Wrinkles In The US Raisin Cartel

Cartel sounds much sexier than “marketing order”, doesn’t it? But that’s basically what it is…and some of the cartel members are not happy.

It didn’t receive the attention some other recent US Supreme Court cases did, but a couple weeks ago in Horne v. Department of Agriculture the SCOTUS heard arguments about whether mandatory marketing order set-asides amount to federal takings and should be compensated. This case has tremendous potential impact for upward of 30 agricultural products governed by marketing orders run under the auspices of the USDA. These marketing orders date back to the 1930s and were an attempt by agricultural producers to increase the prices they received for the products by disposing of “excess production”. In other words, farmers of the 1930s got the federal government to institute a national cartel for the purposes of raising the price of food…and those cartels continue to operate today.

So how does that work?

In the raisin case, the Raisin Administrative Committee decides what the “right” amount of raisins are in order to sustain a certain market price. When production exceeds the target quantity, the RAC requires raisin producers to surrender whatever percentage of their crop is necessary in order to bring the market quantity down to the target level. In 2003, it was roughly 47% of production. The RAC then disposes of the excess raisins in various ways–such as donating or selling them to other countries so that they can’t be sold in the US. If the RAC doesn’t generate any profits on the sales, the farmers get nothing for their surrendered raisins. Because the set-asides are required by federal law, the producers in the Horne case argue that these are federal takings that must be compensated.

But are they? The whole point of the marketing order is to inflate the market price for the raisins that do get sold in the US. So raisin farmers receive a higher price for the raisins they get to keep. If the RAC is doing their job correctly, the gross revenue farmers receive for the raisins they get to market should be at least as high as the revenues they would receive if all the produced raisins went to market.

The problem, as with any cartel, is that while restricting output to inflate price is good for the group as a whole, it creates an incentive for individual producers to sell their surplus at the higher prices–basically, to double-dip by cheating on the cartel agreement. If everyone did that, prices would fall and the cartel would fail to achieve its pricing objective. The only solution is to have some way of enforcing the set asides to make sure everyone doesn’t cheat. In the case of drug cartels, enforcement is done privately by violence. In the case of US agricultural production, it is done by federally-sponsored marketing orders with the power to fine producers who don’t surrender their crops.

The outcome of this case will likely have significant implication–one way or the other–for agricultural producers and for consumers. If the Court holds that the marketing order does represent a federal taking, that is likely good for consumers as the RAC will have to generate some revenue from the raisins it appropriates in order to pay farmers for the crop. Either RAC will not appropriate as large as share of the crop–leaving more on the market and driving down prices–or the RAC will need to more aggressively sell the set-asides–placing more on the market through other channels that may still reduce prices for consumers. And this may apply not just for raisins, but for a number of other agricultural products.

If the Court rules against the takings argument, then the status quo will remain. And while that won’t necessarily change anything for consumers perhaps it will at least raise an awareness of how private agricultural interests are using the federal government to inflate food prices for consumers. And even that might be a good outcome of the case.

 

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