Posts tagged ‘Archer Daniels Midland’

ADM's Mistake (Mostly Corrected)

Alex Tabarrok discusses the new movie about Mark Whitacre and price fixing at Archer Daniels Midland.  ADM apparently was caught holding meetings with competitors to fix prices of certain chemical commodities, specifically Lysine.

Here was ADM's mistake, and it is one they have clearly learned from:  in the modern American corporate state, there is no reason to engage in illegal private price fixing or cartel arrangements when corporations can achieve similar ends legally and openly through the government.  If ADM was concerned about difficult competition depressing pricing, they could have emulated any of these examples:

  • Run to Congress to beg for strong tariff's on foreign sources of their commodity product (as do the sugar and ethanol industries)
  • Run to Congress and have them institute minimum pricing or buy up excess supply (as do many agricultural producers)
  • Run to Congress to seek supply restrictions (as does the taxi business)
  • Run to Congress and have them restrict new competition and sources of supply through licensure (as do a variety of industries, from real estate to funeral homes to medicine)
  • Run to Congress to have them pass onerous legislation that makes it difficult for new capacity to be added in the business (as does the waste disposal industry)
  • Run to Congress to seek subsidies for their product in the name of some public good - it doesn't even have to be true (as does, well, ADM with ethanol)
  • Run to Congress to seek regulations that favor your particular production and product technologies while hamstringing your competition (as does GE with light bulbs)
  • Run to Congress and have them enforce an industry price-fixing arrangement -- its legal when Congress does it (as do the Milk producers)
  • Run to the FTC to bring anti-trust actions against your competition (as did Netscape and Sun against Microsoft)  This is an interesting article on this, which says in part, "Most [antitrust] cases are not brought by public representatives, whether elected or self-appointed, but by private companies, often rivals of the defendant who are being driven out of business. Businessmen believe that competition is good if they win but bad if the other guy wins."

Of course, all of this takes a little care.  The competitive relief must be couched in something like "consumer protection" or "saving jobs" or "going green" or "fairness," but there are plenty of good examples of consumers getting the shaft in the name of consumer protection that it shouldn't be too hard to come up with something.  Developing a high profile in an early Presidential primary state like Iowa doesn't hurt either.

As I said in the title, ADM has certainly figured this out, if their approach to the ethanol business is any guide.  In ethanol, they have resorted to any number of these tactics simultaneously.

Ethanol Get's Slammed

Finally, the blinders are coming off and the media is starting to
wake up to the absolute travesty that is the Congress's promotion of
ethanol.  From Rolling Stone(!) emphasis added.

This is not just hype -- it's dangerous, delusional bullshit.  Ethanol doesn't burn cleaner than gasoline, nor is it
cheaper. Our current ethanol production represents only 3.5 percent of
our gasoline consumption -- yet it consumes twenty percent of the
entire U.S. corn crop, causing the price of corn to double in the last
two years and raising the threat of hunger in the Third World. And the
increasing acreage devoted to corn for ethanol means less land for
other staple crops, giving farmers in South America an incentive to
carve fields out of tropical forests that help to cool the planet and
stave off global warming.

So why bother? Because the whole
point of corn ethanol is not to solve America's energy crisis, but to
generate one of the great political boondoggles of our time. Corn is
already the most subsidized crop in America, raking in a total of $51
billion in federal handouts between 1995 and 2005 -- twice as much as
wheat subsidies and four times as much as soybeans. Ethanol itself is
propped up by hefty subsidies, including a fifty-one-cent-per-gallon
tax allowance for refiners. And a study by the International Institute
for Sustainable Development found that ethanol subsidies amount to as
much as $1.38 per gallon -- about half of ethanol's wholesale market

Hurrah!  Unfortunately, I fear we may be waking up too late.  Already, billions of dollars are being invested by politically connected companies
on the promises of subsidies and promotion of ethanol extending out to
the end of the universe.  At this point, ethanol may be as entrenched
as agriculture subsidies, the education department, and depression-era
alcohol regulation.  The government has no problem reneging on contracts with oil companies, but God forbid anyone deny Archer Daniels Midland the right to infinite subsidies.

We Have Got To Stop BioFuel Subsidies Right Now

I have no problem if someone wants to compete out there in the free market producing fuel from corn or switchgrass or whatever.  But we have got to stop the subsidies right now, before it is too late.  Biofuels do absolutely nothing, zero, zippo to change CO2 production, and some studies show they make CO2 output worse when you consider the whole production cycle.  This is not to mention the effect biofuels will have in putting more wild and forest land under the till. 

