Federal Prosecutors Probe Food-Price Collusion By John R.

Wilke 1,734 words 23 September 2008 The Wall Street Journal A1 English (Copyright (c) 2008, Dow Jones & Company, Inc.) Federal prosecutors have opened separate criminal probes into possible price-fixing by major egg producers and California tomato processors, the latest in a series of U.S. investigations of alleged collusion in food and agriculture. The investigations, which have not been previously reported, add to concerns that beyond the rising cost of fuel and feed, a hidden factor may be driving food prices higher: collusion among farmers, food processors or exporters. A Justice Department official confirmed that it had opened investigations into tomatoes and eggs. Federal agencies already are pursuing criminal or civil inquiries in markets including fertilizer, cheese and milk, examining whether suppliers worked in league to manipulate prices. The Justice Department said it had also opened a probe last year into the citrus-fruit industry. Higher food prices have become a hot issue in the presidential campaign and a rising source of anxiety in the global economy. In part, prices have climbed in response to rising world demand in places such as China and India, as well as drought and energy costs. But years of unrestrained consolidation among food producers may have had an impact as well, diminishing competition in many markets. "When big guys get bigger, it makes collusion easier," said Peter Carstensen, a University of Wisconsin law professor who has testified in Congress on competition in the food industry. Under U.S. law, it's a crime for competitors to collaborate on production or prices. However, many farm groups and cooperatives are allowed to work together under antitrust exemptions such as the 1922 Capper-Volstead Act. The act, one of a web of loopholes carved out over the years, was originally meant to help small farms bargain with big processors. Egg and tomato producers say their cooperation is shielded by these exemptions. In stepping up enforcement in food, prosecutors are signaling a new willingness to test these exemptions' limits. In the tomato-industry probe, a federal grand jury in Sacramento, Calif., has issued subpoenas, and Federal Bureau of Investigation agents are interviewing executives of big California tomato processors, lawyers close to the case said. The officials are trying to determine if dominant processors of tomatoes for canning, ketchup, salsa and sauces conspired to fix prices, these people said. The tomato probe grew out of an investigation into allegations that a consultant to a big processor, SK Foods Inc. of Lemoore, Calif., was working with SK to bribe buyers at six major food companies to pay inflated prices for tomato paste and chili peppers. In wiretaps and raids carried out as part of the bribery probe, investigators found evidence of the wider price-fixing conspiracy, according to FBI documents filed in federal court in Sacramento. A lawyer for SK Foods declined to comment on the bribery case or collusion inquiry but said the company is cooperating with investigators. The lawyer, Brian Maschler, said SK and other processors disbanded their industry organization, the California Tomato Export Group, in May shortly after the FBI raided several tomato processors. He said that while its members believed the group was exempt from antitrust law, "we wanted to avoid even the appearance of anything improper." Tomatoes are among the big price gainers in the past year, notwithstanding this summer's scare -- false, it turned out -- that fresh tomatoes could be tainted with salmonella. Tomato prices rose 16% in the year ending in August, while food prices overall rose about 6%, according to the Bureau of Labor Statistics. In an unrelated probe, the three largest U.S. egg processors also have received grand-jury subpoenas. The

