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Thesis – Continuity and change in global capitalism
Jakob Jansen – 10834427
Studie: Bachelor Politicologie – Politieke Theorie en Gedrag
Email: jakobyorickjansen@gmail.com
Deadline: 25-06-2018
Instructor: Jan Fichtner
Second reader: Philip Schleifer
Word count: +/- 8.700
Controlling corn’s industrial value chain: How Cargill exerts its power
over the production process
Introduction
In the modern industrialized world, it is quite hard to know where all the products you buy come from. Supermarkets sell numerous products with different brands and a range of exotic components. Except for the labels on the packages, it takes a great deal of work to know anything about the production process of what you are going to eat. When you get to the processed foods, this task becomes especially hard. Try and find out where your cereals come from and you might just need to invest quite some of your free time to get even a slight idea.
Industrialization has increased the complexity of our food system. In a rural society, farmers provide for their own subsistence and sell their surplus on the market. It is quite easy to know where products come from. In the industrial society, the food chain, or the number of successive stages necessary to produce a food product, is much longer and more complex (e.g. Pollan 2006). More and more often, crops form the basis for refined goods. When you eat processed foods, like cereals, it is highly likely that the food has been processed on a different place and by a different actor than where and by whom the original crop was grown.
Corn is among the crops that have benefited enormously from industrialization (Pollan 2006; Warman 1988). And when I say benefiting, I mean that purely following the industrial logic of higher productivity: from being a botanical bastard, naturally unfit to reproduce on its own, it has grown to be the most produced crop in the United States, the third largest producer of crops in the world
2 (Warman 1988; Investopedia). Although corn was already the most widespread American crop before industrialization, since then yields increased with factors unimaginable. Production was around 2 billion bushels before the second world war. In 2017, it was over 14,5 billion (world of corn)1. This rise is all the more spectacular when you take account of the fact that the total amount
of cultivated land barely increased.
This was not a self-evident process. In fact, it demonstrably taunts with the rules of the free market which neo-classical economists believe so much in. Ironically, the supply of corn rose to such amounts that it took quite some creativity to find ways to get rid of it. This creativity is shown by the way in which new ways were constantly found to turn corn into value-added products: ranging from animal feeds to biofuels (Pollan 2006).
It also took some radical changes in agricultural production to realize the ever-growing yields. Downsides to the increased productivity were numerous: monoculture, loss of biodiversity, soil degradation and water pollution being just a few (idem). New ways had to be found to maintain productivity, through products like fertilizers, pesticides and genetically modified seeds. At the other end of the food chain, new ways were established to turn corn into manufactured products.
This industrial value chain profoundly changed the way that this sector functions. Farmers are ever more dependent on larger and more powerful actors and consumers are being fed more corn than they realize. Industrial logic has taken over the corn sector and its main goals are efficiency and high intensity production (idem: 201). And in this industrialized system, different actors involved can no longer said to be equal. In fact, to understand what is going on, it is paramount to look at power relations in this sector. How do the powerful actors use the complex production process to enhance their control?
This question is a prime example of the interface between the realms of politics and the economy. The neo-classical perspective is to study these as separate domains, arguing that the market can be explained by abstract mathematical equations. I have chosen to work from an institutionalist perspective, which argues that the economy functions based on relations of power, which makes a distinction between politics and economics both impossible and undesirable (Miller 2008: 209).
In order to answer my questions, I want to draw on the work of John Kenneth Galbraith, an economic thinker who was concerned with power relations in the industrialized economy. I will analyze how the U.S. corn sector has industrialized and how the corn value chain has grown in length and in complexity. Then I will look what the effects of industrialization are on power relations in the production process. Specifically, I will look at how the lengthening value chain has given large corporations opportunities to control production.
3 As the number of actors and the number of their activities are far too large for a thesis of this limited scope, I will focus on just one: Cargill. Cargill is one of the so-called ABCD companies, which is an abbreviation for ADM, Bunge, Cargill and Dreyfus. These companies control about 90% of the global grain trade (Burch et al. 2012: 3). Arguably, Cargill – by far the biggest among these traders – is the most important actor in the corn value chain. It certainly is the largest privately-held company in the U.S.A (Salerno 2016: 211). and it is active in most phases of production surrounding the corn sector (Burch et al. 2012; Brewster 2002).
From a galbraithian perspective, I will look at how this companyhas capitalized on
opportunities presented by the increasing corn value chain to enhance its power over production. In this case study, I will look at how Cargill has integrated its business activities to include numerous stages in the corn value chain, and how this has increased its control over production. Following that, I will give attention to an important and recent development: the financialization of agriculture. As a reaction to this process, Cargill has ventured more fully into the financial circuit. I will look at how that has created yet another dimension in which Cargill can control its revenues and use its activities in the value chain to gather information that is pivotal to its financial strategies.
