The Raging 2020s

by Alec Ross

  That trend is consistent across all sectors of the agriculture industry. The family farms that sustained rural America for generations have been replaced by corporate agriculture. As food production has become more concentrated in the hands of a few large companies, rural communities have suffered heavily.

  One can argue that consolidation is simply the invisible hand of the market working its magic—the more efficient the farm, the better. But as farms optimized for efficiency, the animals, the environment, and even farmers ended up worse off. Large-scale operations pack as many animals into as small a space as possible and maximize the production of each animal. The result is a facility that looks more like a factory than a farm. The government does not even refer to these large-scale facilities as farms. Instead, they are known as concentrated animal feeding operations, or CAFOs. The vast majority of the beef, pork, poultry, milk, and eggs that Americans consume today come from CAFOs. Instead of grazing on a pasture, animals are stuck in cages eating corn and soy from a trough. And even factory farms are having a difficult time keeping up with the demands of the market.

  Over the last sixty years, the United States’ growing appetite for meat has been fueled almost single-handedly by chicken. The average American’s consumption of beef and pork actually fell between 1960 and 2012, while the consumption of chicken meat more than tripled.

  Dave Layfield’s family has been farming on the Delmarva Peninsula since the late 17th century. For generations his forefathers grew grain and produce, but his parents—Dave Sr. and Patricia—got into the chicken business in the 1970s, soon after the modern poultry model took flight.

  As chicken production concentrated after World War II, farmers began signing contracts with so-called poultry “integrators.” These companies handled the vast majority of the chicken production process: hatching chicks, delivering them to farmers, supplying feed and other supplies, picking up full-grown chickens, slaughtering them, packaging the meat, and selling it to commercial vendors. All farmers needed to provide was the labor, land, and facilities to grow the birds. Before the integrator model, only a small number of farmers had the infrastructure, relationships, and capital to turn a profit from raising “broiler” chickens rather than raising chickens for eggs. But with integrators taking on the costs of hatching, feeding, transportation, and processing, the barrier to entry fell and the broiler business became more accessible. As more farmers on the Delmarva Peninsula and elsewhere started raising broilers, supermarkets across the country were flooded with low-cost chicken meat and Americans adjusted their diets accordingly.

  The Layfield family operated small-scale poultry farms for decades, growing between thirty thousand and sixty thousand birds at any given time. Until late 2019, they operated a small farm with two older houses, each with a sixteen-thousand-bird capacity. Though technically labeled a CAFO by the government, their operation was small by modern poultry farming standards. Some of the largest farms on Delmarva can raise more than a million chickens at a time.

  As a child, Dave spent his Saturdays “cleaning the drinkers,” scrubbing feed and debris out of the chickens’ long metal watering troughs. It was not easy work. Thousands of birds would be clucking around him while he scrubbed away, the smell of ammonia burning his nose and dust clouding the air. Once while cleaning the troughs, Dave, who had always been tall for his age and today stands six foot six, inadvertently stuck his whole head into a wasp nest. He got stung twenty-six times on his scalp, chest, and back. It was around then, as a preteen, that Dave decided to pursue a different line of work. He eventually became a real estate developer, though he continued to help out around his parents’ farm as needed. But as the poultry industry grew more consolidated, the Layfields found it harder and harder to stay afloat.

  Among economists, a business arrangement where a single company controls multiple stages of production is known as vertical integration. The more of the supply chain the company controls, the more it can reduce its production costs. Lower production costs mean lower prices, and lower prices mean more customers. Vertical integration is what enabled Gilded Age monopolies to conquer their industries. Modern poultry integrators have used it to entrench their dominance over the chicken supply chain. With integrators leveraging economies of scale, it became almost impossible for independent feed mills, hatcheries, farmers, and processors to stay in business. The entire industry began to consolidate around the integrators. In 2018, three companies—Tyson Foods, Pilgrim’s Pride, and Sanderson Farms—produced approximately half of the chicken in the United States. They own every part of the process except the CAFO facilities where the chickens are raised. And this is no mistake. One of the tried-and- true tactics of shareholder capitalism is to shift capital expenditures (like building and maintaining thousands of farm facilities, or paying for the benefit packages that come with full-time employment) onto other parties. This allows for lower liabilities and higher profits. So today, most commercial chicken farmers work as contractors for the big poultry integrators. The relationship between integrators and poultry farmers is similar to that between a rideshare company and its drivers who own and maintain their cars. Crucially, each individual farmer is responsible for building and maintaining the CAFOs and related equipment, often funding them via loans offered by the integrators. In that dynamic, the integrators have all the power.

  Under this model, the integrators have wide latitude in determining the amount of money that farmers like the Layfields earn. The income that the Layfields and their fellow chicken farmers earn depends on their performance relative to other farms that “settled” that week. Every time a flock is harvested, companies rank farmers against one another based on a handful of variables—weight per bird, feed consumption, mortality rate, and so on—and then pay them out based on their relative efficiency. A farm that produced heavier birds with less food and energy consumption would earn more than a farm with a lower “conversion” rate. Dave Layfield said that his parents’ earnings could swing from $150 per thousand chickens to $300 per thousand, based on how well they and other farms performed. The ranking calculation was often very opaque, Dave told me. “Sometimes it was absolutely luck of the draw. There were times when Mom and Dad came in first and didn’t know why, and there were times they came in last and didn’t know why. But the difference between first and last was huge. Like the difference between making the mortgage payment, electric bill, and putting food on the table—and having a little disposable cash.”

