Price and Income Dynamics in the Agri-Food System: A Disaggregate Perspective

Baines, Joseph Doctoral Thesis Price and Income Dynamics in the Agri-Food System: A Disaggregate Perspective Provided in Cooperation with: The Bichler & Nitzan Archives Suggested Citation: Baines, Joseph (2015) : Price and Income Dynamics in the Agri-Food System: A Disaggregate Perspective, The Bichler and Nitzan Archives, Toronto, http://bnarchives.yorku.ca/437/ This Version is available at: https://hdl.handle.net/10419/157992 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by-nc-nd/4.0/ i Price and Income Dynamics in the Agri-Food System: A Disaggregate Perspective Joseph Stanislaw Baines A DISSERTATION SUBMITTED TO THE FACULTY OF GRADUATE STUDIES IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY GRADUATE PROGRAM IN POLITICAL SCIENCE YORK UNIVERSITY TORONTO, ONTARIO February 2015 ii Abstract This dissertation seeks to illuminate contemporary processes of redistribution in the agri-food sector, with particular reference to the US. It addresses the following questions: How has the rapid rise in food price instability since the turn of the twenty-first century impacted income shifts within the agri-food system? Which groups within agriculture and agribusiness benefit from high and volatile food prices and which groups have suffered amid the tumult? Are all of these groups 'price-takers' that simply respond to price signals? Or are some of them 'priceshapers' that, with varying degrees of success, actively seek to restructure the agri-food system, and the regulatory architecture that governs it, in ways that make certain price developments more likely? Hitherto, there has been little in the way of sustained analysis of the connections between prices, power and redistribution in the agri-food system. The dissertation addresses three approaches that offer some perspective on the redistributional-power dynamics of agricultural commodity price movements: global value chains analysis, the food regime approach and the emergent international political economy literature on post-crisis commodity derivatives regulations. As the thesis argues, although these approaches offer important qualitative insights, they have yet to offer quantitative means of gauging the power-shifts between different agricultural and agribusiness groups and their connection to price-shifts between different agri-food sub-sectors. The thesis attempts to enfold the multiple insights of the existing literature into the capital as power approach. I submit that the process of enfoldment results in an analysis that offers a rich and highly differentiated understanding of the redistributional dynamics of high i iii and volatile agricultural commodity prices. The arguments are made in relation to the contestation within agriculture and agribusiness over perhaps the two most controversial developments within the US agri-food sector in the early twenty-first century: the diversion of grain into agrofuels production and the rise of 'excessive speculation' in agricultural derivatives markets. The importance of these two developments is underlined by the fact that a number of scholars have attributed the sharp food price peaks in 2007-08 and 2010-11 to the influx of speculative investment in futures markets, and the general upward trend in food prices in the 2000s to the agrofuel boom. By analyzing the redistributional effects of high and volatile prices, and by examining the contestation over the course taken by agrofuels policy and commodity derivatives regulation, the dissertation outlines the winners and losers of high and volatile food prices within both agribusiness and agriculture. ii iv Acknowledgments This thesis would not have been possible if it were not for the support of many people. Eric George, Jeremy Green and Sandy Brian Hager have offered great friendship over the last six years. My horizons have been broadened considerably by their wit, verve and erudition. Julian Germann has also been tremendously kind, making me feel at home when I first moved to Canada. The second half of my doctoral studies was transformed by the friendship of Karl Dahlquist, Elif Genc, Arthur Imperial, James McMahon, Shourideh Molavi, David Ravensbergen, Joel Roberts, Alain Saleh, Sune Sandbeck and Donya Ziaee. They are among the finest people I know. In the early period of my time in Toronto, I was uneasy with the academic path that I had chosen. This feeling of unease ebbed away once I took Jonathan Nitzan's course on the capitalist mode of power. With the research skills that I developed under his guidance, I found an independent voice as a scholar. I feel incredibly lucky to have had such a supportive supervisor who, along with Shimshon Bichler, has contributed so much to the field of political economy. I have also benefitted tremendously from the encouragement and the constructive criticism offered by Mark Peacock. His integrity, intellect and professionalism are a constant reminder of why I was originally drawn to academia. Additionally, I feel very grateful to Rodney Loeppky for making the Department of Political Science a warmer and more collegial space than it might be otherwise, and for being a key source of support at the latter stages of the doctorate. iii v Marlene Quesenberry and Judy Matadial have helped me clear administrative hurdles at York University. And Xumei Li always made me feel incredibly welcome in Bronfman Business Library, even though I was acquiring financial data for very different reasons to the business students working beside me. Moreover, in my four research trips to the National Agricultural Library in Maryland, Daniel Lech was extremely accommodating while I spent countless days hunched over his department's photocopying machine. I would also like to express my gratitude to Jordan Brennan, D.T. Cochrane and Jongchul Kim. In their own very different ways, they have been role models for me. Furthermore, Lana Goldberg and Shaghayegh Tajvidi deserve special mention because they have reminded me, through their words and their actions, that research ought to be combined with political engagement. I am grateful to the Ontario‟s Ministry of Training, Colleges and Universities for awarding me an Ontario Graduate Scholarship in support of my research. But most of all, I would like to thank Janina Juchnowicz. It is primarily because of her belief in the intrinsic value of education that I have reached this milestone. I dedicate the dissertation to her. iv vi Table of Contents Abstract i Acknowledgments iii List of Tables vii List of Figures viii 1. Introduction 1 The Questions 1 The Approach 3 The Synopsis 9 2. Food Price Inflation as Redistribution: Towards a New Analysis of Corporate Power in the World Food System 13 Introduction 13 Questioning Supermarket Mastery 18 Mapping out Corporate Power in the World Food System: 23 The Emergence of the Agro-Trader Nexus 34 The Power Trajectory of the Trader-Core 34 The Agro-Core and the Contested Emergence of Agro-Biotechnology 40 The Formation of the Agro-Trader Nexus and the Agrofuel Boom 44 Conclusion 53 3. The Ethanol Boom and the Restructuring of the Food Regime 56 Introduction 56 The Food Regime Analysis of Agrofuels 62 Toward the Disaggregation of Agri-Food Capital 67 Archer Daniels Midland and the Political Institutionalization of the US Food/Fuel complex 73 The Agro-Trader Nexus and the Corn-Ethanol Coalition 79 The Agro-Trader Nexus versus the Animal Processor Nexus 83 Conclusion 106 4. Futures Tense: The Food Crisis and the Contested Regulation of Agricultural Derivatives 110 Introduction 110 The IPE of Agricultural Derivatives Regulation 116 v vii Clapp and Helleiner 118 Pagliari and Young 120 A Power-Distributional Approach 123 The Distributional Dynamics of Grain Futures Price Instability 125 Farmers 126 The Trader-Core 137 Coalition Dynamics: Rule Ambiguity and Definitional Conflict 143 Change Agents: Narrow the Exemptions, Broaden the Target Group 147 Veto Players: Broaden the Exemptions, Narrow the Target Group 149 The Agricultural Derivatives Endgame 152 Conclusion 158 5. Conclusion 160 The Dynamics of Power, Prices and Redistribution: A Summary 160 Avenues for Future Research 167 References 171 vi viii List of Tables 2.1 Dominant Corporations in the World Food System 30 3.1 Animal Slaughter and Corporate Control 86 4.1 Multivariate Regression Analysis of Agricultural Income and Grain Futures Price Dynamics 129 vii 5 nerves, and muscles... the expenditure of human labour in general... the labour-power which, on average, apart from any special development, exists in the organism of every individual‟ (Marx 1867: 134). Nitzan and Bichler distance themselves from Marx's attempt to find material units of inquiry. However, they embrace his emphasis on the transformative dynamics of conflict. In so doing, they concur with Castoriadis in arguing that value is not an objective-material substance (what Aristotle calls the physis). Rather, it is social and thus derives from the norms, laws and institutions of society (the nomos). Moving from this line of argument, Nitzan and Bichler contend that the researcher ought to be open to the multiplicity of power relations that may impact the valuation of commodities. From this perspective, the changing ratios of prices and incomes within capitalism do not reflect any intrinsic property of the goods and services that are traded, whether it is understood in terms of 'utils', as postulated in neoclassical economics, or 'abstract labour', as argued by Marx.1 Instead, these changing ratios are quantitative manifestations of the overall patterns of conflict that re-shape the nomos (Castoriadis 1984; Nitzan and Bichler 2009). This shift by the CasP approach from the material to the social, and from the exploitation of labour to the totality of power, owes much to Veblen's conception of capital. Whereas Marx begins his theory of capital with a materialist analysis of production, Veblen's conceptualization begins with 'the state of the industrial arts': the immaterial assets inherited from previous generations necessary to produce socially useful goods and services. The historically contingent, and context-specific, development of the technology that makes up 'the state of the industrial arts' occurs through the integration of myriad streams of information and 1 For a comprehensive critical analysis of the utility and labour theories of value, see Nitzan and Bichler (2009: 67-124). 6 the synchronization of numerous industrial sub-processes. Veblen contrasts the cooperation involved in the collective advancement of technology with the pecuniary impulses of business. Business, Veblen argues, strategically inserts itself at the interstices of the multiple subprocesses of industry, so as to exact tribute from the community in the form of profit, in return for granting the community access to privately-controlled, but collectively-created, productive capacity. According to Veblen, the level of tribute that is demanded by business is a reflection of the bargaining power of owners vis-à-vis the rest of the community. This bargaining power will in turn be determined by such factors as the importance of the asset, the means by which it is controlled, and the ease with which it can be substituted (Veblen, 1904; Nitzan and Bichler, 2009; Cochrane, 2011). While Veblen alludes to the redistributional dynamics of relative price changes, Nitzan and Bichler rework Veblen's insights in advancing a systematic power theory of value, based on new categories and new research methods. In constructing methodological tools for the power theory of value, the analysis of the neo-Marxian economist Michal Kalecki has been particularly instructive as he is perhaps the first scholar to have tentatively sketched a distributional measurement of corporate control. This measure comes in the form of 'the degree of monopoly': the quantitative proxy for market power as registered in the profit ratio of sales. In advancing the concept of the degree of monopoly, Kalecki gestures towards the view that income redistribution is not merely the consequence of market power shifts, but rather its very definition. Notwithstanding its importance, Kalecki's measure clearly only pertains to the narrow economic issues of monopoly and competition. Accordingly, Nitzan and Bichler devise other measures that quantify the patterns of power that inhere in the capitalist restructuring of social reproduction as a whole (Kalecki, 1943; Nitzan and Bichler, 2009). 7 In developing these measures, Nitzan and Bichler render explicit what remains only partially revealed in the work of both Veblen and Kalecki. More specifically, Nitzan and Bichler argue that the quantitative changes in the architecture of prices and the qualitative changes in the institutions of society are part of the same power process. From this viewpoint, the price system is the numerical expression of power over social organization, and this power over social organization changes according to the transformations in cooperation and conflict between different groups. Thus, in place of dual quantity theories of prices that posit a direct connection between the nominal quanta of prices and earnings and underlying but unobservable quanta in the spheres of consumption and production, Nitzan and Bichler argue that the nominal sphere is the only quantitative sphere to which we have access. Accordingly, the CasP framework represents an alternative approach whereby the analysis of quantitative changes in prices and pecuniary earnings can be synthesized with an investigation of qualitative changes in the institutions of society, to create a 'scientific story' of capitalist power (Nitzan and Bichler, 2009: 313). Analyzing the pecuniary quanta in terms of power has a number of important methodological implications. First and foremost, power is inherently relational. As such, both accumulation and prices can only be understood differentially. The differential drive of capital is manifest in the fact that large firms do not simply aim to accumulate in absolute terms. Instead, they strive to beat some average benchmark. Second, power is inherently dynamic. Thus, rather than conceptualizing the market in terms of static equilibria, as in neoclassical economics, the CasP framework encourages the researcher to analyze how one group's ongoing attempts to restructure social reproduction encounters ever-changing resistance from other social groups. Lastly, because power is inherently relational and dynamic, Nitzan and Bichler suggest that rather than engaging in case-studies of individual firms or aggregate 8 analysis of the corporate sector as a whole, we should delineate and disaggregate the performance of the contending coalitions within what they call 'dominant capital': the major corporations which operate in tandem with, and are often intertwined with, key government organs in restructuring social reproduction for differential pecuniary gain. The thesis uses three such measures for charting differential pecuniary shifts for groups within US agribusiness and agriculture. The first and most widely used measure in this dissertation is differential earnings: the net income of any given group of firms or farmers relative to the net income of 'the average'. The second measure is differential capitalization: the market value of any given group of firms relative to the market value of 'the average'. The third and final measure is differential markup: the weighted net income to sales ratio of any given group of firms to the weighted net income to sales ratio of the 'the average'. When using these differential measures in the analysis of the power shifts between agribusiness firms and the largest US corporations outside of the agribusiness sector, 'the average' is taken to be dominant capital as represented by the top 500 US-listed firms, ranked by net income. When using these differential measures in the analysis of the pecuniary shifts within agriculture, 'the average' is taken to be the average net income of all farmers in the US. And when using these differential measures to chart the shifts in income between US farmers and the remainder of the US population, 'the average' is taken to be the average earnings of US nonfarm workers. The differential earnings measure is the most widely used measure in this thesis because a number of the largest agribusiness firms are not publically traded, and as such, there are no market capitalization data available for these entities. Moreover, unlike the differential capitalization measure, the differential earnings measure is easily transposable to the analysis of income shifts between farmers, as almost all farming operations in the US are run by 'petty producers' rather than publically-traded entities. Following the research methods pioneered by 9 Nitzan and Bichler, this dissertation connects key quantitative shifts in differential earnings and relative prices on the one hand, to the qualitative shifts in the restructuring of social reproduction on the other, in order to create a quantitative-qualitative analysis of transformations in the agri-food system. The Synopsis What might seem like burdensome theoretical baggage during these preliminaries, will be properly unpacked in the chapters that follow. After all, it is only when a theory is put to work in the field of investigation that the meaning of its concepts, and the purchase of its methodological tools, can truly be determined (Green, 2014). But this thesis is not simply an empirical exposition of the CasP approach. Rather it seeks to show how the CasP approach's concepts and tools may be adapted and refined by other researchers in the exploration of territory that has yet to be charted by disaggregate accounting. Moreover, it shows that through disaggregate methods of accounting, new concepts can be expounded. This process of re-search, in which theoretical concepts and empirical analysis are in continual dialogue, has been integral to the evolution of the CasP approach. This process not only entails the continual exercise of reflexivity, but also openness to the insights offered by complimentary approaches. Hopefully, such a research philosophy ensures that the CasP approach does not ossify into an established 'school of thought', wherein the defence of existing theoretical postulates is prioritized over the discovery of new patterns and the elaboration of new concepts. The thesis espouses this reflexive way of proceeding. Specifically, the thesis examines the redistributional-power dynamics within US agribusiness and agriculture in two arenas: government agrofuels policy and regulation of 10 agricultural derivatives markets. These two arenas are of particular importance because, according to some of the literature on food price inflation, booming agrofuel production and investor speculation in agricultural derivatives markets have been the two main contributors to the surges in agricultural commodity prices in the early twenty-first century. In fact, one group of analysts go so far as to argue that: [T]he dominant causes of price increases are investor speculation and ethanol conversion. Models that just treat supply and demand are not consistent with the actual price dynamics. The two sharp peaks in 2007/2008 and 2010/2011 are specifically due to investor speculation, while an underlying upward trend is due to increasing demand from ethanol conversion. (Lagi et al. 2011a: 1) Other studies lend some support to these conclusions (see: Timmer 2008; Piesse and Thirtle 2009; Baffes and Haniotis 2010; Ghosh 2010; Ghosh et al. 2012). As such, I principally focus on the coalitional and redistributional dynamics between agri-food corporations and farmers in regard to agrofuels and investor speculation. In so doing, I seek to outline how interests within agribusiness and large-scale agriculture may relate to the interests of those poor households across the world that are existentially vulnerable to food price shocks. With these considerations in mind, the second chapter engages with existing analyses of corporate power in the world food system, and it lays out some aspects of the CasP approach in greater detail. Adopting a macroscopic focus on shifts of differential earnings between agrifood corporations, it points to the rapid ascendance of a new power configuration in the global political economy of food. I call this configuration 'the Agro-Trader nexus'. I argue that the agri-biotechnology and grain trader firms that belong to the Agro-Trader nexus have not been mere „price takers‟, instead they have actively contributed to the inflationary restructuring of the world food system by championing and facilitating the rapid expansion of the first- 11 generation agrofuel sector.2 As a key driver of agricultural commodity price rises, the agrofuel boom has raised the Agro-Trader nexus‟s differential profits and it has at the same time exacerbated food insecurity. These initial findings affirm a core theme of the thesis: that food price inflation is a mechanism of redistribution. The third chapter builds directly on the second chapter in four main ways. First, it narrows the focus of analysis from the global agrofuel boom in general, to the US ethanol boom in particular. Second, it offers a more concerted examination of how the Agro-Trader nexus, and more specifically, Archer Daniels Midland, has championed increases in cornethanol production from the 1970s onwards. Third, it develops a richer understanding of how the corporate conflict that arises from soaring agrofuel production, as indicated by the second chapter, plays out in the US agri-food sector in relation to the increased antagonism between the Agro-Trader nexus and what I call 'the Animal Processor nexus'. Finally, it incorporates US farmers into the picture. As I argue, the ethanol boom has not only engendered a shift in pecuniary earnings from the Animal Processor nexus toward the Agro-Trader nexus; it has also led to a shift in income from farmers specializing in livestock production to farmers specializing in corn production. The fourth chapter extends the analysis to contemporary debates concerning speculation in agricultural derivatives markets and attempts to regulate it. While the second and third chapters illuminate the redistributional dynamics brought about by soaring agrofuel production, the fourth chapter outlines the shifts in relative income engendered by grain futures price volatility. With quantitative methods, I show that while livestock interests have suffered hardship as a result of price volatility, crop grower and commodity trader groups have 2 Following Philip McMichael and other analysts of the biofuel boom, I label biofuel „agrofuel‟ to underscore the problematic diversion of agricultural products from food to fuel uses. 12 generally prospered amid the tumult. And with qualitative methods, I show that the former constellation of interest groups has pushed for far-reaching restrictions on speculation but the latter has opposed the emergence of a new speculative position limits regime. The chapter argues that the ongoing conflict within and beyond agriculture over the timing, scope and necessity of reform has contributed to the protracted manner in which the nascent speculative limits regime has been implemented. The concluding chapter looks back at the territory covered in this thesis and it suggests possible directions for future research. I argue that the CasP approach, when combined with the insights of existing scholarly contributions, casts into sharp relief aspects of the agri-food system that have been heretofore unclear. Most importantly, the thesis offers a more qualified understanding of the power of major supermarkets in food supply chains; it delineates the major winners and losers within agriculture and agribusiness of the agrofuel boom; and finally, it outlines in hitherto unreached levels of detail the redistributional impacts of agricultural commodity price instability within the US. In offering these insights, the dissertation demonstrates how the CasP approach's concepts and tools may be further adapted and refined by other researchers. Through this process of adaptation and refinement, a new generation of scholars might clear the way to a more comprehensive panorama of the agri-food system and the myriad fields of business control to which the agri-food system is connected. 