Grains Still Highly Competitive, Panel Told

May 17, 2001

The grain marketplace remains highly competitive, despite ongoing consolidations throughout the agricultural industry and other sectors of the U.S. economy, the National Grain and Feed Association told a congressional panel. David S. Reiff, president of Reiff Grain and Feed Inc., Fairfield, IA, said, "Robust competition, particularly between first buyers who purchase grain from producers, and the highly transparent nature of the grain marketplace work together to ensure that competitive markets are the norm for U.S. grain farmers."

Reiff made the statements during a hearing on agricultural market concentration conducted by the Senate Appropriations Committee's Subcommittee on Agriculture, Rural Development and Related Industries. The NGFA said that concentration in the grain industry is most notable in the processing sector - including oilseed crushing, flour milling, and wet and dry corn milling - because extensive capital investment is required. But processors must compete for farmer grain with a large number of country elevators, feed millers, livestock producers, industrial users (such as ethanol plants) and exporters, Reiff said.

Reiff noted that competing elevators frequently are located within a 10-mile radius in corn-growing states and within a 20- to 25-mile radius in wheat-producing areas. Further, he said, the global nature of the grain marketplace and the fact that the United States produces less than 25 percent of the world's supply of major grains means that U.S. grain prices are influenced heavily by foreign competition and supply/demand conditions.

He also emphasized the transparency of the futures and cash grain marketplace and its price-discovery mechanism, which includes three public futures exchanges and private electronic market services that disseminate to producers cash grain market prices and bids for thousands of U.S. locations daily. "This very public and highly competitive method of price discovery gives every farmer in the United States a strong indication of the value of commodities on a daily basis," Reiff said.

In addition to cost-cutting pressures, the NGFA said grain industry consolidation has occurred for several reasons, some of which directly benefit producers:

· Grain handlers are seeking to build a loyal farmer-customer base by providing enhanced services, such as tailored risk-management, farm-input supply consultation, farm-input application and record keeping. "This trend requires grain handlers to have greater expertise and manpower on staff," Reiff said.

· A shrinking producer-customer base that requires fewer grain-handing firms. The NGFA noted the continuing decline in the number of commercial farms, defined as those that have annual gross sales of $100,000 or more annually.

· Low margins in the grain marketing and handling industry.

· Continued consolidation in the rail industry, which accounts for 25 percent of commercial grain shipments. The NGFA noted that only seven major grain-hauling railroads now exist in the United States, which means more rail grain shippers are dependent on a single carrier. In addition, there has been a trend in the rail industry of offering preferable rates for grain shippers able to load unit trains of 100 or more cars, which may reduce transportation costs for producers but requires increased capital investment by grain handling facilities.

· Increased complexity and compliance costs associated with government regulation, which increases investment and operational costs.

In addition, the NGFA said, increased vertical integration, joint ventures and special "just-in-time delivery" contracting practices have resulted from the demand for greater uniformity, choice and quality among retail customers. "Today's food marketplace requires considerably more management control over production, delivery and quality specifications of raw and semi-processed products at each stage of the food chain," the NGFA said. "Some firms are choosing to obtain this increased management control through ownership - full vertical integration - while others are accomplishing it through joint ventures and through contracts that require tight quality specifications and just-in-time delivery provisions."