[Senate Hearing 106-663]
[From the U.S. Government Publishing Office]
S. Hrg. 106-663
GRAIN INSPECTION, PACKERS AND STOCKYARDS ADMINISTRATION OVERSIGHT
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HEARING
before the
COMMITTEE ON AGRICULTURE,
NUTRITION, AND FORESTRY
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
ON
GRAIN INSPECTION, PACKERS AND STOCKYARDS ADMINISTRATION OVERSIGHT
__________
February 1, 2000
__________
U.S. GOVERNMENT PRINTING OFFICE
65-409 CC WASHINGTON : 2000
Printed for the use of the
Committee on Agriculture, Nutrition, and Forestry
_______________________________________________________________________
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC
20402
COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
RICHARD G. LUGAR, Indiana, Chairman
JESSE HELMS, North Carolina TOM HARKIN, Iowa
THAD COCHRAN, Mississippi PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky KENT CONRAD, North Dakota
PAUL COVERDELL, Georgia THOMAS A. DASCHLE, South Dakota
PAT ROBERTS, Kansas MAX BAUCUS, Montana
PETER G. FITZGERALD, Illinois J. ROBERT KERREY, Nebraska
CHARLES E. GRASSLEY, Iowa TIM JOHNSON, South Dakota
LARRY E. CRAIG, Idaho BLANCHE L. LINCOLN, Arkansas
RICK SANTORUM, Pennsylvania
Keith Luse, Staff Director
David L. Johnson, Chief Counsel
Robert E. Sturm, Chief Clerk
Mark Halverson, Staff Director for the Minority
(ii)
C O N T E N T S
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Page
Hearing:
Tuesday, February 1, 2000, Grain Inspection, Packers and
Stockyards Administration Oversight............................ 1
Appendix:
Tuesday, February 1, 2000........................................ 75
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Tuesday, February 1, 2000
STATEMENTS PRESENTED BY SENATORS
Lugar, Hon. Richard G., a U.S. Senator from Indiana, Chairman,
Committee on Agricultural, Nutrition, and Forestry............. 1
Roberts, Hon. Pat, a U.S. Senator from Kansas.................... 20
Fitzgerald, Hon. Peter G., a U.S. Senator from Illinois.......... 24
Conrad, Hon. Kent, a U.S. Senator from North Dakota.............. 26
Craig, Hon. Larry E., a U.S. Senator from Idaho.................. 17
Harkin, Hon. Tom, a U.S. Senator from Iowa, Ranking Member,
Committee on Agricultural, Nutrition, and Forestry............. 17
Leahy, Hon. Patrick J., a U.S. Senator from Vermont.............. 23
Baucus, Hon. Max, a U.S. Senator from Montana.................... 5
Feingold, Hon. Russell D., a U.S. Senator from Wisconsin......... 2
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WITNESSES
(Panel I)
Baker, James R., Administrator, Grain Inspection, Packers and
Stockyards Administration, U.S. Department of Agriculture,
accompanied by Mr. David Shipman, Deputy Administrator, Federal
Grain Inspection Program....................................... 6
Dunn, Michael, Under Secretary for Marketing and Regulatory
Programs, U.S. Department of Agriculture....................... 10
(Panel II)
Foster, Kenneth, Dr., Purdue University, West Lafayette, Indiana. 31
Paarlberg, Philip, Dr., Purdue University, West Lafayette,
Indiana........................................................ 29
(Panel III)
Packers and Stockyards Administration
Crabtree, John, Center for Rural Affairs, Walthill, Nebraska..... 49
McNutt, John, President, National Pork Producers Council, Iowa
City, Iowa..................................................... 39
Roenigk, William P., Senior Vice President, National Chicken
Council, Washington, DC........................................ 43
Sharma, Rita, National Cattlemen's Beef Association,
Williamsport, Indiana.......................................... 41
Stumo, Michael, Organization for Competitive Markets Winsted,
Connecticut.................................................... 46
Warfield, Ron, President, Illinois Farm Bureau, Gibson City,
Illinois....................................................... 44
(Panel IV)
Grain Inspection Program
Clark, Mike, National Corn Growers Association, representing the
concerns of the American Soybean Association and the National
Association of Wheat Growers Homer, Illinois................... 65
Farrish, Bert, President, Columbia Grain, representing the North
American Export Grain Association Portland, Oregon............. 61
Smigelski, Robert, The Anderson, Incorporated, representing the
National Grain and Feed Association, Maumee, Ohio.............. 63
Wiese, Dennis, National Farmers Union, Flandraeu, South Dakota... 67
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APPENDIX
Prepared Statements:
Lugar, Hon. Richard G........................................ 78
Fitzgerald, Hon. Peter G..................................... 92
Hagel, Hon. Chuck............................................ 79
Gilchrest, Hon. Wayne T...................................... 76
Baker, James R............................................... 80
Clark, Mike.................................................. 154
Crabtree, John............................................... 137
Farrish, Hubert O............................................ 141
Foster, Ken.................................................. 99
McNutt, John................................................. 104
Paarlberg, Philip............................................ 94
Roenigk, William P........................................... 116
Sharma, Rita................................................. 111
Smigelski, Robert............................................ 151
Stumo, Michael............................................... 127
Warfield, Ron................................................ 119
Wiese, Dennis................................................ 159
Documents submitted for the record:
The National Turkey Federation............................... 166
Structural Change and Market Performance in Agriculture:
Critical Issues and Concerns about Concentration in the
Pork Industry, submitted by Philip Paarlberg, Michael
Boehje, Kenneth Foster, Otto Doering, Wallace Tyner........ 172
Nation Grain and Feed Association, statement on Grain
Inspection, Packers and Stockyards Administration.......... 184
PACKERS AND STOCKYARDS ADMINISTRATION
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TUESDAY, FEBRUARY 1, 2000
U.S. Senate,
Committee on Agriculture, Nutrition, and Forestry,
Washington, DC.