13 2. Food Price Inflation as Redistribution: Towards a New Analysis of Corporate Power in the World Food System There isn‟t one grain of anything in the world that is sold in a free market. Not one! The only place you see a free market is in the speeches of politicians. - Dwayne Andreas, CEO of Archer Daniels Midland from 1972–983 Introduction The turn of the millennium marked a sea change in the world food system. After a two decade decline, food prices trended upward. From 2006 to 2008 food price rises accelerated and the number of undernourished people in the world increased to over 1 billion. Food riots erupted in 30 countries. There was a temporary reprieve from price hikes in 2009, but in the following year much of humanity was drawn into another brutal round of food price inflation. By January 2011 the Food and Agricultural Organization‟s food price index had surpassed the levels scaled during the previous crisis and again widespread upheaval ensued. Unrest crested during the Arab Spring but social discontent is evident far beyond the Middle East and the Maghreb. Indeed, all over the world people have poured onto streets in protest against the rising cost of living. This severe bout of food price inflation is not without precedent. Figure 2.1 traces the movements in the Economist‟s Food Price Index – the oldest index of its kind available. It shows how the inflation-adjusted price of a basket of foodstuffs has changed over the last 165 years. In the twentieth century one can identify at least three agricultural commodity price cycles. The first cycle occurred from the turn of the twentieth century to the mid-1930s. The 3 Cited in Carney (1995). 14 0 20 40 60 80 100 120 140 160 180 0 20 40 60 80 100 120 140 160 180 1840 1860 1880 1900 1920 1940 1960 1980 2000 2020 The Economist Food Price Index deflated by US CPI (1845=100) jbaines.tumblr.com second cycle began in the mid-1930s and ended in the early 1970s. And the third cycle was experienced in the three decades leading up to the most recent escalation in the relative cost of food. From a quantitative standpoint each cycle appears to follow a consistent pattern: each lasts for 30 to 40 years; in each cycle there is a commodity price boom; and after each commodity price boom there is a period of „excess capacity‟, usually lasting around two decades, that weighs down on food prices. Figure 2.1 Inflation-adjusted Food Prices Note: The Economist Food Price Index represents a basket of 14 food commodities that are weighted in terms of their relative values in world trade. Source: Food price index from the Economist Newspaper Ltd. CPI taken from Lawrence H. Officer, the Annual Consumer Price Index for the United States, 1774–2010, from Measuring Worth, 2010; http://www.measuring worth. com/uscpi/ [accessed 30 May 2012]. 21 standpoints, meso-level conflicts between different corporate groups are obscured. By drawing a distinction between food manufacturers and food retailers and by focussing on power relations within commodity chains, supermarket mastery theorists make an important step in devising an analysis which promises to offer a nuanced conception of the corporate restructuring of the world food system. However, this promise is only partially fulfilled. The shortcoming is primarily born out of the fact that few if any studies of supermarket power within the IPE literature offer a quantitative method of actually gauging the power-shifts between different corporate groupings in the world food system. To illustrate the problems of neglecting this empirical dimension, Figure 2.2 plots the world profit shares of the three major business segments within the global political economy of food. If the balance of power within food supply chains had indeed shifted decisively from manufacturers to retailers one would expect retailers to increase their share of overall corporate profits generated within the global food system. As the graph shows, the world‟s supermarkets‟ and food wholesalers‟ profit share trended upwards in the 1970s, 1980s and 1990s. So far so good: this trend coheres with the thesis. However, at the dawn of the new millennium the correspondence between the supermarket mastery narrative and the empirical reality of capitalist profits ends. Instead of superseding food processing and manufacturing companies, the food retailers‟ profit share hits its zenith in the year 2000 and then it declines. This decline is ironic as it is precisely during the downtrend that Burch and Lawrence profess their belief that „the period when the manufacturing sector dominated the supply chain has passed, never to return‟ (2007: 119). 22 Figure 2.2 Profit Share Breakdown of the World Food System Note: Profit data for each sub-sector calculated by dividing its total market value by its price-earnings ratio. Profit shares are computed as a percent of the aggregate profit of the three food sectors. The data cover listed companies only. Source: Thomson Reuters Datastream. Series codes: food processing and manufacturing companies– FDPRDWD(MV), FDPRDWD(PE); supermarkets and food wholesalers – FDRETWD(MV), FDPRDWD(PE); fishing and farming companies – FMFSHWD(MV) and FMFSHWD(PE). The profit-share data clearly cast the supermarket mastery thesis in a new light. More specifically, the data encourages an investigation into whether supermarkets‟ development of their own product lines and their diversification into new areas of business, rather than indicating a shift in the overall balance of power away from food manufacturers, may be manifestations of intensified struggle over consumer loyalty in the retail sector itself. It may 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 per cent per cent Food Processing & Manufacturing Companies Supermarkets & Food Wholesalers Fishing& Farming Companies jbaines.tumblr.com 23 also suggest that the computerised logistical systems that seemed to benefit retailers so much from the 1970s to the 1990s, were offering diminishing pecuniary returns by the beginning of the twenty-first century. Finally, the data may indicate that supermarket mastery theorists exaggerate the degree to which food retailers have become empowered through the regulatory competencies that they have acquired over suppliers‟ production standards and their customers‟ consumption habits. There is no room to explore such hypotheses here, but suffice to say at this point, Figure 2.2 demonstrates the need to adopt quantitative methods of gauging power shifts within the political economy of food. Without these methods, researchers will find it hard if not impossible to know how much weight they should give to various qualitative transformations in control over food supply chains. They are thus liable to arrive at wayward conclusions. Mapping out Corporate Power in the World Food System The capital as power framework propounded by Jonathan Nitzan and Shimshon Bichler represents an advance on GVC analysis for four main reasons. First, and most fundamentally, capital from the standpoint of GVC is an 'economic' entity that is distorted by power, whereas from the view of the CasP framework, capital is power. Second, and following from this first point, the CasP framework puts business conflict and cooperation front and centre in the analysis of the accumulation process. Third, the framework links these various forms of conflict and cooperation to the formation of prices. And last, it encourages the researcher to critically theorise the connection between the quantitative changes of capital accumulation and qualitative transformations within the world food system. This section elaborates on these key 24 aspects of the CasP framework and sketches out the framework‟s theoretical significance in relation to the global political economy of food. Building in part on Thorstein Veblen‟s theory of business sabotage, Nitzan and Bichler argue that all profits stem from the institution of private ownership as it confers upon owners the power to exclude others from using their assets. Such a view gives the researcher a much more radical starting point than what is offered by GVC theory. Value chains analysis begins from the premise of perfect competition and then offers the concept of barriers to entry to account for those situations of „market deviation‟ in which „supernormal profits‟ are attained. But from a capital as power perspective, the idea that barriers to entry give rise to supernormal profits is unhelpful because it rests on the assumption that there exist „normal profits‟ that can be secured without exclusion. For Nitzan and Bichler, all profits are exacted through exclusion because all profits depend on private ownership. Without private ownership there could be no restriction on the use of goods; and without restriction on the use of goods, goods could not be priced into commodities that yield pecuniary earnings. As such, it is private ownership in general that institutionalises exclusion, not „barriers to entry‟. The foundational exclusionism of private ownership is evidenced in the etymological roots of the word private: „privatus‟ and „privare‟ – Latin for „restrict‟ and „deprive‟ (Nitzan and Bichler, 2009: 228). Moreover, the exclusionary underpinning of private ownership not only enables business to limit the use of goods so as to generate pecuniary earnings; it also enables any one group of business to circumscribe the pecuniary earnings of other business groupings. Indeed, the pecuniary earnings claimed by one, are the pecuniary earnings that the others cannot have. Thus, by emphasising the centrality of exclusion within business, Nitzan and Bichler suggest that, at its core, the capitalist political economy is constituted by redistributional struggle. And by emphasising the integral role that restriction plays in generating pecuniary earnings, Nitzan 25 and Bichler argue that this redistributional struggle within business undermines efficient social reproduction of humanity for the benefit of humanity (Nitzan and Bichler 2009). Following on from these observations, in the CasP framework the concept of the market is turned on its head. Rather than being a pristine space that is distorted by power, through for instance the erection of barriers to entry, the market is itself a mechanism of power. It is the means through which corporate control over the restructuring of social reproduction is expressed. This capacity to reorient human and non-human life for pecuniary gain is subject to constant resistance, transformation and negotiation and it is only because of the encompassing institution of the market that these socially heterogeneous dynamics can be articulated into universal quanta of dollars and cents. Indeed unlike pre-capitalist societies, in which exclusion is codified by custom and fealty in relatively stable structures of social control, exclusion within capitalism is continually being recreated through the buying and selling of ownership claims. To cite Nitzan and Bichler directly: „in capitalism change itself has become the key moment of order‟ (2009: 153). Moreover, as capitalism is constituted by ongoing redistributional conflict within business, pecuniary magnitudes should be understood in relative rather than absolute terms. Thus, the continual process of recreating exclusion in the capitalist political economy is manifest in the qualitative realignments of corporate control, on the one hand; and it is given quantitative expression in changes in relative prices and relative profits, on the other (Nitzan and Bichler 2009). In applying this method to the exploration of food retailer power, Figure 2.3 reproduces the time-series data of supermarkets‟ and wholesalers‟ changing profit share presented in Figure 2.2 and compares it with movements in the retail price of US consumer foods relative to the US price of foods at the intermediate stage of processing. The two time-series have a correlation coefficient of 0.89. This is remarkable when one considers that the price data are 26 US-based only, but the profit share data pertains to supermarkets and food wholesalers all around the world. Moreover, the strength of the relationship is impressive given the fact that non-food items (such as clothing, fuel and financial services) constitute a large proportion of supermarkets‟ revenues. Last but not least, given that both series shifted from an uptrend to a downtrend at the very same time (early 2000s), the correlation between them is unlikely to be a mere statistical fluke. The graph suggests that the ability of supermarkets to increase their profit share in the overall food sector depends to a large extent on the degree to which they can increase the price of foods faster, or reduce the price of foods more slowly, than firms exerting power further upstream in the supply chain. Now, if we compare Figure 2.1 with Figure 2.3 a very interesting finding comes to the fore. Food retailers‟ profit share and the relative price of retail foods fall at the turn of the millennium – the very same point at which food price inflation returns to world food markets. This observation underscores another key insight of the capital as power approach that is worth emphasising here: that „inflation is always and everywhere a redistributional phenomenon‟ (Nitzan and Bichler 2009: 369). Or to put it in the terms of this research: food price inflation is the aggregate appearance of redistributive conflicts between various groups and organisations within food supply chains. These conflicts involve, but are not necessarily limited to, farmers, biotech companies, international trading houses, food and beverage corporations, retail firms and consumers. From these data we can tentatively conclude that on a sectoral level, the food price inflation that has occurred in the last decade has benefited agricultural input firms, food processors and food manufacturers at the expense of food retailers. Of course, to substantiate this conclusion we need more empirical scrutiny and further breakdown of corporate profits which we cannot pursue here. But even without such an 27 inquiry, the distribution of profit and its relationship to relative prices presented in Figures 2.2 and 2.3 pose serious questions to those who ascribe „mastery‟ to supermarkets. Figure 2.3 Relative Food Prices and Retailer Profit Share Note: Price ratio data computed by dividing the monthly finished food price index by the intermediate food price index. The relative price data are presented as a one-year moving average. The Pearson Correlation Coefficient for the raw data for the two time-series is 0.89. Source: Profit share data from Thomson Reuters Datastream (see Notes to Figure 2.2). Finished consumer food price data and intermediate food price data from Global Insight. Series codes: 110157513 (US Producer Price Index Finished Consumer Foods) and 110157453 (US Producer Price Index Intermediate Foods and Feeds). 90 95 100 105 110 115 120 125 0 5 10 15 20 25 30 35 40 45 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 per cent Supermarkets and Food Wholesalers' Profit Share of the Global Food Sector (left) Price Ratio of Finished Consumer Foods to Intermediate Foods (1973=100) (right) jbaines.tumblr.com 28 So what do we disaggregate from here? The CasP approach encourages the researcher to study dominant capital with reference to differential profits. In the terms set out by Nitzan and Bichler, dominant capital is constituted by the leading firms and government organs that form the centre of the accumulation process. And differential profits are defined as the net earnings of a group of firms relative to some benchmarked average. The relativity of this measure stems from the fact that actual firms do not endeavour to maximise the absolute dollar level of their profits. In fact, the very notion of a profit maximum is conceptually indeterminate in any situation other than perfect monopoly or perfect competition. If we move into the real world of corporate finance, we find that firms continually measure their performance against an evershifting „average‟. Political economy scholars should perhaps heed this ritual as it will give them a better understanding of the quantitative imaginary of business. Moreover, the benchmarking practice shows that different groups of corporations do not simply seek to retain their share of overall business profits; instead they continually strive to increase it. Therefore, through charting the differential profit trajectories of corporate groups one can illuminate the dynamic restructuring of dominant capital‟s control over the organisation of human and nonhuman life (Nitzan and Bichler 2009). With this approach in mind, I have constructed new proxies for what I delineate as the four major clusters of dominant capital that mediate the journey that food takes from „farm to fork‟. I call these clusters the Agro-Core, the Trader-Core, the Food-Core and the Retail-Core. The Agro-Core consists of the 10 most profitable firms that control the production and marketing of inputs sold to farmers. The Food-Core is composed of the top 10 most profitable firms that manufacture agricultural products into food products packaged within their multiple brand lines. The Retail-Core is made up of the top 10 most profitable supermarkets that sell these foods to the consumer. And finally, the Trader-Core comprises the three most profitable 29 firms engaged in the processing and trade of raw agricultural commodities. The Trader-Core proxy is limited to three constituent firms because of the paucity of available data on the major grain traders. The historical changes in the net profits of these four proxies relative to the net income of the Compustat 500 – the 500 largest firms by net income listed in the United States – are presented in Figure 2.4. The data are plotted on a logarithmic scale to facilitate comparison and to highlight the rates of change in differential profits (indicated by the respective slopes of the different series). It is worth noting that although each proxy is an index in which the underlying constituent firms change with each quarter, there have been a number of companies that have consistently made it into the top 10 for the Agro-Core, Food-Core and Retail-Core categories. These firms are listed in Table 2.1, along with the three firms that currently dominate the global agricultural commodities trade. By disaggregating the profit data for the four major clusters of firms operating within the world food system, one can build upon the insights first derived from the sector-based profit share data presented in Figure 2.2. As one can see, the Retail-Core underwent a decadelong differential accumulation boom that began in the early 1980s and ended in the mid-1990s. Since then there have been modest cyclical upswings and downswings around a very slight secular uptrend in the Retail-Core‟s differential profit. This indicates that the dominant supermarkets have experienced little more than pecuniary stagnation over the last two decades. Therefore, the chart raises further questions about the supermarket mastery thesis. While Figure 2.2 suggests that the food retailing sector reached its apogee within the world food system at the turn of the millennium, Figure 2.4 indicates that the retail revolution was already running out of steam by the mid-1990s. Moreover, Figure 2.4 shows a very strong correlation between the differential profits of the Food-Core and the differential profits of the Retail-Core, especially from the early 1990s 30 onwards. This suggests that the arguments about there being a shift in the balance of power from food manufacturers towards supermarkets may be ill-conceived. The dominant food Company Market Value (May 12, 2012) Comments Agro-Core Trader-Core Monsanto Potash Corp. Deere and Co. Cargill ADM Bunge $38.5bn $35.5bn $31.9bn $53.5bn* $21.4bn $9.0bn The world‟s largest biotech company. 