About a dozen states, led by Oklahoma's attorney general, will join the department's antitrust division in a review of the plan by ConAgra Foods Inc (CAG.N) to join Horizon Milling, a joint venture of Cargill Inc. CARG.UL and CHS Inc (CHSCP.O).
The deal would combine their U.S. flour milling businesses into a venture that would control about one-third of U.S. capacity, dwarfing all competitors in size and market reach. The deal was announced on March 5.
"The antitrust division is investigating a proposed joint venture between ConAgra Foods, Cargill and CHS Inc that would combine the flour milling operations of ConAgra Mills and Horizon Milling into a new joint venture called Ardent Mills," said Justice Department spokeswoman Gina Talamona.
Horizon Milling is currently the largest U.S. miller.
Oklahoma and the other states are concerned that the new venture, to be called Ardent Mills, will have the power to illegally push down prices received by farmers for their wheat, the sources said.
They will also look at the impact on prices companies and consumers pay for flour, the sources said.
The fact that states are involved typically gives the Justice Department additional resources - and sometimes creates additional pressure - to ensure that a proposed transaction complies with antitrust law.
ConAgra and Cargill said that they had not been contacted by the attorneys general.
The other major player in the wheat milling business is Archer Daniels Midland Co (ADM.N), which has about 17 percent of U.S. wheat milling capacity, according to the American Antitrust Institute, a nonprofit group that advocates for competition in business.
AAI said in an April letter to the Justice Department that the proposed joint venture "raises potentially significant competitive concerns."
Agriculture, already a fairly concentrated market, has a history of price-fixing, said Thomas Horton, a veteran Justice Department litigator who now teaches antitrust courses at the University of South Dakota School of Law.
"It's a very bad deal. To me, it's just a plan to implement a price-fixing conspiracy through what's called a joint venture," Horton said.
But one industry expert, who asked not to be identified for business reasons, noted that the companies were not the only buyers of U.S. wheat. "It seems like a concern that could be overblown if you don't take into account that they have to compete with people who export wheat as well," the expert said.
The U.S. Department of Agriculture estimates that 958 million bushels of U.S. wheat will be used for food in the 2013/14 marketing year, which started on June 1, while 975 million bushels will be exported.
CHS, owned by farmers and cooperatives, said the deal would be good for farmers. "We are entering this venture because it brings good value for our farmers and cooperatives," said spokeswoman Lani Jordan.
ConAgra spokeswoman Becky Niiya added that assuming the joint venture is approved, it "will continue to face significant competition from many other companies." The companies expect the joint venture to close in late 2013.
If the Justice Department decides the venture would violate antitrust laws, it can ask a court to block it or require asset sales.
"Even something as storable as wheat, you're still a price-taker ultimately," said Patrick Woodall of Food and Water Watch, a public interest group. "I think this deal should be stopped irrespective of any divestiture plan."
The proposed Ardent Mills would have 44 flour mills as well as bakery mix and specialty bakery facilities.
After Horizon Milling, Archer Daniels Midland is the second-largest U.S. miller and ConAgra is No. 3.
