The Big Get Bigger
Gaming the [Public] System
The Iowa Fertilizer Company in Lee County was the first world-scale nitrogen fertilizer plant built in the U.S. in 30 years when it opened in 2017 – and the largest private construction project in Iowa history.
Today, there's a Sale Pending sign on the 320-acre site.
Unless you're an Iowa farmer, why should it matter that the company is being sold, or who might be the buyer?
You have more at stake than you may realize. Back in 2012, the Branstad/Reynolds administration argued that a new Iowa plant was crucial to decrease the costs imposed by a highly concentrated market, and in turn, reduce food costs for consumers. Branstad singled out one of the four most dominant nitrogen fertilizer companies in his comments: Wichita-based Koch Industries.
After much debate, the state legislature passed a heavily subsidized package, totaling $550 million in state and federal tax breaks, grants, and loans, to make it happen. Lee County threw in a $30 million property tax abatement. "The local governments and state will get a lot more out of it than they put into it," Branstad said, just before leaving Iowa for China.
The plant in Wever, owned by chemical company OCI in the Netherlands, opened with great fanfare. Initial reports indicated it brought more competition to Iowa, and lowered the unemployment rate.
But the fertilizer business operates in a global market. Fast forward four years. In 2021, the prices of six types of fertilizers escalated, due to high tariffs, and in some cases, prices rose more than 300%. Russia and Belarus are major suppliers of fertilizer, and the war in Ukraine triggered swings in market prices, exacting a heavier toll on 2023 U.S. farm input decisions, and lowering nitrogen usage. Fertilizer accounts for 36% of a farmer's operating costs for corn.
In December last year, Koch Industries announced it was buying Iowa Fertilizer Company. Koch Ag and Energy Solutions, its subsidiary, already owns a Ft. Dodge fertilizer plant. If the sale of the Wever plant goes through, Iowa taxpayers will have subsidized Koch to become an even bigger player.
Taxpayers on the Hook
The $3.6 billion purchase currently is being examined by the antitrust division of the Dept. of Justice (DOJ) and the Competition Bureau of the Federal Trade Commission (FTC).
Spearheaded by Rep. J.D. Scholten (D-Sioux City), Iowa House Democrats wrote a letter of protest to the DOJ and FTC last month, and asked Iowa Attorney General Brenna Bird to investigate the issue, including the potential for the loss of 260 jobs. Rep. Megan Srinivas, D-Des Moines, also has taken a prominent role in this issue.
The Iowa Farmers Union has joined in an effort with 18 national ag and policy organizations to block the pending sale. "Back at the time the subsidies were passed, the Iowa Farmers Union was opposed to it," says Aaron Lehman, president. "We didn't know how the taxpayer investment would ever be returned in the event of a sale."
The Big Get Bigger
During over three decades as an editor for Successful Farming, I raised questions about the impact of the unchecked growth of large agribusinesses. Sure, their size was incentivized by what economists call "increasing returns to scale". But didn't such consolidation pose a major downside for the U.S., and Iowa, creating monopolies and vertically integrated companies with the market power to set prices, control supplies, and put mid-sized farmers out of business?
Economists agree that an industry no longer is competitive when the market share of the top four companies is 40% or higher; that ceiling has been exceeded almost across the board in the agriculture industry.
For most of the 21st century, the Dept. of Justice's anti-trust division only seemed concerned about one narrow impact of concentration: consumer welfare. The Obama administration tried to reform the federal Packers & Stockyards Act and strengthen GIPSA (Grain Inspection, Packers and Stockyards Administration) antitrust enforcement. These efforts were shelved by industry lobbying of Congress.
In 2004, Pickett v. Tyson Foods showed that captive supplies of cattle (owned by meat packers) are used to drive down cash prices, but the jury verdict was overturned on a technicality.
The top four companies in the fertilizer market control 75% of all nitrogen production. Koch Industries has an established history of growth through mergers and acquisitions.
What are the odds that yet another round of anti-trust objections, this time in the farm fertilizer industry, will make a difference?
Technology Sector Under Scrutiny
The regulatory landscape has begun to shift. In 2021, after President Biden took office, he issued the executive order "Promoting Competition in the American Economy," to boost competition in concentrated ag input industries, including fertilizer. He named Lina Khan Chair of the FTC and Jonathan Kanter as assistant attorney general at the DOJ.
For decades, technology companies have been allowed to grow ever larger. Today even Republican policymakers have become concerned. Companies typically argue the free market is the solution to any monopoly, and that seemingly uncompetitive practices are necessary to protect themselves against potential new rivals. But too often, these dominant companies can (and do) eliminate their rivals by buying them. (For example: Google and YouTube and Facebook and Instagram and WhatsApp.)
To date, antitrust enforcement in the technology sector has been the administration's top priority, with suits against Amazon, Google, and Facebook to increase competition in the digital economy.