Theoretical framework
Before I start to investigate the topic, I will lay the theoretical foundation for this thesis. It is written from an institutionalist perspective. Institutionalism can be seen mainly as a criticism on
neo-classicism, which tries to separate the studies of economics and politics (Miller 2008; Stilwell 2006). Neo-classicism, according to me, has too abstract and simplistic an understanding of reality. To name an example, it believes in a free market that exists on its own, with rational consumers that base their preferences on perfect information (ibidem).
Institutionalism rejects this vision of the market, and argues that it is always embedded in social, institutional, cultural and political structures (Stilwell 2006: 209). Power is a fundamental concept in the institutionalist school of thought. In fact, market actors do not have to follow the principles of the free market, but it is often the other way around: powerful actors can control the market (Galbraith 1972). Now I will explain a couple of important theoretical concepts mentioned throughout the thesis.
4 First of all: industrialization. This is a very complex concept. Miller, broadly speaking, defines it as a unique set of technological and societal breakthroughs (Miller 2008: 6). An important effect of this process, which in turn was a catalysator for developments in many areas, was the increase of production efficiency. This was due, among other things, to the adoption of new energy sources, new production methods and many inventions (ibidem). The effects would be enormous and would increase output, technological innovation and the rise of new industries.
The political economist Herman Schwartz distinguishes between two different strategies to industrialize (2012). The first one he calls Ricardian (named after the economic thinker David Ricardo). This is a strategy which aims to export agricultural crops following the principle of
comparative advantage. This entails that a country starts trading in crops it is naturally able to grow efficiently – for example due to its climate (Schwartz 2012: 59). In order to industrialize a country will need to switch to second strategy at some point: the Kaldorian strategy (named after Nicholas Kaldor).
A Kaldorian strategy focuses on increasing productivity in a certain sector. Through
Verdoorn-effects (increasing returns on a product), a country can invest more money in an industry, becoming ever more efficient at producing certain products (idem: 61). But successful development following this strategy has to be achieved with the help of the state, for example through investment, protectionist policies and subsidies (ibidem).
Schwartz’ also names two types of production that have been of fundamental importance to industrialization. The first is called economies of scale, which comes from “using the same highly specialized (and extensive) machinery to produce enormous quantities of same standard product (idem: 153). This mode of production became important in agriculture, where farmers started specializing in intensive production of one single crop. Economies of scope refers to applying knowledge and similar production methods in different, though similar products (ibidem). In agriculture for example, different crops can be grown using a lot of the same knowledge.
There is a kind of logic behind this type of production that one could call industrial logic: the food system is organized on industrial lines. Consistency, mechanization, predictability,
interchangeability, and economies of scale are the main pillars with which to measure the economy. The goals are the expansion of production and the highest possible efficiency - no matter what the costs are for consumer, farmers, or the environment (Pollan 2006: 201). Like the economy as a whole, agriculture is increasingly organized accordingly.
Value chain
Another important concept in this thesis is the value chain, which is inextricably linked to the process of industrialization. I found the following definition in the Dictionary of Information Science
5 and Technology: “the sequence of activities that directly transform raw materials into final goods and services for consumption, as well as activities that indirectly support these transformations (Singh, 2010).”
So the concept refers to the different stages of a production process which turn a raw material (like corn) into a commodity or service to be bought by consumers. The term value makes clear that all these stages of the process present an opportunity to add value to a product – and as a consequence to make profit from it. For example, when a farmer sells a bushel of corn, he simply sells to cover the costs growing it and a small share to make a living. The moment corn turns into a raw material that can be used to manufacture other goods, that adds a stage to the production process. A company that turns raw materials into commodities can also profit from doing so.
Galbraith
There are different actors who play a role in the value chain. Some of them have made enormous profits thanks to industrial developments, others are worse off. It is important to understand their relationship with regards to the concept of power. J. K. Galbraith has made work of the relations of power in the industrial society in his book The industrial state. He criticizes the orthodox economic claim that economic actors are subject to the forces of the market. He argues that this has changed, especially in the world after the second world war. Many industries became dominated by a small number of big companies. He looks into the question how these companies could become so powerful.
Technology came to play a fundamental role in this industrial state. It provided a way to increase yields and productivity, but it also required the investment of large amounts of time and capital. This made it necessary for companies to plan, which consists in “foreseeing the actions required between the initiation of production and its completion and preparing for the
accomplishment of these actions (Galbraith: 24).” This means that big companies need to try and control both the supply of raw materials necessary for their production and the demand for their final products.The less dependent a company is on market forces, the more thoroughly it can control demand and supply (idem: 168).
In order to plan, there is an increased reliance on specialized scientific and technical knowledge. As production processes have grown to consist of numerous stages, it is key to have information about every aspect. No one individual can have this overview. That is why Galbraith argues that power increasingly lies with the organization that can coordinate the knowledge of different specialists. He calls this corporation mature. The task of coordinating knowledge lies with the technostructure, an apparatus of group decision (idem: 71). Coordination is the key to increase control over production.
The capacity to gather and coordinate information follows from size. Size allows a company to dominate production processes through numerous stages, giving it effectual control over supply.
6 Through sheer size, companies can also drive out competition, invest in new products and control demand. Power consists of the biggest possible autonomy from market forces, and this can be reached through size.
