Oh No! The Free Market Is Acting Like a Free Market!

Much has been written lately about how “speculators” might be impacting crude oil markets and other commodities markets, such as corn. Some analysts even told Congress recently that gas prices could go as low as $2 a gallon if Congress acted to limit market speculation.

That sounds more than a little fishy to me. Speculators, like everyone else trading in the market, are trying to make money. That requires that they be correct about their “speculation”; otherwise, they take a bath. Note that speculation is not the same as market manipulation, which is impacting the market through fraudulent activities, like wash trading or false price reporting.

Increased numbers of speculators are driving up prices, but I think that the resulting price increase is primarily the result of a proper market reaction. This all seems analogous to a "value gap" that triggers a leveraged buyout, merger, or tender offer, which leads to a bidding war, ratcheting up the price well beyond the trading price of the stock. (See, for example, the RJR Nabisco sale chronicled in Bryan Burrough and John Helyar’s book, Barbarians at the Gate, subsequently a film starring James Garner).

Quite simply, the market price for oil has been impacted by “new money” interested in the market. Whether it is a hedge fund or pension fund or other investors moving to the market because of the decline of the dollar and rising inflation, there are additional market participants that have joined the fray. But this is not inherently a bad thing. There are just some new people who think the commodities are worth more than the market reflected in the past. But these speculators need to be “right” for the market to stay at these levels. Just ask Time Warner about that purchase of AOL, or Mortimer and Randolph Duke.

This is not to say that sky-high prices in both fuel and food markets are not a concern. Rather, we need to stop focusing on speculators and market manipulators as the primary cause, and look deeper into how current policies create the markets themselves. Market regulators can and should look for those defrauding or cheating the market. Congress, on the other hand, should be looking at the markets themselves, rather than complaining about a (relatively) free market acting like a free market.

If Congress is going to fix the problem, the focus needs to be on figuring out how to reduce our use of and reliance on foreign energy, improve gas mileage and use of other fuel sources for vehicles, expand energy-efficiency measures in homes and businesses, and promote sustainable activities in farming and energy production. But then, this is a lot more work, for a lot less media coverage, than complaining about rogue speculators.

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Manipulating Market Manipulation

The U.S. Commodity Futures Trading Commission (CFTC) recently announced that it would be investigating agriculture futures markets, “including the lack of convergence between the futures and cash prices, the impact of higher margin requirements, and the role of speculators and commodity index traders.” This comes on the heels of last month’s unusual revelation that, "because of today’s unprecedented market conditions," the CFTC was six months into an investigation of U.S. oil markets, focusing largely on possible price manipulation.

The CFTC, FTC, SEC, FERC, and other agencies all have a role in monitoring and/or investigating price manipulation, and any time markets boom or bust regulators are likely to take notice. And high prices in oil and agriculture sectors very well may have been made even higher by market manipulators. However, the fact that agriculture prices are soaring at the same time crude oil prices are skyrocketing should be of little surprise.

It seems to me an awful lot of time is being spent “looking” for market manipulators instead of looking at the policies impacting the markets themselves. Ethanol mandates, increased worldwide demand for oil and food, and a falling dollar all are having more impact on the markets than are market manipulators.

I am all for catching cheaters, and I am confident there are more than a few, but I fear all this talk of market manipulation will artificially inflate the role of unscrupulous investors in causing the rise of high food and fuel prices when large-scale U.S. and global food and fuel policies should be under the microscope. I suppose, as usual, only time will tell.

Tyson Sues USDA

In a new development in the “raised without antibiotics” chicken saga, the Wall Street Journal reported today that Tyson Foods has filed suit against the USDA, claiming itself to be the “victim of flawed regulatory procedures.”

The background on this issues was explained in an earlier post, Twists and Turns: Tyson’s Raised Without Antibiotics Claim.

As noted, the USDA recently learned that Tyson was using the antibiotic Gentamicin to prevent illness and death in its chicks, and as a result rescinded its approval of Tyson’s “raised without antibiotics” label.

Although Tyson initially said it was voluntarily withdrawing its label, it is now arguing that the USDA decision to rescind their approval was “arbitrary and capricious.”

