ChewsWise Blog

ChewsWise Blog

Legal Eagles Ponder WFM v. FTC

I'm not a lawyer, but my thinking comes awfully close to these two legal scholars blogging on the FTC's opposition to the Whole Foods/Wild Oats merger.

Thomas Lambert of the University of Missouri law school writes of the FTC complaint: "This is bad news for consumers. If the FTC successfully blocks this merger, it will thwart consumer-friendly productive efficiencies without procuring any benefits in terms of constrained market power."

Geoffrey Manne at Lewis & Clark Law School writes at Truth on the Market:

The FTC argues that Whole Foods and Wild Oats compete for market share.  I have no doubt that’s true.  The question, left unanswered in this complaint, is whether, in a business notorious for razor thin margins, shifting market share injures anyone at all other than the losing competitor.  Likewise, other than John Mackey’s belief to the contrary, the question remains what evidence supports the seemingly crazy contention that this battle for market share is fought by these two merging companies alone, to the exclusion of practically everyone else.

This is similar to my point: the FTC is punishing Whole Foods for the way it markets natural and organic foods, finding that this creates a distinct industry. This has nothing to do with the actual products it sells, of which it would have combined 15 percent market share.

Mackey Comes Out Swinging at FTC

Whole Foods CEO John Mackey published an extraordinary blog post in his battle with the Federal Trade Commission, which has opposed its $670 million merger with Wild Oats. In the annals of corporate literature, it's unusual in the details it provides about the deal, and in Mackey's aggrieved personal take on the FTC. The only thing that comes close to this type of public venting is Warren Buffet's annual letters to shareholders. The lawyers must have been sweating.

I highly recommend the section  explaining the deal and detailing Whole Food's competition, which is primarily Trader Joe's. The juicy part comes further down when CEO John Mackey says what he really feels about the FTC, leading him to conclude that Whole Foods will never pursue another merger that needs government approval.

He also argues that Whole Foods prices have never been determined by competition with Wild Oats, but with other competitors like Trader Joe's. (In DC, Whole Foods has actually gone so far as displaying check-out receipts from Trader Joe's and Whole Foods side-by-side to show customers it is competitive, even cheaper, on a basket of products. Presumably, the FTC never visited the "P" St. Whole Foods store across town - as I regularly do - to witness this evidence of competition).

Curiously, the FTC never asked for any pricing information, despite requesting 20 million documents, Mackey says. Still, the FTC has claimed prices will rise.

If you're interested in the organic and natural food marketplace, this makes for extremely interesting reading.

- Samuel Fromartz

So Much for Fresh & Local

What fuels a global food system? Packaging. Philip Nelson of Purdue University just won $250,000 World Food Prize for his work, which was announced Monday at the State Department. The Des Moines Register reports:

His achievements include perfecting heat sterilization and cooling methods for preserving many vegetable and fruit products without refrigeration, designing valves to keep micro-organisms out of storage containers and developing tanker ships for transporting orange juice around the globe.

Reading the FTC Leaves

By Samuel Fromartz

The Federal Trade Commission's complaint against Whole Food's merger with Wild Oats is getting hammered from all directions. The Wall Street Journal editorial page weighed in today, wondering why the FTC took on the case.

The FTC argued (pdf) the merger should be blocked because it would get rid of the only competitor in a "distinct" industry, leading to higher prices and crappier stores. I've blogged on the weakness of this argument before but the Journal – whose editorial page I don't often agree with, let alone quote - puts it nicely:

But this is where the FTC's story gets weird. It wants to argue both that the quality, selection and "experience" make Whole Foods unique among supermarkets and that without competition from Wild Oats (in the few markets in which they overlap), Whole Foods' quality, selection and experience will worsen. Which means, we guess, that Whole Foods would look more like an "ordinary" supermarket. Which would mean, more competition for Whole Foods. Or something. We admit the FTC lost us when it started arguing that Whole Foods' evil plan is to undermine the very uniqueness on which the FTC is basing its antitrust case.