90% of the U.S. soybean crop and 80% of the corn crop are grown with seeds containing genetic traits owned by the firm. Has the largest share of control over global fertilizer production. It is the world‟s largest producer of potash and the third largest producer of phosphate and nitrogen. The world‟s biggest manufacturer of farm machinery. Its main strengths lie in the large agricultural equipment associated with the soybean and corn sectors. The largest private company in the world. Cargill cemented its position as the world‟s most powerful grain trader when it bought the trading division of its rival Continental in 1998. Has the largest share of control over the world ethanol industry. Historically just an agricultural commodities processor, it moved into trading in the 1970s. Has the largest share of control over the flour milling and fertilizer industry in South America. It also has the world‟s largest share of control over dry corn and soy processing. Food-Core Nestlé $196.4bn The most powerful global food conglomerate. Moreover, in 2011 it was the world‟s most profitable company of any sector. Owns 29.5% stake in L‟Oreal. Retail-Core Pepsi-Co Kraft Wal-Mart Tesco Carrefour $104.7bn $69.4bn $202.4bn $42.0bn $12.5bn Famed for its eponymous soft drink, PepsiCo is much more than just a beverage corporation. It owns many food brands including Frito-Lay and Quaker. Owner of numerous household names including Jacobs, Maxwell House and Philadelphia. In 2010 it acquired the Cadburys brand after a fractious takeover campaign. With 2.1 million workers it is as about as large as the People‟s Liberation Army of China in terms of employee numbers and it is the world‟s largest firm in terms of sales. Dislodged Sainsbury‟s from the top spot in UK food retailing in the early 1990s. Tesco gets around 30 pence from every pound spent on groceries in Britain. Headquartered in France. It is the world‟s second largest retailer in terms of revenue and it has a strong presence in 37 Source: CR4 data from US Census Bureau (available from: http://www.census.gov/econ/concentration.html [accessed 30 May 2012]). Individual firm data for 1977, 1978 and 1988 from Marion and Kim (1991). Firm data for 2002 and 2006 from Hendrickson and Heffernan (2007). The Trader-Core‟s strategy of extending their pecuniary ambit over domestic processing made a good deal of sense from a business standpoint. Amidst a slump in world grain exports after the boom of the 1970s, the devalued agricultural commodities that they were trying to sell internationally could be absorbed into their new processing divisions. But the traders‟ expansion into processing was also constitutive of dietary transformations in the period. Some of the main facets of this transformation are depicted in Figure 2.6. At the broadest level, the increased American consumption of grain-based foods, as depicted in Figure 2.6, was driven by the „fast food revolution‟. From being rather peripheral players in the food service industry in the 1960s, fast food restaurants have become ubiquitous. By the turn of the millennium, it was estimated that on any given day one in three American children and one in four American adults will visit a fast food outlet (Schlosser 2001: 3; Pollan 2006: 111). The development of the fast food supply chain has wrought violence upon communities across the world, precipitating deforestation and peasant displacement on one end and coronary heart failure and diabetes on the other. However, for the grain merchants the changes brought about by the fast food revolution were most welcome. More and more consumers munched through nuggets made from an amalgam of corn-fed chickens, modified corn starch and soy lecithin; more and more consumers chomped on burgers comprising wheat-based buns and beef patties originating from soy-fed cows reconstituted with yellow corn flour and partially hydrogenated soybean oil; and more and more consumers slurped on corn-sweetened beverages to wash this junk down. And as the fast food revolution rolled out to the rest of the world and as people increasingly turned towards meat-heavy diets, the major grain traders felt there was good 38 cause to be optimistic. The enthusiasm for the meat sector as an absorbent for grain „excess capacity‟ was well articulated by the CEO of Archer Daniels Midland in the 1980s: Think of chickens with their little mouths... Nothing affects them. They‟re biting, biting, biting... Little pigs biting, biting. More every single day. It‟s a dog-eat-dog competitive global market, but it isn‟t true that exports aren‟t going to come back. Chickens are growing damn near 10% each year (cited in Stavro 1985:40) However, the Asian Financial Crisis of 1997–8 depressed global grain consumption. Up until that point East Asia represented a key regional market for the Trader-Core. But in the wake of the crisis, imports of foodstuffs processed and transported by the major grain merchants fell precipitously. To compound problems for the Trader-Core, there was a slowdown in the expansion of major fast food chains and low carbohydrate diets became increasingly popular. And in the beverage sector, corn-sweetened soft drinks were falling out of favour amidst the increased popularity of bottled water, activism against soft drink vending machines across schools and universities, the end of „supersizing‟ by some fast food chains and well-publicised research that suggested corn syrup was a key cause of obesity (Meyer 2005: 48). The key dietary changes are depicted in Figure 2.6. The chart shows that by the early 2000s per capita flour and cereal consumption tapered off and high fructose corn syrup (HFCS) intake dipped. And a few years later even meat consumption was falling. The decline of the differential profits of the Trader-Core during the late 1990s was in large part brought about by this relative decrease in the consumption of grain-based products. As a result of these changes in international grain markets and American consumption trends, problems of „excess capacity‟ within the storage and processing of corn and wheat had returned, and by the late 1990s the 39 relative cost of primary agricultural commodities had reached its lowest level for three decades (see Figure 2.1). Figure 2.6. Transformations in the American Diet Source: http://ers.usda.gov/data/foodconsumption/FoodAvailspreadsheets.htm [accessed 25 June 2012]. At the dawn of the third millennium, one market analyst remarked that „[a]nything to do with food – growing, processing, packaging, marketing, retailing – attracts all the investor interest of a dead skunk at a tea party‟ (Meyer 2000: 20). But as one may recall from Figure 2.4, some clusters of firms within the world food system were doing worse than others. While -20 0 20 40 60 80 100 120 140 160 100 120 140 160 180 200 220 240 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 lbs/capita/year lbs/capita/year Meat (left) Flour and cereal products (left) High fructose corn syrup (right) year 2000 jbaines.tumblr.com 40 many investors turned their noses up at major supermarkets and food manufacturers, from a pecuniary standpoint it was the performance of the Trader-Core and Agro-Core firms that stank the most. The major causes for the pecuniary downturn of the Trader-Core have been detailed in this section and it is worth noting that these factors also negatively impacted the Agro-Core. The easing consumption of grain-based foods precipitated a slump in commercial farming in many parts of the world and this slump put downward pressure on the volume of the sales of the agricultural inputs that the Agro-Core controlled. However, the Agro-Core‟s pecuniary performance was not simply shaped by the balance of production and consumption. Instead, the rapid differential decumulation of the dominant agricultural input firms in the late 1990s has to be contextualised in relation to the „troubled birth‟ of the biotechnology sector within agriculture (Falkner 2009). This troubled birth did not affect all Agro-Core firms. But agricultural input companies that were delving in the „life sciences‟, such as Monsanto, had a strong interest in ensuring the successful delivery of biotechnology from its prolonged gestation in bioengineering laboratories to true genesis in world agriculture. The Agro-Core and the Contested Emergence of Agro-Biotechnology In principle, biotechnology held a lot of promise for corporations selling inputs to farmers: by patenting various bioengineered seeds, agribusiness could intensify the commodification of the agricultural process. Moreover, from the perspective of chemical companies, biotechnology held the key to increasing farmer dependency on the agrochemicals they sold as most of the early genetically modified crops were designed for herbicide tolerance. The engineering of this genetic trait was important for firms such as Monsanto because their patent on their Roundup product – a herbicide that kills plants indiscriminately and that contributed to around one-fifth 41 of the company‟s revenues – was going to expire in 2000 (Vellema 2004: 46). By inserting a gene into plants that made them tolerant to the blanket application of the herbicide, Monsanto could maintain its large market share in agrochemicals and sell their Roundup herbicide and Roundup Ready seed as part of a comprehensive package of inputs to farmers. But chemical firms such as Monsanto knew that in order to seize the opportunities that the biotechnology industry offered they had to influence government policy on genetically modified (GM) crops. They achieved this end through intense lobbying and also through the „revolving door‟ that facilitated the two-way movement of staff between the upper echelons of agribusiness and the apex of the US government‟s regulatory apparatus. This regulatory incest between the „regulators‟ and the „regulated‟ made the US‟s policymaking environment very propitious for the rapid spread of transgenic crop production (Palaez and Schmidt 2004: 233–5). However, the chemical companies perhaps underestimated the degree to which they needed to convince people beyond the halls of the US government about GM plants. Some agronomists found that the yields of transgenic crops were below that of non-engineered varieties. Such findings undermined the credibility of those agri-biotechnology firms that boldly proclaimed that genetic modification would increase agricultural productivity. The controversy of GM food was cast into sharper relief after Monsanto first touted its planned use of „terminator technology‟ – a modification that was to take away plants‟ germinative capacity and thus guarantee the company‟s proprietary rights over living organisms. NGOs such as Greenpeace and farmers‟ organisations such as the one-and-a-half-million-strong Brazilian Landless Workers‟ Movement protested vociferously against genetic modification in the wake of such revelations. The terminator episode was a public relations disaster for Monsanto and in 1999 the company announced that it was discarding plans to render its seeds sterile (Vellema 2004: 50–2). There was also resistance to agro-bioengineering from consumers. People in 42 Europe were particularly uneasy about GM „Frankenstein‟ foods as they had just gone through the jitters of the BSE crisis. To compound problems for the agrobiotech companies, major food manufacturers appeared to be exploiting widespread consumer scepticism about bioengineering so as to present themselves as the true guardians of human nourishment. Nestlé and Unilever insisted that they would not „take a bullet for GMOs‟, to cite the words of one Nestlé representative, and they publicly declared they would refrain from using bioengineered foods in the products that they sold (Deutsche Bank 1999). Similarly, many food retailers were unsympathetic to agro-biotechnology. Indeed, major European supermarkets adopted a discouraging labelling policy for GM foods that went far beyond anything stipulated by EU legislation (Falkner 2009: 235–8). As a result of these counter-currents, biotech and chemical firms had difficulty encouraging the spread of transgenic crop production beyond the United States and a small number of other countries such as Argentina and Canada. Moreover, many governing authorities within key import markets, such as the EU, Japan and Korea, followed the major food conglomerates and retailers in establishing strict import and labelling regulations. As the major biotech firms became increasingly aware of the rising public hostility towards transgenic crops, they sought to insulate their pharmaceutical divisions from the contestation over agricultural biotechnology. In 1999, Novartis and AstraZeneca, the third and fourth largest „life sciences‟ firms at that time, decided to spin off their respective agribusiness divisions and merge them to form Syngenta. Similarly, in early 2000 Monsanto and Pharmacia and Upjohn completed a merger of their pharmaceutical operations and created a separate company focused on the application of biotechnology to agriculture, under the name of Monsanto. It was thus in this context of widespread public disquiet over agro-biotechnology that the AgroCore crystallised into a distinct corporate cluster. However, the GM controversy 43 did not abate. A few years after the new Monsanto was formed, the company sought to introduce transgenic wheat to the US; but because of farmer resistance towards the idea, the plan was scrapped. Hence, even in the heartland of agrobiotechnology, there seemed to be severe limits placed on the Agro-Core firms‟ capacity to use the biotech industry for their own pecuniary ends (Falkner 2009). At the turn of the millennium there were discernible similarities between the Agro-Core and the Trader-Core. As we can see in Figure 2.4, both clusters of firms were experiencing rapid differential decumulation amidst widespread scepticism about GM food, the declining popularity of grain-based products and a slump in global agricultural markets. And perhaps partly in response to those adverse developments, both clusters were undergoing rapid consolidation. The world‟s largest grain firm, Cargill, bought up the entire trading division of the world‟s second largest grain trader, Continental, in 1998. The major food processor-cumtrader Archer Daniels Midland bought up important assets of Louis Dreyfus, Glencore and also of André when it went bankrupt in 2000. And Bunge became the world‟s leading soybean trader after it purchased Europe‟s oilseed giant Cereol in 2002 (Milling and Baking News 2002). According to one estimate, by the early 2000s ADM, Bunge and Cargill, taken together, controlled between 75 per cent and 90 per cent of the entire word‟s trade in grain (HoltGiménez and Patel 2009: 18). Consolidation was just as dramatic within the Agro-Core. After DuPont bought up Pioneer Hi-Bred in 1999 it gained the world‟s largest share of control over commercialised seed. The seed sector got even more consolidated in 2002 when DuPont and Monsanto signed a deal to swap their key patented technologies and drop all outstanding lawsuits they had levelled against one another (ETC 2003: 7). The US seed business has subsequently been dominated by a Monsanto-DuPont duopoly. It was in this context of pecuniary retrenchment and corporate consolidation that a new Agro-Trader nexus developed 44 between the Agro-Core and the Trader-Core. The remainder of this chapter outlines the institutional makeup of this power constellation and explores the social ramifications of its rise to prominence. The Formation of the Agro-Trader Nexus and the Agrofuel Boom The links between the Agro-Core and Trader-Core were primarily constructed through joint ventures – a means of corporate amalgamation which offered almost all of the advantages of mergers but without the impediments of antitrust law (ETC 2008: 13). Perhaps the most important joint venture that ADM embarked upon was with Countrymark – a major eastern Corn Belt cooperative. Countrymark was aligned to Novartis – the third largest seed company after Monsanto and DuPont in the late 1990s (Heffernan 1999: 8). However, the two other main grain traders were ensconcing themselves much more deeply than ADM within the AgroCore. In 1998, Cargill hooked up with Monsanto and they embarked on a joint venture called „Renessen‟ (Milling and Baking News 1998: 11). The venture indicated significant consolidation within the global food system as it brought together the world‟s largest grain trader with what would soon become the world‟s most powerful agro-biotech firm. Similarly, in 2003 Bunge married some of its operations with DuPont, giving birth to the „Solae‟ project (Milling and Baking News 2003: 10). In this venture, Bunge agreed to sell DuPont‟s seeds and agrochemicals to farmers who were contracted to produce soybeans for Bunge‟s silos. Moreover, after a series of acquisitions in the 1990s, Bunge commanded the largest share of control over the fertiliser industry in South America (Howie 2000: 3). And in 2004 Cargill acquired a majority stake in Mosaic – the world‟s second largest fertiliser company. Taken as a whole, these developments were premised on the establishment of proprietary claims over agrochemicals and plant life. Cargill‟s CEO Gregory Page summarised his company‟s re- 45 orientation in eerie terms: „[i]n the broadest sense, Cargill is engaged in the commercialisation of photosynthesis. That is at the root of what we do‟ (Page 2012). By becoming more integrated into the Agro-Core, the Trader-Core was instituting new areas of exclusion and thus new sources of potential profits that supplemented the traditional norms of secrecy that had for a long time characterised their merchandising divisions. The Agro-Trader nexus emerged as a result of these developments. Figure 2.7 outlines the nexus‟s key companies. Figure 2.7 The Agro-Trader nexus The formation of this power constellation put the Agro-Core and Trader-Core in a very strong position to benefit from the emergence of a new agricultural commodities cycle in the early 2000s. But, crucially, these firms were not simply benefiting from the upsurge in agricultural commodity prices, they were actually encouraging the upturn by expanding 'institutionalized waste', or what Baran and Sweezy (1966: 337) describe as the „formula for maintaining scarcity in the midst of potential plenty‟. The institutionalised wastage is partially achieved through the diversion of grain into meat production. But this is nothing new. In actual fact, world feed grain use has fallen from 41 per cent of total world grain consumption DuPont ADM John Deere Bunge Solae Alliance for Abundant Food and Energy Monsanto Cargill Renessen jbaines.tumblr.com 46 in 1972 to 34 per cent of the total in 2010 (Earth Policy Institute 2012). It was primarily the rapid development of the first-generation agrofuel sector in the 2000s that catalysed the inflationary shifts that have recently reverberated throughout the world food system. The Agro-Trader nexus was at the forefront of this agrofuel boom. Indeed, the Renessen venture between Cargill and Monsanto sought to engineer and patent varieties of corn with high levels of starch, so that the crop can be more easily processed into ethanol (GRAIN 2007: 19) and Bunge‟s and DuPont‟s Solae venture has also come up with inbred and bioengineered varieties of corn and soybeans specially designed for the combustion engine rather than the human stomach (Milling and Baking News 2006: 20). Although ADM has not been involved in any comparable ventures with the agro-biotech giants, as the next chapter shows, it has worked unremittingly to create a policy environment within which the wasteful absorption of grain in the agrofuel sector can be achieved. In the 2000s the American agrofuel sector experienced a dramatic growth spurt. The „War on Terror‟ and the concomitant rapid rise in oil price inflation (see Nitzan and Bichler 2004), made the arguments concerning agrofuel-based energy security appear more credible. In 2005 the Energy Policy Act was passed. The bill mandated the blending of 7.5 billion gallons of ethanol into America‟s gasoline supply by 2012. In 2007 the agrofuel sector was further bolstered by the US Energy Independence and Security Act. This piece of legislation increased government subsidies for ethanol production and mandated that 36 billion gallons of agrofuel be added to gasoline by 2022. And in 2008, amidst increasing concern about the role of agrofuel in contributing to food price inflation, ADM formed the „Alliance for Abundant Food and Energy‟ along with the major companies of the Agro-Core – Monsanto, DuPont and John Deere – to defend the existing government subsidies for the agrofuel sector (Cameron 53 the analysis, Figure 2.9 presents data on global hunger levels alongside data on the profits of the Agro-Trader nexus relative to the firms listed in Compustat 500. The strikingly tight correlation suggests that the redistribution of business profits towards the Agro-Trader nexus was in part brought about by a redistribution of food away from the world's poor via food price inflation. As the figure clearly shows, since the turn of the millennium, the Agro-Trader nexus‟s share of dominant capitalist profits increases when global hunger levels rise and its share of dominant capitalist profits declines when global hunger levels fall. More analysis of the multifarious power processes behind food price inflation needs to be conducted; however it seems likely that the Agro-Trader nexus‟s facilitation and championing of the first-generation agrofuel boom was key. As Figure 2.8 indicates, in 2010 almost 40 per cent of America‟s corn crop was used to produce ethanol and this amount of corn could have fed around 350 million people given average world grain consumption levels. In short, the dramatic increase in agrofuel production, particularly as it pertains to the corn-ethanol business, is not only dubious from an environmental standpoint, it has also contributed to the emergence of structural scarcity within the world food system. Conclusion This chapter has demonstrated the analytical potential of using sectoral profit share and differential profit data to gauge the power shifts between groups of corporations in the world food system. Such an analysis requires capital to be disaggregated and accumulation to be understood not as an overarching structural phenomenon, but rather as an ongoing process of intra-capitalist conflict over the re-ordering of human and non-human life. This method of 54 progressive disaggregation illuminates crucial power processes within the world food system. Two interrelated insights are particularly important. First and foremost, the research casts doubt on the prevalent view within IPE literature that there has been a shift in power away from food manufacturers, in favour of food retailers. On a sectoral level, the combined profit share of food retailers and wholesalers has declined significantly during the recent period of rapid food price inflation. And when one examines the differential profit data one can see that the dominant supermarkets have been experiencing little more than pecuniary stagnation since the mid-1990s. What is more, the earnings performance of the major supermarkets appears to move in sync with that of the dominant food conglomerates. This synchronicity suggests that the business interests of the dominant food retailers and food manufacturers are more closely aligned than the supermarket mastery thesis suggests. Overall these findings indicate that we should be circumspect about arguments that lay a great deal of emphasis on the increasing role that major retailers play in setting the terms of access to food supply chains and in shaping consumption patterns. Although these developments may have had a great impact on farmers, small food manufacturing firms and consumers, they do not seem to have given major retailers great pecuniary leverage over other major corporations operating in the twenty-first century world food system. Secondly, my findings indicate that in recent years the real shift in power in the world food system has not been from the food manufacturers to the food retailers, but rather from the major food manufacturers and food retailers to what I term the Agro-Trader nexus. I argue that instead of being passive „price takers‟, the firms belonging to the Agro-Trader nexus have actively sought to restructure the global political economy of food in a way that not only increases their own profit growth but also limits the potential growth of profits of other groups of firms within food supply chains. The primary vehicle of the Agro-Trader nexus‟s 55 restructuring of the political economy of food has been the first-generation agrofuel boom. The boom has had profound implications, not only for corporate control and global undernourishment, but also for the categories that we use to understand such phenomena. Indeed, given the wholesale opening of agriculture to agrofuel production one may even ask whether the concept of the world food system as a distinct political economic arena still has analytical currency. To sum up, the cost-benefit analysis of soaring agrofuel production could hardly be more stark. By redistributing energy away from the world‟s poor to the world‟s combustion engines, the agrofuel boom has contributed to the emaciation of bodies, on the one hand; while augmenting the Agro-Trader nexus‟s differential earnings, on the other. Needless to say, we should have no illusions about the pecuniary motivations of those corporations that have fought against the extensive government support for first-generation agrofuel production. But nonetheless, putting an end to the first-generation agrofuel debacle is a necessary step that must be taken if we are to work towards the construction of a world food order where no one goes hungry. 