As discussions surrounding the 2012 Farm Bill heat up, there will be no shortage of material for debate. Adding to that mix is a new report released from the American Enterprise Institute (AEI) that looks at the “Market Structure and Competition in the U.S. Food Industries; Implications for the 2012 Farm Bill.”

Richard Sexton, professor of agricultural and resource economics at the University of California-Davis, and Tina Saitone, a postdoctoral scholar in that department, authored the paper. They analyze the structural changes that have influenced the U.S. agriculture and food sector.

Specifically, the researchers examined the trends in vertical coordination, the application of contract arrangements, and the growing emphasis of product differentiation through quality. They point out that today’s business models do not align well with traditional agricultural markets on which farm policy is typically based.

Sextone and Saitone consider what role, if any, competition policy should play in the 2012 Farm Bill. They also evaluate some of the competition policies that may be considered during the farm bill debate.     

AEI contends that several initiatives under consideration to expand regulations in the food and agriculture sector “with the overall goal of increasing competition and commodity prices farmers receive,” will likely produce unintended consequence of raising consumer prices and lowering farmers’ prices, as well as reduce the quality and variety of food products available.

Here’s a snapshot of some of the paper’s conclusions:

1) Congressional initiatives to “manage supply” would be detrimental to U.S. interests. Sextone and Saitone cite a dairy supply-management program proposal introduced in both the House and Senate, which is likely to be considered for the 2012 Farm Bill. They say it would increase consumer prices, increase milk production costs and diminish U.S. competitiveness in dairy products in the world market.

2) Policies that restrict contract provisions are likely to be counterproductive. They point to policies that restrict contract provisions, such as the proposed Grain Inspection, Packers, and Stockyards Administration (GISPA) regulations, are likely to backfire because they inhibit the markets’ ability to provide the product quality and variety consumers seek.

3) Most food processing and retail firms have an incentive to maintain steady, long-run supplies of farm products to operate facilities at full capacity. This incentive motivates firms to pay competitive prices and resist exploiting short-term market power. Government intervention to promote capacity utilization and reduce market power is not only unnecessary, but could create inefficiencies and increase, rather than lower, food production costs, the researchers note.

4) Modern food markets increasingly demand product quality in a wide variety of
dimensions. Vertical markets from farm to retail have become increasingly coordinated, mostly through contracts. This has helped solve information problems and enabled farmers and food processors to more consistently and accurately meet consumers’ quality demands. Restricting the contracting process, as recent regulations have proposed, is therefore likely to harm both consumers and farmers, according to Sextone and Saitone.

5) Advancements in genetically modified, or transgenic, seeds have led to dramatic
concentration in seed markets for major crops such as corn, cotton, and soybeans. Antimonopoly and competition policies should be guided by the objective of maximizing total private incentives for transgenic innovation, the economists say, not intentionally or unintentionally limiting technical innovation.

While the farm bill debate is just beginning to stir, the likelihood of Washington lawmakers being able to complete a plan by the September deadline is another issue altogether.

To access the full AEI report, click here.