Using the FTC's definition of uniqueness, you could argue that Nike was unique in the 1990s because it had Michael Jordon as its spokesman. There was only one Jordon, only one Nike swoosh logo, and therefore it had a monopoly. (Or was it just selling sneakers in a smart way?) Or you could argue that Apple Computer is a monopoly because it sells premium computers that are distinct from the mass market and appeals to certain customers. (But it only has 4.8 percent share of PC sales).

As the Journal points out:

The FTC is again playing 'pick your market' to justify a dubious antitrust action …The public-policy principle at work here is that if you define a market narrowly enough, you can find an industry monopolist anywhere.

The Hartman Group, a market research firm, also weighs in:

This is like suggesting that Starbucks must be monitored because they currently dominate the market in the "sophisticated" or "specialty" coffee experience, as if this were somehow an inherent right guaranteed to all. Never mind that Dunkin' Donuts sells a heck of a lot of coffee, should Starbucks ever offer to buy out Tulley's we can presume what the FTC's answer would be.

Let's consider another argument that escapes the FTC.

If Whole Foods and Wild Oats are so distinct why are supermarket companies rushing to sell organic and natural food in reformatted stores that look awfully similar to Whole Foods and Wild Oats? These supermarkets are getting into the segment for the same reason every other major food company is – because they are losing food sales to the new competition.

Despite the best efforts of food companies to simply get us to buy more food and get fat, we have limits. If we start buying a new product it usually means we are buying less of something else. Supermarkets know they can't just quit selling the slow-growing old line products, because a lot of people like them. But they would surely like to get a piece of fast-growing organic and natural food sales. They know if they don't get a piece of those sales, they will lose them to places like Whole Foods and Wild Oats. That's also the same reason Kraft, Kellogg, General Mills and all the rest of the mainstream food companies are selling organic food. It is a growth market.

Jon Ogg at Blogging Stocks writes:

Kroger used to be just another one of the many grocery stores out there. After years, the food retailer has finally figured out that not only could it carry many of the same organic and natural foods that Whole Foods does, but that it could also do it at a lower cost. To top it off, Kroger also figured out that the profit margins were better than the ones on other packaged goods of lower quality and price.

Over the last year, the Kroger closest to my house has expanded its offering of organic and natural foods, not just in selection, but in shelf space as well … it looks like a 300 percent jump.

John Mackey, Whole Food's CEO, is quoted in the FTC complaint as telling his board: "By buying [Wild Oats] … we eliminate forever the possibility of Kroger, Super Value or Safeway using their brand equity to launch a competing natural/organic food chain to rival us. … [Wild Oats] is the only existing company that has the brand and number of stores to be a meaningful springboard for another player to get into this space. Eliminating them means eliminating this threat forever, or almost forever."

Mackey's worry was that if another company bought Wild Oats, then Whole Foods would face stiffer and well-capitalized competition. Now other companies will have to build competition from the ground up, as they have been doing. The merger, in other words, was a defensive move that would put Whole Foods one step ahead of its competitors who want to take back a share of food sales they lost to an upstart. Will it keep them out of the natural and organic food business entirely?

Not a chance.

Money Talks

The Environmental Working Group last week released its new farm subsidy database that shows you the money. In case you missed all the news reports - many by local reporters showing who got what in their county - the database lets you to search for subsidy recipients any which way, including by name. (The entry point is Ken Cook's Mulchblog.)

EWG also helpfully provided a breakdown of farm subsidies that flow to the districts of lawmakers on the House Ag Committee's Subcommittee on General Farm Commodities and Risk Management.

The 18 members on the Subcommittee (out of 435 members in the House, or 4 percent) received $10.013 billion in farm subsidies from 2003 through 2005. This constitutes 23.2 percent of total subsidies nationwide. Of the five programs targeted for payment limits, these 18 members receive $8.227 billion, 23.7 percent of the nationwide total for these programs.

As the saying goes, "money talks." It's something to consider when you're trying to change the Farm Bill. Speaking of which, if you want real inside-the-beltway reporting on the Farm Bill, look no further than the Blog for Rural America.

"Organic" Mega-Dairy Reapplies for Certification

The Case Vander Eyk dairy, suspended from organic certification in May, tells the Capital Press it is now working with a new certification agency to get back in business. "We're working with another certifier now and expect to be back in a couple of weeks," said Vander Eyk. "This is not uncommon, and it is very disruptive to our operation."