56 3 The Ethanol Boom and the Restructuring of the Food Regime The trick is always to own the tollgate. - Dwayne Andreas, CEO of Archer Daniels Midland from 1972–98, in response to an associate who asked him about the secret of his business success5 Introduction The surge in the production of agrofuels in general, and US ethanol in particular, represents one of the most significant transformations in the world food system in recent decades. After a series of government initiatives to support the ethanol sector from the early 2000s onward, the diversion of corn into the US‟s agrofuel feedstocks increased dramatically. In 2001, US ethanol production accounted for 34% of global production of agrofuel. Ten years later this figure rose to 48%. The American ethanol sector is now so large that it consumes around two-fifths of the corn produced in the US. The re-channelling of grain from food production into fuel production has, according to many analyses, been a chief contributor to rising food prices since the beginning of the twenty-first century. A leaked World Bank internal report estimates that 70-75% of the food price rises between 2002 and 2008 were caused by the absorption of grain into burgeoning global agrofuel feedstocks; and a study by researchers at the New England Complex Systems Institute contends that the US ethanol sector alone was the preponderant long-term driver of food price inflation between 2004 and 2011 (Mitchell 2008, Lagi et al. 2011a). These food price hikes have had stark impacts. According to one estimate, 5 Quoted in Kahn (1991: 244). 57 the „real‟ price paid by the world‟s landless poor for the world‟s major calorie staples has doubled since 2004 (Wright 2014). The wrenching changes brought about by soaring ethanol and biodiesel production have prompted some scholars to ask whether the categories and methods of agrarian political economy are adequate to the task of analyzing the agrofuel boom. In an important overview of „agrofuels capitalism‟, Ben White and Anirban Dasgupta address this issue directly. They suggest that the existing tools of analysis offered by agrarian political economy can be used to explain the agrofuel boom, just as these tools help to explain expansions in large-scale, monocrop agriculture in the past. A political economy approach, they argue, focuses our attention on „the social relations of production and reproduction and the structures of accumulation or (dis)accumulation‟ generated by agrarian change, and the „accompanying processes of social differentiation and class formation‟ (2010: 600). This focus, they contend, is encapsulated by Henry Bernstein‟s catechism: „who owns what? who does what? who gets what? what do they do with it?‟ In the case of agrofuel, White and Dasgupta suggest that Bernstein‟s formulation can be distilled into the following three questions: Where does the land for the growing of agrofuel feedstocks come from? How is agrofuel production organized? And for whose benefit? In seeking to answer these questions, White and Dasgupta contend that we will establish „the actors involved and the added value in different points in the agrofuel commodity chain, the power positions and relations of the various actors, and the role of external agencies, including government‟ (2010: 605). A significant amount of agrarian political economy research has advanced the project of disaggregating the various actors and interests involved in the agrofuel boom (Borras et al. 2010). These contributions offer rich insights in regard to the conflictual and redistributional dynamics brought about by soaring ethanol and biodiesel production, at a variety of social 58 scales. The broadest and most wide-ranging appraisal of the agrofuel boom is perhaps offered by Philip McMichael. In his macroscopic analysis, McMichael (2009a, 2009b, 2010, 2012) combines a world-historical conception of capital accumulation with important observations garnered from case-study investigations of the agrofuel boom. From this vantage point, one can discern a food/fuel complex around which a socially and ecologically unsustainable foodfor-fuel regime may be taking shape. Moreover, some scholars offer detailed examinations of how the broad processes of capital accumulation and peasant displacement, outlined so well by McMichael, play out in terms of regressive redistribution within regions (Dauvergne and Neville 2009, 2010; Richardson 2010, 2012), while others focus on the redistributional shifts, land-use changes and struggles around agrofuel development at the national level (Carolan 2009, 2010, Novo et al. 2010, Wilkinson and Herrera 2010, Holleman 2012, Mintz-Habib 2013). Crucially, there are also a number of fine-grained analyses of the differentiated ways in which agrofuels development impact, and are mediated by, local agrarian class structures and ethnic divisions (Gillon 2010, Vermeulen and Cotula 2010, Borras et al. 2011, McCarthy et al. 2011, Bain et al. 2012, Bain and Selfa 2013, Montefrio and Sonnefield 2013, Selfa et al. 2014). And finally, some scholars have extended agrarian political economy‟s focus on conflict and social differentiation to the domain of gender relations, by examining both the variegated effects that expanding agrofuel production have had on men and women and the uneven ways in which male and female labour is commodified and valued (Rometsch 2012, Julia and White 2013). These contributions affirm the importance of the agrarian political economy framework to our understanding of the agrofuel boom. Not only does this body of literature successfully differentiate between the interests and roles of various rural social constituencies in regard to ethanol and biodiesel production; it also offers significant insights in regard to the way in 59 which corporations work with government to institutionalize agrofuels capitalism. However, hitherto, less attention has been given to differences within agri-food capital. As such, the analysis offered in this chapter seeks to contribute to existing research by extending the agrarian political economy project of social disaggregation more explicitly to the domain of agribusiness. More specifically, I suggest that through drawing on the method of disaggregating capital accumulation and labor income found in the capital as power approach, we can make better sense of the struggles between corporate-led coalitions over the future trajectory of agrofuels capitalism. I also suggest that, in so doing, we can discern sources of tension within the corporate food regime and the limits and contradictions of agrofuels capitalism as a whole. The investigation focuses on the US ethanol sector as it is the global epicenter of the agrofuel boom. More specifically, I identify and analyze two rival constellations of corporate power within the US food system. The first is the Agro-Trader nexus. As outlined in the previous chapter, the core of this nexus comprises one of the world‟s largest grain processors along with a triumvirate of agricultural input firms. The second is the Animal Processor nexus. This constellation comprises the major firms that oversee the conversion of animal life into meat products. The feed grain sector lies at the interstices of the Agro-Trader nexus and the Animal Processor nexus and, as a result, it has become a site of redistributional conflict for the two business configurations. As I argue, the corn-ethanol boom has been a manifestation of this struggle. More specifically, soaring corn-ethanol production has shifted the balance of feed grain prices in a way that benefits the Agro-Trader nexus and Corn Belt farmers to the detriment of the Animal Processor nexus and livestock farmers outside of the Corn Belt. Concomitantly, while the Agro-Trader nexus and corn growers have championed government support for the corn-ethanol sector, the Animal Processor nexus and most livestock farmers 60 have opposed it. Thus, changes in the relative price of feed grain on the one hand, and changes in the relative power of the Agro-Trader nexus and the Animal Processor nexus on the other, are two sides of the same process of redistributional restructuring and social differentiation in US agribusiness and agriculture. Why does this analysis matter? Most importantly, it offers a nuanced quantitativequalitative understanding of the power dynamics that surround the corn-ethanol boom. As I argue, many analyses of agrofuels capitalism chiefly examine the power relations between agri-food capital and agricultural producers, arriving at the broadly true, but now oft-stated, conclusion that the former is increasingly dominating the latter. My method of tracing the uneven distributional consequences of the ethanol boom within agriculture and within agribusiness adds important details to the analysis of agrofuels development because it helps the researcher cut across the agribusiness/agriculture divide to show how one cluster of farmers and agri-food corporations appears to be benefiting at the expense of another. By specifying the winners and losers of the agrofuel boom in this manner, the chapter casts light on the uneven geography of agricultural development within the US and it also points to the social forces that stand to gain from the continuation of large-scale corn-ethanol production. As my findings indicate, putting an end to corn-ethanol production would not only involve challenging the accumulation strategies of some of the most powerful agri-food corporations in the world, it would also necessarily entail addressing the interests of a large constituency of monocropping farmers within the Corn Belt that benefit from the continued diversion of agricultural products into agrofuel feedstocks. More broadly, the chapter points to the potential of conducting research in other areas of agrarian political economy, on the ways in which redistributional struggles within agriculture become co-articulated with redistributional struggles within agribusiness. Such research may contribute to existing understandings of the 61 dynamics of inclusion and exclusion, and resistance and incorporation, in the relationships between farmers and agri-food capital. The chapter comprises three sections. The first section takes Philip McMichael‟s account of agrofuel as its point of departure. As I have already suggested, the importance of McMichael‟s work lies in its situating of soaring ethanol and biodiesel production in relation to the world-historical dynamics of capital accumulation. In this respect, his analysis offers an important analytical map that helps orient those researchers conducting investigations on agrofuels at regional, national and local levels. However, by virtue of the wide-ranging scale at which he navigates the changing global food-fuel landscape and by virtue of his aggregative outlook on capital accumulation, McMichael tends to underspecify the redistributional conflicts between corporations over agrofuel production. This under-specification is typified by his assertion that agrofuels represent a „portal‟ for the increased profitability of „capital in general‟. As I argue, although the concept of „capital in general‟ is useful for elucidating the broad transformations in the food system, it tells us little about the contending alliances that incorporate both agri-food capitals and farmers. The second section outlines additional aspects of the CasP approach. Particular attention is given to the CasP methods and concepts that can be used to specify the processes of (dis)accumulation within agribusiness and social differentiation within agriculture. The third section draws on both the food regime approach and the CasP framework in putting the ethanol boom of the early twenty-first century into historical perspective. Moreover, it outlines how commodity-crop production and animal-meat production have become more or less distinct sectors of corporate control. And it then examines how the ethanol boom is constitutive of a conflict between these two sectors. As I show, while the US ethanol boom may have increased the profitability of capital in general, it has also been a vector of redistribution: increasing the earnings of the Agro-Trader nexus and 62 corn growers while reducing the earnings of the Animal Processor nexus and livestock farmers outside of the Midwest. In the conclusion of the chapter, I discuss the implications of these findings. The Food Regime Analysis of Agrofuels McMichael‟s analysis of the agrofuel boom is primarily anchored in the food regime framework. The framework was propounded by Harriet Friedmann (1987) and it received further substantiation two years later in a landmark article that she authored with McMichael. In this article, Friedmann and McMichael (1989) identify stabilized relations in the production, trade and consumption of food, from the period of high colonialism onwards. These stabilized relations emerge out of particular balances of social forces, within and between imperial metropoles, colonies and settler-states, and then later within and between advanced capitalist countries and the newly decolonized nations of the Third World. The approach combines a world-systems theory perspective on geographical specialization with a method of periodizing capitalism derived from the French Regulation School. Added to this theoretical synthesis is a focus on the evolution of various agri-food complexes that connect farmers to consumers through various webs of supply chains (Friedmann and McMichael 1989, Friedmann 2009, McMichael 2009a). Friedmann and McMichael originally identified two food regimes. The first food regime was centered on British hegemony in the late nineteenth and early twentieth centuries. It combined the sequestering of exotic goods from tropical colonies with the importation of basic grains and livestock from the more temperate settler states, the most important one of which was the US. The cheap prices ensured by this imperial arrangement enabled rapid 69 discounting formula from the power perspective of what Nitzan and Bichler call „dominant capital‟: the firms and government entities at the center of accumulation. Capitalization is inherently encompassing. Any change in social organization that may bear on the expected future earnings of any given asset is factored into the capitalization formula. And since dominant capital strives to re-shape the interactions of human and non-human life in a manner that augments future income and reduces risk, market value is itself the master signifier of business power. This insight has far-reaching implications. Instead of being a mere tool that enables owners to passively measure the value of their ownership claims, capitalization is the inter-subjective process whereby investors collectively translate dominant capitals‟ power to actively restructure social reproduction into the universal symbols of dollars and cents (Nitzan and Bichler 2009, DiMuzio 2012). Nitzan and Bichler concur with the food regime approach in taking accumulation to be an inescapably antagonistic process through which capital subjects the biosphere to a universalizing value-metric. However, their identification of capitalization as this metric opens up new ways of interpreting and researching accumulation. Indeed, if capitalization is the metric of capitalist power, the social conflict inherent to accumulation exists on two levels. Firstly, it exists between different corporations as they attempt to re-organize social reproduction in their own specific ways; and the future stream of earnings that one firm can confidently claim is a future stream of earnings that all others cannot claim. Secondly, it exists between dominant capital and the biosphere, of which society is an integral part, as those subject to different corporate groups‟ attempts at controlling agricultural supply chains persistently evade and oppose such control. Such evasion and opposition, if effective, undermine the confidence that capitalists have in restructuring supply chains for their own pecuniary gain. As such, capital accumulation is nothing other than the augmentation of 70 power. This power is articulated numerically in the form of the discounting formula of capitalization; and it asserts itself in qualitative terms through different corporations‟ attempts at controlling the continuum of ecological and social processes that supply chains punctuate, in ways that boost their expected future earnings over and above the expected future earnings of other corporations (Nitzan and Bichler 2009). Moreover, since power is relative, accumulation is differential. Following on from this presupposition, the CasP framework suggests that corporations tend to coalesce into different „distributional coalitions‟ in a bid to enforce the necessary changes in humanity and nature to attain differential gain. Mancur Olson devised the concept of „distributional coalitions‟ in his theory of collective action to denote small and exclusive groups of actors that focus on redistributing existing social product in their favor as opposed to increasing the overall social product. Owing to the exclusivity of distributional coalitions, the costs of increasing „the average‟ – whichever way that may be denominated - are very large; but the benefits to the coalition members themselves are very small. The concept of distributional coalitions is instructive for CasP analysis, not least because it sheds light on how capitalist exclusion is institutionalized within business alliances. However, the CasP approach departs from Olson‟s schema in a number of important ways. Most fundamentally, whereas for Olson, power is merely a means to a utilitarian end, for CasP it is a goal in itself. Moreover, unlike Olson, the CasP approach focuses on the social damage caused by corporate-led distributional coalitions, rather than distributional coalitions tout court. Finally, unlike Olson, the CasP framework offers a systematic method of quantitatively mapping out the trajectory of these capitalist alliances. The method involves comparing the changes in the capitalization of any one group of firms within dominant capital against the changes in the average capitalization of dominant capital at large or of the business universe as a whole (Olson 1965, Nitzan 1992). 71 To summarize this section, from a CasP perspective, the „value calculus through which capital rules the world‟ (McMichael 2010, 622) is differential capitalization.6 By understanding this value calculus, we can analyze the agrofuel boom in ways that significantly extend existing agrarian political economy literature. My proposed method comprises three steps. First, the researcher outlines the different corporate constellations and alliances that operate at the key interstitial points of the agri-food complexes that they are analyzing. Second, the researcher charts the relative price changes of the commodities traded at these interstitial points, along with the corporate groupings‟ respective capitalized profit shares. Third, the researcher links these quantitative changes in relative prices and capitalized profit shares, on the hand, to the evolution of corporate alliances, on the other, with an eye to formulating an integrative, quantitative-qualitative analysis of the transformations in control over human and non-human life. As I will show, we can apply this differential analysis to agricultural producers, by examining how the relative income of various commodity-crop farmers and livestock farmers shift in relation to the interstitial changes of the agri-food complexes in which they are ensconced. By examining both the shifts in differential capitalization of agribusiness groups and the shifts in differential income of agricultural producers, we can discern how power may be redistributed from one cluster of agri-food capitals and farmers at the expense of another cluster. 6 Interestingly, in a recently delivered conference paper, McMichael (2014: 2) breaks with his nominally materialist conceptualization of capitalism by stating that 'capital is a mode of power (not just of production)'. In the same paper, he goes on to cite the arguments of both Nitzan and Bichler (2009) and DiMuzio (2012) to contend that the market episteme and the price form are defined by the universalizing metric of capitalization. Notwithstanding McMichael's welcome acknowledgment of some core claims of the CasP framework, it may be asked whether his conceptualization of capital as both a mode of power and a mode of production is logically sustainable. Moreover, unlike his brief exegesis of the CasP approach, this chapter draws out some key methodological implications of analyzing capital as a mode of power, in terms of engaging in a new disaggregate approach to accounting. 