Methodology and case study
I have chosen to do a qualitative research: I began by studying the subject broadly, and I have then used the institutionalist perspective to interpret the data. Following this I have started to construct my conceptual framework and narrowed my research question(s) (Bryman 2012: 384). This helped me to look for more data specifically, and through this circular movement I have pinpointed the exact topic, question and data I wanted to study.
As my research design I picked the case study, of which the emphasis is on “an intensive examination of the setting (idem: 67).” I wanted to look at a powerful company active in the corn value chain. It seemed the most feasible to look just at Cargill for two reasons: one is that its range of activities is so big that there was more than enough material for a thesis of this limited scope. Second, I thought that this would be a typical case, which “exemplifies a broader category of which it is a member (Bryman 2012: 70).” What I mean by this is that looking at Cargill seems a good way to make claims about a broader category of actors: the ABCD companies in general, which are companies controlling large parts of agricultural value chains in ways similar to Cargill.
I understand that using a case study always makes it difficult to generalize your findings. However, as I have read a lot of the literature available on the ABCD companies, I feel that it is safe to say that Cargill’s business strategy is exemplary for this group of actors. These actors are often studied together (e.g. Clapp 2015; Burch et al. 2012; Spratt 2013).
Burch et al. (2012) make a strong case that the main framework of these companies’ business models is actually quite similar and they share ten pivotal components in their business activities (Burch et al 2012: 10). These components point specifically towards the fact that these companies have similar roles in the agricultural value chains, as all of them are active in many stages and many interlinked industries. They also have very similar strategies when it comes to using these broad activities as a key to information that is paramount to the planning and minimization of risk of the long value chains they are active in (idem: 14). It is for these reasons that I think that Cargill’s specific role in the corn value chain is quite representative of the role of the other ABCD companies in similar agricultural value chains. When it comes to the financial circuit, the companies also seem to operate in very similar ways (Clapp 2014).
A lot of my data come from the articles on the ABCD companies, some of which I just mentioned. The most extensive source on Cargill, which is quite secretive about its huge range of activities, is Kneen Brewster’s book Invisible Giant – Cargill and its transnational strategies. This book gives the best overview of the Cargill’s activities in general and its way of operating on a specific level. The book was last edited in 2002, and Cargill’s activities after this year are a bit more
7 vague. Most notably, it has ventured more deeply into the financial circuit, about which I have found some good recent articles. I think I add to the existing literature on Cargill because I look more specifically into its role in the corn value chain, and into its strategies to control it. I do this using Galbraith’s work as a framework, which has not been done before. Most importantly I think, I add to Brewster and other existing literature by looking how Cargill’s activities constitute its vertical and horizontal power.
Analysis part one: industrialization and value chain
There are two question I want to answer in this part of the thesis, although they are actually two sides of the same medal: how did the corn sector industrialize and how did the value chain evolve? It is important to note that the evolvement of the value chain is a direct result of
industrialization or even an inherent part of it. Industrialization is associated with (mainly
technological) innovations, which made possible the rapid increase in productivity and thus output. A fundamental part of industrialization is a sort of cross-fertilization between different industries. Innovations in one industry often prove to be beneficial for other industries as well – something that Herman Schwartz calls economies of scope (Schwartz: 153).
Specialization is also an important part of industrialization: different parts of the production process get separated to raise efficiency – often introducing different actors for different stages of the production process. These different processes lead to a longer value chain. Specialization and production makes it possible to increase the number of steps in the production process. Through industrialization, it became possible to turn raw materials into processed products on a large scale. Now I will look into the industrialization of the corn sector and the increasing value chain that was a result of this.
Industrialization of corn
At the end of the 19th century, the U.S. was still an agrarian society, with most farmers producing
largely for their own subsistence (Warman 1988: 186). Corn was mainly used to feed people and animals on the farms where it was produced. Surpluses were sold on the market. In those days, it was also processed to make alcohol, like whiskey and rum. Corn was already big: its value put together with that of corn-fed meat, was greater than the combined value of all other U.S. agricultural products (idem: 179).
8 Thanks to the mechanization of agriculture, the production of corn could greatly increase. As corn is sown into separate rows, it responds very well to mechanical growing. More and more farmers became commercial and started producing for the market. They started specializing in corn. The diversified farm was steadily replaced by that of monoculture (Pollan 2006). Corn production doubled at the end of the 19th century and stayed relatively stable for the following decades
(Warman 1988: 183). Nonetheless, many innovations that would benefit corn production were already on the way. But to that I will turn later.
After the second world war, corn production started soaring: around 1956, its total production crossed the three trillion bushel line. In the 1980’s, this had grown to eight trillion
bushels, or half of the world production (idem: 187). Yet this increase was accomplished without any increase in cultivated acreage, thus solely through increase of productivity (ibidem). Since then, corn production has yet doubled (world of corn). The production was about 14.5 billion bushels in 2017.2
These high rises in production can be explained as a result of a Kaldorian strategy. First of all, the state had to step in to fix a number of the collective action problems, like protecting the industry and providing the necessary infrastructure. It also greatly invested in agricultural research through the USDA (United States Department of Agriculture). These were the foundations of agricultural breakthroughs that would spur industrialization (Schwartz 2000: 128). It was especially due to important technological breakthroughs that this exponential growth in productivity could be reached.
