D.O.J. lays out case requiring milling divestitures, approving deal
WASHINGTON — Preserving competition for customers who receive by truck locally milled flour in four U.S. market areas was the central objective of the proposed final judgment in the case against Ardent Mills, according to a May 29 filing by the U.S. Department of Justice. In addition to requiring the divestiture of four mills, the judgment also contains language prohibiting the dissemination of non-public information to Ardent about wheat trading from the companies that own the new milling business.
The D.O.J. case against “ConAgra Foods et. al.” was published in the Federal Register in a 17-page (18,500-word) filing containing extensive details about flour milling, the companies that are bringing their milling businesses together to form Ardent and the government’s view of the competitive landscape for flour.
While flour routinely is shipped by rail long distances to customers, even in areas where local mills are located, the D.O.J. focused on prospective milling concentration in select markets around the United States.
In the case, filed May 20 in the U.S. District Court for the District of Columbia, the U.S. Department of Justice Antitrust Division filed suit to block the proposed joint venture, first announced in March 2013. At the same time, the department proposed a judgment requiring, among other terms, the sale by the Ardent Partner — Cargill; ConAgra Foods, Inc.; and CHS, Inc. — of four of their flour mills — ConAgra mills in Oakland, Calif.; Saginaw, Texas; and New Prague, Minn.; and a Cargill mill in Los Angeles.
The sale of the four mills to Miller Milling Co. for $215 million was completed May 27.
In its complaint, five specific violations of Section 7 of the Clayton Act are alleged:
1. competition between ConAgra and Horizon (a joint flour milling venture between Cargill and CHS, Inc.) in the relevant markets would be eliminated;
2. competition in the relevant markets likely would be substantially lessened;
3. reductions in milling capacity would be more likely;
4. coordination in the relevant markets would be easier and more likely; and, as a result,
5. hard wheat flour prices would increase for customers in Northern California, Southern California, Northern Texas, and the Upper Midwest; and soft wheat flour prices would increase for customers in Southern California and Northern Texas.
Discussing the need for the divestitures, the complaint says the acquisition as initially proposed would give Ardent Mills “a substantial share of flour milling capacity serving each relevant market.”
“Flour millers take into account rivals’ mills that can economically supply a customer when determining the price at which to sell to that customer,” the filing says. “Thus a miller will charge a higher price to a customer in an area with few supply options relative to a customer in an area with many supply options.”
Elaborating on the competitive marketplace, the complaint says ConAgra Mills and Horizon “routinely compete by offering lower prices to their customers, and customers have secured lower prices by playing ConAgra Mills and Horizon off one another.” The D.O.J. also says Horizon’s and ConAgra’s delivered flour costs “tend to be lower than those of their rivals’ more distant mills.”
Background information in the filing estimates ConAgra Mills flour milling capacity at 225,000 cwts and 2012 annual “reported revenues” of $1.8 billion, and Horizon Mills daily milling capacity of 270,000 cwts with annual revenue of $2.5 billion.
As originally proposed by the companies, Ardent would be 44% owned by ConAgra, 44% by Cargill and 12% by CHS, the filing says. The company would own 41 U.S. mills in the U.S. and would have annual sales in excess of $3 billion.
Quantifying the impact of the new business on each of the markets, the D.O.J. says Ardent would have owned about 70% of hard milling capacity in the San Francisco vicinity, 40% of hard wheat milling capacity in Southern California, 70% of the soft wheat milling capacity within 200 miles of Los Angeles, 75% of hard winter milling capacity in northern Texas, 100% of soft wheat milling capacity in the Dallas/Fort Worth area and 60% of the hard wheat milling capacity in the Minneapolis area.
Making its case about milling capacity concentration in the affected markets, the D.O.J. discussed transportation costs in some detail.
“Although transportation costs tend to be a relatively small portion of the delivered price of flour, they frequently determine whether a flour miller can supply a customer cost effectively,” the complaint says.
Estimating the distance flour may be shipped economically by truck to be 150 to 200 miles at most, the D.O.J. acknowledges some customers are capable of receiving flour delivery from distant mills by rail or “rail-to-truck transfer.” Still, “neither is a viable option for many customers,” the complaint says.
