Volume 42 | Number 3 Summer 2007
The Agricultural Exemption in Antitrust Law: A Comparative Look at the Political Economy of Market Regulation
VI. Conclusion: Is There a Justification for an Agricultural Exception?
The rationale of competition law is that competition is good for the economy and for the consumers and that attempts by firms to restrict competition should be prevented by law. Competition is seen as the pillar of modern market economies and the foundation of capitalism, in that it stimulates innovation, encourages efficiency, and drives down prices. According to microeconomic theory, in general, no system of resource allocation is more efficient than competition. It causes commercial firms to develop new products, services, and technologies, which in turn gives consumers greater selection and better products. The greater selection typically causes lower prices for the products compared to what the price would be if there was no competition. While competing firms have a clear interest in restricting competition to capture monopoly or monopsony rents at the expense of consumers or suppliers, respectively, the general efficiency of a society requires that such strategic behavior is prevented so that competition is preserved.
The question that has to be asked is whether there is anything peculiar to the agricultural sector that justifies departure from this rationale in countries where it is followed and implemented in all other economic sectors? One such peculiarity which, as we have seen, seems to have motivated legislators in the U.S., EU and the UK to grant certain exemptions to farmers, is the atomistic nature of the farming industry, which often is made up of family-run farms and other relatively small units of production. This nature is sometimes contrasted with the concentration in the agricultural marketing and processing sector. Under such conditions—and under the assumption that countries have an interest (usually, for non-economic reasons) in preserving these traditional characteristics of the farming industry—there may be efficiency and distributive justice rationales for cooperation and coordination among farmers. Efficiency may be promoted by allowing farmers to organize in cooperatives so as to rationalize their production, transportation and distribution processes, provide the farmers with up to date information on market trends, consumer preferences and agricultural know-how, and to establish common brands and quality standards.158 Such cooperation may also help put the farmers on a more equal footing with marketing and processing firms, thus allowing a more efficient bargaining outcome and preventing oligopsonistic rents in the pockets of the latter. Organization into cooperatives in effect serves as an alternative to corporate mergers of small farmers into larger farming conglomerates, which in any case would not be prevented under most merger regimes.159 Preserving the livelihood of family-run farms would also be more in line with distributive justice, considering the generally hard living conditions of small farmers in relation to large marketing firms. Finally, by preserving family farms and traditional farming communities, we would also be serving communitarian values as well as contributing to the protection of the environment.160
However, such rationales could only be invoked to permit small or perhaps medium-sized farmers to organize into cooperatives. It certainly cannot justify exempting marketing firms as such from the regular competition rules. And even as far as farmers are concerned, the exemption can be justified only under certain conditions, similar to those described. Thus, an exemption must be granted by a very fine-tuned instrument that sets appropriate conditions for the right to invoke it. Such conditions should include provisions to ensure that the cooperative does not obtain market power (for instance, that the exemption is limited by a maximum market share of the cooperative), that only small- or medium-sized farms or agricultural producers can benefit from the exemption, that the cooperative only incorporates active farmers and deals almost exclusively with the produce of its members; and that the cooperative is managed by and for the benefit of its members. One should also ensure continuous supervision by competition authorities and courts, who ought to be authorized to withdraw the exemption whenever it is used to excessively restrict competition or distort markets.