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criminal investigation is focused on the pricing and marketing of egg products, such as liquid and powdered eggs, lawyers and industry executives said. Golden Oval Eggs LLC, Michael Foods Inc. and MoArk LLC, a unit of Land O'Lakes Inc., have each confirmed that they received subpoenas, sent by the U.S. Attorney in Philadelphia, covering the years 2002-08. Golden Oval said it is cooperating with the U.S. inquiry; MoArk also is cooperating and noted that it sold its egg-processing business but remains in fresh eggs. A Michael Foods executive also declined to comment and said the company is responding to the government's requests. Michael Foods of Minnetonka, Minn., is the world's largest egg processor, with 2007 sales of $1.6 billion. Its products end up in hundreds of prepared foods from pasta to pancake mix. The Justice Department wouldn't disclose how it believes processors manipulated the prices of egg products. There's no indication that the department is looking into the larger market for fresh eggs, where prices have increased more than 40% in a year. But producers of fresh eggs have coordinated their efforts to raise prices, according to industry participants and a Wall Street Journal review of industry documents. Fresh-egg farmers acted together through a series of export shipments, organized by United Egg Producers, an industry cartel whose 250-plus members include virtually all of the nation's big egg producers. By removing a small fraction of eggs that would have been bound for U.S. sales and arranging instead for their export, United Egg helped tighten domestic supply and drive up the price of eggs across the country, according to newsletters and other documents that United Egg sent to its members. After three years without significant exports, United Egg shipped nearly 100 container loads, or 24 million dozen fresh eggs, to Europe and the Middle East at the end of 2006 and early 2007, industry participants say. Each member was required to provide a share of the sale, prorated by flock size. The orders were sold at below the prevailing U.S. price for fresh eggs, United Egg said. The industry group itself credited the campaign with helping to boost domestic egg prices, which rose more than 40% in the next year. Gene Gregory, the Georgia-based group's executive director, said export orders amounted to less than 2% of industry output. "But it is amazing how one or two percent can have an effect on the rest of your domestic price," he said. Egg prices began to soften in March 2008. United Egg put together another export order. It sent 100 container loads, this time to buyers in Japan and Iraq, again selling them at well below the domestic price. U.S. egg prices shot up again in the summer. United Egg says it is in the process of shipping 120 more container loads. The U.S. Agriculture Department's chief economist said that while higher feed costs have played a part in lifting egg prices, the primary causes for price rises through 2007 and into 2008 were limited production and tight supply. "In 2007, table-egg producers cut production," a decision that predated the run-up in feed costs, the Agriculture Department economist, Joseph Glauber, said in congressional testimony in May. "In 2007, the wholesale price for a dozen Grade A large eggs in New York averaged $1.14 per dozen, 43 cents higher than the previous year," Dr. Glauber testified. The exports followed a previous effort by United Egg to limit supply by pressing members to cut the size of their flocks. In 2004, according to members and internal documents, the group pressed its members to increase the sizes of their hen cages, a response to the growing number of producers advertising "cage free" eggs and the threat by some states to introduce new animal-treatment rules. But bigger cages also mean farmers can keep fewer hens in the same space. United Egg warned its members not to build additional cage capacity to make up for these flock reductions, according to its internal newsletters. Producers that raised flock size risked being removed from United Egg's "animal-care certified" logo program. Mr. Gregory, the United Egg executive, said that the program "was not done to raise prices. We phased in these cage-size restrictions over several years to avoid market disruptions." Before United Egg's export initiative and the industry's flock reductions, the egg industry had a boom-and-bust history of profit and overproduction. The industry leader, Cal-Maine Foods Inc., of Jackson, Miss., has enjoyed sharply higher share prices and

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profit in the past two years. In the year ended July 28, it reported that higher egg prices helped push net income to $152 million, from $37 million a year earlier. Its shares traded as high as $48.80 in August. Cal-Maine shares have slipped recently, to $40.36, still well above the August 2006 price of $7.42. "Greece had its Golden Age . . . and now the U.S. egg industry is having its turn," Watt's Egg Industry newsletter boasted in its February edition. "Egg prices have soared at historic highs through months in which producers usually hold on for dear life." United Egg says its collective actions, including exports handled by a United Egg affiliate, are shielded from antitrust law under the Capper-Volstead Act. But its efforts to raise U.S. prices could lead to new scrutiny of exemptions from Congress and regulators. Farmers are a powerful political voice, and the exemptions aren't likely to be repealed. But the latest food-industry investigations show that antitrust enforcers are increasingly willing to challenge the co-ops they allege have overstepped the spirit of the law. A presidentially appointed commission last year raised questions about whether such exemptions still efficiently served the purpose of helping small farms. "Some of these exemptions have outlived their usefulness" given vast changes in the economy, said David Wales, competition chief at the Federal Trade Commission, which shares antitrust enforcement with the Justice Department. Without referring to a specific case, he added: "If businesses are going to use one of these narrow exemptions to engage in anticompetitive conduct, we're going to take a hard look at that." Investigators are also looking into alleged efforts by the Dairy Farmers of America to restrict competition, lawyers close to that case say. The big dairy cooperative is also under investigation by federal regulators for alleged manipulation of cheddar-cheese futures prices in the Chicago Mercantile Exchange. The Justice Department official declined to comment on the dairy industry. The dairy cooperative says it hasn't violated antitrust law and is cooperating.