72 This approach can contribute important details to the food regime analysis of agrofuels, in particular. Indeed, McMichael tends to examine the power dynamics between agri-food capital and agricultural producers in his analysis of agrofuels, arriving at the broadly true, but now oft-stated, conclusion that the former is increasingly dominating the latter. The concept of distributional coalitions, along with the method of tracing the trajectories of differential capitalization of agri-food capital and differential income of farmers, may both substantiate and refine McMichael‟s account because it helps the researcher cut across the agribusiness/agriculture divide. And in so doing, the researcher can discern power shifts between different agribusiness-agriculture coalitions. In what remains, I combine the food regime approach‟s analysis of evolving agri-food complexes with the CasP approach‟s focus on relative prices and relative pecuniary gain, in my analysis of the US corn-ethanol boom. More specifically, I explore the political institutionalization and oligopolistic dynamics of the modern food/fuel complex as it pertains to the US ethanol sector. I then identify two constellations of firms and farming groups that have vied over the course of the food/fuel complex during the 2000s. And finally, I show how this struggle has manifested itself in a structural shift in feed grain prices and a radical divergence in the pecuniary trajectories of the two corporate-led coalitions. Through shedding new light on the processes of social differentiation and (dis)accumulation engendered by the agrofuel boom, I seek to demonstrate how a synthesis of the food regime approach and the CasP approach may help advance the project of disaggregation within agrarian political economy. 73 Archer Daniels Midland and the Political Institutionalization of the US Food/Fuel Complex The conversion of plant biomass into transportation fuel has a long history (see Carolan 2009). But the food/fuel complex that exists in the US today emerged in the 1970s, following three decades in which ethanol was completely marginalized as a source of energy. The renaissance of the ethanol sector was made possible by extensive government subsidies and the assiduous lobbying efforts of one firm: Archer Daniels Midland (ADM). To cite one analyst, „[p]erhaps no commodity in American history has depended more on government support for its viability than ethanol. And perhaps no other company has done as much to orchestrate Washington's current support for the fuel than ADM‟ (Palmer 2006: 1). ADM‟s successful championing of the food/fuel complex took place against the backdrop of two key developments. Firstly, gasoline prices were soaring as a result of the transition of the global oil business from a „free-flow‟ regime to a „limited flow‟ regime (Nitzan and Bichler, 2002: 224). This transition was marked by the successful centralization of control over global oil production in the 1970s by the Organization of the Petroleum Exporting Countries (OPEC) cartel. The resulting upsurge in gasoline prices can be seen in the main chart of Figure 3.1, which compares the inflation-adjusted prices of gasoline and corn over the last four decades. Secondly, just as controls over Middle East oil production were being tightened, controls over US grain production were being loosened. This general loosening of government regulations over agricultural production was in large part a result of the fracturing of the farm bloc and the coeval rise in the power of agribusiness (Feedstuffs Magazine 1968, Friedmann and McMichael 1989, Friedmann 2005). The passing of the 1973 Farm Bill was a key turning point as it initiated the dismantling of the comprehensive system of agricultural price supports 74 that had existed since the New Deal era. Set-aside controls were suspended, public grain reserves were emptied, prices were allowed to fall below the cost of production, and farmers‟ incomes were now supported by direct payments from government (Winders 2009, Lehrer 2010). No matter how much market prices fell, farmers could keep on producing more, safe in the knowledge that they would receive direct payments that would make up the difference between the prices they got for their crop and the „target prices‟ set by government. As the left insert of Figure 3.1 shows, the amount of US land devoted to corn production subsequently increased after a four decade decline. Wheat production also rebounded. The soaring gasoline prices of the late 1970s conferred more credibility upon those who supported greater energy independence through the expanded use of US-produced alternatives to petroleum; and the general rise in corn production increased the feasibility of corn-ethanol being one of these alternatives. The grain processing giant, ADM, seized the opportunity and relentlessly championed ethanol as a petroleum substitute. ADM at this point was the preeminent force in the durable food complex. It had long been the front-runner in developing myriad soy derivatives (Southwestern Miller Magazine 1972). Moreover, it dominated High Fructose Corn Syrup (HFCS) production, with its corn wet mills churning out one-third of the national output of the sweetener (ERS 1993: 22). However, ADM‟s HFCS operations were buffeted by seasonal cycles in consumption patterns. During the summer soft drink sales soar. But in the winter such beverages are not so popular. ADM figured that if the right government 75 Figure 3.1 Transformations in the Political Economy of Corn and Gasoline Note: Corn and gasoline prices are deflated by the US Producer Price index and presented as 1-year moving averages. Acreage data are presented as 5-year moving averages. Source: 1977-2009 corn and gasoline prices from Commodity Research Bureau 2010 Yearbook. 201013 corn and gasoline prices from Index Mundi (2014). Corn and wheat planted acreage data from USDA ERS (2014a). US chain-type price index from Global Financial Data; series code: WPUSAM. HFCS consumption data from USDA ERS (2014b). Meat consumption data from USDA ERS (2014c). supports were in place, the very same corn mills that turned out HFCS to sweeten the huge quantities of Coke and Pepsi gulped by thirsty American consumers in the summer months, could in the slow-selling winter months, produce ethanol to be guzzled by American automobiles. These seasonal switches of output in what ADM called its „sweetener/alcohol complex‟ would ensure that the company‟s corn milling plants ran close to capacity, thereby 0 0.2 0.4 0.6 0.8 1 1.2 1.4 0 0.5 1 1.5 2 2.5 3 3.5 4 1975 1980 1985 1990 1995 2000 2005 2010 2015 US$, 1977 prices Corn prices (per bushel) (left) Gasoline prices (per gallon) (right) 50 75 100 125 1920 1940 1960 1980 2000 2020 acres (million) Corn Wheat 0 20 40 60 80 120 160 200 1920 1940 1960 1980 2000 2020 lbs/capita/year Meat (left) HFCS (right) jbaines.tumblr.com 76 boosting sales and minimizing average production costs (Milling and Baking News 1982: 32). It was within the womb of ADM‟s sweetener/alcohol complex that the broader food/fuel complex first developed. ADM continuously flirted with scandal in its search for benefactors. According to a deposition given by a former presidential secretary, Dwayne Andreas – the then CEO of the company - personally delivered a package to President Nixon containing $100,000 in $100 bills in 1972. The cash was kept in a White House safe for around a year before being returned by Nixon when the Watergate scandal was beginning to engulf him (Carney 1995). In another apparent attempt at currying favor, ADM bought Jimmy Carter‟s peanut warehouse for $1.2 million in 1981 (Weiss 1990). But ADM has not only bestowed its largesse upon the White House. It has also lavished Capitol Hill. Andreas‟s relationship to the self-described „Senator of Ethanol‟ Robert Dole was particularly important. Dole frequently flew on ADM‟s private jets to speak at company engagements, and he received thousands of dollars in return. Additionally, Dole purchased Andreas‟s holiday home in Miami, below the market rate (Manning 2004). By cultivating close relationships with those in government, and by capitalizing on the broader shift in the climate of elite opinion that was brought about by soaring oil prices, ADM was able to reap bounteous rewards. Most notably, in the 1978 Energy Tax Act, a 40 cent tax exemption was granted to every gallon of ethanol mixed into gasoline and in the 1980 Omnibus Reconciliation Act, a 40 cent tariff was imposed on Brazilian ethanol. ADM also lobbied via the ostensibly farmer-based commodity groups that had superseded the farm bloc. For example, at the beginning of Ronald Reagan‟s presidency, ADM joined with the American Sugar Alliance to campaign for increased government support for sugar farmers. The campaign was a success. In 1981 a new Sugar Bill was introduced that 77 extended import quotas on sugar and raised the price-floor of domestically produced sugar to about double the world market price. Soon after the bill was passed domestic sugar prices predictably increased and, in response, Coca Cola and Pepsi ratcheted up their orders of HFCS (Milling and Baking News 1984: 10). Partly as a result, American consumption of the sweetener surged (see right insert, Figure 3.1). The import quotas on sugar also bolstered the corn-ethanol sector, for sugar was widely used as an ethanol feedstock in Brazil, and sugarcane ethanol was proven to have a far superior energy conversion ratio to corn-ethanol. The US ethanol sector was thus now doubly protected: from ethanol imports and from the imports of a rival feedstock. As ADM‟s sweetener/alcohol complex accounted for 87% of ethanol production capacity in the US and 32% of the country's HFCS production capacity, it enjoyed the bulk of the benefits (Economic Research Service 1993, Henkoff 1990). From a broad perspective then, the food regime approach is correct in arguing that the development of substitutable commodities, such as HFCS for cane sugar and ethanol-blended „gasohol‟ for gasoline, can be considered as part of an overarching process through which capital overcomes barriers to accumulation in the agri-food system. But at the specific level of federal policy, the rise of the „sweetener/alcohol complex‟ in the US can be seen as the result of an active erection of accumulation barriers, in the form of tariffs and import quotas. These barriers enabled ADM to increase its expected future earnings over and above other agri-food companies. The company not only jealously guarded itself from foreign competition through securing government tariffs and import quotas; it also barred potential rivals in the US from challenging its supremacy by pushing the ostensibly sector-wide lobby group - the Renewable Fuels Association (RFA) - to dissuade the US Department of Energy from disbursing loan guarantees to start-up ventures (Henkoff 1990). This strategy worked. By the late 1980s the company claimed a 75% share of ownership of total US ethanol processing capacity (Weiss 78 1990). Thus, the corn-ethanol sector remained little more than a government-backed monopoly. In maintaining its control over most of ethanol production and in maintaining its influence over the major lobbying organization for the ethanol sector, ADM was well positioned to engage in more policy breakthroughs in the 1990s. Once again bribes (viz. campaign contributions) appeared to be a key component of the company‟s success. In the 1992 US Presidential election race, ADM was the largest single source of funding for George Bush Senior‟s re-election bid and the third largest single source of campaign funding for Bill Clinton. In just one campaign fundraiser organized by Andreas, $3.5 million was raised for Clinton. Soon after Clinton was elected into office, he stipulated that 30% of fuel in America‟s nine most polluted cities be cut with ethanol, despite mounting evidence presented by his own advisors that the resulting gasohol fuel would lead to new environmental problems (Manning 2004: 27). However, not everything was going to ADM‟s liking. As Figure 3.1 shows, during the 1990s the inflation-adjusted price of gasoline continued on a downward slope from the heights it reached at the beginning of the previous decade. As ethanol prices were in effect tied to movements in gasoline prices, and because gasoline prices were low, the profit margins of the company‟s ethanol operations were very thin (ADM 1994: 5). Moreover, the Asian Financial Crisis of 1997–8 greatly undermined ADM‟s export business. Up until that point East Asia represented a growing regional market for the company. But in the wake of the crisis, East Asian imports of the foodstuffs processed and transported by ADM fell dramatically. Dietary trends in the US compounded ADM‟s problems. The slowdown in per capita corn sweetener intake, as depicted in the right insert of Figure 3.1, was particularly worrisome for ADM because in the mid-1990s an estimated 40% of the company‟s profits were generated by its HFCS division (Kilman, Ingerson and Abramson 1995). 85 complex is partly indicated by the fact that the market share of the four largest firms in the US meat packing sector rose from a post-war low of 19% in 1977 to 59% just 25 years later (US Census Bureau 2013). Table 3.1 relays the latest obtainable data on meat company shares over animal kill in the US and it also puts the slaughtering of American domesticates within a global context. Although startling, the figures presented in the table do not tell us anything about the amount of control that major meat companies wield over animals prior to their death and dismemberment. In fact, some of the companies listed in the table have incorporated the very reproduction of animal life within the domain of their business. In a process that mimics the development of hybrid crops, these meat companies have engaged in the crossing of different pure-bred lines of animals so as to optimize certain genetic traits that conduce to greater and more predictable earnings. As the offspring of hybrids do not reproduce the same traits found in animals conceived from the initial crossing of „nucleus herds‟, farmers return to the cross-breeders to replenish their stock of animals (Fuglie et al. 2011). Thus, cross-breeding extends companies‟ exclusionary control over the meat production process and it simultaneously re-shapes animal life in ways that are propitious for future pecuniary gain. The growing corporate control over the lives and deaths of American domesticates has been particularly pronounced in the poultry sector. The largest poultry firm, Tyson, now commands a 60% market share of the US chicken breeding stock (Food Safety Magazine 2007). In a system of vertically integrated operations that was first developed in the 1950s, contract farmers receive feed from Tyson along with one day old chicks delivered straight from Tyson‟s own hatcheries. The chicks are housed in factory-like structures made according to Tyson‟s specifications and after a period of 7-9 weeks they are taken to Tyson‟s slaughterhouses (Boyd and Watts 1997). Smithfield spearheaded the adaptation of this model of vertical integration to the swine business in the 1990s. The company began to control every 86 stage of hog production: from the DNA lines, to the „farrowing‟ of pigs, to the „finishing‟, to their eventual slaughtering and processing into consumer products (CGGC 2009). Corporate power over cattle breeding is not so centralized, due in large part to uncontrolled mating in the rangeland and pasture conditions of the early stages of steer-raising (Fuglie et al. 2011). However, in the last stages of steer-raising, in which the cattle are confined to feedlots, ownership is highly concentrated. In fact, some feedlot operations are so vast that they can accommodate over 100,000 cattle at a time (Millet 2006: 223), Number Slaughtered in the world annually Number Slaughtered in the US annually 4 Largest Firms in the US Share of US Animal Slaughter (%) Chickens 59.9 billion 8.7 billion 1. Tyson Foods 21 2. Pilgrim‟s Pride 18 3. Sanderson Farms 7 4. Perdue Farms 7 Turkeys 649.5 million 250.1 million 1. Butterball 2. Jennie-O Turkey Store 3. Cargill VA Meats 4. Farbest Foods, Inc. 19 18 15 6 Pigs 1.4 billion 107.5 million 1. Smithfield Foods 26 2. Tyson Foods 17 3. JBS Swift 11 4. Cargill 9 Cattle 295.5 million 31.9 million 1. Tyson Foods 23 2. JBS USA 21 3. Cargill 20 4. National Beef Packing 11 Table 3.1: Animal Slaughter and Corporate Control Note: Global and US slaughter figures as of 2012. Market share data for chicken slaughter as of 2014. Market share data for turkey, cattle and pig slaughter as of 2013. Source: Global and US animal slaughter figures from FAOSTAT 2014b. Market share data for chickens, turkeys, pigs and cattle presented in Watt Poultry 2014, Pork Checkoff 2013 and Cattle Buyers Weekly 2013 respectively. jbaines.tumblr.com 87 The functional division of animal husbandry from crop agriculture has coincided with the emergence of regions of specialized crop production and regions of specialized meat production. This spatial separation was also spurred by the low agricultural commodity and energy costs that prevailed for much of the 1980s and 1990s, as outputs from crop monocultures could be cheaply processed and transported into inputs for intensive animalmeat production. In this context, the American Midwest, within which the Corn Belt is situated, transformed from being the main integrated crop-and-livestock farming region in the US to the heartland of specialized corn and soybean production. Meanwhile, commercial beef production has slowly shifted westward and southward to the huge feeding operations in the Southern Plains. Contrariwise, the national center of hog production has gradually migrated east of the Corn Belt in large part because of the opening of enormous factory farms in North Carolina. Moreover, poultry production has transformed from being a dispersed, rural household activity to an industrialized process centered in the Southern states of Georgia, Arkansas and Alabama (Boyd and Watts 1997, Hart and Mayda 1998). Hence, by the turn of the millennium, agribusiness control over agriculture was simultaneously highly consolidated and bifurcated. A small group of oligopolistic firms superintended the production and processing of commodity crops and a small group of oligopolistic firms commandeered the conversion of animals into meat products. As corn growers increasingly became reduced to being providers of feed inputs for the livestock-feed complex, fewer and fewer raised their own livestock. It was in the context of this diminution of integrated livestock-crop farming that corn farmers considered investment in ethanol cooperatives as their best alternative source of „value-added‟ (Ray 2009). Moreover, by championing and facilitating the diversion of grain from the feed sector, the Agro-Trader nexus appeared to have wagered that it would be able to gain leverage over the major meat 88 companies. But while the earnings strategies of corn farmers and the Agro-Trader nexus played an instrumental role in the ethanol boom, the rapid development of the ethanol sector in the 2000s was also intertwined with wider transformations in global capitalism. In particular, the „War on Terror‟ contributed to the reignition of instability in the Middle East and due to the ensuing panic in global energy markets, oil prices began to surge (Nitzan and Bichler 2006). Just like the oil price spike of the late 1970s, oil price rises in the early twenty-first century had a sharp knock-on effect on gasoline prices (see Figure 3.1). This knock-on effect imparted a veneer of credibility to the emergent Agro-Trader nexus‟s claims that the ethanol sector could bolster US energy security. It was in this context that the 2005 Renewable Fuel Standard (RFS) was implemented. The RFS mandated the blending of 7.5 billion gallons of agrofuel into America‟s gasoline supply by 2012. In 2007 the food/fuel complex was further bolstered by the US Energy Independence and Security Act. This piece of legislation increased the RFS to 15 billion gallons of corn-ethanol by 2015 and endorsed the ‟25 by „25‟ vision backed by Deere (Shea 2007). The enactment of the ethanol mandates caused massive interstitial restructuring between the overlapping food/fuel and livestock-feed complexes. As Figure 3.3 shows, the ethanol sector‟s share of total corn produced in the US rose from just 6% in 2000 to over 40% in 2012. Meanwhile, the share of corn used by the livestock-feed complex plunged. The turning point appears to be 2005, when the ethanol mandate was first introduced. Until that year, increases in corn-ethanol production did not lead to a substantial decline in the share of corn consumed by the feed grain sector. However, at the height of the ethanol boom, from 2005 to 2012, the share of total corn produced in the US for feed fell from 58% to 36%. Given that 90% of feed grain used in the animal processing sector is corn-based; and given that feed comprises 6070% of livestock production costs, the diversion of corn into ethanol distilleries had a huge 89 impact on the meat business (Becker 2008). The effect is confirmed by the insert of Figure 3.3. As the graph shows, the falling share of corn used for meat production from 2005 onwards has coincided with a structural shift in feed grain prices relative to meat prices. Moreover, the structural shift appears to be particularly stark in the hog and poultry sectors. From 1985 to 2005 a pound of pig meat cost around twenty times more than a pound of corn and a pound of Figure 3.3 Proportion of Domestically Produced Corn used by Feed Grain and Ethanol Sectors Note: The feed price – meat price ratios weigh the price of feed per pound against the per pound price of meat. Source: Feed price – meat price ratios from USDA ERS (2014a). Corn use data from USDA ERS (2014d). 