A significant point of concern in the complaint is the possibility that Ardent Mills would have an incentive to close certain flour mills that serve the markets that are at issue.
“With a larger base of mills to benefit from increased flour prices, the joint venture would have an increased incentive to shut down capacity,” the D.O.J. says. “The joint venture also would have mills with a wider array operating costs from which to choose capacity to shut down, increasing the ability of the joint venture to shut down capacity or entire mills.”
Later in the complaint, the department expands on this point, centering on higher cost mills that, all else being equal, “yield lower profits.”
“Because the joint venture would give Ardent Mills a broader array of capacity from which to choose capacity to close, including relatively high cost capacity, it would increase the ability of the joint venture to profitably shut down capacity,” the filing says
With closings, supply relative to demand would tighten “inducing Ardent Mills and rival millers to compete less aggressively for flour sales, ultimately increasing flour prices to customers in the relevant geographic markets,” the department says.
The complaint also suggests the formation of Ardent would raise the likelihood of “anti-competitive coordination” among flour millers.
“The relevant markets already are highly concentrated, and the formation of the joint venture would significantly increase that concentration by reducing the number of substantial millers in each of the relevant markets,” the D.O.J. says. “As a result, the formation of Ardent Mills would allow it and its few remaining rivals to more easily identify and account for the competitive strategies of one another, making it easier for them to coordinate on capacity, price, or other competitive strategies in the relevant markets, which already are susceptible to coordination. This, in turn, will make coordination more likely and more durable, increasing the likelihood that hard and soft wheat flour prices would increase in the relevant markets.”
The department expresses the concern that competing millers may reach “implicit or explicit” agreements on “production, capacity, price, quality or other aspects of competition.”
Another concern voiced in the complaint is the prospective sharing of information about grain trading between CHS, Cargill and the joint venture, through “side agreements.”
“These agreements include terms that, in principle, would permit CHS and Cargill to provide Ardent Mills with detailed information about rival millers’ wheat purchases, giving the joint venture greater insight into its rivals’ costs,” the department says.
Flour millers commenting on this provision of the judgment said that the sharing of such information has not been common or even an acceptable practice in the grain business for decades, or since large grain operations and flour milling operations have had common ownership.
Discussing the proposed final judgment requiring the sale of the four mills, the D.O.J. says an “upfront buyer” was needed to be sure the new owner had the wherewithal to be “an effective, long-term competitor in the production and sale of flour.”
A specific concern the judgment seeks to address along these lines was ensuring the buyer of the mills would be able to assemble an effective management team and other personnel.
“The Proposed Final Judgment provides the acquirer(s) with an expansive right to hire relevant personnel without interference,” the complaint says. “The Proposed Final Judgment gives the acquirer(s) the right to hire any and all of defendants’ employees who are employed at, purchase or advise on the purchase of wheat or wheat futures for, provide instructions, guidance, or assistance relating to food safety or quality assurance for, or sell or arrange for transportation of wheat flour or any wheat flour byproducts from the assets to be divested.”
The D.O.J. says it gave consideration to “a full trial on the merits” against the proposed new business.
“The United States is satisfied, however, that the divestiture of assets requirement and the nondisclosure of wheat customer confidential information requirement described in the Proposed Final Judgment will preserve competition for the provision of hard wheat flour to customers in Northern California, Southern California, Northern Texas, and the Upper Midwest, and for the provision of soft wheat flour to customers in Southern California and Northern Texas, the relevant markets identified by the United States,” the D.O.J. says.
The judgment prohibits reacquisition of the assets sold to Miller Milling during the term of the final judgment. Unless an extension is granted, the judgment is to expire after 10 years.
The judgment is subject to a determination in two months that the settlement is in the public interest, and public comment is invited for 60 days.
“Such comments, including the name of the submitter, and responses thereto, will be posted on the U.S. Department of Justice, Antitrust Division’s Internet web site, filed with the Court and, under certain circumstances, published in the Federal Register,” the D.O.J. says.
Comments may be directed to Maribeth Petrizzi, Chief, Litigation II Section, Antitrust Division, Department of Justice, 450 Fifth Street NW., Suite 8700,Washington, D.C. 20530.