Washington Insider-Wednesday

Chicken Pricing Under Fire

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

US State Attorneys General Join Dow-Dupont Merger Probe: Reuters

U.S. state attorneys general have joined a federal antitrust probe of the planned merger between DuPont and Dow Chemical Co., according to three people familiar with the matter cited by Reuters.

A separate group of state attorneys general are expected to join a probe of Bayer AG's $66 billion plan to buy Monsanto Co. The involvement of the state attorneys general increases scrutiny of the mega deals and will complicate what are already expected to be tough and lengthy reviews by U.S. antitrust enforcers. The states are concerned that the companies may raise pesticide and herbicide prices for farmers following a merger, and have less incentive to compete to introduce better and cheaper products.

Bayer said in a statement it looked forward to "working diligently with regulators to ensure a successful close."

While it is up to the Justice Department to decide whether to file a lawsuit to stop a merger, states provide information on how the mergers would affect their jurisdictions and conduct joint calls to gather data from the companies, as well as critics and supporters of the deals.

Koch Industries Now Fifth Largest US Ethanol Producer

Growing to be the fifth-largest U.S. ethanol producer, Koch Industries jumped into the renewable fuels market despite opposition to federal policies like the Renewable Fuel Standard (RFS) by the Koch brothers who lead and own much of the company.

In 2010, oil-refining executive Jeremy Bezdek urged brothers Charles and David Koch to expand into renewable fuels, a struggling industry promoted by government mandates the billionaire brothers actively oppose. Since then, Koch Industries' role in the industry has boomed, and in August it opened a $100 million plant that makes biodiesel.

The potential for robust profits ultimately lead Koch to step into the renewable fuels industry. Six years ago, the ethanol industry was in crisis, with new plants built to capitalize on the fuel mandate struggling due to surging costs for corn, the main raw material, and surplus fuel-making capacity. More than a dozen ethanol producers filed for bankruptcy protection starting in 2008.

That created opportunities "to buy some of the best plants" to make renewable fuels, as they could be acquired cheaply enough to make them profitable investments, especially for a big oil refiner like Koch, Bezdek told Bloomberg BNA. Koch has become "a big player" in renewable fuels, noted Jason Ward, an analyst at Northstar Commodity Investments in Minneapolis. "They weren't five years ago."

Koch's initial foray into renewable fuels -- through its Flint Hills unit -- was the 2010 purchase of two ethanol plants in a bankruptcy sale from Hawkeye Energy Holdings LLC. Later, Koch made additional purchases as the industry was rocked by high debt, oversupply and volatility in crude oil and corn prices. The company now has a total of six plants in Iowa and Nebraska, and another in Georgia. Their plants have a combined capacity to produce 820 million gallons of ethanol annually.

Flint Hills then dived deeper into the renewables industry with a $100 million investment to complete construction of a biodiesel plant in Beatrice, Nebraska, with partner Benefuel Inc. The facility opened in August and is unusual because it can convert multiple feedstocks into fuel and products used in food and pharmaceuticals.

The goal is to create a business that does not need government mandates, which the Koch brothers continue to oppose, Bezdek noted. An April 2015 letter to U.S. lawmakers from the company's Washington lobbyist, Philip Ellender, argued the mandate system needs to be dismantled. "The RFS is an unqualified failure that should be repealed in full," Ellender wrote. "We bought these ethanol plants despite the RFS, not because of it."

The Koch brothers remain firmly opposed to renewable fuel mandates and subsidies. "Charles is a big believer in free markets," Bezdek said, adding that the company still wants the government to end its mandate on renewable fuel use. "We're fine if [the RFS] goes away."

Washington Insider: Chicken Pricing Under Fire

As the national media face increasing criticism over their performance in recent months an old, old theme has come to the surface, questions about whether ag prices are fairly reported. Only, this time it is not beleaguered farmers who are crying foul, it is meat wholesalers and retailers and some consumers. The New York Times raised the question this week, somewhat tentatively, whether prices of chicken meat are too high.

The Times says that gluts of corn and soybeans are leading to production boosts for a variety of meats and forcing lower prices, but not for chicken, which has largely bucked the trend. It also thinks the steady prices may be buoying the fortunes of major chicken producers, at the expense of food shoppers.

The details involved, says the Times, are "largely a mystery." However, it notes that questions are being raised about one chicken price series, the Georgia Dock, an index widely used by grocery stores when buying from producers. The obvious problem is that is that it is estimating prices sharply higher than competing analysts do—down some 5 percent from 18 months ago. The competing Urner Barry index estimates that the price for the same chicken should be down a third over that time. USDA seems to agree.

USDA now has created a new price series for such birds and it closely matches the Urner Barry series. As a result, the Times says, questions are being raised by "investors" and are leading some to "bet against the price of poultry company stocks." They contend that the way the Georgia Dock index is compiled has been instrumental in holding the retail price of chicken artificially high.

The issue of how prices are made and chicken sold has been especially contentious as the industry has consolidated. Now only a handful of companies sell most U.S. poultry and retailers and restaurants generally base their bids and offers on one of a few indexes.

The issue heated up recently after Maplevale Farms, a food service company in upstate New York, filed a class-action lawsuit claiming that the big chicken processors were using a data company, Agri Stats, in a "conspiracy" to set prices high. "Agri Stats reports are so detailed that a reasonably informed producer can even discern the identity of competitors' individual broiler complexes," Maplevale asserted. Agri Stats denies the accusation.

The Georgia Dock series is assembled by the Georgia Agriculture Department and uses data from 10 of the 11 companies that process poultry in the state, but critics now are questioning the methods used. They charge that the index does not do enough to verify the company reports. They also say that the data from the two largest producers in the state, Pilgrim's Pride and Tyson Foods, are weighted too heavily relative to reports from other companies.

Last spring, USDA raised questions about details of the index and told Georgia officials that the index would need to start verifying the prices being reported, among other changes. In response, the Georgia department conceded that it could not verify its numbers but that it "is in agreement with the poultry industry that there is no desire to review invoices for verification of data reported." So, last August USDA dropped the Georgia Dock from its weekly report and now provides only a link to its website.

However, the Georgia Agriculture Department told USDA last week that it is "currently vetting a new model to serve as a trend analysis of demand." The staff noted that the industry expressed "quite a bit of concern" about the speed with which changes in the Georgia Dock were going to take place and "the decision was made to examine the process further."

The Times goes on to speculate about who gains from high and low prices in the short and long run, a very strange tack to take regarding something as objective as market price histories. Credibility at all market levels is essential for both consumer and investor confidence, and no one should lose sight of that fact no matter how much beneficial a price trend may be.

USDA seems justified to step in to shore up data that don't reflect fundamental market realities since bad or incomplete data become very costly for very quickly for market participants at all levels, as history has shown clearly, Washington Insider believes.

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