Another peculiarity of the agricultural sector is the relatively inelastic demand for its produce, the unpredictable and seasonal supply, and the inability in many cases to store the produce for long periods of time. However, these problems can hardly be solved by merely allowing coordination between growers. If these problems exist, and to the extent that they cannot be overcome by regular market mechanisms, they would require government intervention and special market organization. If, for instance, there is justification for regulation of production quantities and allocation of quotas, surely this cannot be effectively done by voluntary agreements between the producers. Such quotas would need to be imposed and enforced on all of the producers in the market, in particular on those producers who have an incentive to produce more than their allocated quotas and would therefore never join a voluntary arrangement that restricts their ability to do so. Even if agreement could be reached between all the producers, because of the Prisoners’ Dilemma involved, it would be a very fragile agreement that would be extremely hard to enforce. Therefore, states that have reached the conclusion that they want to impose such special centralized market organization have done so by means of mandatory regulation in one form or another.161 Such regulation, to the extent that it is in conflict with existing competition rules, would usually be exempt by a general exemption of statutory mandated arrangements162 and not by a specific exemption for restrictive agreements in the agricultural sector. In any case, such specific market regulation, which often has the effect of almost eliminating competition altogether, ought to be pursued with utmost caution, after extensive study of the market and only after the regulators are completely convinced than no other market-based solution is possible. Certainly, there is no place for a comprehensive elimination of all competition in the agricultural sector, as can be learnt from the Israeli (and the EU) experience.
In light of this analysis, all of the agricultural exemptions discussed in this article would require some amendments. The U.S. exemption, found in the Capper-Volstead Act of 1922, could benefit from some more clear-cut market-share caps, which would ensure that the exemption is not utilized whenever it leads to market-power by the parties to the arrangement. In this connection, it should be kept in mind that the Act permits not only agreements between the farmers and their respective cooperatives, but also agreements between various cooperatives,163 something that could lead to cartelization of the market. The same applies to the EU exemption, which also permits arrangements between farmers’ associations, or associations of such associations,164 but fails to set market-share caps or other clear limitations. Since both the U.S. and EU exemptions, unlike the U.K. and Israeli exemptions, extends not only to joint marketing and preparation for market (sorting, packaging, etc.), but also to processing, there is also a risk that the exemption will be used by industrial food producers, owned by various farmers cooperatives, to restrict competition between them. While such problematic developments could be thwarted by the authorities or the courts if they discovered them, it would seem much more effective to define expressly the scope of the exemption so as to remove doubts and to make prosecution and civil proceedings in case of abuse easier. Clearly defined rules also create a more predictable business environment which is an important component of an efficient market. As for the U.K. exemption (prior to its harmonization with the EU regime in 1998), it lacked the safety valve of judicial and administrative supervision by competition authorities and the courts, to ensure that the exemption is not used to restrict competition and distort markets excessively.
This last shortcoming (lack of supervision) is also one that the Israeli exemption suffers from. In addition, there can be no justification for an extension of the exemption to marketing firms. The exemption should therefore be amended so that it is confined to farmers. It should be modeled upon the previous UK exemption, so that only farmers’ cooperatives are exempted under similar conditions as provided for therein. In fact, in order to achieve a well-balanced and fine-tuned exemption in line with the principles elaborated above, it would be best if the exemption was removed from the Law itself, and incorporated into a new block exemption. Such exemptions can be issued by the General Director of the Antitrust Authority, with the consent of the Advisory Exemptions and Mergers Committee, and are the more appropriate instruments for granting fine-tuned exemptions to specific sectors or to certain categories of agreements.165 They are often restricted by market-share caps and other sector-specific conditions. Another advantage of using a block exemption is that it remains in force for a maximum period of five years only, after which it can be renewed as is or in an amended formula, if it is still deemed necessary. This mechanism ensures periodical reviews of the exemption, of the structure of the market to which it applies, and of its continuing necessity. Also, by taking the exemption out of the law once and for all, required amendments to it will no longer be blocked by the agricultural lobby. Instead, the exemption will be designed and amended by the Antitrust Authority, in conjunction with the Advisory Committee, which is made up of independent civil servants and antitrust experts.166 Finally, by using a block exemption, instead of a statutory exemption as is done today, we would achieve the safety valve that today is missing. Under Article 15A(g) of the Law, the General Director has the authority to withdraw the exemption from a specific restrictive arrangement, and would do so presumably if she finds that the competition is being excessively restricted to the detriment of consumers or other market participants.
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Footnotes
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