The antibiotic is used in the Tyson hatcheries two or three days prior to the chicks hatch. Tyson argues that what happens prior to hatching is not part of “raising” the chicken. Instead, as the Journal reports, “Tyson says the correct interpretation of the word ‘raised’ should mean ‘the period between hatching and slaughter.’”

Tyson argues that inoculating the chicks “in ovo” is consistent with the claim because they have not hatched yet.

In a related development, the California law firm of Girard Gibbs is conducting an investigation on behalf of consumers who purchased Tyson chicken advertised or labeled as “raised without antibiotics.” Presumably this is in anticipation of a class action lawsuit.

The $4 barrier and rural America

As reported in the New York Times, the breaking of the $4/gallon barrier for gasoline is taking an extraordinary toll on rural America:

Tchula, Miss. — Gasoline prices reached a national average of $4 a gallon for the first time over the weekend, adding more strain to motorists across the country.

But the pain is not being felt uniformly. Across broad swaths of the South, Southwest and the upper Great Plains, the combination of low incomes, high gas prices and heavy dependence on pickup trucks and vans is putting an even tighter squeeze on family budgets.

Here in the Mississippi Delta, some farm workers are borrowing money from their bosses so they can fill their tanks and get to work. Some are switching jobs for shorter commutes.

People are giving up meat so they can buy fuel. Gasoline theft is rising. And drivers are running out of gas more often, leaving their cars by the side of the road until they can scrape together gas money.

The disparity between rural America and the rest of the country is a matter of simple home economics. Nationwide, Americans are now spending about 4 percent of their take-home income on gasoline. By contrast, in some counties in the Mississippi Delta, that figure has surpassed 13 percent.

As a result, gasoline expenses are rivaling what families spend on food and housing.

“This crisis really impacts those who are at the economic margins of society, mostly in the rural areas and particularly parts of the Southeast,” said Fred Rozell, retail pricing director at the Oil Price Information Service, a fuel analysis firm. “These are people who have to decide between food and transportation.”

Some longstanding staples of agricultural economics warrant reexamination as rising fuel prices squeeze rural consumers:

1. The concept of the price squeeze is known throughout many sectors of industrialized economies. The agricultural variant is often called "the agricultural treadmill" — farmers, as it were, sell at wholesale but buy at retail. The diversification of rural economies hasn't so much softened the blow as spread the pain to all residents. Everyone is feeling the squeeze of lower returns on rural labor, coupled with higher retail prices on consumer goods across the board.


2. Engel's law holds that as a consumer's income rises, the proportion of that income spent on food declines. In other words, demand for food is relatively inelastic, and relative to other goods, food is an inferior good.
   
   Substitute fuel for food in Engel's law, and the relationship still holds. Raising the price of food or fuel is tantamount to exacting a very regressive tax, whose impact falls most heavily on the poor.


3. Old-time agricultural economics stressed parity, the goal of maintaining farmers' purchasing power relative to a historic baseline. If one unit of agricultural output used to purchase a certain level of consumer goods, then parity prescribes price and/or income supports designed to maintain rural purchasing power at that level as consumer prices rise. A broader notion of parity in diversified rural economies would extend the concept to nonagricultural workers in rural communities.


4. Speaking of conventional farm policy, federal commodity programs since the New Deal have striven to prop up commodity prices in order to raise farmers' incomes. Commodity prices have skyrocketed, and the result, for large swaths of the rural population, is misery. Rural economic welfare has long rested on pillars besides farm incomes.


5. Transaction cost analysis, the heart of economic analysis of law, still matters. The naked, awful truth is that basic geography is driving economic distress in rural communities: greater distances demand more fuel, and fuel is costing more in relative and absolute terms.

Supreme Court decides Quanta

The Supreme Court just handed down its decision in Quanta Computer Inc. v. LG Electronics Inc., 06-937. The Court ruled 9-0 in favor of Quanta ruling that method patents are subject to exhaustion, and that the patents had been exhausted in this case. The opinion is here. It will be interesting to see how this decision plays out in the agbiotech context. Croplife International, BIO and the American Seed Trade Associations all filed amicus briefs urging the court to decide the case in a fashion that did not raise questions about the licensing agreements used in the agbiotech context. Given the Court's fairly sweeping language and unanimous opinion, I imagine there are some very anxious patent holders in agbiotech land this afternoon.

