Beak Capitalism, Part 3: Un-Clucking the System

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0:41Joe, why did the chicken join the Revolutionary War? I have no idea. Because it didn't want to be cooped up under British rule. Okay, but setting aside the terrible puns, wasn't it really about taxes? Joe, Joe, why did the colonial chicken refuse to pay British taxes? Because it didn't want to put all its eggs in King George's basket. Should I keep going? No, I'm good. I'm good. Thanks. I'm good. OK, fine. To understand chicken and the current landscape of the U.S. economy and the companies in it, it helps to go back in time and revisit a few key moments in U.S. history. Going back to the founding, Americans were actually suspicious of the power of large corporations.

1:24And one reason for that is that it used to be that the government would grant corporate charters. There's this history in the United States before general and corporation statutes that corporations are really creatures of the state. And so there was always this suspicion that if they grew to be too powerful, the kind of abuse that they could bring to bear on the lives of ordinary people was really extensive. Doha Meki is the principal deputy assistant general in the antitrust division of the Department of Justice. That's a long title. It means she's the second highest ranking official there. Today, the U.S.

2:02government has a whole constellation of laws, acts and agencies all aimed at ensuring that America's economy remains fair and competitive. One of the most important is where Doha works, the DOJ. The Antitrust Division is one component of many at the Justice Department. And our specific mandate is to enforce the antitrust laws and essentially to guarantee and vindicate the economic liberty of all Americans. And we do that by enforcing the federal antitrust laws, the best known of which are the Sherman Act and the Clayton Act. You've probably heard of these before. the Sherman Antitrust Act of 1890 was famously deployed in the breakup of Standard Oil back in 1911, which is still probably the country's most well-known antitrust case, and the Clayton Act arrived soon after that.

2:50But America's approach to antitrust has constantly changed over time. And chicken, with all its accusations of price gouging and unfair labor practices and just huge corporate concentration, seems to be a perfect poultry petri dish to experiment with some new ways of looking at antitrust.

3:10Welcome to part three of Beat Capitalism, our ongoing exploration of the U.S. economy through the medium of chicken. In this episode, we're asking how we can solve some of the problems that big chicken creates. Can we actually uncluck the system?

3:44So, a little bit of history. Actually, the relationship between agriculture and antitrust goes back to the beginning. Farmers were one of the big supporters of the Sherman Act, the first antitrust statute passed by Congress. Michael Cadiz is deputy assistant attorney general for the Antitrust Division at the DOJ. He works alongside Doha, but recently he spent a lot of time focused on agriculture. Because it turns out the DOJ has a long history with the food industry. And early on, the Department of Justice brought a number of cases against meat packers. And along about 1914, Congress looked at the way the Supreme Court was handling that act and was not happy.

4:27So they passed the Clayton Act, which was supposed to broaden the enforcement powers of the division. They also created the Federal Trade Commission. And the first thing the president asked the newly created Federal Trade Commission to do was study the meatpacking industry. Fast forward to 1920, the FTC issues a three-volume report documenting everything going wrong in meatpacking markets, both collusion and deception. And at the same time, the Justice Department files an antitrust case that breaks up the packing industry. And yet Congress still wasn't happy. So then in 1921, Congress now under strong Republican and a fairly conservative Congress passes the Packers and Stockyards Act, which really said, look, we are concerned that the people who ranch and grow hogs are always going to be facing very large, powerful interests, and we want to give them extra protections.

5:27And so whereas the antitrust laws focus solely on competition, the Packers and Stockyards Act actually provided explicit protection for ranchers, hog growers, eventually chicken growers, from deception, unfairness, discrimination. You're going to want to remember the Packers and Stockyards Act. It's been deployed quite a bit lately in the name of antitrust enforcement in agriculture and chickens especially. But Chicken also says something about fairness in business more generally. There are many lessons to be drawn from antitrust enforcement in the chicken industry that I think have made us better enforcers and that have really brought into focus the expansiveness of our mission.

6:12Again, antitrust is a big mandate. It rhymes with a lot of core democratic values that all of us hold as citizens of this country. And so to bring that down to the level of enforcement, antitrust enforcement at the market level, what we see in the chicken industry is that this outsourcing of risk is actually a business model that many kinds of companies employ. For example, a ride-sharing company that outsources risk, investment, and recoups a lot of the profit for simply matching riders and passengers, for example. There are other examples in the real estate industry, in banking, again, where you see this sort of outsourcing of risk.

7:02And it raises fundamental questions about how those markets are functioning, whether consumers are ultimately getting the kind of choices, good value, innovation and other things that we really lean on the antitrust laws to deliver. All of this raises the question of what exactly we mean by antitrust and what exactly is anti-competitive behavior. Yeah, we should talk about that. Because for years, competition was judged on the basis of a consumer welfare standard. What that means was, for example, if two companies decided to merge and prices for consumers ended up being lower as a result, then that was generally fine.