Technological and scientific breakthroughs
The first breakthrough was the hybrid seed: this is a genetically modified seed which increases yields up to a 100% compared to natural seeds (Warman: 184). Hybrid seeds were introduced in 1933. Just after the second world war, they were already universally used throughout the country (ibidem). In 2017, only 8% of planted corn in the U.S. was not biologically engineered(world of corn).3 Next to the fact that hybrid seeds are more productive, there are at least two other important
consequences: first of all, they made farmers dependent on suppliers of biotech seeds. As was just mentioned, corn prices were so low that increasing production was about the only way for farmers to make ends meet. Once only producing corn, it became hard not to move along with these
developments. The dependency on suppliers is even bigger when the fact is taken into account that biotech-seeds have to be replaced every year (Pollan 2006: 31).
Another important consequence was that the soil degraded due to the intensive
monoculture. This kind of industrial production needs artificial fertilizer (idem: 41). Ironically, the
2 http://www.worldofcorn.com/#us-corn-production
9 second world war turned out to be highly beneficial in this regard. As commonly known, the
government spent incredible amounts of money on the industry of warfare, which led to the Military Industrial Complex. After the war, large amounts of ammonium nitrate (intended to be used as a poisonous gas) were left over. These could be adequately used in the production of chemical fertilizer (ibidem). Next to this, the monoculture created the need for pesticides and insecticides, which could also be supplied by other actors.
At the other end of the value chain, breakthroughs in milling provided manufacturers multiple ways to turn corn into value-added products. There are basically two different types of milling. Dry milling is a way to grind corn down to turn it into flours and oil (Warman: 182). More ingenuous is the wet mill, which breaks corn down into different components using alkaline. The corn starch, which is made from its endosperm, is the most important part. Chemists have learned to rearrange it into many different organic compounds, like acids, sugars, starches and alcohol (Pollan: 86).
A big breakthrough in the 1970’s was that scientists learned to turn the glucose molecule in corn into the much sweeter fructose, which was just as sweet as sugar yet slightly cheaper (idem: 89). This is now known as high-fructose corn syrup. It is used as a sweetener for coca cola and many other food products. Corn has become the main source of calories for almost any fast food meal in the U.S. (idem: 116). Since the beginning of the 21st century, an increasing share of corn is turned into ethanol, a type of biofuel.
These developments are part of a general trend associated with industrialization: different industries became linked. At the input side of the value chain, the corn sector got linked to other industries like the chemical and biotech ones. Moving further along the chain, the corn sector became linked to the industries of food processing and production of biofuels. These are all good examples of Schwartz’ economies of scope: the same kind of technology (chemical milling, to name an example) could be used to produce a whole range of new products, like many different kinds of processed foods, animal feeds and biofuels.
10 The above picture shows what corn is produced for nowadays. Although the largest share in corn (around 46%) is still turned into animal feed, its relative share has been declining. Over 30% is used to produce biofuels. In 2006, this was only 10% (Pollan 2006). In 2002, ethanol production from corn was not even a fifth of what it is now.4 Around 10% is used for processed foods. The biggest share
in this sector goes into the production of high-fructose corn syrup – 3,2%. Only 13% are destined for exports.
Value chain
I have tried to visualize corn’s value chain – which is shown on the following page - with important steps in its production process. There are some important things to note: first of all note that the arrows present an important part of the value chain. They represent transportation of corn and other raw materials. Transport is an important step in the value chain and a source for profit.
Second, this is obviously a simplification of a much more complex chain. I have tried to give an idea of where the corn sector gets linked with other industries. For example, the production of chemical fertilizers or pesticides brings along yet another chain with different steps of production. The share of corn that is turned into animal feed enters yet another long chain of meat production. The same counts for the production of biofuels. I have tried to just give an insight in where the actual corn chain is directly linked to another industry.
Two important findings can be derived from the visualization. First, the chain has grown in length: the production process has been separated into different specialized stages. These added
11 stages present new opportunities to add value to corn, and has increased the number of actors active in the chain.
The fact that the chain has grown longer has also linked the corn industry to other industries. I have tried to show this in the chain by encircling different industries that have become part of the corn value chain. As can be seen, the corn (or agricultural) industry has become interlinked with the chemical and biotech industries at the input side. At the output side, it has become interlinked with the energy, food processing, and meat industries. The interdependency of different industries and the increasing number of steps in the value chain have presented companies like Cargill with important means to increase their control over production. I will now turn to the case study to investigate this control.