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ELECTION FORUM '96 EDITORIAL Oil Price Collusion a Political Witch-Hunt Gary M. Galles 860 words 25 May 1996 Chicago Sun-Times LATE SPORTS FINAL 14 English 1996 Chicago Sun Times. Provided by ProQuest Information and Learning. All rights reserved. Absent a smoking gun documenting conspiracy, collusion in the oil industry today is unprovable. You can tell it's an election year by the political response to the recent increase in gasoline prices. Rather than serious analysis, office-seekers are scrambling to score political points by proving how they will protect voters better than their rivals. Republicans have used the public attention to tar President Clinton for his earlier gas tax increase, even though that has nothing to do with the recent price jump. The president has ordered the release of some of the Strategic Petroleum Reserve, looking for credit for moderating gas prices - even though the budget requires the sale, and the total sale is only a fraction of one day's consumption - by timing the sale to take credit for already anticipated future price reductions. Further, the Clinton administration is protecting us by investigating whether higher gas prices also reflect oil industry collusion. Of course, such investigation is nothing but a way to try to pressure oil companies to keep prices below market levels, "or else." Absent a smoking gun documenting conspiracy, collusion is unprovable. The reason is that the evidence of collusion is higher prices, but there are multiple political and market forces that have been pushing gas prices up. There is no way to subtract the magnitude of those effects from the increase in market prices, to prove that collusion has raised prices even further. Recent increases in crude oil prices have increased the price of gas, but collusion among refiners has nothing to do with that. Further, the expectation of impending Iraqi oil sales contributed to the oil price jump by leading other producers to cut back their output in anticipation. Unusually harsh winter weather, resulting in a greater demand for heating oil, delayed the normal refining shift from heating oil to gasoline production, putting more pressure on gas prices as better weather increased the demand for gasoline. But there is no way to know precisely how much these factors should have increased prices. Leaner refiner inventories in search of efficiencies and reduced risk of falling values also have increased the price risk from a falling gas supply, particularly in California. California's mandate for cleaner gas has raised refining costs, as well as isolated California from most outside sources of gasoline, since they do not conform to California's "recipe." But there is no way to establish exactly how much the price for a gallon of gas should rise to cover the $4 billion or so of added refining costs. Further, accidents at a Shell plant in Martinez, Calif., and an Arco refinery in Los Angeles have temporarily reduced output below normal, with the resulting competition for supplies pushing up prices. How can the government know how much prices "should" have risen? The elimination of the Alaskan oil export ban, rerouting crude supplies away from California to Asia, also will result in higher prices in California. But again, no one knows exactly how much. None of these effects by itself can entirely account for recent gas price changes. But all of them would have to be both understood and quantified before any analysis of industry prices capable of establishing collusion could be done. This has not been done, and probably cannot be done, given the multiple interacting market forces at work. While politicians eventually will concede that the price trends have not proved oil industry collusion, they will insist that it hasn't been disproved, either. And by then the votes will have been won. But, in the absence of definitive price evidence, there are better data to evaluate collusion claims - profits, since higher profits should result from effective collusion. But oil refining and distribution has been only marginally profitable. Chevron and Arco earned only $18 million and $25 million in the first quarter in these areas, while Unocal has lost money on its $2.5 billion investment. Combined with a 20 percent decrease in U.S. refining capacity

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since 1982, this is hardly evidence of successful collusion. In Salomon Brothers oil industry analyst Paul Ting's words: "Are oil companies gouging, making unconscionable profits? The indications are that on the refining and marketing side, the earnings have actually been abysmal." What should we make of a government collusion witch-hunt that cannot possibly prove what it is looking for, and that ignores clear evidence of abnormally low profits? It seems, more than anything else, to demonstrate that rather than relying on the government to protect us against the evils of the market, we need to rely more on the market to protect us against the evils of government. And after the 1970s, we shouldn't need this reminder. After all, while the market price of gas will rise when underlying conditions warrant, only the government can create block-long gas lines. Gary M. Galles is a professor of economics at Pepperdine University, Malibu, Calif. Some Illinois residents are driving to Hammond, Ind., for better gas prices as the cost of filling up has risen this spring.; Credit: BOB RINGHAM Document chi0000020011013ds5p00hhc