  By setting up competition between its chicken suppliers, the integrator is able to soak out as much profit as possible while also keeping its farmers racing against each other on a treadmill. The pay structure favors the farms with the most capital, as operations with modern feeding, watering, and ventilation systems can grow chickens more efficiently than older ones. Soon, older farms see their relative ranking (and therefore earnings) start to slide. To top it off, the integrators began, in the late 1980s, explicitly requiring older farms to upgrade their equipment. The cost of that investment fell mostly on the farmers themselves, which in many cases kept the farm stuck in debt. If a farmer could not keep up with the requirements, she risked having her contract dropped by the integrator. This typically happened to older farmers with older equipment. If they lost their contract, elderly farmers would be left with empty chicken houses, unable to sell the farm or obtain a new contract, Dave told me.

  This is the situation that Dave’s parents find themselves in today. When Dave was a child, his parents used to consistently rank near the top of every harvest, but as more modern farms started popping up, they slid toward the middle. Then in 2019, the Layfields’ integrator, Mountaire Farms, told Dave’s parents that they needed to invest $8,000 to upgrade their equipment. They did, and Mountaire sent them another flock. A few weeks later when the integrator picked up that batch of birds, the company said the Layfields needed to do another $80,000 worth of upgrades or they would lose their contract. The family was stuck. If they made the upgrades, Moun
taire might just hit them with another costly upgrade requirement the following year. They could sell the farm, but then the new owner would need to make an even costlier capital improvement requirement. Either way, the Layfields would end up footing the bill. They had a third option—let the contract expire—but that would leave them with an inactive, unsellable farm. Ultimately, the Layfields chose option three. Patricia and Dave Layfield Sr. are both in their seventies, and their single most valuable asset has been rendered virtually worthless.

  “The modernization of the poultry industry has just hung hundreds of older farmers and older farms out to dry,” said Dave Jr. “Just go on Google Maps and pan around the Delmarva Peninsula. You’ll see hundreds of long rusty rectangles. Those are old abandoned poultry houses and almost every one of them has an old farmer behind it who is out of luck. That’s the cost of modernization and industrialization of farming.”

  The effect on communities can be just devastating. Local farmers end up taking on much of the risk, as they load up on debt to try to keep their CAFOs state of the art. Yet most of the profits leave the local economy, as they are realized further up the food chain by integrators and their shareholders in distant financial hubs. By way of illustration, Tyson Foods has a market capitalization of more than $40 billion and its largest shareholders are all asset managers clustered in the very small number of places—all urban—that have benefited from the last thirty years of wealth creation. Decades ago, in the era when independent farms had more stability, their profits would have been funneled back into local towns, communities, and other small businesses. But that local economy has dried up, and the cost has been borne by families like the Layfields.

  All the incentives now drive farms toward scale and size, and this is true not just for livestock but also for farms that produce corn, soy, wheat, and other crops. Maximize plants, maximize output, minimize space. The consolidation of the agriculture industry has devastated America’s rural communities. In the 1950s, for every dollar spent on food at the grocery store, fifty cents went to the farmer. Today it’s fifteen cents. With family farms no longer offering a path to a viable economic life, more young people are leaving small towns for better-paying jobs in urban centers. Rural populations are shrinking, and the people who remain tend to be older and poorer. Nearly a quarter of the children in rural America grow up below the poverty line. Rural Americans are 45 percent more likely to commit suicide than their urban counterparts. In the United States and elsewhere, populist leaders have capitalized on the economic and political grievances of these communities. This is reflected in my native West Virginia, where the population has shrunk from 2.1 million to 1.8 million during my lifetime, with only a small percentage of my classmates choosing to stay. Politically, it has moved from being dominated by “union Democrats” to being radicalized, with the populist fringe now mainstream. Its politics have gone from union to nativist as it has grown poorer and sicker.

  * * *

  SHAREHOLDER CAPITALISM ACCELERATED during the 1990s after the Soviet Union fell and it was clear that capitalism had won. Companies doubled down on Friedman’s ideas, leading to an increase in short-term planning. Senior executives saw their pay increasingly linked to equity rather than salary, meaning the higher a company’s stock price, the richer the reward for the executive team. Private equity, activist investing, and mergers and acquisitions activity accelerated as antitrust protections weakened further.

  Economists found that between 1997 and 2014, three-quarters of US industries became more concentrated and the largest firms in most industries increased their share of the market. There were 66,847 corporate mergers and acquisitions in the United States between 1970 and 1989—an average of 3,342 per year. Between 2000 and 2019, there were 236,895 total mergers and acquisitions, about 3.5 times as many per year. In 2019, the total value of those mergers hit $1.9 trillion. In nearly every industry, from construction to finance, start-ups make up a smaller share of the market than they did in 1979. Through mergers and other means, established firms are snuffing out potential competitors before they ever leave the cradle.