Twists and Turns: Tyson's "Raised Without Antibiotics" Claim

Last week, Tyson Foods pulled the plug on its "raised without antibiotics" marketing campaign, ending a year long struggle involving Tyson, its competitors, the FDA, the USDA, the FTC, and a district court in Baltimore. Although along the way, the struggle seemed to involve nuances of scientific classification and the wording of Tyson's claims, the proverbial final straw came with the USDA discovery that Tyson was still using antibiotics to prevent illness and death in its chicks.

The widespread use of antibiotics in animal production has long been known to contribute to the development of antibiotic resistant bacteria. The FDA has been slow to react, but has gradually restricted the use of certain antimicrobials in animal production, thus saving the effectiveness of certain drugs for treatment of human disease. The recently released Pew Commission on Industrial Farm Animal Production called for strong actions to limit antibiotic use.

And, as early as 2002, it was reported that the market leaders in the poultry industry had begun to transition from the use of antibiotics that were also used by humans, instead using drugs that were not needed for human treatment. Tyson was at the forefront of this transition.

In June of 2007, Tyson took this a step further and combined it with a major marketing strategy focused on the advertising claim that its chickens were "raised without antibiotics." The $16 million campaign included new packaging and advertisements in print, on the radio, on billboards, and on television. The strategy was very successful, and Tyson received praise from consumer advocates for their efforts.

However, two problems surfaced.

First, Tyson still used ionophores in its chicken feed as a disease-prevention mechanism. Tyson claimed that ionophores are not antibiotics. USDA initially seems to have agreed, approving the label but then reconsidered and rejected it. The USDA and Tyson eventually agreed on a modified label that stated "raised without antibiotics associated with human resistance."

Second, several other poultry companies cried foul. They said Tyson's claims constituted false advertising because ionophores are antibiotics and because the claim implied that Tyson's products were safer than theirs. They argued that most other poultry companies have also switched to using ionophores. In late April, U.S. District Judge Richard Bennett issued a preliminary injunction and set a May 15 deadline for Tyson to stop from running any of the "raised without antibiotics" advertisements.

The lawsuit did not involve the actual product labels, evidencing the confusing split between labeling and advertising, with the former regulated under food safety laws by the FDA and USDA and the latter regulated as false advertising under the Lanham Act and regulated by the FTC.

Then, the final chapter. Last Monday, Tyson Foods announced :

Due to uncertainty and controversy over product labeling regulations and advertising claims, Tyson Foods, Inc. (NYSE: TSN) has notified the USDA it is voluntarily withdrawing its qualified Raised Without Antibiotics chicken label. In addition, company officials have asked the USDA to consider initiating a public process to bring more clarity and consistency to labeling and advertising rules involving antibiotic-related product claims and all raising claims in general.

Not included in its announcement, however, was mention of the fact that the Food Safety and Inspection Service (FSIS) of the USDA issued a letter to Tyson that same day rescinding its label based on a new fact that they had discovered -

"FSIS is required to ensure labels are not false and misleading. In December 2007, FSIS approved the qualified raised without antibiotics label based on information provided by Tyson Foods, Inc.

"The label is being rescinded based on additional information provided to FSIS only after the qualified claim had been approved.

"Specifically, FSIS found that they routinely used the antibiotic Gentamicin to prevent illness and death in chicks.

"Because of this information, FSIS notified Tyson Foods, Inc. that the company must stop using the qualified raised without antibiotics labels, or any variation of a "Raised without antibiotics" claim by June 18.

Perhaps the hearings referenced will be held and if so, perhaps they will help to bring clarity and transparency to this issue. Consumers have a right to accurate labeling that they can understand and rely on. However, one way or another, it is hoped that the meat industry will continue on the path toward the reduced use of antibiotics in production agriculture.

[Note: an anonymous commenter complained about my reference to the complexity of this issue; I have since amended my wording to more accurately reflect my conclusion.]

The Enron of Farming?