I can't see any conceivable benefit to the economy from subsidizing biofuels, except some hazy notion of energy independence which has limited economic value and which will never be achieved with biofuels  (we will have jacked up the price of corn so high we can't feed cattle long before biofuels make even a minor dent in oil imports).  My only guess as to true motivation is that people want to spite Exxon and Shell, but if you don't like those companies, you really aren't going to like Archer Daniels Midland. 

Biofuels, given current technology, are a pure product of politics.  They are a massive subsidy of Midwestern farmers that the recipients can claim is not really a subsidy.  If the first presidential primary were in Nevada rather than Iowa, you would never hear a word from politicians about ethanol.

But here is the reason we need to end the subsidies right now.  [emphasis added]

A $400-million integrated biodiesel and ethanol refinery the first
complex of its kind in North America will be built in central Alberta.

by Dominion Energy Services, LLC a Florida-based group with pioneering
ties to Calgary's natural gas marketing sector investors that include
$45-billion US private equity fund The Carlyle Group LLC and affiliate
Riverstone Renewable Energy Infrastructure Fund I, LP said Monday they
have finalized plans for the facility....

Alberta Agriculture Minister Doug Horner noted the "world-class"
Dominion plant follows the provincial government's recent, $239-million
over five years initiative to boost biofuels production. The province
will provide a 14-cent per litre production credit to the facility
.  [for those rusty on the metric system, that is 56-cents per gallon or $23.53 per barrel]

Companies are currently building massive subsidy-magnets biofuel plants.  Once these investments are in place, there is going to be a huge entrenched base of investors and workers who are going to wield every bit of political power they can to retain subsidies forever to protect their jobs and their investment.  Biofuel subsidies will be as intractable as peanut and sugar subsidies and protections.

Update:  Radley Balko mentions another great example.  For various post-prohibition reasons that may or may not have made sense at the time, state laws prohibit retailers from buying alcoholic beverages straight from the manufacturer - e.g. Costco cannot buy direct from Anheiser-Busch.  Wholesalers who emerged to fill the legally required middleman role became rich.  Since then, even thought this 3-layered distribution requirement makes zero sense, it has become impossible to change it because the wealthy distributors who owe their fortunes to the requirement block every move to deregulate.

Get Wal-Mart Out of the Public Trough

I have defended Wal-Mart on a number of occasions given its new whipping-boy-of-the-left status.  However, if it wants to get my further support, it is going to have to take it's nose out of the public trough.

It's hard to find reliable numbers on the total value to Wal-Mart of such subsidies. The leading report is Shopping for Subsidies: How Wal-Mart Uses Taxpayer Money to Finance Its Never-Ending Growth
by Philip Mattera and Anna Purinton was published by a left-leaning
advocacy group and funded in part by one of the very unions trying to
unionize Wal-Mart's work force, which will suggest to some a need for
caution. Yet, even if one applies a substantial discount to Mattera and
Purinton's results, Wal-Mart is still doing quite well at the public

  • In a sample of subsidy deals for individual stores, they found
    subsidies ranging from "$1 million to about $12 million, with an
    average of about $2.8 million."
  • In a survey of Wal-Mart regional distribution centers, they found
    that "84 of the 91 centers have received subsidies totaling at least
    $624 million. The deals, most of which involved a variety of subsidies,
    ranged as high as $48 million, with an average of about $7.4 million."

In a very real sense, Wal-Mart thus is in part a creature of big
government. From this perspective, Wal-Mart's recent hiring of
long-time Democratic operative Leslie Datch and significant increase in
contributions to Democratic politicians comes as no surprise. (Of
course, as Timothy Carney has argued,
it may also be that Wal-Mart is now using big government not just to
boost its own growth but as a tool to squash competition.)

Is Wal-Mart becoming the Archer-Daniels-Midland of retail?  In fact, the article does not even mention the egregious practice of getting local governments to use eminent domain to clear them a building location.  A while back I argued that Wal-Mart was using regulation as a club to pound on their competitors:

Apparently, though I can't dig up a link right this second, Wal-mart
is putting its support behind a higher minimum wage.  One way to look
at this is a fairly cynical ploy to get the left off its back.  After
all, if Wal-mart's starting salary is $6.50 an hour (for example) it
costs them nothing to ask for a minimum wage of $6.50.