The Committee met, pursuant to notice, at 9:00 a.m., in
room 328A, Russell Senate Office Building, Hon. Richard Lugar,
(Chairman of the Committee), presiding.
Present or submitting a statement: Senators Lugar, Roberts,
Fitzgerald, Grassley, Craig, Harkin, Leahy, Conrad, Baucus,
Feingold, and Hagel.
STATEMENT OF HON. RICHARD G. LUGAR, A U.S. SENATOR FROM
INDIANA, CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND
FORESTRY
The Chairman. This hearing of the Senate Agriculture
Committee is called to order.
Let me point out that agriculture in the United States is
experiencing a significant transformation. This evolution can
be attributed to rapidly improving technologies, developments
in biotechnology, changes in worldwide consumption, and
concentration in production agriculture and agribusiness. These
developments create opportunities but they also raise questions
about concentration and antitrust. The developments also raise
new challenges in the regulation of unfair and deceptive
business practices and identifying the best policies to address
these issues.
This Committee has examined the concentration issues in
previous hearings. The competitive implications of
consolidation and concentration in production agriculture and
agribusiness are clearly numerous. Situations of monopoly or
monopsony can result from the reduction in the number of market
participants or an increase in the market share of the
participants.
Unique among Federal statutes that are within the purview
of the Department of Agriculture are the Packers and Stockyards
Act, which provides the Secretary with the legal authority to
take action against activities by packers in interstate
commerce that have the effect of restraining commerce or
creating a monopoly in commerce. The USDA has restructured the
Grain Inspection, Packers and Stockyards Administration to
strengthen enforcement of anti-competitive practices and to
improve the Agency's ability to enforce the provisions of the
Packers and Stockyards Act.
Today the Committee will examine the present structure and
functions of the Grain Inspection, Packers and Stockyards
Administration. The marriage of two previously independent
agencies occurred in 1994, intended to secure a production and
competitive global marketplace for U.S. agricultural products.
I will welcome in a moment Mr. Michael Dunn, Under
Secretary for Marketing and Regulatory Programs; Mr. James
Baker, Administrator of the Grain Inspection, Packers and
Stockyards Administration [GIPSA]. I have asked Mr. Baker to
provide testimony addressing the challenges facing GIPSA and
Under Secretary Dunn may offer additional comments to our
hearing.
I thank Mr. Baker in advance for coming to my home State of
Indiana in order to receive input from Hoosier farmers
regarding concentration and consolidation. It is a major issue
in our state. I also welcome Mr. David Shipman, Deputy
Administrator of the Federal Grain Inspection Program, who is
present to respond to questions the Committee may have
regarding this program.
I am pleased that Dr. Philip Paarlberg and Dr. Kenneth
Foster from Purdue University are with us today. They will
review findings in their recent paper entitled ``Structural
Change and Market Performance in Agriculture: Critical Issues
and Concerns about Concentration in the Pork Industry.''
Today's third panel contains producer representatives who
will provide commentary on the functions performed by the
Packers and Stockyards Administration. And finally, the last
panel consists of members from producer groups and the business
community who will discuss the functions assigned to the
Federal Grain Inspection Program.
Senator Hagel's statement will be made a part of the
record.
It is my privilege, first of all, to welcome my
distinguished colleague Senator Feingold of Wisconsin, who will
offer testimony and then be on his way, unless he wishes to
participate in the hearing further. Russ, it is good to have
you this morning.
[The prepared statement of Senator Hagel can be found in
the appendix on page 79.]
[The prepared statement of Senator Lugar can be found in
the appendix on page 78.]
