Tate & Lyle

My most recent blog post, discussing whether Barack Obama is good or bad for business, attracted more, and more vociferous, comments than anything else I have ever posted, apart from one article I wrote expressing mild skepticism about the utility of Apple’s new iPad (lesson: don’t criticize cultish dogma of any kind). Most of those who commented, some of them using noms de blog like “John Galt,” attacked me for peddling “pure propaganda” in favor of the President’s policies, while others, also missing the point, congratulated me for standing up in favor of the President. My point, however, was neither to praise the President nor to attack him, but to point out how much he resembles his predecessors as President and other senior elected officials, regardless of party affiliation. He and they are keen to show their pro-business bona fides by granting subsidies and protection to corporations, some of which may – directly or via their industry lobbies – contribute to their campaigns. At the same time, the President and Members of Congress are not at all eager to prune back the thicket of regulation that makes it increasingly difficult for many American companies, especially small businesses, to prosper and grow. The people who govern us act favorably towards specific companies and industries, but show little fondness for free markets, which favor all comers equally.

Though many companies benefit from government largesse, none has mastered the game of turning government policy to its advantage better than Archer Daniels Midland, the world’s largest corn processor based in Decatur, Illinois. ADM, with $69 billion in 2009 revenue, ranks 27th in the Fortune 500 and is the second largest U.S. agro-processing firm after Cargill, the privately owned Minneapolis company, which pulled in an estimated $110 billion in 2009 revenue.

ADM has exerted a strong influence on U.S. agricultural policy for at least 40 years. In  1973 Earl Butz, President Nixon’s Agriculture Secretary, engineered a shift away from the New Deal policies of farm price supports, which included limiting production of corn and other major commodities, to encouraging farmers to produce as much as they could, regardless of price. The government henceforth would pay direct subsidies to farmers to make up the difference between the market price and what it considered an appropriate floor price. Naturally, this sharply drove down the price of corn, providing a windfall to major corn processors. Michael Pollan describes this phenomenon in detail in his excellent book, The Omnivore’s Dilemma.

Except it wasn’t precisely a windfall, since ADM had done a great deal to engineer this outcome. During the Watergate investigation, Special Prosecutor Archibald Cox indicted then-ADM CEO Dwayne Andreas for giving $100,000 in illegal contributions to Hubert Humphrey’s 1968 Presidential campaign. But Andreas was nothing if not bipartisan. Richard Nixon’s secretary Rose Mary Woods, testified that during Nixon’s 1972 campaign Andreas handed her an envelope containing $100,000 in $100 bills. Between 1975 and 1977 Andreas gave $72,000 in ADM stock to the children of David Gartner, senator Humphrey’s chief of staff at the time, whom President Jimmy Carter in 1977 named to head the Commodity Futures Trading Commission (he was later forced to resign when the details of the ADM gift came to light).

ADM continues to lavish huge sums on candidates for high office. During the 1996 Presidential campaign ADM gave $100,000 to Bob Dole’s Better America Foundation, provided numerous free rides on ADM’s corporate jets to Senator and Mrs. Dole, and gave over $1.5m in soft money to the Republican National Committee. Though Bob Dole lost his Presidential race he remained highly influential as a Senator and helped arrange the 54-cent per gallon ethanol tax credit of which ADM, producer of more than 60% of America’s corn-based ethanol, is the main beneficiary. ADM also contributed to Clinton’s and George W. Bush’s campaigns. Although Barack Obama apparently has received no direct campaign contributions from ADM – ADM was, however, a major sponsor of the 2008 Democratic National Convention – as a Senator from ADM’s home state of Illinois Mr. Obama was one of several farm-state Senators who staunchly opposed a Bush Administration proposal to lower the prohibitively high import duties on Brazilian ethanol made from sugar cane. During his Presidential campaign Mr. Obama vigorously defended the corn ethanol subsidy, and as President he has kept the policy firmly in place.

ADM’s own corporate website has this to say about its political contributions:

“As a global agricultural leader, Archer Daniels Midland Company connects the harvest to the home and serves growing global demand for food and energy.   Our ability to fulfill this vital purpose is enhanced when government policies impacting our operations promote growth — growth that facilitates job creation as well as ongoing investment in our business, our employees and the communities where we live and work.

“For this reason, ADM and ADMPAC, our political action committee, support candidates for political office and organizations that share our pro-growth vision, our aspirations for the future of global agriculture, and our commitment to the people who depend on it for their lives and livelihoods.  All ADM and ADMPAC political contributions are made in strict accordance with applicable federal, state and local laws.”

In 2009, not an election year, ADM gave $197,575 in political contributions while its political action committee, ADMPAC, gave another $134,500.

If rigging U.S. agriculture, trade, and energy policies to its advantage weren’t enough, ADM has also conspired with other agro-processing giants such as Cargill and Ajinomoto to fix prices for lysine, citric acid, and corn syrup. It paid a $100m fine in 1996 for lysine price-fixing in a plea bargain that led to two-year prison sentences and $350,000 fines for Michael Andreas, Dwayne’s son and heir apparent, and Terence Watson, another ADM executive. At around the same time, ADM, Cargill, and the British sugar company Tate & Lyle were indicted by the U.S. government for  conspiring to fix the price of high-fructose corn syrup. Though they were cleared of criminal charges in 1999, they subsequently settled a lawsuit brought by U.S. food and beverage manufacturers, Cargill paying $24m, Tate & Lyle $100m, and ADM $400m.