A different, and perhaps more realistic way to look at this Wal-mart
initiative is as a bald move to get government to sit on their
competition.  After all, as its wage rates creep up, as is typical in
more established companies, they are vulnerable to competitors gaining
advantage over them by paying lower wages.  If Wal-mart gets the
government to set the minimum wage closer to the wage rates it pays, it
eliminates the possibility of this competitor strategy.  Besides, a
higher minimum wage would surely put more low-skilled people out of
work, increasing the pool of people Wal-mart can hire  (and please do
not bring up the NJ convenience store study that supposedly shows that
higher minimum wage increase employment - no one in their right mind
really believes that demand for labor goes up when the costs go up).  I
am not sure what the net effect on Wal-mart's customers would be --
some would have more money, from higher wage, and some would have less,
from fewer hours or due to being laid off.

I have defended Wal-mart in the past,
but I am going to stop if they become the new auto or steel industry
and use the government to protect their market position.  Already they
are losing my sympathy with their whoring for local relocation subsidies and eminent domain land grabs.

If Wal-Mart wants to seek public funding for its business and impose regulation on its competitors, and thereby make itself a semi-governmental entity, then I am no longer going to have any sympathy for them when governments want to single them out for special regulation, no matter how bone-headed the regulation may be.

Virtues of a Carbon Tax

Michael O'Hare and Matt Yglesias (via Megan McArdle subbing at Instapundit) makes this very good point about carbon taxes:

Tragically, if you tell people you're going to tax their ft ossile
fuels, they freak out and your political career dies a swift and
merciless death. But if you tell people you're going to subsidize alternative energy sources
the people will like that. Functionally, however, these are basically
the same thing, except for the fact that the tax method works much,
much better.

This is unfortunately true.  As I have posted a number of times, I am skeptical that man-made global warming and the net of the problems (and opportunities) it brings will be bad enough to justify the economic cost of slowing or reversing CO2 emissions.  However, I can imagine being convinced that efforts to limit CO2 emissions are necessary.

Regulations on emissions, whether to the air or into shared waterways, is one of the few areas of government action that actually facilitate the smooth operation of strong property rights.  As I explained before, one could easily imagine a world of strong property rights bogged down in constant suits and counter-suits, as any property owner could rightfully sue over molecules of emissions that crossed their property line from another.  Certainly I can imagine private solutions and agreements that could have developed in the absence of government to sort this out, but government emissions restrictions, when done well, are not an unreasonable approach.

Of course, there are a lot of bad ways to manage emissions, and the government has tried about all of them.  New source controls, which are still debated and, incredibly, supported, represent all the worst of government hubris in trying to micro-manage solutions and technologies rather than just defining the desired outcome.  If anything, new technology subsidies (think ethanol) have been even worse, acting more like political pork and rent-seeking than intelligent pollution policy.

However, the government, especially the environmental lobby which tends to be full of technocrats and statists, greatly prefer the government micromanagement approach.  The impossibility of the task should be clear.  Take CO2 reduction -- to micromanage the reduction, the government would have to sort through every source of CO2, every available technology, and come up with a prioritized plan for investment to get the most reduction for the least $.  And even if the tried, they would be wrong, because this is a problem with a billion variables.  And even if they happen to get it right, they would not implement it, changing their plans the minute the Archer Daniels Midland lobbyist walked in the door. 

To understand the complexity, take one example: electric cars.  Hey, everyone loves the idea of electric cars -- they are zero emissions, right?  Well, sort of.  Actually they are emissions outsourcing devices, shifting emissions from the individual car's tailpipe to the power plant where the electrical charge is coming from.  Now, that power plant is a lot more efficient at burning fossil fuels, so often the net is better, but what if the marginal electricity production is coming from coal?  Does that net reduce CO2?  And, if electric cars reduce carbon emissions, does $10,000 investing in electric cars reduce more or less carbon emissions than $10,000 in solar?

These decisions are impossible to make, but we don't have to.  Every day, markets and price signals help individuals make such tradeoffs rationally.   That's why a carbon tax, that raises the price of CO2 emissions fairly directly, would be a much more efficient approach to managing emissions.

Update: People have asked about emissions trading.  Emissions trading schemes are OK, in that they help push emissions reductions towards the people who can do it most efficiently.  What I don't like about them is they are a government form of incumbent subsidy - basically industry incumbents get a tradeable asset of value, while new and future entrants do not.

Why Won't Ethanol Just Go Away?

