ARCHER DANIELS MIDLAND: PRICE-FIXER TO THE WORLD (Fourth Edition) by John M. Connor Staff Paper 00-11 December 2000 Dept. of Agricultural Economics Purdue University Purdue University is committed to the policy that all persons shall have equal access to its programs and employment without regard to race, color, creed, religion, national origin, sex, age, marital status, disability, public assistance status, veteran status, or sexual orientation. ARCHER DANIELS MIDLAND: PRICE FIXER TO THE WORLD by John M. Connor Dept. of Agricultural Economics, Purdue University West Lafayette, Indiana 47907-1145 [email protected] Staff Paper # 00-11 December 2000 Abstract Both market structure and corporate practices of Archer Daniels Midland fostered the implementation of the largest price-fixing conspiracies seen in modern times. The overcharges imposed on U.S. buyers of lysine and citric acid during 1994-1995 by ADM and its co-conspirators amounted to at least $250 million, and the total amount of public penalties, private damages, and legal costs exceeds $666 million. Perpetrators of price-fixing now face monetary exposures that are five times the amount of the harm caused to buyers. These events have spurred renewed attention by U.S. antitrust authorities in prosecuting international cartels. Keywords: Price fixing, lysine, citric acid, sweeteners, wet-corn milling, starch industry, Archer Daniels Midland, market structure, monopoly overcharge, antitrust law, legal damages, U.S. Department of Justice. Copyright 8 by John M. Connor. All right reserved. Readers may make verbatim copies of this document for non- commercial purposes by any means, provided that this copyright notice appears on all such copies. The views expressed in this paper are the author=s own; they do not necessarily correspond to the views of any party to or counsel involved in the law cases described herein. i Outline Introduction ................................................................................................................................... 1 The Markets................................................................................................................................... 3 Lysine ................................................................................................................................ 3 Citric Acid......................................................................................................................... 5 Corn Sweeteners................................................................................................................ 6 Bulk Vitamins ...................................................................................................................8 Profile of Archer Daniels Midland Co. ....................................................................................... 10 Economic Conditions Facilitating Price-Fixing.......................................................................... 12 Price-Fixing: Chronology & Mechanics ..................................................................................... 17 The Lysine Conspiracy.................................................................................................... 17 The U.S. Lysine Investigation ......................................................................................... 41 Citric Acid....................................................................................................................... 46 Corn Sweeteners.............................................................................................................. 52 Vitamins .......................................................................................................................... 52 Other Products................................................................................................................. 57 Measuring the Injuries................................................................................................................. 59 Economic Theory and the Law........................................................................................ 60 Empirical Estimation Issues ............................................................................................ 64 Public Penalties and Private Awards............................................................................... 67 Conclusions ................................................................................................................................. 74 References ................................................................................................................................... 83 2 ARCHER DANIELS MIDLAND: PRICE-FIXER TO THE WORLD by John M. Connor Introduction The purpose of this paper is to describe the operation of several large price-fixing conspiracies involving wet-corn milling products and to analyze a number of legal and economic issues raised by these events. The paper begins with a brief description of the markets for and market structures of lysine, citric acid, corn sweeteners, and vitamins. A short profile of Archer Daniels Midland (ADM) indicates a company with a leadership and corporate culture well suited to reckless collusive behavior and well positioned in markets that had nearly all the features necessary to carry out such a scheme. The next section chronicles the operation of the three conspiracies as far as that is possible from the public records. The final section of this paper examines the legal and economic issues surrounding the proper estimation of antitrust damages. The importance of these topics is demonstrated by the paper=s six major conclusions: C ADM was at the center of at least two international price-fixing conspiracies involving wet-corn-milling products, circa 1992-1995: lysine, citric acid, and allegedly corn sweeteners. Buyers in the U.S. were overcharged $220 to $345 million for the first two products alone. C Collusion began in the market for bulk vitamins in late 1999 and spread through the Hoffmann-La Roche and ADM companies to citric acid and lysine in 1991 and 1992, respectively. By the time that collusion ceased in early 1999, nearly $40 billion in global commerce had been affected. C In terms of the monetary damages paid, these are by far the largest price-fixes in antitrust history. The huge fines paid by ADM and its co-conspirators were unprecedented; future fines and damages could reach more than five times the overcharges generated by a conspiracy. C The events have spurred the Department of Justice (DOJ) into investigating more than 30 international commodity cartels for criminal price fixing. Since the ADM cases, four more cartels have been uncovered and prosecuted. C ADM management practices have been called into question; ADM=s board of directors changed over night; the AAndreas= Era@ at ADM may be over; and three ADM managers were found guilty of criminal price-fixing. C These events demonstrate that import competition is no longer sufficient condition for good domestic competition and that companies with vastly different corporate cultures and globally dispersed operations can easily learn to conspire. The extraterritorial reach of the antitrust laws is more needed than ever. 1 Why do companies conspire to raise prices, divide markets, or restrain production? The answer is that all such actions boost profits to levels significantly higher than those that would be generated in the absence of collusive behavior. The impact on profits from even a modest increase in price (assuming costs remain the same) is quite large. Aristotle, perhaps the world=s first economic thinker, recognized that small changes in price or output levels would have large impacts on corporate income.1 For example, if a conspiracy causes prices to rise a modest ten percent, the percentage increase in net income will be enormously larger. The average pre-tax profits of semi- processed food ingredients have historically been about 3 percent of sales. In the organic chemicals industry the comparable return was 6 percent of sales. Thus, a 10 percent price elevation translates into an increase of 167 percent to 333 percent increase in average profits for firms in those industries. Why individuals conspire to fix prices, often in the face of legal or corporate proscriptions, is more complicated. Senior managers may receive bonuses that depend on their profit-center=s financial performance, so personal greed may well play a role. More commonly, price fixers are trying to fix looming financial problems. The prospects of slow market growth, declining market share, or squeezed profits can be magically reversed by an effective price-fixing arrangement. Perhaps the sheer thrill of participating in a secret, dangerous activity motivates some. Merely moving markets, a power allegedly reserved for the Chairman of the Federal Reserve System and few other mortals, may be reason enough. The various conspiracies in food-and-feed ingredients discovered as of late 2000 account for a substantial share of sales of all such ingredients. The total size of these varied markets is not easy to identify, but let us take a stab at it. The food ingredients component corresponds roughly to what are called semi-processed foodstuffs or producer goods made by the food-manufacturing sector. Producer goods are manufactured and sold as inputs for further processing, and these goods accounted for 27 percent of total U.S. domestic supply of manufactured foods (Connor and Schieck 1997:61). In 1995, this segment