Now the E.U. has fined Apple $2 billion, pointing to its practice of charging fees of up to 30% to other companies that sell services through the App Store. Apple sometimes has refused to allow companies like Spotify to advertise cheaper alternatives to the same services. Apple is appealing the E.U.'s $2 billion fine, but has agreed to make some changes. The DOJ also is likely to act on this issue in 2024.
Reasons for Optimism
When large corporations are unchecked by healthy competition, they typically don't pass cost savings on to consumers. They also exploit their workers.
For the first time, the FTC and DOJ are finalizing a new tool in their anti-trust toolbox: merger guidelines that will allow a greater focus on the impact on workers.
Iowa Fertilizer Company is one of the few direct competitors of Koch in Iowa. Will the farm and food sectors be the next antitrust frontier?
Persistent food inflation remains an issue, with U.S. consumers complaining about the impact of higher food prices. Kroger is the largest supermarket chain in the U.S. Last week, the FTC's Bureau of Competition blocked the $25 billion takeover by Kroger of its rival Albertson on the basis that it would "eliminate fierce competition" between the two industry giants. It argued the impact of the merger would be felt by U.S. shoppers and affected employees.
Last week, JetBlue Airways and Spirit Airlines announced they wouldn't fight a Dept. of Justice court ruling to block its $3.8 billion merger. The DOJ argued that the merger would reduce competition and increase ticket prices.
The federal government is the only entity with the power to stop a monopoly in its tracks. It broke up the railroads and oil trusts more than a century ago and curbed AT&T in the 1980s. Today, however, many Americans seem inclined to entrust their lives and livelihoods to powerful businesses, corporations, or multi-national corporations over the U.S. government.
It’s too soon to know whether it will become a new era of trustbusting, but the federal government is taking some initiatives in this direction.
"We've seen more action than in some time," Lehman says. "The FTC is working on the 'right to repair' laws, and we're hopeful this Koch sale will be another issue."
But if Biden isn't re-elected, the anti-trust enforcement pendulum is likely to swing back.
Cashing in on Subsidies
Investment capital is one of the primary barriers for new players in concentrated industries. If the sale of Iowa Fertilizer Company is approved by regulators, it won't be the first time Koch Industries, the second largest private company in the U.S., has taken advantage of public funds.
This multi-national conglomerate, with holdings in the energy, chemical, and agriculture sectors, received about $29 million in tax rebates and incentives to build and expand a plant in Enid, Oklahoma. Koch also has profited from local and state subsidies in Texas, Louisiana, and Oregon. It benefits from discounts for leasing federal land for drilling and from ethanol subsidies in Iowa and other states.
Koch also uses its profits to fund libertarian think tanks and dark money groups, including the conservative Americans for Prosperity. Its practice of milking state and local government subsidies is in stark juxtaposition to its worship of the free market, and unabashed assault on big government. How do you spell hypocrisy?
Too Little, Too Late
At about the same time in late December when Koch announced its deal to buy the Iowa Fertilizer Company, Sens. Chuck Grassley and Joni Ernst were joining with Sen. Tammy Baldwin (D-WI) to propose the Fertilizer Research Act, which would require the USDA to study the market factors behind the increased costs of fertilizer, and to encourage more competition. If it's passed, it's likely much too late to prevent Koch's acquisition of the Iowa Fertilizer Company.
And Grassley still is plugging away on another bipartisan legislative effort, the revised Cattle Price Discovery and Transparency Act. It would allow farmers more information about current market prices, increase farmers' options for selling their cattle, and create more federal oversight of this concentrated industry. Coming on the heels of livestock supply chain disruptions caused by Covid-19, the lack of competition and increasing consolidation should be a U.S. priority.
I'd like to ask the FTC and DOJ: Isn't the food supply at least as important to this country as the technology sector?
At the state level, I don't see Attorney General Bird using her bully pulpit to convince other state Attorneys General to join with her to call on the fertilizer market to be more competitive and transparent. What about Governor Reynolds, who stood by the side of former governor Branstad at the Iowa Fertilizer Plant opening in 2017?
But no strings were attached to this massive public subsidy to prevent taxpayer dollars from being siphoned away in a subsequent sale to a dominant competitor.
"We've seen this before," Lehman says. "It's yet another painful example of public investments being misused to increase monopolies. We desperately need more competition. This sale must be halted."
Terrific column!
Great column, including: "But no strings were attached to this massive public subsidy to prevent taxpayer dollars from being siphoned away in a subsequent sale to a dominant competitor."
That a private company would avail itself of an inefficiency in a market created by an incompetency in government is not a crime and is to be expected at some point by some astute enterprise. And a willing seller contracting with a willing buyer is an absolutely essential feature of any functioning economy. If there is a villain here it is the dim bulbs at city, state and federal level giving away public subsides to perceived winners then left with their pants around their ankles. Their inability to pick these winners is perpetually remonstrated and it will be interesting to see how many more are lurking in our current renewable-energy, micro-chip, and infra-structure giveaways.