THE HERFINDAHL-HIRSCHMAN INDEX: What Is It?
Under the Department of Justice guidelines, any market with a Herfindahl-Hirschman Index ("HHI") above 1,800 is considered highly concentrated.
The HHI is a way to measure concentration.It has more or less replaced the four firm concentration ratio. It is calculated by taking the sum of the square of market shares. A monopoly is 100 squared, or 10,000. Ten firms, each with 10 percent, would be 10 times 10 = 1,000. A duopoly with equal shares would be 50 times 50 = 5,000. Because small shares don't add up to much, even when squared, it is pretty safe to ignore them.
The Department of Justice Antitrust guidelines consider an industry with an HHI of 1,000 or less to be competitive, and an HHI of 1,800 or more to be pretty concentrated. An increase in the HHI of 100 is considered important enough to trigger a merger review.
The U.S. Department of Agriculture's recent and long-awaited study of who controls the beef packing industry revealed the following picture: Iowa Beef (38%); Cargill [Excel] (22%); ConAgra (21%) and National Beef (6%). Applying the HHI formula that would show: Iowa Beef 1444, Cargill (Excel) 484, ConAgra 441, and National Beef 36 for a total of 2355. If one goes back as recently as 1992 we see the Big Four in the meat packing industry with a HHI of 2128, an increase in just the past three years of 227!!!
In 1921 when the Packers & Stockyards Act (P&SA) was passed it was reacting to a slaughter market where four firms ---- Swift, Armour, Cudahy and Wilson --- controlled nearly 40% of the market. A 1916 study, requested by President Woodrow Wilson, by the Federal Trade Commission had found that there was no longer competition in the meat packing industry and saw the need for severe industry restructuring.
The Northern Plains Resource Council (NPRC), in alliance with the Western Organization of Resource Councils (WORC) have petitioned Secretary of Agriculture Dan Glickman to exercise his authority under the P&SA to restrict meat packers use of "captive supplies" of slaughter cattle. The petition asks for rules that:
1) Prohibit packers from procuring cattle for slaughter through the use of a forward contract, unless the contract contains a firm base price that can be equated to a fixed dollar amount on the day the contract is signed, and the forward contract is offered or bid in an open, public market.
2) Prohibit packers from owning and feeding cattle, unless the cattle are sold for slaughter in an open, public market.
Packers ownership and feeding of cattle for slaughter and their procurement of slaughter supplies through forward contracts have decreased prices paid to cattle producers. These practices unjustly have discriminated against some producers providing unreasonable preferences to certain producers over others, in violation of the P&SA.
From April 1994 to May 1996, the price of beef fell from $3.16 per pound to $2.97 per pound, or six percent. The packers' share increased 82%, from 23 cents to 42 cents/lb. The producer's share fell from $1.76 to $1.31 per pound, or 25 percent. If those trends hold for one year, consumers will save just under $5 billion dollars in reduced costs of beef; but producers will lose $11.25 billion, and a handful of packers will make an extra $4.75 billion.
The rule and its supplementary information was published in the FEDERAL REGISTER, January 14, 1997, pg. 1845-1859.
Here's what you can do before April 14, 1997:
Send an original and two copies of a letter of comment to:
Acting Deputy Administrator
Packers and Stockyards Programs
GIPSA, USDA
3641, 1400 Independence Ave,, SW, Room 3039-S
Washington, D.C. 20250
You can obtain a copy of the notice and the petition, more information, or help in writing comments, from WORC, 2401 Montana Avenue, #301, Billings, MT, 59101. Phone: 406-252- 9672. Fax: 406-252-1092. E-mail: billings@worc.org.
"Ralcorp Holdings Inc.'s exit from branded cereals is the latest example that in the breakfast-cereal business, big isn't just better. It may even be mandatory."
--- Richard Gibson, Wall Street Journal, August 15. 1996
The cereal business in the U.S. is an $8 billion annual market. Every one percentage point in market shares is equal to $80 million in annual revenues. Four major companies control 84% of the total U.S. cereal market: Kellogg's 33%;General Mills 25%; Philip Morris\Kraft General Foods\Post 17%, and Quaker Oats 9%. The concentration index for the industry, based on the HHI formula, in 1996 was 2084.