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Analysis part two: Cargill
Cargill
First, I need to give a quick overview of Cargill’s history and its activities. It is not only active in the corn industry. In fact, it is one of the most important companies in the entire grain industry, as well as the industry of oilseeds (like soybeans) (Burch et al. 2012). The fact that Cargill is active in so many similar industries is a prime example of Schwartz’ economies of scope: Cargill uses its knowledge and infrastructure to produce a range of products that are very alike and also often substitutable. However, as my thesis focusses on corn, I will look specifically at Cargill’s role in the corn value chain. Based on the used literature, it is my expectation that Cargill exerts power in this chain in ways similar to other agricultural chains in which it is active.
Cargill was founded in 1865 and was originally a regional grain merchant. Today, it is the biggest privately-held company in the U.S., still owned by the Cargill family (Salerno 2016: 211). It is part of a group of companies called the ABCD’s (an abbreviation for ADM, Bunge, Cargill and Dreyfus), which together control about 90% of the global grain trade (Burch et al. 2012: 3). It is an understatement to say that Cargill has benefited from the industrialization of corn. It is now active in 68 different countries (Salerno 2016: 215). Its sales and other revenues amounted to 119.5 billion dollars in 2011 (Burch et al. 2012: 9). It is twice the size of the second biggest ABCD company, ADM (Whitford and Burke 2011).
Cargill is organized into five business segments: agricultural services; food ingredients and applications; origination and processing; risk management and financial; and industrial (Murphy et al. 2012: 9). The Cargill Platform, which coordinates information from different segments, is divided into seven units: 1) agricultural supply chain; 2) Cargill animal nutrition; 3) Cargill animal protein and salt; 4) Cargill energy, transportation and metals; 5) Cargill financial services; 6) Cargill food and ingredients and systems; 7) subsidiaries maintained but not associated with the platform (Salerno 2016: 215).
It seems fair to use one of Cargill’s own quotes to describe its activities. Although its
statements are obviously biased, this one is actually quite descriptive of their massive involvement in the agricultural value chains: “Cargill is an international marketer, processor and distributor of agricultural, food, financial and industrial products and services. We provide distinctive customer solutions in supply chain management, food applications and health and nutrition. We are the flour in your bread, the wheat in your noodles, the salt on your fries. We are the corn in your tortillas, the chocolate in your dessert, the sweetener in your soft drink. We are the oil in your salad dressing and
14 the beef, pork or chicken you eat for dinner. We are the cotton in your clothing, the backing on your carpet and the fertilizer in your field (Brewster 2002: 5)”.5
It is quite a daunting quote and it raises the question where to start. It is impossible to give a detailed account of all Cargill’s activities, simply because much is unknown. Being a private
company, Cargill does not have to report earnings or be transparent about their activities. However, there exists an understanding of what Cargill does on a general level. I will try to give an idea. I will quote Murphy et al., who have done a lot of research on the ABCD companies, their activities and the implications for the global food system. “Rather than simply marketing agricultural commodities that farmers independently decided to produce, these firms have now become careful managers of entire agricultural value chains. The grain trading companies consider themselves to be “originators” of grain supply, and they have become a central focal point for management along entire commodity chains—from land ownership to input supply, to advice and insurance, to growing contracts, to purchasing, to storage, to processing and retail, as well as being active in building and maintaining storage and transportation infrastructure and financing all along the chain (Murphy et al., 2012).”
This gives some indication of simply how vast the ABCD companies are. I repeat: Cargill is clearly the biggest among these. Cargill is not simply active in one sector, it is active in a range of different industries that are linked in one way or another. Its scope is almost beyond believe. It is for example active in meat processing – corn is a fundamental raw material in the production of animal feed – being the third largest meat processing company in the U.S. (Brewster 2002: 38). As we will see later, it is also active in the financial circuit.
The question I asked myself at the beginning of the thesis was how large companies have capitalized on opportunities that result from the increasing complexity in the corn value chain. From the given quotes, it becomes clear that Cargill has become active in an increasing number of production stages. This phenomenon is called integration. I will now look at the way Cargill has integrated into different stages of the corn value chain. Following that, I will look at the implications for Cargill’s power in relation to other market actors. Lastly, I will look at Cargill’s increasing activities in the financial circuit.
1. How has Cargill used integration to respond to developments in the value chain?
As we have seen, industrialization has brought along developments in value chains, like the increase in its length and its connection with different industries. These developments bring along risks to the actors involved. It might now be the case that a sudden rise in oil prices has implications for actors in all the different industries I mentioned. Successful production is dependent on a reliable
15 supply of many different products and raw materials. Cargill has responded to both the increasing sequence of production phases within sectors as the interconnectedness between sectors. These strategies are called vertical and horizontal integration respectively.
Biotech and chemical industries
As became clear in the historical analysis, corn became increasingly reliant on the chemical and biotech industries following the beginning of the 20th century. Cargill has been active in the
production of engineered seeds since 1907 (Brewster 2002: 127). Hybrid seeds’ efficiency clearly benefits industrial traders like Cargill, to which high volumes are paramount (Murphy et al. 2012: 11). Hybrid seeds also created a dependency of farmer’s on a supplier.
