysine, and ADM and three Asian companies together produced 95 percent of the world's feed-grade lysine. Annual sales of lysine were as high as $330 million in the United States, and $600 million worldwide.
In October 1996, ADM pleaded guilty to fixing the price of lysine from 1992 to 1996. The Justice Department fined ADM $70 million (plus an additional $30 million for citric acid price fixing).
"Hog and poultry farmers, as well as feed companies, that bought animal feeds containing lysine were harmed by both the higher price of animal feed and lost farm sales," Connor says.
A typical hog producer in the Eastern Corn Belt who bought 100 tons of lysine-enriched feed per year would have bought three tons of lysine. At this rate, the producer would have spent about $7,200 for lysine in 1994, which was an overcharge of approximately $3,600.
But this wasn't the only damage to farmers, Connor says. The artificially inflated lysine prices caused an increase in the price of pork, so consumers purchased less pork. "By my rough estimate, farm revenues from hog sales declined by $15 million to $20 million during the conspiracy," Connor says. He calculates that the producers and feed companies were overcharged a total of $65 million to $140 million during 1992 1995.
Farmers have traditionally been wary of the financial maneuverings of companies, such as ADM, that buy their commodities and sell food products. "There's a suspicion of middlemen, and episodes such as this perpetuate the stereotype," Connor says.
Source: John Connor, (765) 494-4260; firstname.lastname@example.org
Purdue News Service: (765) 494-2096; email@example.com