The U.S. cereal market is also probably THE most profitable sector of corporate agribusiness. The average annual return on equity (profitability) from 1992-1996 for the four largest cereal manufacturers was: Quaker Oats 34.5%, Kellogg's 25.2%, General Mills 24.4%, and Philip Morris 19.9%.
The 1992-1996 average median for the food, beverage and tobacco processing industry was 11.6%, for all U.S. industry it was 9.8%, and for U.S. agriculture the 1991-1995 annual average was 1.98%. Applying the HHI formula to other food products we see soft drinks (1992), 2793; beer (1992), 2698 and on and on it goes.
The Bolivian government has begun dredging activities at the grain port in Puerto Aguirre, Bolivia. The dredging is the first engineering work being carried out as part of a mega-project to alter the natural channel of the Paraguay and Parana Rivers to construct an industrial waterway for barge convoys called the Paraguay-Parana Hidrovia.
The dredging of Cargill's port is designed to open the Tamengo channel to convoys of 16 barges carrying soybeans and soymeal. The Tamengo Channel is Bolivia's 8-kilometer-long link with the Paraguay River, which flows downstream into the Parana River, and onward to the Atlantic Ocean. Dredging in Puerto Aguirre port is apparently being supported financially and politically by Cargill, and is being carried out without environmental safeguards, and against the recommendations of environmental impact studies funded by the Inter-American Development Bank and the United Nations Development Programme.
Independent studies indicate that even small changes in the level of the Paraguay River, part of South America's second most important river system, may cause irreversible damage to the Pantanal, the world's largest remaining wetlands ecosystem..
The Puerto Aguirre grain terminal was originally built with partial funding from the U.S. Agency for International Development. Cargill bought a controlling interest earlier this year, and took over operation of the terminal in September. With Bolivian soy exports growing as more land in Santa Cruz province is converted to soy monocultures, Cargill is in a position to profit handsomely if the Hidrovia moves forward by lowering its costs for exporting soy to Europe, at the expense of the Bolivian people who are paying most of the cost of altering the channel.
For more than three years, a coalition of environmental, social, and human rights groups, and indigenous peoples called Rios Vivos has pressed for transparency and public participation in the Hidrovia studies. The city of Puerto Suarez recently staged a general strike in protest of the planned dredging and rock removal in the channel.
The WALL STREET JOURNAL reports (Nov. 12) that a panel created by the National Association of Corporate Directors has urged that corporate America limit chief executive officers and senior executives to no more than three public-company directorships and confine other directors to a maximum of six seats.
Only 49 of 775 companies limit the number of boards on which their directors serve, according to a recent survey by the American Society of Corporate Secretaries. Consequently, corporate America today has directors who serve on too many boards and often lack time to keep close watch on weak executives and poor business performance. About 120 directors serve on the boards of eight or more public and private businesses, concludes a proxy analysis conducted for The JOURNAL by newsletter Directorship in Greenwich, Conn. Another finding: The CEOs of 10 major U.S. corporations sit on six or more public-company boards.
The NACD's recommendation sparked immediate and considerable controversy. Panel members say the loudest protests over numerical limits came from Ann McLaughlin, a former U.S. Labor Secretary and a member of 10 corporate boards. "I do think the number limits are the tail wagging the dog," Ms. McLaughlin told a JOURNAL reporter.
Ms. McLaughlin voiced her objections to the commission by phone. She didn't attend any commission meetings in person because, she says, "they specifically conflicted with a number of [my] board meetings."
In its report on the Blue Ribbon Commission on Director Professionalism (see above) the WALL STREET JOURNAL pointed out that John L. Clendenin, chairman, president and CEO of BellSouth Corp., finds time to hold board seats at eight big businesses besides his own, including Home Depot Inc., RJR Nabisco Holdings Corp. and Coca-Cola Enterprises Inc.
He says outside board meetings never occur more than twice a week, and on those days he arrives at BellSouth by 5 a.m. or earlier. An insomniac, he says he usually gets only five hours of sleep a night.
Mr. Clendenin believes his multiple directorships have helped him to transform the once-sleepy telephone utility into a marketing powerhouse. "I have plagiarized the living daylights out of the marketing expertise" at Coca-Cola Enterprises, the big Atlanta-based bottler, he noted.