Cargill has an ambiguous relation with seed production. Following a lawsuit in the 1950’s, it decided to largely leave the seed business. However, in 1994, it was described as an “industry giant in the seed business (Brewster 2002: 127).” In 1998, quite abruptly, it sold almost all of its
international seed operations to Monsanto. At that time, Cargill was big in the research and
production of seeds. It can be argued, however, that Monsanto aims for the same industrial goals of Cargill, trying to create high production and dependency on chemical supplements in agricultural farming. The two companies even formed the joint venture Renessen, which, following Cargill’s official press release “draws on Monsanto's capabilities in genomics, biotechnology and seeds and on Cargill's global agricultural input, processing and marketing infrastructure to develop and market new products with traits aimed at improving the processing efficiencies and animal nutrition qualities of major crops (idem: 129)."
Brewster argues that the use of hybrid seeds has the following advantage: it creates
dependency on both chemical fertilizers and agro-toxins (idem: 127). Cargill sells agro-toxins, but it was also active in the production of chemical fertilizers. It is especially big in the production of two of the main components of commercial fertilizer: nitrogen (which can be artificially produced from natural gas) and phosphorus (which can be derived from mined phosphate) (idem: 85). How big Cargill was in the production of fertilizer is not quite clear, as it often worked through acquiring stakes in other companies producing fertilizer. In 1989, Cargill began constructing one of the world’s largest nitrogen fertilizer plants in at Belle Plaine, Canada (idem: 87). However, following the food price volatility in recent years, Cargill has stated to further distance itself from this industry
(Polansek 2016).
Overlapping food, fuel & feed complexes
At the other end of corn’s value chain, Cargill is active in the three major industries that use corn as a raw material: food, fuel and feed. These industries require the same kinds of raw materials – next to corn also oil seeds like soya, or other types of flours. Mainly, Cargill supplies necessary services
16 for these industries – traditional activities like transportation, storage, trading of the grains and the involved logistics. The ABCD companies’ size allows them to handle incredibly high volumes of raw materials (Murphy et al. 2012: 11). However, Cargill is also active in the actual food, fuel and feed industries themselves.
Probably, the animal feed business is still Cargill’s main focus, although that is not certain. Cargill got into the animal feed business in the 1930’s. It started its own brand called Blue Square. It now produces the brand Nutrena feeds (Brewster: 35). Some decades later, it ventured into feeding cattle in so-called feed operations (or CAFO’s), which are large-scale “factories” were cows are raised for slaughter. As a meat processor, it also started slaughtering animals and cutting and packaging meat (often on the same feedlot). This is an example of how Cargill takes advantage of the resulting synergy: the process of combining different stages of production to add value (ibidem). At the time Brewster wrote his book, Cargill was the third largest meat company in the U.S. through its meat division called Excel Foods. It was about a quarter of Cargill’s business at the beginning of the 21st century (idem: 38).
Cargill is also active in the processing of corn for the food and fuel industries through milling. According to Brewster, Cargill was one of the two largest corn dry millers in the world at the
beginning of the 21st century (Brewster 2002: 63). In the 1960’s it also got involved in the wet milling
business (ibidem). As might be recalled, this process derives types of sugar, starches and acids among other things from corn. One of the things it produces is HFCS for the fast food and retail sectors.
Apart from that Cargill produces ethanol from corn, although it has stated that it takes a cautious approach to this product (Murphy et al. 2012: 45). In this article it is claimed that Cargill produces about 235 million gallons of ethanol per year. Although this seems a lot, it is not even half a percent of the total ethanol production in the U.S., which was around 50 billion gallons of ethanol in 2017 (world of corn).6 In relative terms, this indeed seems to be a very small part of Cargill’s
business.
Up to recently, Cargill seemed to wish to stay away from the actual plantation-style
production, deeming it to be too risky. It usually prefers to let farmers do the actual growing of crops. However, this relation to land is dynamic. Sometimes it does acquire land, which it leases or on which it produces directly (Murphy et al. 2012: 13). Cargill uses a range of different strategies towards land, like ownership through subsidiaries or sub-contracting. Its size allows it this flexibility, using different models in different cases (ibidem). Traditionally, Cargill has also been involved in the financial circuit, but I will come to this later.
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2. How has integration increased Cargill’s power?
I think it has become clear from the last part simply how integrated Cargill is. Galbraith argued that size is power in the industrial society. I will look now at how this works out through two kinds of power mechanisms Galbraith uses in his analysis: vertical and horizontal power.
Size
First of all, it has to be stressed that Cargill is so big that it indeed taunts with the rules of the free market. In fact, it seems that prices of raw materials are not even the most important factor to Cargill due to its size. When volumes are high, Cargill makes a lot of profits through freight, exchange rates and storage to name a few (Murphy et al. 2012: 11). It is due to Cargill’s size that it is capable of handling such massive volumes. In order to do this, a company needs an incredible network of infrastructure, relations with other companies, expertise and a high management capacity. This process also needs a lot of planning ahead. As the ABCD companies are unrivaled in size, it is virtually impossible for new competitors to compete. I will now turn to the power Cargill derives from its size.