Lynne Kiesling points out that, like swallows returning to Capistrano, a new energy bill debate in Congress has brought out the Ethanol advocates.  Lynne takes several good swipes at this stupidity:

I actually just heard John Thune say that ethanol is a clean fuel that will
lessen our dependence on foreign oil. Spare me. Ethanol is neither clean nor a
silver bullet to make us self-sufficient in energy. Ethanol production is
filthy, just as dirty as other manufacturing processes, particularly when you
take into account the appalling effects of fertilizer runoff killing fish in the
Gulf of Mexico when growing the corn for the ethanol. Why don't the Senators
from Louisiana open up a can of whup ass on this one?

Reducing dependence on foreign oil is a specious objective when you recognize
that oil is traded in integrated world markets and we are not low-cost
producers. So even if we reduce our oil consumption the marginal barrel of oil
will still come from somewhere in the Middle East. That won't change. Reducing
our consumption would be likely to reduce oil prices (but only marginally,
because China's demand is the big price driver right now) and would be good from
a conservation perspective, but it won't change the fact that we import oil from
places we don't think we can trust.

What she does not mention, probably because she is tired of repeating the obvious, that most careful studies show that producing ethanol requires as much or more energy than it provides.  In other words, it takes more than a barrel of oil to make the fertilizer, run tractors, harvest the corn, take it to market, and process it into a enough ethanol to replace a barrel of oil. 

To prove this, I would point to a lot of studies from ethanol opponents, but I will instead use data from an ethanol supporter.  From this biofuel support site:

In the US most ethanol is
made from corn (maize). A US Department of Agriculture study concludes
that ethanol contains 34% [sic, see below] more energy than is used to grow and harvest
the corn and distill it into ethanol.

Here are a couple of observations.  First, 34% is incorrect.  The first paragraph of the study they link says 24%, not 34%.  Second, this is the only study I have ever seen that shows the energy balance positive, which may be because it is from the Department of Agriculture and not the Department of Energy.  Third, to get to even this small positive balance, their number is based on the theoretical best number if every single stage of the agriculture and production process uses best known practices.  Using current practices that are actually in place in the production chain, even this study says the energy balance is probably negative.  Fourth and finally, 24% is pathetic.  Supporters imply that one gallon of ethanol replaces one gallon of oil.  It does not -- using these numbers, and factoring the .8 gallon of oil needed to produce that one gallon of ethanol, then one gallon of ethanol replaces at best only .2 gallons of oil.  This means that if we subsidize ethanol 30 cents per gallon (which is probably low) then the effective subsidy per gallon of gasoline replaced, which is what is relevant, is $1.50!  Ouch! And remember, this is based on ethanol's supporters numbers.  Based on most everyone else's numbers, the subsidy per gallon replaced is infinite.

Ethanol subsidies do nothing to add energy to the US market and just pass tax dollars to Archer Daniels Midland and other similar Ag conglomerates.  Stupid, stupid, stupid.  The only thing uglier than these distortions in the energy bill is the scene of Republican and Democratic candidates falling over themselves every four years to support these subsidies in order to compete in the Iowa caucuses.

A Blow for Competition

Just yesterday, I wrote in this post how depression-era alcoholic beverage laws meant to curb organized crime were being used by governments to protect local businesses from competition.  Today, the Supreme Court took aim at one such practice:

A Supreme Court decision Monday means that Missouri and Illinois
consumers soon will have access to a wider selection of wines and that
wineries in both states will be able to expand their consumer base.

In a 5-4 ruling, the court declared unconstitutional state laws that
prohibited out-of-state wineries from directly shipping wine to
consumers, yet allowed in-state wineries to do direct shipments. The
court said the laws unfairly discriminated against out-of-state

Congratulations to the Institute for Justice, one of the few groups out there protecting property rights and individual freedoms in the commercial arena.  Now, if only the Supreme Court would take on laws protecting car dealers from competition.

Postscript:   While major industries change from region to region, nearly every town or city of any size has influential local business owners in three areas who tend to have an unduly large influence on local politics:

  • Media owners (newspaper, radio, TV station owners)
  • Car Dealers
  • Beverage wholesalers (Coke, Pepsi, Miller, A-B, etc.)

While at the national level, government may be more focused on shoving subsidies at dairy farmers and Archer-Daniels-Midland, local and state governments love to protect incumbants in these three industries from competition (particularly in small to medium sized cities), who in turn donate tons of money (or in the case of media, in-kind exposure) to the politicos.