0 10 20 30 40 50 60 70 0 10 20 30 40 50 60 70 1975 1980 1985 1990 1995 2000 2005 2010 2015 year 2005 Feed Grain Ethanol percent percent 0 5 10 15 20 25 0 10 20 30 40 50 1955 1965 1975 1985 1995 2005 2015 Heifer & Steer-Corn (left) price price ratio ratio HogCorn (left) Broiler-Feed (right) jbaines.tumblr.com 90 chicken meat cost around five times more than a pound of chicken feed. But by 2012, a pound of pig meat cost just ten times more than a pound of corn and a pound of chicken meat was just three times more expensive than a pound of chicken feed. Although feed-meat price ratios within the beef sector have historically been more cyclical than the poultry and hog sectors, a sharp fall in the steer and heifer to corn price ratio can also be seen from 2005 to 2012. The precipitous drops in the meat price-feed price ratios during these seven years were driven by soaring corn prices. Indeed, in this period, inflation-adjusted corn prices increased by 215%, while inflation-adjusted average meat prices increased by merely 7%. The inflationary impact that the ethanol sector has had on feed prices underscores the severe tensions within the corporate food regime, between the food/fuel complex, on the one hand, and the livestock-feed complex, on the other. To be sure, when the ethanol sector was a peripheral feature of the agrarian political economy of the US, there was very little opposition within agriculture and agribusiness to the use of corn as a fuel feedstock. However, once ethanol production shifted from being an ancillary income support for a small set of farmers and corporations to an overt attempt at restructuring prices and redistributing income within agriculture and agribusiness as a whole, disunity broke out. Fault lines first became visible in the early 2000s when US ethanol production started to take-off. And these fissures enlarged into wholesale rupture by 2005 when the RFS was instituted. As Figure 3.3 shows, it was in that year that the relative price shifts began to have a jolting impact on animal agriculture in the US. The dramatic price shifts coincided with sharply contrasting pronouncements made in regard to the effects of the ethanol sector on the meat business. In 2006, the then CEO of ADM, G. Allen Andreas, bluntly stated: „[t]here is no consumption versus combustion debate, except for those who really do not recognize the realities of the way this business functions‟ 91 (Milling and Baking News 2006: 11). The CEO of Tyson Foods, Dick Bond, did not recognize the „realities‟ that his counterpart at ADM was referring to. In fact, Bond could hardly contain himself when remonstrating against the ethanol sector: „I can rant and rave about this for some time, but some of the things that our government in Washington has done in terms of mandating the use of corn-based ethanol… it's not right‟ (Mosely 2008). Similarly, in an op-ed for the Wall Street Journal, Larry Pope - the CEO of Smithfield – argued that the US government‟s mandate on ethanol blending had a more baleful effect in terms of increasing corn prices in 2012 than the deleterious drought of that year. „[I]f the ethanol mandate did not exist‟, Pope moaned, „even this year's drought-depleted corn crop would have been more than enough to meet the requirements for livestock feed and food production at decent prices‟ (2012). Such is their animus toward the RFS, interest groups within the US livestock sector have even set up a 'Corn for Food not Fuel' campaign group, to encourage concerned consumers to join them in their movement against corn-ethanol. As Figure 3.3 indicates, the Corn for Food not Fuel campaign is headed by four major meat business lobbying groups: the American Meat Institute, the National Meat Association, the National Chicken Council and the National Turkey Federation. It is around this network of lobbying groups that a new corporate-led distributional coalition - the Animal Processor nexus - can be seen to take shape. Whereas the Agro-Trader nexus encompasses a fairly narrow set of groups that operate upstream in agricultural supply chains such as seed firms, crop growers and trading firms, the Animal Processor nexus is part of a broader and more diffuse constellation of interests that operate further downstream in supply chains. This constellation of interests begins with livestock farmers that use basic crop derivatives, such as corn meal as inputs to raise animals into edible commodities. And it ends with those multinational firms, such as Burger King and Wal-Mart, that sell processed and reconstituted forms of animal- 92 based, as well as plant-based, commodities to consumers. Pharmaceutical companies such as Pfizer and Bayer (see Figure 3.3) are also crucial in this supply chain as they furnish livestock growers with the antibiotics that increase animals' biophysical capacities to withstand extreme stress, crowding and confinement (Weis 2013). But the axial firms in the Animal Processor nexus are the major meat packing companies: Tyson Foods, Smithfield Foods, Pilgrim's Pride and Sanderson Farms. Their dominance in the livestock-feed complex is attested to by their shares in overall animal slaughter (see Table 3.1), and it is also affirmed by the fact that they are the four largest meat packers headquartered in the US by market capitalization. The charges and counter-charges between key figures in the US agri-food sector clearly point to polarized opinions amongst the agribusiness elite. And the emergence of the Alliance for Abundant Food and Energy and the Corn for Food not Fuel campaign is also indicative of a deepening cleavage within US agri-food capital. But what connections, if any, can we draw between these recriminations and alliances, on the one hand, and the changing pecuniary quantities of prices and market capitalization, on the other? Figure 3.4 presents the contrasting power trajectories of the axial firms of the Agro-Trader nexus and the axial firms of the Animal Processor nexus. The average per firm market capitalization of each corporate grouping is divided by the average per firm market capitalization of dominant capital for every quarter to yield differential capitalization data. Dominant capital is represented in this analysis by the top 500 corporations listed in the US, ranked by market value for each quarter. The right insert presents the Agro-Trader nexus‟s and Animal Processor nexus‟s differential markup. This measure is calculated by dividing the net income to sales ratios of each corporate grouping by the weighted average of the net income to sales ratio of dominant capital. Thus, while the main chart in the figure depicts changes in investors‟ collective appraisal of the 93 Figure 3.4 The Differential Capitalization of the Agro-Trader nexus and the Animal Processor nexus Note: The differential capitalization (DK) and differential markup of the Agro-Trader nexus (ATN) and Animal Processor nexus (APN) show quarterly data presented as one-year moving averages. „Livestock farmers‟ is a composite category comprising cattle, hog and poultry farmers, weighted by farm population size. Given DuPont‟s wide ranging activities, only its agricultural division‟s net income and revenue data were included in the calculation of the Agro-Trader nexus‟s differential markup. Source: Company market capitalization from Compustat through WRDS. Net income and revenue data for Archer Daniels Midland, Deere and Co. and Monsanto from Compustat through WRDS. Net income and revenue for DuPont‟s agricultural division from 10-K SEC filings. Farmer net income data from the USDA NASS (2013). power of the Agro-Trader nexus and Animal Processor nexus, the right insert depicts changes in the relative capacities of both corporate constellations to turn a profit. The left insert 0.05 0.06 0.07 0.08 0.09 0.1 0.11 0.12 0.13 0.14 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 2000 2002 2004 2006 2008 2010 2012 2014 Agro-Trader Nexus DK (left) Animal Processor Nexus DK (right) ratio 0 0.5 1 1.5 0 1.5 3 4.5 1996 2000 2004 2008 2012 Livestock Farmers (right) Corn Farmers (left) differential income ratio -0.4 0 0.4 0.8 1998 2002 2006 2010 2014 ATN APN differential markup ratio jbaines.tumblr.com 94 switches the focus from the redistribution of power and profitability within agribusiness to the redistribution of income within agriculture. The differential income of corn growers and livestock farmers is calculated by dividing their respective average net incomes each year by the corresponding net income of all farmers in the US. The average net income data of livestock farmers is the weighted average of the net income of cattle farmers, hog farmers and poultry farmers. Three major observations can be made from the figure. Firstly, the market capitalization of the Agro-Trader nexus is greater than that of the Animal Processor nexus by one order of magnitude. Secondly, as the trendlines suggest, while the Agro-Trader nexus has accumulated power ever since the onset of the ethanol boom, the Animal Processor nexus has experienced a general decline in power. Thirdly, in addition to these general trends, there are interesting oscillations in the differential capitalization of both the Agro-Trader nexus and the Animal Processor nexus. The Animal Processor nexus experienced a significant upsurge in its power in 2004 and 2005, when meat consumption and meat price-feed price ratios reached highpoints (see Figure 3.3 and Figure 3.4). However, from 2006 to 2010 – when ethanol production soared and when meat price-feed price ratios plummeted - the Animal Processor nexus‟s differential capitalization dropped almost uninterruptedly. And when the Agro-Trader nexus reached the zenith of its power in 2009, the differential capitalization of the Animal Processor nexus was well on its way to reaching its nadir. Similar patterns can be seen in the differential income data of corn growers and livestock farmers. In terms of magnitudes, from 1996 onwards corn farmers have enjoyed incomes that are on average almost six times larger than their counterparts in animal agriculture; and in terms of the changes in these magnitudes, the shifts in the differential incomes of corn farmers and livestock farmers are broadly synchronized with the power 101 Figure 3.5 The Relative Income of Farmers in the Corn Belt and the Southern Seaboard Region Note: The Corn Belt comprises Iowa, Illinois, Minnesota, Ohio, Kansas, North Dakota, Michigan, Kansas, Nebraska and Minnesota. The Southern Seaboard region is represented by Texas, North Carolina, South Carolina, Mississippi, Georgia, Virginia, Delaware, Maryland, Arkansas and Alabama. Farm income data consists of the net income of sole proprietorships and partnerships that operate farms. For more information regarding the computation of these data see www.bea.gov/regional/pdf/lapi2010.pdf. Farm income data collected for each state and then weighted according to the farm population of each state. Famer relative income data calculated by dividing this weighted income data by the average U.S. hourly earnings of nonfarm production workers for each year. Data are smoothed to 3-year moving averages. Farmer relative income data re-based at 100 in 1983 Q3, Source: Farmers proprietors‟ income data from the Bureau of Economic Analysis through Global Insight; series code: YENTAF. Average hourly earnings data of nonfarm workers from the Bureau of Labor Statistics through Global Insight. Series code: [email protected]. State farm population data from USDA NASS (2012) Census on Agriculture: http://www.agcensus.usda.gov/ and from the USDA NASS (2013b) Agricultural Resource Management Survey: http://www.ers.usda.gov/data-products/arms-farm-financial-and-cropproduction-practices/. 0 100 200 300 400 500 600 50 100 150 200 250 300 350 1980 1985 1990 1995 2000 2005 2010 2015 Southern Seaboard Region relative farmer income (left) Corn Belt relative farmer income (right) 1984Q3 = 100 index jbaines.tumblr.com 102 Animal Processor nexus, has been mirrored by a growing divide on Capitol Hill. In the mid2000s when national gasoline consumption was still on the increase and when the US army was still deeply engaged in its Iraq adventure, politicians representing Corn Belt states enjoyed a broad-base of congressional support for their initiatives to bolster the ethanol sector. Considerations of „energy security‟ reigned supreme. However, from 2007 onwards national gasoline consumption declined due to improved automobile efficiency and a decline in travelling by recession-hit drivers. Moreover, the widespread introduction of hydraulic fracturing („fracking‟) has opened vast shale fields for oil extraction. As a result of these developments, ethanol increasingly appears to be the panacea of yesteryear. Members of Congress representing Corn Belt states still staunchly champion US government support for ethanol, as their interests are intertwined with the agribusiness-agricultural constituencies that they represent. Nonetheless, they have found themselves fending off an anti-corn-ethanol drive headed by political representatives of major meat producing states such as Arkansas, Alabama, Georgia and Texas (Gillon 2010, Winters 2012). This legislative backlash has had significant effects. In 2012, the US Congress voted to discontinue two bulwarks of the ethanol sector that had existed for over three decades: tariffs on imported ethanol and the tax credit for ethanol blenders. Beyond lobbying for these measures, the firms of the Animal Processor nexus have been attempting to mitigate persistently high feed grain prices through rationalizing their operations. For example, Smithfield has downsized its hog production division in a bid to insulate itself from corn price inflation. In fact, in just a four-year span it has reduced its domestic exposure to corn markets by 40% through outsourcing more hog raising operations to nominally independent producers (Clyma 2011). More broadly, there has been a renewed focus on animal population control. From 2009 to 2011, the US chicken population flat-lined at 2.1 billion, 103 while the US cow population fell by 2% to 92.7 million and the pig population declined by 3% to 66.4 million (FAOSTAT 2014b). In the short term, the increased liquidation of existing animal stocks led to a large outflow of meat in the retail market, further pushing meat prices down relative to feed grain prices. However, in the longer term, the cutbacks have mitigated cash-flow problems caused by elevated feed grain prices and they have led to a recovery in the differential markup of the Animal Processor nexus, as shown in the right insert of Figure 3.4. The Animal Processor nexus has also sought to offset adverse domestic meat consumption (see right insert of Figure 3.1) and relative feed price trends through capitalizing on the general 'meatification' of diets abroad (Weis 2010). International sales of Tyson Foods have increased from 11% of total revenue in 2005 to 17% in 2012 (Tyson Foods 2006: 2; 2012: 2). Similarly, Smithfield‟s corresponding international share of sales has risen from 15% to 24%, in the same period (Smithfield 2006: 23; 2012: 17). The rationalization of the Animal Processor nexus‟s domestic operations and the expansion of meat sales outside of the US have helped to reverse the decline in its differential capitalization, as depicted in Figure 3.4. Moreover, as the figure shows, these changes also seem to have contributed to a resurgence in the differential income of livestock farmers. Interestingly, the Agro-Trader nexus has perhaps contributed to the recovery of the Animal Processor nexus's earnings capacity, by supporting and facilitating the spread of meat-centered diets abroad. The support has been articulated in the discourse of the Global Harvest Initiative, for its policy statements continually equate social development with increased meat consumption (see for example Global Harvest 2013). And the Agro-Trader nexus has facilitated global meatification through encouraging the spread of agro-biotechnology and monocropping practices for feed grain production, and through setting up milling and distribution channels that process and deliver these feed grains to confined animal feed operations across the world. Thus, the tensions between the Agro-Trader 104 nexus and the Animal Processor nexus regarding the corn-ethanol boom have partially been defused through the international expansion of the livestock-feed complex (Gereffi and Christian 2010, Weis 2013, Schneider 2014). The Animal Processor nexus has also benefited from the general slowdown of the cornethanol boom. By the beginning of the second decade of the twenty-first century, the ethanol sector was producing more fuel than could be absorbed by existing fuel consumption in the US. Almost all of the fuel in the US now contains about 10% ethanol, and surmounting this „blend wall‟ will be difficult as higher percentages of ethanol used in fuel damages the engines of automobiles that are not built according to „flex-fuel‟ specifications (Barnett 2013). The slowdown in the growth of ethanol production from a compound annual growth rate of 29% from 2005 to 2009 to a growth rate of just 5% per year for the four following years is reflective of a wider modulation in the power of the Agro-Trader nexus. As Figure 3.4 shows, between 2009 and 2010 the Agro-Trader nexus‟s differential capitalization fell dramatically. The slowing growth in the diversion of corn into the ethanol sector (Figure 3.3) contributed to a decline in corn prices in 2009 and 2010 and this in turn contributed to the emergence of a brief deflationary period within agriculture that the Agro-Trader nexus struggled to negotiate. In particular, there was a farmer backlash against Monsanto‟s genetically engineered Smartstax corn seed as the high price the company charged for it seemed to be completely unreasonable given its yield performance. Monsanto claims that it has now adjusted its pricing model. According to Monsanto‟s own figures, toward the end of the first decade of this century, the company sought to glean 50% of the extra profit that the introduction of its newly engineered seeds generated for farmers. Now, they have reverted to their strategy of claiming one-third of the extra profits (Pollack 2010). The moderation in Monsanto‟s pricing strategies, in the face of corn farmer discontent, perhaps contributed to the flat-lining in the differential 105 markup of the Agro-Trader nexus in recent years, as depicted in the right insert of Figure 3.4. ADM, for its part, found that the margins of its ethanol processing division were caught in a cost-price squeeze due to the diminution in the differential between gasoline prices and corn prices (Blas 2012). Finally, Deere and Co. experienced reduced sales of its specialized crop agriculture vehicles, as falling crop prices reduced corn growers‟ willingness to make costly machinery purchases. Although the Agro-Trader nexus is operating in accordance with the Animal Processor nexus in the promotion of global meatification, it remains in a deadlock with the Animal Processor nexus over the US ethanol sector. The sharp rise in corn-ethanol production from 2005 to 2009 corresponded with a rapid redistribution of profitability-read-power from the Animal Processor nexus to the Agro-Trader nexus. And in the following years, corn-ethanol production kept climbing, albeit at a slower pace. According to the latest estimates, by 2013, a record-breaking 43% of corn produced in the US was channelled into the ethanol sector. This figure is predicted to fall to 40% in 2014 (AgMRC 2014). Despite the apparent downtrend in the proportion of corn channelled to ethanol feedstocks, it is unlikely that the corn-ethanol sector will be dramatically curtailed for a number of reasons. Firstly, as the chapter has argued, the companies of the Agro-Trader nexus enjoy a profound influence over the US government decision-making process and as a result, it is improbable that new policies and regulations will come to pass that substantially undercut their accumulation strategies. Secondly, the broader pro-ethanol coalition has significant electoral clout because two major „swing states‟ – Iowa and Ohio - are in the Corn Belt. As such, US presidential candidates disregard the interests of corn farmers, and the nexus of agribusiness power in which these farmers are ensconced, at their peril. Thirdly, the possibility of non-edible biomass dislodging corn from its position as the US's premier ethanol feedstock looks extremely remote. In fact, the latest data show that 106 second-generation agrofuels account for only 0.04% of total agrofuel production in the US (USDA ERS 2014). Due to seemingly insurmountable problems regarding their commercial viability, it does not seem likely that second-generation agrofuels will be a significant factor in the US energy sector for the foreseeable future. Given these considerations, the food/fuel complex will probably remain an integral, but perhaps somewhat diminished, feature of the US agrarian political economy. The pecuniary effects of the interstitial adjustments that are under way are clearly depicted in Figure 3.4. The great divergence from 2008 to 2009 in capitalized profit shares within agribusiness, and in income shares within agriculture, has been followed by considerable re-convergence in both differential capitalization and differential income trends. Conclusion Building on previous scholarship in agrarian political economy (Goodman et al. 1987), the food regime approach underscores the importance of the corporate appropriation of discrete phases of agricultural production, on the one hand; and the reconstitution of perishable foods into substitutable commodities, on the other. As Friedmann and McMichael argue, these processes of appropriation and substitution have eroded the autonomy of farmers over the agricultural process and they have also undermined the capacity of different governments to direct agriculture for national ends (1989). In the account offered here, I have sought to emphasize another major consequence of the decomposition of the world food system into discrete sectors: this decomposition can give rise to rivalry between corporate constellations that superintend different agri-food complexes. Specifically, I have examined the rivalry between the Animal Processor nexus and the Ago-Trader nexus. While the former has 107 appropriated control over distinct parts of animal-meat production, the latter has extended its pecuniary ambit over distinct parts of corn and ethanol production. Additionally, by underscoring the seemingly indispensable role played by corn for both of these axes of power, my analysis shows how processes of substitution can drive conflict between different groups of agri-food corporations and between different groups of farmers. In the case of the US agrofuel boom, the dramatic increase in the substitution of ethanol for petroleum completely