STATEMENT OF HON. RUSSELL FEINGOLD, A U.S. SENATOR FROM
WISCONSIN
Senator Feingold. Thank you very much, Mr. Chairman, for
having the hearing and for letting me make some comments. As a
former member of this Committee, it is a great opportunity to
discuss something of tremendous importance to people in my
state.
I am pleased to be here this morning to briefly discuss the
effects of the increased consolidation and concentration
rolling through America's agricultural industry, which is
causing disruption for many farmers and actual ruin for others.
I am particularly concerned about these changes to the
structure of the U.S. agriculture industry because of the
effect it is having on family farms.
Over the past 70-years, Mr. Chairman, we have certainly
seen a transformation of America's agricultural sector. As U.S.
farms have consolidated, their numbers have declined from there
being nearly 7 million farms in the 1930s to about 2.2 million
in 1998. Many farmers believe through bitter experience that
consolidation in the agriculture industry has put the economic
opportunity that many others are experiencing in this country
out of reach for some of America's small family farmers.
I want to be clear, because this is far too complex a
subject to oversimplify, that I realize that consolidation of
our agriculture industry is not the root of all of our farmers'
problems. I am not blaming low commodity prices solely on the
mergers in corporate America on the increased consolidation of
our nation's farms. But surely these trends are a big part of
the problem for a small farm.
As I travel to each of Wisconsin's 72 counties each year, I
hear again and again that increased market concentration means
less negotiating power for the men and women who actually
produce our dairy products, our grain and our livestock. And
sometimes, as I am sure you have experienced, Mr. Chairman and
my colleague from Montana, I am sure you have heard these
stories from proud, hard-working farmers who wonder if or fear
that the loss of power that they are experiencing will mean
that they will be the last generation in their family who will
be able to farm.
Farmers understand all too well that increased
concentration in the agriculture industry has led to inadequate
market access for small and medium-sized farmers and has also
resulted in price discrimination against small, independent
producers.
I am pleased that you, Mr. Chairman, have agreed to hold
this hearing on the subject of the Grain Inspection, Packers
and Stockyards Administration. After all, the Packers and
Stockyards Act is one of the strongest antitrust laws ever
written in this country and certainly one of the most important
to our nation's agricultural industry. Its goal is to protect
livestock producers and meat consumers from the potential use
by packers of a monopoly power to unduly lower the prices paid
to producers and to raise prices for consumers.
As many of you know, this legislation was originally passed
to break up the so-called Beef Trust, a group of five packing
companies that controlled a large percentage of the beef and
hog slaughter throughout the country. Ironically, the
concentration levels in the beef packing industry at the time
that the Packers and Stockyards Act was enacted are roughly the
same as they are today. A 1916 Federal Trade Commission report
found that the Big Five packers controlled 82.2-percent of the
cattle slaughter. Today the top five beef packers control as
much as 83-percent of the beef slaughter, and the same trend
has occurred in the pork industry. According to the 1916
report, the top five packing firms controlled 61-percent of the
hog slaughter; today the top four packers control 57-percent
and the top seven firms control 75-percent of the hog
slaughter.
This trend toward market concentration in these industries
is alarming and it must be addressed with the same vigor that
our predecessors in Congress brought to their effort to pass
the Packers and Stockyards Act nearly a century ago.
I further urge GIPSA to fully enforce its authority through
Section 202 and other means to protect our farmers against
price discrimination in the grain and livestock markets. Unless
we protect our independent producers against price
discrimination, we will be left with only a few giant firms
that get to call the shots and economic devastation in many
rural communities throughout the United States.
Independent producers, whether they are hog producers,
cattlemen, dairy producers or soybean farmers, have a dwindling
number of markets available to them and face significant price
discrimination. Last year alone the GAO reported that during an
18-month period, slaughter capacity in the pork industry
decreased by 9-percent. In my State of Wisconsin, many hog
farmers have to ship their animals as far as Iowa or Illinois.
Even in these states there are fewer and fewer slaughtering
plants each year.
All indicators in the pork industry point to producers
receiving an increasingly smaller share of the retail dollar.
Last year, for example, when producer prices went down over 60-
percent, USDA reported that consumers were only paying 3-
percent less. While that money is going somewhere, it is
certainly not going to the farmers.
Of particular concern in Wisconsin, Mr. Chairman, are the
mergers of large dairy coops. In the last few years we have
seen the mergers of Mid-America Dairymen, the Associated Milk
Producers, Milk Marketing and the Western Dairymen Cooperative.
These coops were the first, second, third and twelfth largest
in the country and they all joined together to form the Dairy
Farmers of America, now the largest coop in the country, and it
handles over 26-percent of the country's milk. Land o'Lakes
recently acquired Atlantic Dairy, then merged with Dairyman's
Creamer. Last week Land o'Lakes bought Madison Dairy Produce,
Inc., which turns about 15-percent of the Nation's butter.