Galbraith differentiates between two forms of power in The industrial state. The first is the power to supersede the market. This basically refers to vertical integration: “the planning unit takes over the source of supply or the outlet (idem: 27).” Through this, a part of production is internalized, and as a result, subject to more careful control. Following Burch et al. (2012) I will call this vertical power.
The second form of power is control of the market. In this strategy, the market keeps functioning, with different actors that buy and sell. Because of their size, large industrial companies can have notable control over other actors in the same production process. The individual farmer has not much influence on how much he must produce and against what price. A large company like Cargill has a lot more options. It can simply choose not to buy from one supplier and turn to another. This is because it is one of only a few buyers of the farmers’ product. At the same time, it is one of only a few suppliers to retailers further along the chain. Again, following Burch et al. (2012), I will call this horizontal power.
Cargill mainly uses a combination of these forms of power. As I established in the first part of this case study, Cargill is vertically integrated along the corn value chain. However, Cargill never takes over entire value chains. Usually, Cargill leaves risky parts of the business to other parties. I already said that Cargill has traditionally tried to stay at an arm’s length to actual farming. Cargill often supplied farmers with (formerly) seeds and chemical fertilizers. The farmers then grew corn, which in turn they sold to Cargill. It is this type of relation that Cargill prefers: it is both the supplier and the buyer of a farmer, creating a maximum dependency. Through this, it can set many of the specifications the crops need to meet, the quantity, and their price (Brewster 2002: 79).
18 Due to the very intensive industrial style of production, farmers often have to get finance in order to get into business, or to expand, or for whatever other reason. High production demands force them to do this. Cargill has huge financial resources, and has the ability to supply farmers with capital (idem: 39). But through this it can force the farmers to produce according to Cargill’s
standards and to use Cargill’s products. It kills two birds with one stone, and all thanks to its highly integrated business model.
This is an example of horizontal power: there are many farmers, but only very few companies like Cargill that can offer expertise, financial services; supply products and raw materials; and buy end-products all at the same time. Cargill can easily substitute one farmer for another, or even one raw material for another for that matter. But a farmer cannot easily find another supplier or buyer of its products, especially when he has been growing according to standards following Cargill’s industrial logic. And all that time, the farmer has to do the most risky part of the business, namely growing the actual crops. The dissimilarity in power makes it possible manipulate the market and for Cargill to have the control it needs for its long and complex production process.
It has become clear through this that Cargill uses a mixture of vertical and horizontal power. Through diversifying into different stages of production, whilst leaving the more risky part of
production to farmers, it has obtained considerable control over the farmers. This is a way to ensure that farmers produce according to Cargill’s standards and prices. Equally important, through
horizontal integration, Cargill has been specializing in many different products and crops that are very alike. When the corn supply falls short, Cargill has access to other crops that are very alike, like soy, for which corn can easily be substituted. These kinds of mechanisms provide Cargill with
means to stabilize a market that brings along considerable risks. In the minimization of risk, access to information also plays a fundamental role. I will get to this in the final sub-question of this thesis.
3. How has Cargill responded to the financialization of agriculture and increasing food price volatility?
In recent times, Cargill has ventured more fully into the financial circuit. This is a type of horizontal integration. It has also established control in this dimension. I will try to show that it has done so – and has been successful in doing so – due to its integrated activities. In the shaping of Cargill’s financial strategies, especially its access to information is pivotal. It has this access due to its presence throughout entire value chains. A large chunk of Cargill’s corporate platform is now aimed at coordinating all information, and using it as a basis for financial activities.
Cargill’s recent activities in the financial dimension can be seen in the broader trend of the financialization of agriculture, which refers to the increasingly important role that financial investors play in agri-food systems (Murphy et al. 2012: 26). This means that not only commercial traders, like Cargill, are now active in the financial circuit around agriculture, but also non-commercial traders like banks, who have no interest in taking possession of any physical commodity (ibidem).
19 Financialization is a difficult concept, since financial markets in the agricultural sectors were already established as early as the mid 1800’s (Salerno 2016). It is a risky business: supply can vary due to different outcomes of harvests. There are different kinds of financial tools to limit this risk. One is a forward contract, which is an agreement between two parties to deliver a commodity on a future date at set price (Murphy et al. 2012: 59). Futures are contracts to buy or sell an asset on or before a future date at a specified price.
I will give a short example: Cargill might buy a large quantity of corn in a foreign country. This is risky, so it will probably sign a futures contract at the same time. When prices drop in the
meantime, Cargill does not suffer because it has set the price beforehand. When prices begin to rise, it can sell its futures contract and decide to sell the corn for a higher price on the market. These practices are called hedging: using financial strategies as a protection against short term price volatility (Salerno 2016: 214). Commercial traders were usually exempted from regulations because hedging is seen as a bona fide strategy to limit risk in dealing with large amounts of physical
commodities.