I would be very eager to find out who this new certifier is. I find it surprising to say the least that a company can be decertified by one entity and then be considered for recertification by another a month later. At the very least, this should prompt a review by the USDA's National Organic Program.

According to this article: "Vander Eyk, who has been an organic milk producer since 1999, said last week he did not know the reason for his suspension by certifier Quality Assurance International." I also find this statement hard to believe, considering the process involved in suspending a producer, a process that includes time for the producer to try and correct the situation.

The Limits of Local

I had a spirited discussion on Seattle's NPR affiliate, KUOW, on the local v. organic debate, but it wasn't much of a debate, since the highest standard everyone seemed to prefer was local AND organic. The chef and author Deborah Madison had a thoughtful piece on Culinate reaching the same conclusion.

The point I tried to make is that local alone is not sufficient. Buying within a certain radius of one's house could mean purchasing from Smithfield Farm if you're in North Carolina, and that might not be what locavores have in mind.

The problem with local is that distance gets the major emphasis, rather than environmental impact, the way the food is produced, or the myriad other issues to consider in reaching a higher food standard. Organic has been criticized because it's all about the method (rather than distance or social justice), but I expect local too will find itself facing similar criticisms. Take note that among the most active opponents to chemical and intensive animal farming are neighbors who live nearby the fields and manure ponds. They don't want this in their backyard, yet it's from a local farm. ...Oh wait, that's not what you mean by local. And Wal-Mart wasn't what organic was supposed to be either.

- Samuel Fromartz

Organic Through Rose Colored Glasses

(Editors Note: We are correcting the misstatement in the original version of this post that Wolaver's sources organic hops. They do not. We explain their position, beginning in the 12th paragraph below).

By Samuel Fromartz

The news that the USDA was on the verge of approving 38 non-organic agricultural ingredients for use in organic food got a lot of attention this week.

The Los Angeles Times first picked up on the story, then the rest of the media pack, and the early trust seemed to be: the USDA is being pushed by lobbyists to loosen organic food regulations!

But is that the case?

First, a little background about these 38, background that requires us to get deep-and-dirty in the world of USDA organic regulations.

A product can only be labeled organic if 95 percent of the ingredients are in fact organic. (A standard that is accepted globally under various organic regimes).

In that remaining 5 percent, non-organic ingredients can be used, but only if specifically approved by the citizens advisory panel known as the National Organic Standards Board. If they pass muster with the NOSB, they are placed on the so-called National List by the Secretary of Agriculture and allowed to be used.

There was one exception however: non-organic agricultural ingredients had an express pass to get into an organic product. If the organic processor told his certifier than an organic agricultural ingredient was not available, then the certifier could issue a pass for the non-organic version to be used. No review by the NOSB, no placement on the National List. Just a pass by the certifier.

Can't get organic turmeric? Then go ahead use the non-organic version in the 5-percent. Can't get organic hops for beer. Use non-organic hops, again at a 5-percent threshold.

Well, an organic blueberry farmer from Maine, Arthur Harvey, had a big problem with this and sued the USDA. He won in 2005 and the court gave the USDA two years to place specific non-organic agricultural ingredients on the National List. The two years expired June 8, 2007.

So while all the stories are screaming – THE USDA IS GOING TO APPROVE 38 NON-ORGANIC INGREDIENTS! – the real news is that USDA is going to drastically limit the current widespread use of non-organic agricultural ingredients to just 38 and only after they get a a review by the NOSB. This is all thanks to Harvey.

That said, I have a problem with some of these 38 that got by the NOSB.

Take hops, which are getting a blanket exemption. The big boys like Anheuser-Busch argue that they can't find enough organic hops, so need an exemption to use non-organic hops. This is apparently a widespread issue, since a micro-brewer like Wolaver's Organic in Vermont also told me too that they had trouble finding hops. The only source appropriate for the taste profile of their beer comes from New Zealand. One farmer they were sourcing from in the State of Washington (pictured below, at  Wolaver's web site) pulled out of the market a year ago because of the challenges of growing the crop organically.