Two major mergers in recent months have further consolidated the supermarket and commercial aircraft manufacturing industries.
In California Vons Cos. Inc. agreed to a takeover offer from Safeway Inc. who already owned 34.5% of Vons, which has most of its stores in southern California. The merger thus solidifies Safeway's position as the second-largest supermarket company in North America ranking it only second behind Cincinnati-based Kroger Co.
Safeway now operates 1,050 stores in the United States and Canada. The Vons' 325 outlets will enable Safeway to reenter Southern California, an area it abandoned eight years ago when it sold 172 stores to Vons. Vons also has stores in Nevada. The combination would result in a chain through 16 states, the District of Columbia and five Canadian provinces, with sales in excess of $22.5 billion.
Meanwhile, Boeing and McDonnell Douglas announced a major merger making Airbus, the European consortium, and Boeing virtually the only two major commercial airplane (100 plus passenger seats) manufacturers in the world. It is estimated in 1996 Boeing had a 64% world market share and Airbus a 36% share. The Index for WORLD commercial airline manufacturing would now this read 5392!!!
ConAgra Inc., the nation's second largest food manufacturer, has agreed to pay nearly $10 million in penalties, according to the Wall Street Journal, to settle the largest grain-adulteration probe in several decades. Charges, the paper claims, against some former employees of the company's Peavey Grain unit are also being pursued.
The five-year criminal investigation focuses on Peavey's practice of spraying water on grain stored in its elevators, particularly those located in the Terre Haute, Indiana area. ConAgra has said its practice of using the watering system is designed to repress grain dust which can and has fueled past grain elevator explosions. The water, however, also increases the grain's weight, and thus its market value.
Other recent actions involving ConAgra include:
* In August, 1996 ConAgra paid a $2.9 million settlement in a class-action lawsuit that accused the company of exaggerating the amount of debris in soybeans that it bought, lowering their value and allowing ConAgra to buy them for less. The lawsuit involved four of ConAgra's Indiana elevators. ConAgra denied any wrongdoing.
* In 1994-95 ConAgra abruptly canceled poultry producing contracts with over 250 independent contract growers in the U.S. South. In offering new and what one producer described as "abusive" contracts ConAgra demanded binding arbitration be included. Some 38 families refused to accept such terms, saying it was clearly a violation of their freedom of speech.
ConAgra's cancelation of contracts, many of the producers believed, came in retaliation for an earlier court suit brought on behalf of some 300 poultry growers in the region where a federal court jury awarded the producers some $17 million after they presented evidence of being cheated by ConAgra on the weight of their birds.
The Company's poultry-processing plant at Enterprise, Alabama had been deliberately making trucks seem heavier before they left the plant and then later tinkered with the scales when they returned loaded to make the trucks appear lighter. Growers were paid on the basis of the weight difference.
For many of those families who refused to sign the new contracts with ConAgra their action meant that they would have to sell their facilities, despite the fact that many of them had only recently installed almost-new equipment to meet ConAgra's production requirements. But the giant corporate agribusiness wasn't through with these families just yet for they made it very clear that they will sign no contracts with anyone who subsequently might buy these same family farmers' facilities, thus making it increasingly difficult for the families to even sell their farms.
While the Exxon Valdez damage suits are still wending their way through the U.S. court system one revelation came to light which again illustrates the lengths which corporations like ConAgra will go to to protect their interests.
In 1991 the Exxon Corp. made a secret deal with seven Alaska seafood processors whereby the seafood processors settled claims with Exxon for about $70 million, but then promised to return to Exxon any money they received from awards of punitive damages.
After the jury awarded $5 billion in such damages against Exxon, the nation's largest oil company, the seven processors put in claims totaling $745 million, or 15% of the $5 billion. The seafood processors, however, had previously and privately agreed to "kickback" $745 million to Exxon if their claims were upheld, and in turn receive from Exxon $12.4 million.
One of those seafood processors was Trident Seafood Corp., a wholly owned subsidiary of the ConAgra Corp.
Presiding Federal Court Judge H. Russel Holland of the U.S. District Court which tried the case, in a June 13, 1996 decision, described the arrangement as an "astonishing ruse," saying Exxon had deceived the jury and acted as "Jekyll and Hyde" by "behaving laudably in public and deplorably in private."