7:44Monopoly was only a really bad thing if it led to higher prices. Right, because pretty much everyone likes cheap chicken. And at a minimum, you could argue that concentration in the poultry industry and industrialization of chicken and all the scale that comes with it has created a lot more white meat to go around. But in recent years, policymakers' approach to anti-competitive behavior has started to change. A lot. Not only are they looking beyond simple chicken supply, but they're also arguing that it's not clear that all of this is leading to better outcomes for consumers either. One of the problems in antitrust enforcement generally is people said, well, you know, if you have power on the buying side, that just will get passed down the line to the ultimate consumers.

8:30That's actually wrong, right? The concern here is if the middle person has the power, they're going to extract taxes up and down the line. and it's not the case that you would expect somebody if there are forcing prices down through anti-competitive means that they're going to pass that along and just as a sort of general example think about it this way the way you you exert monopoly power on the buying side which we call monopsony power right is you actually buy less so you're reducing demand so that prices go low. Well, if they're buying less, they're selling less. And so that can't help consumers.

9:11Consumers want more supply, more competition. So either it has sort of no effect downstream or it actually contributes to higher prices. So when we go after monopsony power in the agricultural industry and are successful, it benefits both the producer and often the consumer. Joe, ring the monopsony klaxon. Monopsony. It comes up a lot nowadays. To put it simply, it's basically a market structure where there's only one big buyer, whether that's of labor, widgets, whatever. So if you're a chicken farmer in Rhode Island, for instance, there might be just one poultry processor that you can sell your chickens to.

9:52And that company might be able to dictate its terms. So where a monopoly is all about a single seller that controls supply of a particular product or service, monopsony is about what's happening on the buy side. Here's Doha. It's this idea of deep power that is exercised on the buy side of the market. And this is actually very old economics, right? This is a theory that was pioneered by Joan Robinson in the 1930s. And so there's this idea that buyer power might be harmless, but we've known for almost a century empirically that, you know, if a buyer chooses an input along a supply curve and then is able to exercise the power to drop the value of that input, maybe in the short run, you get lower prices or expanded output.

10:42But if you drop the value below a reservation wage, right, especially when you're talking about labor markets, which a lot of producer and grower economies, you know, know, are basically labor markets, that you will eventually destroy incentives to continue making that input. And so in the long run, you will actually get contraction in a market. That is classical monopsony power that is empirically sound. And that has been, I think, upheld by a lot of economists for a very long time. There is another flavor of monopsony, of course, which is just the abuse of bargaining leverage. If you fear termination of a contract that your buyer has negotiated with you, if you fear, this is the same thing with non-competes, right?

11:35This is the same sort of economic idea that if you have lower bargaining leverage, you are likely to do everything you possibly can to be more compliant with the terms that are imposed by the purchaser of whatever product or service that you are selling. And so that just maps on almost perfectly with the chicken industry. And what is really, I think, most fascinating in the chicken industry and other types of labor markets is that you can actually exercise power and abuse bargaining leverage at much lower concentration thresholds, which is a really interesting and fruitful area of economic research that has been produced over the last five to 10 years.

12:19So armed with that wider definition of competitive pressures, the DOJ has gone on the attack. For instance, they successfully blocked a merger of the publishers Penguin Random House and Simon & Schuster by arguing that the deal would lead to lower earnings for authors. But the DOJ's results when it comes to chicken have been more mixed, despite that broader definition of antitrust. In 2020, the DOJ indicted executives from poultry processors, including Pilgrim's Pride and Claxton Poultry Farms, for price fixing, only to see them acquitted by a jury. There have been some wins, too. The DOJ got a$85 million settlement with a bunch of poultry processors over allegations that they conspired to share information on wages.

13:01One of the cases we brought involved an information sharing amongst chicken processors, and they were sharing incredibly detailed information about compensation. And not only were they sharing it, they were like meeting every year and eventually bringing their data so that they could all be sure that they were sharing accurate data and then talking about compensation. So there's the example of coordination amongst people who should be competing for workers actually figuring out how not to compete with each other. And last year, Coke Foods, a huge poultry processor, agreed that it would no longer charge a penalty if contract growers choose to switch processors after the DOJ filed suit under Sherman and our good friend the Packers and Stockyards Act.

13:51Another case we brought involved, again, a specific chicken processor who was contracting with, and that's already a relationship where the processor owns most of the bargaining power, but decided that wasn't enough. They're growers. If you want to switch to one of our competitors, we're going to make you pay a penalty. So that is the processor preventing competition unilaterally by making it harder for the grower to actually benefit from whatever competition exists in the market. And it's also just simply obviously unfair to these growers who don't have that much opportunity by denying them whatever limited opportunities exist.