overwhelmed the Animal Processor nexus's rather limited capacity to substitute corn for cheaper commercial feed with comparable energy content. As such, by shifting from an aggregate to a disaggregate perspective, I have moved the focus of analysis from the supersession of national government authority and farmer autonomy by capital in general, towards an examination of how both government organs and agricultural interests become enfolded into power struggles between different groups within agri-food capital. This disaggregating analysis offers novel answers to some foundational questions of agrarian political economy regarding (dis)accumulation and social differentiation. On a macroscopic level, the agrofuel boom may have increased the profitability of capital in general, as McMichael contends. But within the agrarian political economy of the US, the agrofuel boom can also be characterized as a vector of redistribution. The redistributional dynamics are multi-dimensional. By triggering the massive diversion of corn from the livestock-feed complex toward the food/fuel complex, the corn-ethanol boom shifted capitalized profit shares within agri-food capital, from the Animal Processor nexus to the Agro-Trader nexus. It also redistributed income within agriculture, from livestock farmers to corn growers. And the ethanol boom may have contributed to a shift in earnings within the livestock sector itself: from livestock farmers outside of the Corn Belt to livestock farmers inside the Corn Belt. 108 Furthermore, in specifying the winners and losers of the agrofuel boom, the chapter has pointed to the social forces that stand in the way of change within the corporate food regime. As my findings indicate, putting an end to corn-ethanol production would not only involve challenging the accumulation strategies of some of the most powerful agri-food corporations in the world; it would also entail confronting the interests of more than 400,000 corn farms in the US, many of which have a direct stake in the continued diversion of their output into agrofuel feedstocks (EPA 2013). Finally, the chapter underlines the importance of supporting farmer-led movements that operate at the margins of the corporate food regime. As activists, food regime analysts and agrarian political economists have long argued, locally oriented polycultures, and peasant farming more generally, offer a vital alternative to the destructive directions in which agrifood corporations are taking the world food system. In defending and advancing these forms of agriculture, we may be able to move away from a food regime that commits inordinate amounts of energy and resources to fueling cars and feeding intensively reared animals, towards systems of provisioning that are fundamentally centered on nourishing humans. In presenting these findings, the chapter points to the potential of conducting further research that inquires into the ways in which redistributional struggles between farmers become co-articulated with redistributional struggles between agri-food corporations, and it points to the importance of analyzing how these struggles impact nourishment outcomes. Such research may deepen our analysis of uneven agrarian development and it may nuance existing understandings of the relations of inclusion and exclusion, and resistance and incorporation, between farmers in advanced capitalist countries, global agri-food corporations and the landless poor. The next chapter takes up this task, in relation to conflicts within US agribusiness and agriculture over the re-regulation of agricultural derivatives markets. 109 4. Futures Tense: The Food Crisis and the Contested Regulation of Agricultural Derivatives It‟s important to allow markets to work and fluctuate properly and not squelch price volatility... - Emery Koenig, Cargill chief risk officer7 Introduction So far, this dissertation has only examined the redistributional-power dynamics in physical commodities markets. No attention has yet been paid to redistributional patterns of price changes within derivatives markets. These markets trade in financial instruments whose values derive from the underlying physical commodities. Commodity derivatives warrant attention because, according to a large portion of the literature on food price inflation, the price spikes in 2007-08 and 2010-11 were in part caused by the influx of investment in these financial instruments (see Timmer 2008; Piesse and Thirtle 2009; US Senate 2009; Baffes and Haniotis 2010; Ghosh 2010; Lagi et al. 2011a; Ghosh et al. 2012). Thus, whereas the previous chapters examined the coalitional dynamics between agri-food corporations and farmers in regard to agrofuels policy, this chapter will examine the divisions within agriculture and agribusiness over the re-regulation of agricultural derivatives markets. Moreover, by exploring debates around the alleged role of 'excessive speculation' in destabilizing futures markets, the chapter 7 Cited in Meyer 2012. 110 investigates the effects of price volatility, rather than just price levels per se, on relative incomes for different groups within the agri-food sector. Like the previous chapter, the argument in this chapter is focussed on patterns of power within the US. However, these patterns should be understood against the backdrop of the broader landscape of food insecurity. As has already been noted, expenditure on food accounts for 60-80 percent of income for poor households in some countries. When the price shocks that first register in US commodity exchanges reverberate into local markets across the world, these households have to make drastic adjustments in order to sustain themselves. The adjustments may entail cutting back on basic expenditures, by buying food of inferior nutritional value, or in smaller quantities; by extending work hours or engaging in casualized labor; and by pulling children out of school (Estruch and Grendelis, 2013). This collateral damage should be borne in mind when we assess the intricacies of the redistributional shifts within US agriculture and agribusiness, and when we weigh-up the various roles played by US farmers and US-headquartered agri-food corporations in lobbying over the re-regulation of agricultural derivatives markets. By doing so, we may arrive at a preliminary understanding of how interests within agribusiness and large-scale agriculture in the US may relate to the interests of those poor households across the world that are existentially vulnerable to food price shocks. As Figure 4.1 shows, from 2007 to 2008, both price levels and price volatility in grain futures markets surged. During this period, there were mounting concerns among US policymakers that „excessive speculation‟ was a key driver of the price instability. Moreover, other derivatives markets, with no linkage to physical commodities, also aroused acute anxiety. In particular, many believed that the over-the-counter (OTC) trade in credit default swaps amplified the wave of defaults in the US mortgage sector into the tsunami of financial 117 Clapp and Helleiner The apparent failure of existing approaches to account for the dynamics of derivatives reform motivated the groundbreaking intervention of Clapp and Helleiner (2012). The pioneering nature of Clapp and Helleiner's work stems from the fact that, while the IPE literature on many aspects of financial regulatory policymaking is voluminous, „the study of agricultural derivatives markets and their regulation has been almost completely neglected to date‟ (2012: 201). For these two scholars, the financial crisis of 2007-08 undermined the legitimacy of the elite-dominated „Wall Street-Treasury complex' and opened the way for the politicization of commodity derivatives markets. The collapse of the subprime mortgage sector thrust the business operations of the major financial firms into the spotlight because these firms‟ trade of credit default swaps was widely considered to have spread the 'toxic waste' emanating from the subprime meltdown through the entire financial system. The popular backlash against this financial fallout was accompanied by significant changes in the regulatory policymaking environment. As the legitimacy of the Wall Street-Treasury complex waned, the focal point of regulatory agenda-setting shifted from technocratic policy networks towards branches of government, such as the US Congress, and standing committees, such as the House Committee on Agriculture, that were more receptive to interest group pressures from outside the financial sector. In making these claims, Clapp and Helleiner seek to refute those elite-oriented approaches that suggest that unclear distributional consequences in financial regulation conduce towards elite-predominance in regulatory policymaking: „agricultural interests were mobilized by some very clear and targeted distributional consequences of price volatility' (Clapp and Helleiner, 2012: 201, my emphasis). According to Clapp and Helleiner, the failure 118 of futures prices of wheat, and other grains, to converge with corresponding cash market prices at the point of contract expiration was a particularly acute problem for farmers as it raised doubts about the price discovery function of futures markets and, in so doing, made production decisions more difficult. Grain elevator and grain processing companies were also hit by volatility. These firms offset the risk of their grain purchasing commitments in cash markets with opposing commitments to sell grain contracts in futures markets. But because the volatility of grain futures prices rose, grain elevator and processor companies had to pay increasing amounts to keep their margin accounts open. Due to the fact that elevators found it increasingly expensive to offset their cash market commitments, many stopped engaging in long-term forward contracts with farmers; and as a result, farmers were deprived of their main marketing tool. The volatility set in motion an onslaught of denunciations of financial firms by agricultural interests, as many saw „excessive speculation‟ as a chief contributor to the price spikes (Clapp and Helleiner, 2012: 196-7). Clapp and Helleiner go on to argue that agricultural interests enhanced their influence over the regulatory policymaking process by forging alliances with domestic groups that were concerned about energy price instability. The key lobbying organization that emerged out of this marriage of domestic interests was the Commodity Markets Oversight Coalition (CMOC). The CMOC called for a whole range of regulatory changes at the beginning of 2010, including the imposition of aggregate position limits, the clearing of standardized derivatives and the application of these regulations to foreign jurisdictions. This mobilization of domestic groups, according to Clapp and Helleiner, spurred the passage of the Dodd-Frank Act. The Act met the CMOC‟s calls for standardized commodity swaps to be cleared and exchange-traded, and it gave the CFTC enhanced authority to define key regulatory terms and to set speculative limits. Clapp and Helleiner express a degree of optimism in regard to the commodity derivatives 119 reforms that the Dodd-Frank Act appeared to usher in: the case of agricultural derivatives reform, they argue, „is one where the efforts of US agricultural groups to defend their interests may end up generating an outcome – less volatile agricultural prices – which strengthens the food security of the world‟s poor' (2012: 206). Pagliari and Young Since Clapp and Helleiner‟s pioneering article, of all IPE scholars, Pagliari and Young (2013; 2014) have carried the study of the coalitional dynamics surrounding derivatives regulation furthest by offering systematic quantitative evidence of actor plurality within financial regulatory policymaking, and by constructing a preliminary framework with which to assess the significance of this plurality. They suggest that actor plurality is important because it bears on the capacity of financial firms targeted by regulation to influence the policymaking process. The lobbying clout of target groups can be curtailed when non-target groups actively engage in opposition to the advocacy efforts of the target group. Alternatively, the influence of a targeted financial sector group can be amplified or „leveraged‟ by non-targeted groups whose regulatory preferences accord with its own (2014: 585-6). With these considerations in mind, Pagliari and Young argue that the degree to which a targeted financial firm can influence the regulatory policymaking process is conditional on two variables: the extent to which nontargeted groups are mobilized over the regulatory issues in question; and the extent to which the preferences of these non-targeted groups converge with those of the targeted financial firms. The interaction of these two factors yields what Pagliari and Young call a „payoff matrix‟. 120 Pagliari and Young contend that there were low levels of mobilization against those „private financial industry groups‟ (PFIGs) that championed the deregulation of commodity derivatives markets from the 1980s to the mid-2000s. This period was characterized by 'quiet politics' in which the interests of PFIGs took precedence. The interaction of target groups and non-target groups in this context is depicted in Quadrant A of Pagliari and Yong‟s matrix, as reproduced in Figure 4.2. But, like Clapp and Helleiner, Pagliari and Young argue that after the commodity price spikes and financial crisis of 2007-08, the surge in advocacy activity of agricultural groups, working in consort with food and energy firms and NGOs, helped prevent the major banks from vetoing the inclusion of strict new curbs on commodity futures speculation within the Dodd-Frank Act (Quadrant B). Low mobilization of non-target groups High mobilization of non-target groups No convergence of interests between targeted PFIGs and other groups (A) Pre-crisis: banks dominate. Weak opposition from exchanges and agricultural groups. (B) Post-crisis derivatives regulation: agricultural groups and NGOs push for commodity derivatives regulation. Convergence of interests between targeted PFIGs and other groups (C) (D) Post-crisis derivatives regulation: Coalition of Derivatives EndUsers push for exemptions. Figure 4.2 Pagliari and Young’s Matrix (2014: 598) 121 The two scholars compare these regulatory developments in commodity derivatives markets with contemporaneous regulatory developments in credit derivatives markets. The advocacy efforts of non-financial corporations that use derivatives for risk management purposes were particularly important in shaping the trajectory of regulatory policymaking. As the two scholars argue: 'unlike agricultural interests calling for more stringent regulation of commodity derivatives, these firms have mostly mobilized in opposition to a number of aspects of the existing legislative proposals' (2014: 595). The Coalition for Derivatives End-Users (CDEU) emerged as the major lobbying vehicle for these non-financial firms, just as the CMOC emerged as the major advocacy vehicle for agricultural interests. The CDEU was particularly concerned that those corporate actors that used derivatives to reduce their commercial risks would be subject to the same requirements designed for swap dealers. It contended that the mandatory clearing of OTC derivatives would drain significant amounts of working capital from non-financial corporations (Pagliari and Young, 2013: 138). As such, Pagliari and Young suggest that while the mobilization of agricultural interests in the field of commodity derivatives regulation countervailed the power of financial firms; in the field of credit derivatives regulation, the regulatory preferences of corporate end-users and financial firms largely converged (Quadrant D). Financial firms were thus able to leverage the mobilization of corporate end-users in ways that enhanced their own influence over the policymaking process. The resulting 'Wall-Street-Main-Street nexus' successfully prevented the most far-reaching aspects of credit derivatives reform that were proposed in the lead-up to the promulgation of the Dodd-Frank Act (Pagliari and Young, 2013; 2014). 122 A Power-Distributional Approach Clapp and Helleiner have broken new ground in the analysis of derivatives regulation by highlighting the role of agricultural groups in undermining the influence of financial firms over the commodity derivatives reform process. Pagliari and Young make further inroads into the unknown by offering exhaustive statistical confirmation of the diversity of actors mobilized around financial regulatory policymaking. However, there are some aspects of the emergent literature that should be addressed. Firstly, Clapp and Helleiner claim that the distributional dynamics of the food price crisis of 2007-08 are key in explaining the mobilization of agricultural groups around commodity derivatives reform, but they do not offer any quantitative evidence that shows that grain futures price instability actually had a negative effect on income streams within US agriculture. Secondly, Pagliari and Young claim that the passing of the Dodd-Frank Act represented a triumph of non-target groups against target groups in agricultural derivatives regulatory policymaking, but absent from their analysis is an acknowledgment of the fact that over four years after the passing of the Act, the target groups of speculative limits have yet to be clearly determined. As such, it becomes questionable whether we can delineate target groups from non-target groups in advance of an analysis of the struggles through which the boundaries between targets and non-targets are settled. On a quantitative level, we can test Clapp and Helleiner's claims regarding distributional outcomes through quantitatively exploring the relationships between grain futures price volatility on the incomes of different agricultural groups. In so doing, the chapter draws on the method advanced by the CasP framework of charting relative price changes with changes in relative income for different agricultural groups. On a qualitative level, we can nuance the 123 framework offered by Pagliari and Young, by analyzing the open texture of the Dodd-Frank Act. In this regard, the historical institutionalist account of institutional change is particularly helpful. Consonant with the CasP framework, the historical institutionalist approach conceives rules as legacies of past struggles and instruments of ongoing redistribution (Mahoney and Thelen, 2010: 7-8). But one of the major innovations of the historical institutionalist perspective lies in its observation that rules change, not only because of the contested dynamics of regulatory policymaking, but also because there is a degree of openness in the interpretation and the implementation of legislative intent. The openness that exists between the creation of law and the administration of rules creates spaces for definitional conflict over how different groups are to be classified and regulated. This definitional conflict has significant distributional impacts because: 'struggles over the meaning, application, and enforcement of institutional rules are inextricably intertwined with the resource allocations they entail' (Mahoney and Thelen, 2010: 11). As such, Mahoney and Thelen (2010:11) argue that '[c]oalitions form not only as representatives of alternative institutions but also as movements seeking particular interpretations of the ambiguous or contested rules of a given institution'. In analyzing the different distributional coalitions vying over the interpretation of commodity derivatives reform, the chapter follows recent scholarship (notably Moschella and Tsingou, 2013) on financial regulation by drawing on the historical institutionalist concepts of change agents and veto players. Change agents, for the purposes of this chapter, are understood as those groups that advocate far-reaching interpretations of legislative intent in the hope of bringing about significant reform, while veto players are understood as those groups that advocate more limited interpretations of legislative intent, with a view to blocking change and preserving existing privileges. 