As noted earlier today, the New York Times reports that investment funds and large private investors are flocking to food-production-related infrastructure, including “farmland, fertilizer, grain elevators and shipping equipment.” Investors claim that they will benefit “everyone,” because the new capital resources will lead to new infrastructure investment. However, there are those who are concerned that financial investors will be able to put their “put their thumb on the supply-demand scale by holding back inventory to move prices artificially.”

Any time I hear claims of Pareto-like market improvements, especially when new technologies are not part of the equation, I am skeptical. In this case, the new investment is related primarily to a belief in the market’s potential, and not deregulation, but the new investors in the article sound an awful lot like those who pushed for deregulation of the California electric markets and repeal of the Public Utility Holding Company Act (PUHCA). That should raise a few eyebrows.

Why? Well, Enron, for one, found that holding back electricity (by artificially cutting production) could be extremely lucrative. And with Enron, that kind of market manipulation was illegal. To my knowledge, there are no requirements that owners of grain ever sell their commodities. Such owners could legally and legitimately (if not morally) hold back their inventory until the market price was more appealing.

This risk always existed, but smaller farms probably did not have the same ability to "game the market" for long periods of time. It is true that there were already some large players in agriculture (see, e.g., Cargill and ADM), but now that farming is a major component of both food markets and energy markets, consumers and regulators have every reason to be on high alert.

Perhaps these new large investors will “bolster food production at a time when the world needs more of it,” but I rather doubt it, especially in the near term. If recent new investors in the energy industry are any indication, the new investors clamoring to get into the market are looking for ways to maximize wealth with current production, not build new infrastructure. These new financial investors are simply looking for ways to hedge their bets, not increase production. Perhaps this kind of market activity would eventually lead to more and better infrastructure, and thus increased food production. In the near term, though, the only beneficiaries will be the investors themselves.

New York Times Series "The Food Chain"

The New York Times Business page website provides a helpful overview and supplement to its series, The Food Chain. As reported here, this series addresses “the growing demands on, and changes in, the world’s production of food.” In addition to the articles, the site links to the variety of multimedia resources available on this important topic.

Food Is Gold, and Investors Pour Billions Into Farming
By DIANA B. HENRIQUES
The most recent article, June 5 reports on private investment in agriculture worldwide. "Some private investors are starting to make long-term bets that the world’s need for food will greatly increase — by buying farmland, fertilizer, grain elevators and shipping equipment."

Previous articles:

World’s Poor Pay Price as Crop Research Is Cut
By KEITH BRADSHER and ANDREW MARTIN
Agricultural research is reduced even as the growth of the global food supply slows and the population increases.
May 18, 2008 Business Series

Shortages Threaten Farmers’ Key Tool: Fertilizer
By KEITH BRADSHER and ANDREW MARTIN
Shrinking grain stocks and an increasing appetite for meat have collided with a shortage of fertilizer.
April 30, 2008 Business Series

Environmental Cost of Shipping Groceries Around the World
By ELISABETH ROSENTHAL
Never has food moved around the world at the speed or in the amounts it has over the last few years. Now, many say it is time to make shippers and shoppers pay for the resulting pollution.
April 26, 2008 Business Series

Price Volatility Adds to Worry on U.S. Farms
By DIANA B. HENRIQUES
Wild swings in crop futures are damaging mechanisms that are supposed to cushion the jolts of farming.
April 22, 2008 Business Series

A Drought in Australia, a Global Shortage of Rice
By KEITH BRADSHER
The collapse of Australia’s rice production may foretell some of the effects of global warming on agriculture.
April 17, 2008 Business Series

As Prices Rise, Farmers Spurn Conservation Program
By DAVID STREITFELD
Farmers are taking their fields out of a government conservation program that pays them not to cultivate.
April 9, 2008 Business Series

A Global Need for Grain That Farms Can’t Fill
By DAVID STREITFELD
When much of the country is contemplating recession, farmers are flourishing because of runaway demand.
March 9, 2008 Business Series

A New, Global Oil Quandary: Costly Fuel Means Costly Calories
By KEITH BRADSHER
Demand for biofuels has created tension between using land to produce fuel and using it for food.
January 19, 2008 Business Series