14:35It's a nice step for critics of the tournament system that we talked about in episode two, but there's also more that could be done. The third case involved the chicken tournament system, right? And so one of the things chicken farmers face growing chickens is every six weeks when their chickens are picked up by the processor, they are actually weighed and measured against the other growers that are delivering chicks the same week. And it's almost, you know, you're directly competing with your fellow chicken growers. and some people get penalized and some people get a benefit. But given the risk these growers face, we brought a case saying the penalty itself makes it impossible for growers to really understand the financial risks they're taking because there's a lot of arbitrariness in the tournament and it's not just your results don't just depend on how well you perform.

15:32And so Wayne Sanderson, who is the, I believe, the third largest chicken processor in the country, agreed that they would stop penalizing growers in their tournament system. So another small victory. Meanwhile, the U.S. Department of Agriculture this year proposed more regulation of the tournament system under, you guessed it, the Packers and Stockyards Act. Joe, should we make Packers and Stockyards merch? Yes, absolutely. Well, maybe. But it is kind of interesting to think about how 250 years ago, Americans were all worried about taxes under King George and the tyranny of the state. But today, maybe we should all be worrying about something else, what Doha calls the tyranny of the intermediary.

16:14Thinking about the chicken industry in particular, you see limits on the ability to sell your product or service to a small number of companies. And that is how you get this problem of the tyranny of the intermediary, right? It's the meat processor that sits in the middle, right, between the ultimate purchaser and the grower and can command a certain sum or lower the price on one side of the market and really grow revenues and get fatter in the middle. So antitrust has a long history with agriculture and the poultry industry, although the way it's being viewed and enforced has been changing recently.

16:52But that's only one side of the story, because even as antitrust evolves, the way companies run their businesses has evolved, too. A lot. When the Sherman Act and the Clayton Act and the Packers and Stockyards Act were all created, the middlemen of America were smaller and not as technically sophisticated, obviously. If you were going to influence prices, you were probably doing it in a back room somewhere, smoking a cigar, probably playing poker. But today, companies have a host of new data sources and tech-powered tools to run their businesses. And when it comes to chicken and souped-up data sources, we have to talk about agristats.

17:32I will say, generally speaking, it's often been referred to as one of the most important companies you've never heard of. That's Jonathan Cantor, the assistant U.S. attorney general for antitrust at the DOJ. He's the head honcho, Doha and Michael's boss, basically. And together with Lena Kahn, the chair of the Federal Trade Commission, he's been leading one of the most aggressive regulatory responses to antitrust in years, decades even. And one of their more recent actions is against Agristats. Now, OddLots listeners will actually have heard of this company before. We spoke about it earlier this year with David Dian, the executive editor of the American Prospect.

18:11He did such a good job describing what Agristats does that we're just going to let him do it again here. And this company collects real-time proprietary data from all of the meatpacking producers in a given market, whether it's pork or poultry or chicken or turkey. And they put all this data in these giant books and they give them out to these various competitors, which now have basically a setup of everything that their competitors are doing, including their price, including their supply, including every single thing, part of their market. And now they can know that, oh, I can probably raise my price because I'm under price relative to my competitor, but I won't lose market share because my competitor is charging more for this product.

19:02And it has the tendency to ratchet prices upward. The DOJ filed suit against Agristats last year, arguing that it was violating the Sherman Act by sharing competitive information. We reached out to Agristats for comment. However, they didn't respond. The company published a statement on its website shortly after the lawsuit was initially filed. They're denying the allegations. Currently, the case is still live, which means Jonathan can't talk about it in detail. But more generally, he argues that it illustrates the dominance of intermediaries in the economy. So this is a case that we brought involving information exchanges, among other things, poultry processors.

19:42And the idea, and this is something that we're seeing in many aspects of our economy, is that when large companies share competitively sensitive information using often faceless intermediaries, that sharing of information can result in higher prices to consumers, but it could also result in depriving, in this instance, family farmers and others of a fair return on investment. So the way companies might share price and market information has moved on from those secret deals in dark rooms of the past. Now they might do it on a platform or through an algorithm. And antitrust enforcement has to adapt to this new world.

20:22This is an issue that we are confronting throughout our economy. And so the concerns around data sharing and coordination are not new, right? The antitrust laws enacted initially in 1890 have been dealing with this ever since. But what we are encountering now is almost a supercharging of data sharing and coordination. And so the use of technology and intermediaries has created the opportunity for companies to contribute information, for example, to a central database or service and have that service essentially perform the function of coordinating and using that data to help those companies extract higher prices or offer lower returns to people who are selling their goods and services.