  “Being a small economic unit—which has traditionally been the core of the American economic project—is a loser’s game,” said Columbia Law School professor Tim Wu. “Being a producer right now feels a little bit like a sucker’s game. There are a lot of areas where the actual producers are squeezed.”

  This dynamic is especially concerning in western and central Europe, where small- and medium-sized businesses are more predominant than they are in the United States and more deeply embedded in local culture. Small businesses in countries including Italy, France, and Spain were not as impacted by the mall-ification and big box stores that wiped out America’s main streets. Now, these smaller firms are having to hold out against digital platforms and against an overall economic tide accelerated by COVID-19 that puts them in a more tenuous position. Walking through the neighborhood in the university district of Bologna, Italy, where I lived during my time there as a professor, I am struck by the number and variety of locally owned bookstores, grocery stores, and myriad other specialty retailers that would never stand a chance in the United States. Germany, Switzerland, and Austria are home to millions of what are called the Mittelstand, family-owned businesses of small to moderate size that tend to measure their impact across generations rather than quarters and refuse to be acquired by larger firms.

  As firms have gotten bigger, they have also taken a larger share of the profits generated in the economy. The companies on the original Fortune 500 list earned a combined $8.3 billion in profit in 1955 (approximately $79 billion in 2019 dollars). In 2019, the Fortune 500 came out $1.2 trillion in the black. But instead of raising wages for workers or lowering prices for consumers, modern companies direct more of their gains to shareholders.

  If workers held equity—an ownership stake—in the companies where they work, then they would benefit from the appreciating value of their capital, but the numbers state plainly that workers tend not to be owners. In the United States, the top 1 percent owns $15.86 trillion in stocks, while the bottom 50 percent owns $0.18 trillion. A population group a tiny fraction the size of another owns eighty-eight times its stock market wealth.

  This trend is global. The world’s twenty-six richest people now hold more wealth than half of the globe’s population. This is more medieval than progressive.

  To continue to meet market expectation for profits quarter after quarter, businesses have also come to rely on short-term strategies to juice their share prices. The most common of these, and perhaps the least productive to society, is the stock buyback. Companies learned they could drive up their value by simply using revenues to repurchase their own stock rather than investing in innovation or workforce development. Doing so reduces the supply (or “float”) of available shares and thereby pushes the share price higher. Such price manipulation is legal because of a Securities and Exchange Commission rule enacted during the surge in shareholder capitalism policies in the 1980s, immunizing executives and boards from prosecution for stock manipulation using stock buybacks. And since the 1990s, buybacks have become all but ubiquitous.

  Stock buybacks are Exhibit A demonstrating that if share price is all that matters in shareholder capitalism, then it creates major incentives not to invest capital toward productive uses. A buyback is as productive to society as a bonfire of banknotes. When people scratch their heads and wonder how it can be that the stock market is booming and executive compensation is at an all-time high but the overall economy is less dynamic and workers are not benefiting, look no further than the trillions of dollars in stock buybacks.

  S&P 500 companies spent $4.3 trillion on stock buybacks over the last decade. That is more than half of their net income, with another 39 percent ($3.3 trillion) going to dividends to shareholders. These are trillions of dollars that were not spent on research and development, employees’ salaries or training, equipment, or anything else that increases the productive capacity
of the company. At least with dividends, shareholders can reinvest or otherwise spend the money as they choose to, but with stock buybacks the money just disappears.

  This $4.3 trillion produced nothing material. It increased the stock price, which is the sole marker to which most boards hold their senior executives to account.

  And when over 50 percent of all profits are pumped into artificial buybacks, we have a major problem.

  Some Friedman school purists justify this by saying “this is capitalism,” but that obscures the fact that, in practice, whenever these companies hit a crisis they go to the government for a bailout. Because they spent all their free cash flow on stock buybacks, they do not have the money to rescue themselves, so they ask taxpayers to do it for them. Far from some pure form of capitalism, this is corporate socialism. When times are good, these companies are capitalist and privatize their gains. When times are bad, they are socialist and allow the taxes paid by teachers, plumbers, and nurses to get them back to solvency. We saw this with America’s airlines in 2020. The airlines received massive government bailouts despite generating more than $49 billion in free cash flow during the previous decade. The reason they were not able to tap that $49 billion once trouble hit was not because they had been investing in new planes, better service, or better salaries for their workers. No, they had spent $47 billion of that $49 billion on stock buybacks.

  We saw an even more dramatic form of corporate socialism when the US central bank, the Federal Reserve, injected trillions of dollars of liquidity into corporate America during the 2020 crisis. As we will later explore, other nations prioritized keeping their citizens employed or their small businesses open, but the official policy of the United States (backed by trillions of dollars) was to aid its largest corporations, those that had spent more than 50 percent of their profits over the previous decade on share buybacks.