Throughout History, Fewer Players Mean Higher Prices
Railroads were first to hike fees based on farm prices.
Mike Wilson
Published: Dec 8, 2010
Fertilizer is a global sector dominated by a few players (see "Extra" issue p. 32). Prices for fertilizer are determined not on production costs but on supply and how much expected profit farmer customers might make. When corn prices jumped this fall, fertilizer quickly followed suit.
Concerns over suppliers or service companies raising prices when farm prices go up goes back a long, long time, says Purdue Industrial Economist John Connor. In the 1870s, High Plains farmers complained about high railroad shipping rates, leading to the passage of the Interstate Commerce Act in 1887 - the first piece of federal economic legislation.
"It was a deal, because the railroads got guaranteed profit rates - but they lost their ability to raise and lower rates based solely on grain prices," Connors explains. "Farmers ended up paying more for shipping grain over all, but they were allowed to reap some benefits when grain prices got higher."
Farm groups, particularly the powerful Grange, were principle forces behind the adoption of sixteen state antitrust laws. "They tried to break the backs of the railroads, and they found out the railroads had awfully good lawyers, including our great president Abraham Lincoln," says Connor.
The railroads were able to shift assets out of those states where antitrust laws were passed, effectively thwarting monetary punishment. It was that frustration that led to the federal antitrust law - the Sherman Act - in 1890.
The Staggers act of 1980 effectively deregulated the railroads and led to the demise of the Interstate Commerce Commission in 1995. Its main impact was to allow a rail carrier to establish any rate for a rail service, unless the government determined there was no effective competition for rail services.
"Now we're back to a situation where we have a handful of big railroads that are allowed to set whatever rates they want," says Connor. "They figured out when farm incomes go up, farmers are able and willing to pay more; that's what you do when you're a monopolistic supplier. You figure out what the traffic will bear and raise the price accordingly. It's an old trick."
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