However, financial markets were deregulated in the 1980’s. It also became possible for banks and other financial actors to mingle in the financial sector surrounding agriculture. Banks developed CIFs (Commodity Index Funds), which are derivatives (partly) based on agricultural commodities (Salerno 2016: 213). Through these funds, it became possible for financial actors to sell agricultural derivatives over the counter, that is to say without actually trading the physical commodities. This is a form of speculation, meaning that the sole goal is to make profit.
The ABCD companies have also diversified their financial strategies. Apart from hedging, they started speculating with the aim of making profits and offering financial services to third parties (idem: 29). Cargill for example has different subsidiaries which are involved primarily in the area of finance, like Black River Asset Management, Cargill Risk Management and Carval Investors (Salerno 2016: 212). It offers finance to farmers, but it also started selling assets to investors, like hedge or pension funds. Cargill claims that its financial aim is to hedge against risks, but it seems that at least a part of its activities is aimed just at making profits.
In 2008 Cargill made record profits of nearly $4 billion (Murphy et al. 2012: 25). This was at a time of incredible food price volatility. This can also be seen in the corn prices, which more than tripled between 2006 and 2008.7 Cargill actually admitted that it profited from these volatile prices.
In 2011, after a fallback, it again made record profits. However, in 2012 profits massively declined again (idem: 26). It seems that Cargill profits, just like agricultural prices, have become more volatile. However, it is clear that financial activities are now of fundamental importance to Cargill. Murphy et al. even suggest that a majority from their profits now come from this circuit (2012: 11).
20
Coordination of information
The agricultural market has been very unstable in recent years. Food prices have been very volatile. For actors like Cargill, this presents a great deal of risk. Of course, financial strategies have always been a way to tackle these risks. Now that Cargill is speculating on these highly volatile prices, access to information is vital. Actually, commodities trading is the only major US market where companies can act on insider information, something that is forbidden in stock markets (Murphy et al. 2012: 27). Commercial traders have a big advantage over banks in this sense, although both seem to be speculating on products that they do not physically hold.
To Cargill, access to information is paramount in its financial strategies. The Cargill Platform, divided into seven business segments, coordinates information from different parts of the business. Through this, financial subsidiaries which are not formally part of the company, have access to information that is important in their kinds of financial activities. Examples of these subsidiaries are Black River Asset Management, which invests in agricultural company equity; Carval investors, which is active in the buying and selling of assets; and Cargill risk management, which offers hedging products to clients (idem: 216).
It is important to realize that Cargill is the producer and supplier of agricultural products, as well as involved in speculating or hedging on these same products. Through this mechanism, it has first-hand knowledge of what is going on in the physical market, and it can plan its financial
strategies accordingly. Cargill is active around the globe. It knows almost everything about production it needs to know in order to shape its financial strategies. Due to its sheer size, it has become very sophisticated in gathering, coordinating and analyzing data, which clearly gives them an advantage over non-commercial traders active in the same markets (Salerno 2016: 219). More than anywhere else, it is in the financial circuit that Cargill has turned Galbraith’s idea of the technostructure into reality.
Although the actual scope and the specific nature of Cargill’s financial activities remain unknown, I think I have shown that it has found yet another dimension to exert its control. Again, Cargill’s size, presence throughout entire value chains, and its capacity to gather and coordinate information are of fundamental importance to its financial activities. It is unrivaled in this aspect, and has clear advantages over other actors in financial speculation.
Conclusion
In this thesis, I have investigated two things. First, I looked at how industrialization has increased the length of the corn value chain in the U.S. On the input side, the corn industry got interlinked with both the chemical and biotech industries: farmers have gotten dependent on the suppliers of
21 genetically modified seeds, pesticides and insecticides. On the other end of the value chain, corn is now used as a raw material in a variety of manufactured goods, most notably animal feed, biofuels and processed foods.
In the second part I have shown how Cargill has reacted to developments in the corn value chain by integrating both vertically and horizontally. This means that it has gotten active in many successive stages of corn production, and that it has ventured into linked industries respectively. Integration is a way for Cargill to increase both its vertical and horizontal power over other actors. Its most powerful strategy is probably to enforce beneficial prices and set the standards for farmers whilst leaving the most risky part of production to them.
In the final part of the paper I have looked at how Cargill uses its capacity to generate and coordinate information in its financial strategies. Through this, it has clear advantages over non-commercial financial speculators, like banks. Cargill’s access to information was clearly pivotal to its huge profits in recent times of food price volatility.
Although I have specifically studied Cargill in this thesis, I have argued that it presents a typical case, and that my findings can be generalized to other ABCD companies. All these traders seem to have established similar tactics: integration across and between value chains; exerting vertical and horizontal power over smaller actors like farmers; and increasing activity in the financial circuit where they benefit from their activities in the physical market.
I think that upcoming research should be focused on getting a clearer picture of the ABCD’s financial activities. It has become clear that this has become a focus point for all the ABCD’s, but not much is known about the actual scope of these activities. The financialization of agriculture is also a relatively new phenomenon, and the ABCD’s profits have seemed to become just as volatile as food prices in recent times. How the ABCD’s relate to the financial circuit, and to what degree they
actually use their insider information to speculate should be the topic of future research.
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