Milling & Baking News - February 13, 2007 - 8

E D I T O R I A L

Important economic gains realized in m. & a. activity

omplex studies undertaken by the Economic Research Service of the U.S. Department of Agriculture to determine whether the stepped-up pace of
mergers and acquisitions among food companies benefits
the economy might not be expected to produce information
helpful to industry sectors subjected to this sort of intense
examination. The aim of the study was not just to find out
whether the nation as a whole gains from this trend, but
also to deal with alarms expressed by some people about
the increase in food industry concentration. The jump in
the four-firm concentration ratio for the various parts of the
food industry from barely 30 per cent in the late 1970s to
approaching 50 per cent currently has been cited by critics as excessive. That the E.R.S. examination of data from
the Census of Manufactures for eight food sectors, including flour milling, showed plant efficiency increasing in the
wake of increased merger and acquisition activity is a salutary conclusion. Some aspects of the study also are instructive for students of industries like milling.
Fundamental to the finding that mergers and acquisitions are a plus for the economy is the belief that for consumers, greater efficiency in a competitive market often
leads to lower prices "because fewer resources are used to
produce the same output." It is important to recognize in
this context that efficiency increases, which for this study
relate to labor productivity, not only put pressure on prices, but usually result in closing inefficient plants.
This E.R.S. study is different from many predecessors
because of the way the Census data allowed gauging labor productivity, as a measure of economic efficiency, both
prior to and after acquisitions. The aim was to see if new
management improved performance, a concept challenged
in prior studies. As the E.R.S. explained, "Food production
plants that are acquired yield efficiencies if productivity
improves and generate synergies if the plants were productive before the acquisitions and then raise labor productivity to an even higher level afterward."
This statement hints at one of the most surprising findings, which undercut a prominent theory holding that
inefficient plants and firms are the ones being acquired

by new owners and efficient firms survive without facing
takeovers. Instead of upholding the historical belief that
acquirers mainly seek medium-size and large plants that
are performing poorly, the study strikingly shows that acquisition activity in the food industry centers on plants
that already have relatively higher labor productivity. It
does affirm that interest also is tied to size. For instance, it
found that in flour milling a plant that was in the 95 percentile for both relative labor productivity and size had a
46 per cent probability of being acquired in 1977-82 and 55
per cent probability in 1982-87. Similarly, flour mills with
a 50 percentile in both productivity and size had only an
11 and 15 per cent probability of being purchased. In the
same 50 percentile of size, raising labor productivity to
the 95 percentile doubled the probability of acquisition.
The E.R.S. study refutes allegations that purchased plants
often are destined for closing or further disposition in order
to reduce competition. Instead, the study reveals that food
plant acquirers on average kept about half the plants they
acquire. This is to be expected in view of the finding that
buying firms in the first place tend to purchase highly performing plants. On the other hand, non-buying firms are
inclined to sell their most productive plants and to keep the
less productive ones. Buying firms keep their most productive plants and close or resell the less productive ones.
By showing that mergers and acquisitions are positively correlated with labor productivity and plant size and
that productivity increases post-acquisition, the E.R.S.
relies on mathematical regression analysis. The result
is the identification of control variables that affect plant
productivity. Negatives, as might be expected, include
changes in the plant's capital-to-sales ratio and the ratio
of non-productive workers to production workers. Initial
plant size is important, and attention must be given to the
effect of adding non-production workers to comply with
new regulations or new quality concerns. On balance, the
study concludes that merger and acquisition activity in
the food industry, including flour milling, yields positives
for consumers and the overall economy, while producing
synergies in continued growth in plant productivity.

Parallel trade growth path through new aid initiative

oming across "A4T" in a document from the World
Trade Organization, and not understanding what it
meant, prompted a student of this field to delve a bit
deeper into the jargon of international negotiations. It turns
out that "A4T," much like those mysterious automobile license plates that seek to present a lengthy message using
few characters, stands for a fairly new, and quite important,
global initiative under the name of Aid for Trade. Having
translated those three characters, it then became necessary
to grasp the meaning of this program that, while evolving
separately from global trade negotiations, is actually being
given a parallel life of its own. Aid for Trade is no longer
totally dependent on the still very uncertain outcome of the
Doha Round. Those talks aim to liberalize global trade, especially in wheat, flour and other agricultural products.
According to Pascal Lamy, director-general of the W.T.O.,
the thrust of Aid for Trade is making sure that developing
and less-developed nations are prepared to benefit from any
gains made within the Doha Round. This stemmed from
realizing that if the round should succeed, which means developed countries like the United States and the European
Union would agree to reduce barriers to imports of agricul-

bakingbusiness.com / world-grain.com

tural products, while developing nations would open up to
commercial imports, the latter countries are ill prepared for
stepped-up trade. This not just reflects inadequate export
and import facilities, which are a widespread problem, but
addressing the preparedness of essential internal systems required to participate in international agricultural trade. Aid
would come mainly through the World Bank and would be
targeted at supplying the infrastructure important to foreign
trade. The assumption is that opening markets is not sufficient alone to assure infrastructure building.
As Mr. Lamy has observed, attention should be given to raising the profile of trade at the domestic level
in many countries. Suspicions about globalization and
its benefits are not limited to developed nations. These
doubts may actually be greatest in developing nations
that believe they have seen little poverty reduction from
trade. At its start, the Doha Round was aimed at helping
the poorest. American grain merchants and flour millers
have long understood this aspect of the current negotiating round, making it all the more fascinating to realize
that Aid for Trade might conceivably turn out to have as
important a trade expansion role as the Doha Round. MBN
Milling & Baking News, February 13, 2007 / 9

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Milling & Baking News - February 13, 2007

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