According to a 1995 article by James Bovard of the Cato Institute, ADM heavily bankrolled the American Sugar Alliance, which successfully lobbied for high tariffs and quantitative restrictions on sugar imports, raising the domestic sugar price to a substantial multiple of the world market price and ensuring that ADM could profitably produce high fructose corn syrup at a substantial discount to the cost of sugar. According to Bovard’s article, “At least 43 percent of ADM’s annual profits are from products heavily subsidized or protected by the American government. Moreover, every $1 of profits earned by ADM’s corn sweetener operation costs consumers $10, and every $1 of profits earned by its ethanol operation costs taxpayers $30.” The numbers have no doubt changed over the past 15 years, but the underlying practice has not.

The funneling of taxpayer dollars into ADM’s bottom line continues unabated. The Des Moines Register reports today that the EPA is about to issue an approval for 15% ethanol blends to be sold as automotive fuel (the current standard is 10%), almost certain to be a bullish indicator for ethanol futures prices.

Apart from the obvious cost to taxpayers, what are the wider effects of the subsidies and other market distortions that favor ADM?

The current controversy over New York City Mayor Michael Bloomberg’s proposal to ban the use of food stamps for purchases of soft drinks on the grounds that such products contribute to obesity is a case in point. I am not going to wade into the debate over the health effects of high fructose corn syrup (HFCS), except to note that the Corn Refiners Association (principal members ADM, Cargill, and Tate & Lyle) have recently launched a huge campaign to rebrand HFCS as “corn sugar” and to convince consumers that “sugar is sugar,” whatever its source. Even if the association’s claim is true, HCFS has had a hugely adverse effect on public health, mainly because it is so cheap. It has become almost impossible to find a 12-ounce bottle of Coke or Pepsi anymore. Go into any convenience store and the minimum size is now 20 oz., while two-liter bottles, which cost only pennies more than their smaller cousins, appear to dominate the market. As one of the cheapest items on supermarket shelves, soft drinks laden with HFCS are a popular choice for people whose grocery budgets don’t stretch very far, and if you can get two liters for only slightly more than the price of one, why wouldn’t you?

Rather than robbing food stamp recipients of their dignity by telling them what they can and can’t buy, I’d rather see comprehensive reform of our agricultural policies, which would include abolishing food stamps, another form of agricultural subsidy, in favor of cash grants.

Then there is the effect of ethanol subsidies on world hunger. You may remember the commodities price boom in the first half of 2008, before the housing market crash, when the oil price hit $147 a barrel, the corn price went to $7.65 a bushel, and more than 30 countries, including Bangladesh, Cameroon, Egypt, Haiti, India, Indonesia, Mozambique, and Senegal, suffered widespread and deadly food riots. The spike in the corn price was caused largely by the diversion of roughly a third of America’s corn crop to ethanol production. This had a knock-on effect on wheat and rice prices. Numerous grain exporting countries, including Argentina, India, Vietnam, and Russia, imposed export bans, which contributed to shortages and price rises in countries dependent on food imports

The same phenomenon may be about to repeat itself. On Monday, corn prices gained 8.5% on the Chicago Board of Trade, the biggest rise since 1973, and it followed a substantial gain on Friday, both resulting from Friday’s release of a U.S. Department of Agriculture report, which sharply cut the outlook for U.S. corn yields. These developments had a knock-on effect on wheat prices, which rose 2.8% before falling back, and soybean prices, which gained 1.5%. Cotton futures hit a 15-year high on the New York market. Russia, suffering its hottest-ever summer, in August imposed a ban on wheat exports, which it subsequently extended to the 2011 harvest as well.

A lot of things contributed to the 2008 panic and are contributing to the current panic in the making. People in places like China are growing wealthier and want to consume more meat, which increases the demand for grain. Rapid urbanization, especially in China, is forcing the conversion of farmland to industrial, commercial and residential use. Higher oil prices raise the cost of fertilizer, which in turn causes food prices to rise. The planet’s population continues to grow, with much of the growth coming in countries that can’t grow enough food to feed themselves.

You can’t blame ADM for hot weather in Russia. But if you had to identify one principal cause of what seem to be recurring food shortages and price shocks, you’d have to look at U.S. agricultural policy, and if you look at U.S. agricultural policy you have to look at ADM. Ethanol subsidies and tariff protection divert cropland from food production to energy production. It’s as if you cut down a corn field to put in a power plant, except a power plant has a much smaller footprint than the thousands of acres of corn fields needed to produce an equivalent amount of energy. The competition for cropland intensifies, food prices shoot up, and the world becomes much less stable. Starvation abroad and obesity at home, ADM is one corporation with a lot to answer for.

Back to my original point, then. Barack Obama, like all of his predecessors for at least the past 40 years and like most of his former Congressional colleagues, Democrats and Republicans alike, is quite happy to grant hugely expensive favors to ADM and to scores of other big companies. In this he, and they, can be considered highly business-friendly. But this doesn’t translate into enthusiastic support for free markets. Quite the opposite, in fact. It might be appropriate to leave the last word to former ADM Chairman Dwayne Andreas, who told a reporter, “There isn’t one grain of anything in the world that is sold in a free market. Not one! The only place you see a free market is in the speeches of politicians. People who are not in the Midwest do not understand that this is a socialist country.” Even though they would never admit it publicly, a majority of our elected officials – and that includes Presidents Obama and Bush and a majority of senators and representatives from both parties – agree. You can quibble about the details, but President Obama is firmly in the political mainstream: friendly to big companies but distrustful of free markets.

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