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A Section N.Y. Art Dealers Under Investigation; Justice Dept. Reportedly Checking for Possible Price Collusion Sharon Walsh Washington Post Staff Writer 782 words 4 June 1997 The Washington Post FINAL A06 English Copyright 1997, The Washington Post Co. All Rights Reserved NEW YORK, June 3 -- From Chelsea and SoHo to Madison Avenue, the New York art world is being rocked by a Justice Department investigation into possible collusion among art dealers to keep prices low at auctions, according to dealers and auction houses here. Numerous art dealers and the country's two largest auction houses -- Sotheby's and Christie's -- have received subpoenas in the past several weeks for a broad range of documents. The subpoenas have gone to dealers in a variety of specialties, such as old masters, contemporary painters and impressionists. Many art dealers declined to talk about the investigation today, citing the advice of their attorneys. Others said the requests for information have been so wide-ranging that they aren't sure exactly what the investigation is about. "They're clearly looking for patterns of illegal activity, but nobody has any idea what that might be," said Richard Gray, owner of Richard Gray Gallery in Chicago and the president-elect of the Art Dealers Association of America. The investigation is believed by some in the industry to involve an alleged practice known as "bid rigging" or "bid pooling," in which dealers would agree not to bid against each other or not to bid over a certain amount -- a kind of price fixing that is illegal under antitrust laws. In some cases, dealers then allegedly would sell the art at a higher price and split the profits. The commissions charged by Sotheby's and Christie's could be another possible area of inquiry, according to sources, who noted that two years ago Christie's changed its commission schedule, with Sotheby's following suit shortly after that. It is not illegal for the two to charge the same commissions unless they agreed to it beforehand. Both auction houses declined to comment on the issue. Gray, who is scheduled to open a gallery here in the fall, said he had not received a subpoena but had talked with New York colleagues about the inquiry. The investigation apparently is aimed at dealers in New York, which is the center of the art world in this country. "We're trying to cooperate," said Richard L. Feigen, one of the New York dealers who said he has received a subpoena. "They've requested a massive amount of information and told me not to discuss it with my colleagues. I've never heard of anything like this in our business." Justice Department spokeswoman Gina Talamona would say only that the department's antitrust division "is looking at the possibility of anti-competitive practices in the fine art auction industry." A subpoena is merely a request for information and does not mean that the person or entity who receives it is a target of an investigation. The antitrust investigation came to light when Christie's International, which is traded on the London Stock Exchange, made filings in London announcing its intention to raise $75 million in long-term debt through a private placement to finance its new headquarters in Rockefeller Center.

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As part of the announcement, the auction house noted that it had recently received a grand jury subpoena "seeking documents relating to the conduct of the U.S. art market. Christie's Inc. understands that other U.S. auctioneers and several prominent New York art dealers also have been required to provide documents." The auction house said it is cooperating with the investigation and believes it has done nothing wrong. The existence of the inquiry was first reported by the New York Times. Christie's arch rival, Sotheby's, confirmed that it, too, had received a Justice Department subpoena. "Sotheby's is of course working with the Justice Department in providing the relevant information," the auction house said in a statement. The investigation follows on the heels of one of the most successful spring art auctions in the city in years. Buyers at Christie's and Sotheby's spent $387 million on art in a two-week period that experts said reflected the strong stock market and an increasing pool of global buyers. But art experts said that at a time when a single work of art can go on the block for millions of dollars, the investigation is puzzling. More and more, the big auction houses sell directly to the public. "Right now, we're not even players in the auctions," Feigen said. "The sums are so enormous, we're lucky if we get paid to act as an agent. Even if the dealers wanted to collude, they couldn't." Document wp00000020011009dt6400k3s

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