But why can't Anheuser-Busch and Wolaver's enlist more growers into the market, where organic hops go for three times the price of conventional?  After all, they have had two years since the court ruling in the Harvey case to plan their future demand.

Morgan Wolaver agreed that more needed to be done to entice growers into the market. But in the meantime, they need the exemption if they are going to make organic pale ale. Each year they show their certifier that organic hops are not available and each year they get an exemption.

"How do you build organic demand into an exemption?" Wolaver asked. "It gets back to the breweries to really push this." 

Exactly. And if they don't push on the demand side, then the supply will never be there. To be fair, 98-percent of the ingredients in Wolaver's Organic beer are in fact organic.

The other exemption I find questionable is the use of non-organic casings in organic sausages. The rules on organic meat are strict. No animal qualifies as organic unless it was raised organically from the last trimester of gestation. That means the mother has to be organic too, at least in the last third of its pregnancy. If the offspring does not meet this hurdle, then it's not organic.

Except for intestines. For some reason, intestines used in sausage making will get a pass. I find this curious, since the existence of organic meat suggests that organic intestines are also around. And somebody will have a great incentive to make them into casings if they are required.

I spoke with Jim Riddle, former chairman of the NOSB, and he raised questions about the exemption for fish oil, since organic fish isn't even defined yet. He also pointed out the public was only given 7 days to comment on these issues, which is almost as bad as having no comment period at all.

But should all non-organic ingredients be banned, even if used in minute amounts like colorings? Well, then a huge amount of organic products would vanish, crimping demand for the organic ingredients used in the other 95 percent of these products. You are going to have these exemptions unless you want to take the next logical position and ban many organic processed food products, a position that more than a few organic advocates take, including Harvey. But the consensus, globally, in organic circles - and that includes farmers and NGOs not just Big Organic - has been to allow a select few in once they are reviewed.

So the question always becomes where to draw the line. Ethicurean's post on organic annatto considers this issue, although I don't necessarily agree with the conclusion.

In an ideal world, organic farmers will come up with all the organic agricultural ingredients that processors need.

My worry is that the non-organic ingredients will become the de facto ingredients and no one will step up to the plate to try and produce organic ones. Or that once given an exemption, processors will argue that the organic version is not in the right "form" or doesn't meet "quality" standards, another way it can justify using the non-organic versions.

Right now, though, organic processors are in a pinch. The USDA sent out a notice to certifiers on June 8 reminding them that they must avoid using non-organic ingredients (not on the National List) as of midnight. In the meantime, the USDA has not yet approved any of the 38 replacements, as of today.

So, all those beer makers using non-organic hops and all those sausage makers using non-organic casings are not in compliance with the law, if they are still using those ingredients today.

I wonder what they're doing? Hopefully ramping up organic ingredient supplies as they should have done all along.

Where Does Your Food Come From?

The supermarket, of course. The BBC reports:

The Linking Environment and Farming organization found 22% of 1,073 adults questioned did not know bacon and sausages originate from farms.

Some 47% of people did not know farms produced porridge's main ingredient.

I guess we have quite a ways to go in bringing awareness of food and farming into the mainstream, though this survey was surprising to me. Forget about the debate of local and organic, people don't even know food comes from farms. (Via Gristmill).

A Class Act on Food

Tom Philpott over at Grist has an extremely thoughtful essay on Slow Food exploring tough issues like  elitism in the sustainable foods movement.

For all its good work -- and despite its roots within the Italian labor movement -- Slow Food has itself been hounded by charges of elitism. The critique goes like this: Who but a rich few can spend time wringing their hands over whether, say, a cheese that's been made in some Tuscan village for hundreds of years goes extinct -- a cheese that only the well-off can afford anyway?

Yet Slow Food's class problem really applies to the sustainable food movement in all industrialized nations, including the U.S. In short, our economy runs on cheap food; many people rely on it to feed themselves; and advocates of farmers' markets, CSAs, and organic food are asking people to pay more for food without giving them a strategy for raising wages.

The movement is caught between two poles, of wanting to provide more affordable food but also trying to maintain a decent living for its farmers. Closing that gap, Philpott argues, is a primary challenge for the movement ahead.