COMMENTARY: Why regulation is the cause – not the consequence – of consolidation by Dan Murphy on 2/8/02 for www.meatingplace.com

Of all the issues that seem to ignite everyone from processors to politicians (not that they're on opposite ends of the spectrum or anything), none are more incendiary than the specter of consolidation.

Just the word alone gets people steamed up, whether we're talking about a food industry growing rapidly more top-heavy, the prospect that only a handful of airline carriers will survive the decade or the fact that before too long all news, entertainment content and probably all information period will be controlled by one giant AOL/Time-Warner-Disney/MSN.com conglomerate.

If it isn't already.

But what is far less certain is coming to any understanding of why consolidation occurs, especially in the food processing and agri-business sectors. We know it seems inexorable, but no matter how lively or how litigious government regulators become, they can't seem to control the pace of consolidation.

You know why? Because regulations are what causes consolidation.

At least that's the contention of a fascinating new book I picked up for an entirely different reason. Called, “The Death of British Agriculture,” the title seemed to be required reading for anyone who pretends to be an authority on the global meat industry.

Hey -- I wasn't referring to myself. Not necessarily.

Anyway, about halfway through Richard North's searing story of how foot-and-mouth and mad cow ruined England's beef business, he launches into what I found to be an even more powerful explanation of how the watershed event in the near-demise of the United Kingdom's agricultural sector wasn't animal diseases; it was the U.K.'s entry into the European Community in the 1970s.

Economists will argue forever whether Great Britain has a choice or not to join what is now known as the European Union, but North, a Ph.D. agricultural policy expert, argues that its EU membership was the beginning of the end of a thriving, competitive farm sector.

In the case of the recent foot-and-mouth outbreak, he delivers a scathing condemnation of the British government's “slash-and-burn” policy on containment, as opposed to a vaccination program to control the disease.

The chapters he devotes to the official “death squads,” who were little more than armed soccer hooligans sent out to kill millions of livestock in affected areas, are absolutely sickening.

More to the point, North argues that contain-and-kill to control a foot-and-mouth made sense in the '60s, when Britain was still and island fortress. But by 2001, its EU membership guaranteed open borders and massive movement of livestock to seek out better prices. So when foot-and-mouth erupted, he contends that there was simply too much mobility among the sheep, pigs and cattle in Britain and the Continent to even hope that eradication could control the spread of the virus.

Millions of dead animals later, it's tough to argue against North's analysis.

In fact, as the decades rolled along, the signature of Britain's EU membership was not the benefits of greater market access, but the overwhelming costs of added bureaucracy imposed at every turn.

EU regulations, since they must be approved by consensus of all member states, tend to evolve into suffocating layers of red tape managed by a Byzantine labyrinth that stifles innovation and chokes the lifeblood out of even the most progressive producer.

For example, when the country began to emerge from the damage caused by the decade-long BSE crisis, producers tried to institute a “But British Beef” labeling program to help the domestic industry recover. But under the EU's open market rules, no matter what specifications British producers might cobble together in their proposed program, any country that meets those same standards can apply the exact same labeling to their country's product.

And since any of a number of EU countries, particularly Ireland, contribute far more in support payments to their producers than England does, beef from those countries is able to compete directly against British product. Without either a point of difference or a competitive pricing structure, British beef producers abandoned their efforts to revive domestic production.

Is it any wonder, North asks, why agricultural subsidies are so substantial in virtually every Western European country? Without them, its hamstrung farm sector couldn't possibly remain competitive versus its global challengers.

But the collective effect of all the labeling laws, the animal welfare restrictions, the endless series of permits and licenses and certifications required to comply with the EU's massive bureaucracy has its most serious impact on the structure of agriculture, North says.

Coping with the costs of regulations is most onerous on smaller farmers, and every attempt to legislate more rules to deal with mad cow or E. coli or salmonella or any other issue the public perceives to be a problem only leads to the exact opposite effect every activist wants: The exit of thousands of smaller farmers, producers and processors from the business and the further spiraling of consolidation across every segment in the food industry.

Worst of all, the very nature of modern regulation precludes any and all attempts to “de-regulate” or even merely reduce the rise in the regulatory tide. Listen to this passage in North's book:

“In contrast to traditional lawmakers, the new breed of civil servants was no longer content to make laws and wait until people broke them, then rely on the courts to penalize them. They sought to prevent 'non-compliance.' More and more, they sought to intervene, to define regulations that were aimed not at punishing law-breaking but at preventing it. The regulations were developed not to punish the crime of selling unfit meat, but to penalize the slaughterhouse owner for not taking the prescribed steps to prevent the unfit meat from reaching the market.”

Sound familiar?

The ultimate result of letting regulators take over in what North terms “the intervention model,” is that rules are predictive, based on what bureaucrats think will prevent an outbreak or control a problem. Then, farmers and processors have the burden of trying to prove that compliance won't improve the situation.

It's the guilty-until-proven-innocent system toward which we are rapidly gravitating in this country as well.

As North phrases it, “The current regulatory model would make detailed rules prescribing forms of behavior that might preceded or have been known to precede the commission of murder. Regulations would prohibit swearing, drunkenness, adultery and even singing and whistling. And of course, the state would appoint inspectors to ensure compliance with these rules and would extract penalties for failure to conform.”

Would that eliminate all murders?

I think we know the answer to that one.

But what the full-blown intervention model of regulation has done is to initiate the eventual extinction of the British beef producer.

So far, we've escaped the “importation” of mad cow disease from Great Britain.

Let's hope that somehow we can also escape the sorry state into which their agricultural sector has fallen.

Maybe we can just impose a regulation forbidding it.

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