21:06In the context of technology now, something that used to be difficult to do because it required manila envelopes of data and spreadsheets and calculators and a lot of manual labor is increasingly being outsourced to technology algorithms that can take this information and essentially take on the pricing or take on competitively sensitive functions of a business. And the more that is outsourced to these technologies, these algorithms, the more the difficulties that used to somewhat restrict the ability of companies to engage in anti-competitive coordination, those frictions, those impediments are being lifted and eliminated.

21:49And it's going to make it easier and more effective. And that is a real big concern of ours. And so when we think about what does an agreement look like, what is information sharing, what does coordination look like in the year 2024, we have to look at what market realities present. And market realities today present algorithms doing that work. And whether it's an algorithm taking the information, spitting it back out and resulting in higher prices, or two individuals in a smoke-filled room as it might have been 100 years ago, it's the same anti-competitive end. They're just doing it through different means.

22:24And so whether it's a handshake using the postal service and sending mail to coordinate, whether it's using email or text messages or chat or phone or in today's world sharing information through an algorithm and outsourcing it to AI, it's still the same thing. It's coordination. It's price fixing. It's market allocation. And the antitrust laws apply just as much now, if not more, than they did when they were enacted in 1890. So the outcome of the Agristat suit will be very interesting to watch. But what about changes in the way we raise chickens too? Because even if chicken prices come down and labor practices improve, there might still be some other poultry-related problems.

23:11One of the most remarkable food miracles is the story of chicken, a triumph of research on the farm and in the marketing system. Once something special for Sunday dinner, chicken, inspected and grated, is now thrifty every day. Yes, in one generation, people of this country have doubled their consumption of pulchry. Farm research has led to the control of disease, improvement of breeds, advancement of production. Marketing research has developed low-cost methods of mass distribution in processing, storing, handling, and packing. And these boxes join the never-ending... Technological changes in the way we grow chickens was once pitched as a big win for consumers.

24:01We talked about it in our earlier episode. The introduction of hormones, antibiotics, and growth promoters all combined to create a more robust chicken. But just as antitrust regulators have started to repair some of the damage wrought by new technologies, consumers have been pushing back, too. We spoke to Maren McKenna, the public health specialist, earlier in the series. And as she explains it, people's attitudes towards, let's call them augmented chickens, has turned. Now the worry is that all that antibiotic use in birds might make it more difficult to treat people, and that's led to a big change.

24:33We got really significant change in the United States about how antibiotics were allowed to be used in the raising of livestock. Not legislation, because legislation had been tried on this issue back in the 1970s and foiled by some congressmen with big agricultural interests behind them. What the Obama administration did in pretty much their last days in office was instead to change some regulations, they're technically called guidances, at the FDA that affected how antibiotics were allowed to be labeled. And since the label has the force of law for how an antibiotic can be used, that actually created significant change.

25:16And what it basically did was outlaw growth promotion. Now, the reason why this happened was first because the Obama administration took it on as a cause. And second, because one of the most powerful chicken companies in the United States, Purdue Foods, got behind the change. In fact, you could argue led the change in some ways. But also there was a consumer movement. And it's kind of remarkable to me that given the size of the economic forces that we're talking about, this incredibly large trade in livestock, that consumer voices were heard. But sets of very large buyers, for instance, university medical centers and very large public school systems, both of which are feeding vulnerable children or feeding vulnerable patients, said to essentially their wholesalers, We don't want anymore to buy chicken that was raised with routine use of antibiotics because if there is resistant bacteria on this meat, it is going to endanger people whom we're feeding.

26:23And that led both the companies and the regulators to understand that if they stepped out and made these changes, there was an audience and a market waiting for them. And someone to everyone's shock, the change actually happened. So in the last days of the Obama administration, it became no longer possible to use growth promoters in the United States. Because, of course, chicken isn't just about prices and wages. It's about lives, too. We eat a lot of chicken meat, and we want it to be good for us. Meanwhile, the use of antibiotics has gone hand-in-hand with crowded chicken houses and factory farming.

27:07As Marin mentioned, Purdue, the fourth largest poultry company in the U.S., got on board with the change. Even eight years later, it says it's still committed to, quote, no antibiotics ever in its flocks. Some other companies have backtracked, though. Tyson, for instance, has dropped its no antibiotics label, though it says it's only using drugs that aren't important to human health. In 2024, however, there is something else to worry about when it comes to chickens' collective impact on human health. Bird flu. Bird flu has been coming back to the United States and being found not just in migrating wild birds and raptors, for instance, but also in domesticated birds.

27:48And when avian flu, which is incredibly pathogenic to birds, gets into a very large-scale chicken operation, whether that's turkeys or broilers, meat chickens, or laying hens, egg chickens, the results are incredibly dramatic. Entire farms can be wiped out, and those farms may be very large. Egg farms can have more than a million chickens on them easily. And so it's a significant concern that this flu keeps on sort of like knocking at the window of our agriculture and finding ways inside.