124 The remainder of the chapter will examine the distributional impacts of grain futures price volatility, and link these distributional impacts to the definitional conflict over the regulatory boundaries that separate the targets of reform from the non-targets of reform. In the next section, I test Clapp and Helleiner‟s claims regarding the negative effects of market volatility for agriculture by mapping out the relationship between agricultural futures price instability and the income of different agricultural groups. And in the third section, I ask whether Pagliari and Young‟s arguments regarding target and non-target groups are affirmed by the content of agricultural groups‟ testimonies in Congressional hearings and their comments submitted to the CFTC. I argue that, rather than representing a definitive end-point in the derivatives reform debate, the Dodd-Frank Act granted significant latitude to the CFTC to develop rules for commodity derivatives markets in an ambiguous field of meaning. Moreover, I show that in this ambiguous field of meaning, some agricultural groups, chiefly comprising livestock interests, have acted as change agents by advocating an expansive interpretation of Congressional intent in a bid to widen the target group for speculative limits. But the most powerful groups within US agriculture have acted as veto players, as they have championed a much more limited interpretation of the Dodd-Frank Act in an attempt to push the CFTC to narrow the group targeted for regulatory restrictions. The Distributional Dynamics of Grain Futures Price Instability Grain futures price instability can be examined from three different perspectives: the levels of relative grain futures prices; the volatility of relative grain futures prices; and the decoupling of futures prices from cash market prices at the point of futures contract expiration. This section examines the effect of futures price levels and volatility on both farmers and 125 commodity traders. The first part of the section investigates the distributional outcomes of the levels and volatility of relative grain futures prices for the relative income of different groups of farmers; and it then ascertains how the decoupling of futures and cash markets impacts the relative incomes of those groups. The second part of this section examines the relationship between grain futures price instability and the relative income of the three largest agricultural commodity traders: Archer Daniels Midland (ADM), Bunge and Cargill. This group of firms is of direct relevance because, according to Clapp and Helleiner, the 'agricultural interests' that experienced 'hardship' and that mobilized behind the Dodd-Frank reform agenda comprise „farmers, grain elevator operators, and food processor groups‟ (2012: 195). Although the major agricultural commodity traders have no farming operations in the US, they are the dominant firms in grain elevator operations; and they are also dominant in food processing. Indeed, ADM is the largest grain elevator operator with a market share of 20 percent of overall grain storage revenue in the US, Cargill is the second largest with a market share of 17 percent and Bunge the third, with a share of 10 percent (Kruchkin, 2013). Farmers The dependent variable for the scatter charts in Figure 4.3 is farmer relative income. This variable is calculated by dividing the average quarterly income of farmers in the US by the average quarterly income of nonfarm production workers in the US. The independent variable for the left chart is relative grain futures prices. It is calculated by deflating daily grain futures prices by the daily producer price index (interpolated linearly from monthly data) and then computing the average for this ratio. The independent variable for the right chart is the volatility of relative grain futures prices. It is computed by calculating the daily rate of change 126 in the deflated futures price data, and then calculating the quarterly standard deviation of this rate of change, such that each observation denotes the standard deviation of the daily rate of change in deflated grain futures prices for the quarter. Figure 4.3 Farmer Relative Income and Grain Futures Price Instability Note: Farm income data consists of the net income of sole proprietorships and partnerships that operate farms. For more information regarding the computation of these data see http://www.bea.gov/regional/pdf/lapi2010.pdf. Farmer relative income data calculated by dividing quarterly aggregate farmer income data by the interpolated farmer population for that quarter; and then by dividing these data by the earnings of nonfarm production workers for that quarter. For relative grain futures price levels and volatility computations see note to Figure 4.1. Data are smoothed to 2-year moving averages. Farmer relative income and relative grain futures price data re-based at 100 in 1998 Q3. Source: Farmers proprietors‟ income data from the Bureau of Economic Analysis through Global Insight; series code: YENTAF. Earnings data of nonfarm workers from the Bureau of Labor Statistics through Global Insight. Series code: [email protected]. Farm population data from 2012 Census on Agriculture: http://www.agcensus.usda.gov/ and from the Agricultural Resource Management Survey: http://www.ers.usda.gov/data-products/arms-farm-financial-and-crop-production-practices. For relative grain futures price levels and volatility data see Figure 4.1. 40 60 80 100 120 140 160 60 70 80 90 100 110 120 130 Farmer Relative Income Relative Grain Futures Price ratio 2008 Q1 2013 Q3 r= 0.45 1988Q3 = 100, 100 40 60 80 100 120 140 160 0.75 1 1.25 1.5 1.75 2 2.25 2.5 Farmer Relative Income Volatility of Relative Grain Futures Price ratio 2013 Q3 2009Q4 r = 0.00 2007 Q4 1988Q3 = 100 2003 Q1 jbaines.tumblr.com 133 Figure 4.6 Farmer Relative Income and Grain Futures Convergence Note: Farmer relative income calculated by dividing average net cash farm income by the average wages of nonfarm production workers. Relative income data re-based at 100 in 1996 for the top-left chart. Note that, the relative income observation for cattle farmers in 1996 is omitted because it was a negative value in that year. Therefore, this series has been re-based to 100 at 1997. Basis is the daily cash price less futures price during the delivery period for each contract expiration month (bu. = bushel). There are five contract delivery periods for the soft red wheat and corn contracts each year, and eight contract delivery periods for the soybean contracts. Source: Farmer income data from the US Department of Agriculture‟s Agricultural Resource Management Survey available at: http://www.ers.usda.gov/data-products/arms-farm-financial-and-crop-production-practices/tailoredreports.aspx#.U24aB_m7ySq Basis data from Hoffman, L.A. and Aulerich, N. (2013) „Recent Convergence Performance of Futures and Cash Prices for Corn, Soybeans, and Wheat‟, Report from the Economic Research Service, US Department of Agriculture, FDS-13L-01, pp.15-16. For average earnings data for nonfarm workers see source details for Figure 4.3 0 100 200 300 400 500 600 700 800 900 1000 -500 -400 -300 -200 -100 0 100 200 300 400 500 2000 2004 2008 2012 Soy Growers Corn Wheat Hog Farmers Cattle Poultry index Crop Producers' Relative Income (1996=100) Livestock Producers' Relative Income -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 -200 -150 -100 -50 0 50 100 150 200 2005 2006 2007 2008 2009 2010 2011 2012 136 Soy Grower Relative Income (index) Basis in Soybeans ($/bu.) 154 100 49 79 89 132 127 187 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 -200 -150 -100 -50 0 50 100 150 200 2005 2006 2007 2008 2009 2010 2011 2012 98 Wheat Grower Relative Income (index) Basis in Soft Red Wheat ($/bu.) 154 100 72 102 92 78 121 187 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 -200 -150 -100 -50 0 50 100 150 200 2005 2006 2007 2008 2009 2010 2011 2012 122 Corn Grower Relative Income (index) Basis in Corn ($/bu.) 201 100 65 112 145 119 154 jbaines.tumblr.com 134 markets and futures markets are converging. The thick bars reproduce the relative income data for the crop producers presented in the top-left panel. The thin lines track the basis for the futures prices for the different commodity crops. The longer these lines are, the lower the futures prices are relative to the cash prices, and the greater the convergence problems are, for the respective crops. The charts suggest that convergence problems were most acute in wheat markets. When the basis was widest for the wheat farmers, in 2006, 2008 and 2009, their relative income was comparatively low. In contrast, corn and soy bases have been generally much narrower, and there does not seem to be any direct relationship between relative income and basis levels for these crop producers. Why were wheat growers more negatively affected by futures price instability than other farmers in the commodity crop sector? Arguably, a key factor was the outsized presence of Commodity Index Funds (CIFs), such as the S&P Goldman Sachs Commodity Index (S&P GSCI), in the wheat futures market. At the height of the price crisis in 2008, index funds laid claim to the equivalent of 196 percent of the wheat crop, but just 22 percent of the soybean crop and 13 percent of the corn crop for that year (ABA, 2009). A representative of the National Farmers Union (NFU) - a general farm organization that according to Bill Winders (2009) has been historically aligned with wheat interests - was unequivocal in his appraisal of the situation: 'speculators have created a huge mess here for us... farmers are feeling this today' (cited by Reuters, 2009). While wheat farmers have lambasted the possibly destabilizing impact of the influx of CIFs in agricultural futures markets, representatives of other grain farmers have been ambivalent on the issue. The ambivalence partly stems from the fact that convergence problems have been much less acute for corn and soybean markets. It also stems from the fact that the CIFs have been widely considered to have had a 'price-supportive' 135 impact on the market, and thus allowed farmers to sell their crops at higher prices than the putative 'market fundamentals' would have allowed. The complexity of the situation was well articulated in a statement delivered to the CFTC in 2008 by the American Farm Bureau Federation (AFBF): Trading activity by funds is certainly one of the contributing factors generating high futures prices for commodities. Ordinarily, this would appear to be positive for agriculture. But if the futures markets do not converge with cash markets, there is little information on what real price levels should be either for producers or consumers of the commodity in question. (Cited by US Senate, 2009: 141-2) As the purported representative of farmers in general, AFBF's carefully calibrated statement in which it lauds the inflationary effects of the expansion of CIFs but bemoans its apparently destabilizing impact on grain futures markets, coheres with the quantitative findings of this section. For as the regression results suggest, on an aggregate level farmers benefit from higher grain prices but they appear to suffer from increased grain futures price instability. So far we have just examined grain farmers, but what explains the negative effects of high and volatile futures prices on the US livestock sector in general, and cattle farming in particular? Feed comprises 60-70 percent of the livestock production costs in the US, and thus high grain futures prices are associated with crimped margins within animal agriculture (Becker, 2008). Additionally, the more volatile grain futures prices are, the harder and the more expensive it is for livestock interest groups to hedge input costs. These problems are particularly acute for cattle producers because of the unique structure of cow-beef production. Cattle have the longest biological cycle of all farmed animals in the US. The gestation period for calves is nine months, and then cows can live for up to one and a half years before they are killed. In contrast, it takes just 13 weeks to bring chickens from zygote-state to slaughter weight, and 45 weeks for hogs. Furthermore, cows typically produce only one calf a year, 136 while sows can produce a litter of eight to nine piglets every six months and breeder hens can lay over 12-dozen hatching eggs annually. As a result of the low fecundity and long biological cycle of cows, it takes a long time for cattle producers to adjust population levels to new feed grain price conditions, and they are thus particularly vulnerable to grain futures price volatility (McBride and Matthews, 2007). The vulnerability is compounded by the fact that unlike grain farmers, livestock farmers cannot withhold their product using on-farm storage facilities in the hope of more favorable price conditions in the future. The marketing window for live-animals is simply too short and the handling costs are too high. As the old agricultural saying goes, cattle farmers must 'sell it, or smell it' (Knorr, 2010: 12). The Trading Houses Let us shift our attention from the rather unglamorous undertaking of raising livestock to the more rarefied business of commodity trading. Unfortunately, long-term, granular data for the earnings of the agricultural commodity traders are difficult to obtain. The major trading houses that have historically dominated grain merchandising were privately owned, and as a result there is a lack of publically available financial data on these companies. Fortunately, however, fragments of Cargill's net income data have been published in various texts (Broehl, 1992; 1998 and 2008; Kneen, 1995). These fragments have been pieced together in this thesis to create a continuous dataset of the net income of Cargill from 1950 onwards. Shorter-term net income data for the major grain traders have been easier to obtain. From 1999 onwards Cargill began to release press statements on a quarterly basis that disclosed details of its financial performance. Moreover, by 1999 Bunge became a publically traded firm. And by the late 1990s, publically-traded ADM ascended from being a major grain processing firm within the 137 US to one of the world's most powerful trading companies. As a result, the quarterly net income data for the three largest trading companies in the last fifteen years are obtainable. The two charts in Figure 4.7 plot the relative net income data of ADM, Bunge and Cargill (henceforward 'ABC') against the same grain futures price data presented in Figures 4.1, 4.3, 4.4 and 4.5. Following the CasP's method of empirically investigating distributional shifts within dominant capital, ABC‟s relative income is calculated by dividing the average net income of the ABC firms by the average net income of the top 500 US-listed firms, ranked by net income for each quarter (Nitzan and Bichler, 2009). The left chart suggests that there is a non-linear relationship between ABC‟s relative income and the levels of relative grain futures prices. And the right chart shows a clear positive correlation between the relative income of ABC and the volatility of relative grain futures prices. The two charts in Figure 4.8 plot the annual relative net income data of Cargill against annual relative grain futures price levels and volatility. Cargill‟s relative earnings are computed in the same way, mutatis mutandis, as those of ABC. There are two ways of understanding the left panel. Firstly, one can see an unchanging structure that yields a negative but loose correlation for the entire period. Secondly, one can observe a series of sub-structures linked by structural changes, where the underlying substructures show tight positive correlations. From the second perspective, one can see key structural changes during the two commodity super-cycles of the 1970s and of the 2000s, when relative grain futures prices increased dramatically. In these two periods, indeterminate relations between relative grain prices and Cargill‟s differential profit gave way to steep positive correlations. Interpreting the right panel is much more straightforward: here one can see a clear and consistent long-term positive correlation between Cargill's different profit and the volatility of relative grain prices. The fourth and fifth rows of Table 1 present the regression results for the raw data presented in 138 Figures 4.7 and 4.8. These two rows of statistical results should be treated with even more caution than the statistical results for the farmer grain income datasets, due to the lower number of observations upon which the regression analyses are based. But the results appear to confirm the positive relationship between grain traders‟ relative income and the volatility of relative grain futures prices. Figure 4.7 The Major Agricultural Commodity Traders’ Differential Profit and Food Price Instability Note: The major agricultural commodity traders‟ differential profit is computed by dividing the average net income of Archer Daniels Midland, Bunge and Cargill in each quarter by the corresponding average per firm net income of the Compustat 500. For relative grain futures price levels and volatility computations see note to Figure 4.1. Relative price and profit for the major agricultural commodity trader charts smoothed as 2-year moving averages Source: Archer Daniels Midland, Bunge and Compustat 500 net income data from Compustat through WRDS. Cargill data from New York Times, Wall St, Journal and http://www.cargill.com/company/financial/index.jsp (accessed 2 May 2014). Grain futures price index data and Producer Price Index data from Global Insight, series codes: CRGRNSX.D7 and WPID01.M. 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 1 1.5 2 2.5 Differntial Profit Volatility of Relative Grain Futures Price ratio 2013 Q3 2008 Q4 2001 Q3 r = 0.45 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 80 120 160 200 Diffferential Profit Relative Grain Futures Price ratio 2001 Q3 = 100 2008 Q4 2013 Q3 jbaines.tumblr.com 139 Figure 4.8 Cargill’s Differential Profit and Food Price Instability Note: Relative price volatility data computed as the standard deviation of the monthly changes in relative grain futures prices in a 1-year moving window. Grain futures price are measured using a reconstructed CRB Grain Futures Price Index. This reconstructed index comprises an unweighted average of monthly wheat, corn and soybean prices, like the original index for daily prices. Cargill‟s differential profit computed by dividing Cargill‟s net income each year by the corresponding average per firm net income of Compustat 500. Relative price and profit data for the Cargill charts are smoothed as 5-year moving averages. The Compustat 500 is the 500 largest firms ranked by net income. Relative grain futures price data re-based at 100 in 2001 Q3. Source: Archer Daniels Midland, Bunge and Compustat 500 net income data from Compustat through WRDS. Cargill data from Broehl (1992; 1998 and 2008), Kneen (1995) and < http://www.cargill.com/company/financial/index.jsp> (accessed 2 May 2014).Monthly wheat, corn and soybean prices from Global Financial Data, series codes: W_USSD; C_US2D; and SYB_TD. The positive correlations between grain futures price volatility and commodity traders' relative earnings complicate existing understandings of the distributional impacts of volatility for agricultural interest groups. The data indicate that volatility is not a bane for agricultural commodity traders. Rather, at least in a qualified sense, volatility is considered to be a boon. Indeed, due to the trading houses' unsurpassed reach into global trade flows and their often privileged access to policymakers and supply chain participants, they are privy to multifarious 0 0.2 0.4 0.6 0.8 1 1.2 1.4 2 4 6 8 10 12 Differential Profit Volatility of Relative Grain Futures Price 1977 ratio 1954 r= 0.72 1996 2013 0 0.2 0.4 0.6 0.8 1 1.2 1.4 20 40 60 80 100 120 Differential Profit Relative Grain Futures Price ratio 1977 2013 1954 r= -0.37 jbaines.tumblr.com 140 streams of commercially-relevant information. They thus have a clear lead in the 'price discovery' process. And during periods of price turbulence, this lead tends to widen as the agricultural commodity traders can take advantage of the disorientation of other market participants, and harness their differential knowledge to navigate significant profit opportunities through arbitrage, informed speculation or the ramped up provision of riskmanagement services to farms, firms and sovereign states. With these considerations in mind, the agricultural commodity traders may be one of the main beneficiaries of the grain futures price volatility that possibly arises from the influx of CIFs and other investment vehicles in agricultural commodity derivatives markets. A statement made in Deutsche Bank's financial prospectus for Glencore - a conglomerate that accounts for nine percent of the global grain trade - affirms this view: As commodities gain popularity as an asset class, the financial aspect of demand, which is arguably more susceptible to changes in sentiment will also continue to amplify volatility in our view. Commodity price volatility may not suit the pure producers... [But] Glencore‟s trading business actually benefits directly from the volatility. (Sporre, et al. 2011) However, the agricultural commodity traders have not just been passively affected by increased investor interest in agricultural commodities as an asset class. In fact, they have actively facilitated the movement of institutional investors' capital in commodity derivatives. To illustrate, the world's largest agri-food trader, Cargill, expanded into financial services in 1972 by forming Cargill Investor Services - a division that offered a brokerage and advisory platform for investors seeking commodity exposure. And by 1994, the company founded Cargill Risk Management. This business unit designs customized OTC products to financial institutions seeking to diversify their portfolios (Broehl, 2008; Murphy et al. 2012). In the 2000s, Cargill Risk Management even set up its own passive long-only index that emulates the 141 S&P GSCI, and it also founded its own hedge fund - Black River Asset Management. Similarly, in 2006 Glencore embarked on a strategic alliance with Credit Suisse to design structured investment products based on Glencore's insider knowledge of global trade flows (Berne Declaration, 2011). And by 2013, ADM's investor services subsidiary (ADMIS) became the thirteenth largest futures brokerage firm in the world - handling US$2.9 billion in customer equity (Szala and McFarlin, 2013). The key findings that the chapter has reached so far are summarized in Figure 4.9. The figure shows that, in the aggregate, farmers' relative income is negatively correlated with futures price volatility and positively correlated with relative grain futures prices. Moreover, it shows that Southern Seaboard farmers' relative income is negatively correlated with both the level and volatility of grain futures. These findings lend some weight to Clapp and Helleiner‟s claims that grain futures price volatility has had a negative impact on distributional outcomes for agricultural interests. However, the other findings do not cohere with Clapp and Helleiner's arguments. As the matrix shows, Midwestern farmers' relative income is uncorrelated with grain futures price volatility and positively correlated with grain futures price levels; and the major agricultural commodity traders' relative income is positively correlated with futures price volatility and uncorrelated with grain futures price levels. Thus, when we disaggregate farmer income and extend the analysis to the pecuniary earnings of the grain traders, we can see that rather than being 'very clear and targeted' as Clapp and Helleiner suggest, the distributional impacts of price instability have been complex and variegated. In light of this finding, it may be the case that support for wide-ranging speculative limits is less uniform than is suggested by the extant literature. In what remains I investigate this hypothesis with particular regard to the definitional conflict over the delimitation of speculation and hedging, 142 and the correlative demarcation of target and non-target groups in the nascent speculative limits regime. Price Levels Price Volatility Positive Correlation No Correlation Negative Correlation Positive Correlation Midwestern Farmers All Farmers No Correlation Grain Traders Negative Correlation Southern Seaboard Farmers Figure 4.9 The Relationship between Agricultural Income and Price Dynamics Coalition Dynamics: Rule Ambiguity and Definitional Conflict As the first section showed, Clapp and Helleiner take the CMOC to be the key vehicle for agricultural interests during the lead-up to the passing of the Dodd-Frank Act; and Pagliari and Young contend that this countervailing mobilization of agricultural interests stands in contrast to the advocacy efforts of commercial groups that formed the CDEU. According to Pagliari