More Price Fixing Scandals to Come, Expert Says
The U.S. Department of Justice is investigating more than two dozen price-fixing cases, many of which involve food additives, feed supplements and vitamins, says a Purdue agricultural economist.
John Connor, an expert on price-fixing cartels, says news about agribusinesses conspiring to set artificially high prices will become more common in the near future.
In 1996, Archer Daniels Midland paid $100 million 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. Also this year, BASF AG of Germany paid $225 million for fixing vitamin prices.
Connor, a Justice Department witness in the price-fixing case against three former Archer Daniels Midland executives, says huge fines and possible felony convictions will discourage conspiracies. The past ADM executives will get three-year prison terms if their appeals fail.
"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."
Connor says the nature of the food additive industry lends itself to price-fixing cartels, because the small number of companies can organize easily. "Many of the production processes are technologically advanced," he says. "So there are just two, three, or four producers worldwide for each of these chemicals."
Adding to the ease of conspiring is that food additives are priced in individual contracts, not the open market. "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," Connor says.
Creation of international trade associations is another cause of price fixing. "Even when they aren't set up for price fixing, the trade associations can reduce uncertainty, which can help establish cartels," Connor says. "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 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 was the 1996 lysine and citric acid case against Archer Daniels Midland. "The lysine cartel was striking in its comprehensive, multinational dimensions," Connor says.
During 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.
ADM pled guilty to fixing lysine prices from 1992 to 1996 and paid $70 million. It also paid $30 million in the citric acid case.
"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 hog farmer who bought 100 tons of lysine-enriched feed per year would have spent about $7,200 for lysine in 1994, or about twice the $3,600 it was worth.
But that wasn't all, Connor says. The inflated lysine prices caused pork prices to rise, so consumers bought 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.