However, the merger of these coops and their exemption from
antitrust laws under the Capper-olstead Act of 1922 may only be
a small part of the problem because we also have a tremendous
number of mergers in the retail grocery industry. Over the past
2-years, Dean Foods has announced its acquisition of more than
11 smaller retailers. Based on USDA numbers, it seems that the
bargaining power of large grocery chains represents a
significant threat to our dairy farmers' profit margins.
Retailers made 70 cents per gallon in 1992 when the store price
was $2.78. So the grocery store was raking in 25.5-percent of
the earnings in total per hundredweight.
These figures, Mr. Chairman, invite the question: are
retail prices affected by these mergers? How else can one
explain that 10-years ago, farmers were getting $1 more per
hundredweight for their milk than they are now but retail
prices were actually $1 less than today's prices.
Again I am not here to blame the low commodity prices
solely on the coops and the retailers and mergers in corporate
America. However, we in Congress must take a hard look at the
antitrust laws to make sure that they effectively deal with the
problems of concentration that we are now seeing.
Until the Senate passes comprehensive agricultural
antitrust reform legislation, I will continue to push for the
Agribusiness Merger Moratorium Act of 1999, which places strict
limits on market concentration in the agricultural industry by
preventing large agribusiness mergers.
This country, Mr. Chairman, is in grave danger of losing
its independent producers--hog producers, cattlemen, dairy
producers, soybean farmers and others. We are in danger of
losing a rich tradition, of losing the capacity to honor and
reward generations of hard work and the love of the land.
Our nation's farmers are a key pillar of the economy, both
rural and urban. In Wisconsin, the dairy industry alone
generates around $10 billion for the state's economy.
I commend USDA for taking the initiative on small farms. I
am also pleased that the Department of Justice has brought on
board a senior enforcement attorney whose staff will deal
solely with agricultural antitrust issues. However, our work is
far from done because the level of market concentration in some
key sectors is the same, as I said, as it was when Congress
passed the Packers and Stockyards Act way back in 1921. We must
enable all producers to have a fair shot in the marketplace and
we must be mindful of the human consequences for our country if
we fail to do that and do it soon.
I am grateful for all the time and for the opportunity to
testify, Mr. Chairman.
The Chairman. Well, we are grateful for your testimony,
your experience in this issue.
Senator Baucus, do you have a question for our witness?
STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM MONTANA
Senator Baucus. I would just like to commend Senator
Feingold on his very thoughtful statement. He is finding in
Wisconsin, as we all are in all parts of the country, that
producers are in deep trouble. It is a serious problem, as you
know, Mr. Chairman, and you outlined the key points, Senator,
namely the concentration in the packing industry and the cattle
and dairy coops, the mergers of retailers.
And it is true that,that is not the sole cause of the
problems. There is no doubt about that. But it just kind of
feels like, smells like, seems like it is still a part of the
problem, and it is a key part of the problem. It is one that
must be addressed.
And clearly we, as Americans, want to continue to have the
most prosperous agriculture industry in the world but we want
our producers to be part of it. And it is very important that
we look at legislation like that suggested by Senator Feingold,
Mr. Chairman, as well as other legislation that I am sure is
going to be offered because we do not want unintended
consequences, either. We have to be smart about this. But being
smart, to me, means recognizing there is a serious problem and
addressing it, and also addressing it in a way that does not
throw the baby out with the bathwater or upset the applecart,
not to mix metaphors here, but to do it in a smart way.
But it is going to take time. It is going to take a lot of
work for us to try to figure out what legislation seems to make
the most sense here and has the greatest positive effect for
the greatest number of Americans.
But I very much compliment you, Senator, on your statement.
You have touched on the problem, hit the nail on the head here
and by the tone of your statement, you clearly want to do this
fairly and in a solid, responsible way, but it has to be done.
Thank you very much.
Senator Feingold. Thank you, Senator Baucus.
Thank you, Mr. Chairman.
The Chairman. Thank you very much for your testimony. I
would just follow through on the distinguished senator from
Montana's comments and I am certain he has read the back-up for
this hearing, as well as the testimony that we are about to
hear, and these issues are not necessarily of dazzling
complexity but still the thought of doing something that does
not have unintended consequences is a good point. There will be
legislative suggestions today in some of the testimony and we
welcome those, but it is an invitation for all members to be
very observant of all of the by-play. There are counterthoughts
for almost each of the suggestions we are going to have.
Unfortunately, Congressman Gilchrest, who had hoped to come
to testify, will not be able to do so.
[The prepared statement of Congressman Gilchrest can be
found in the appendix on page 76.]
Therefore we will move on to our first panel, which
includes Mr. Michael Dunn, the Under Secretary for Marketing
and Regulatory Programs at the United States Department of
Agriculture; and Mr. James R. Baker, Administrator of the Grain
Inspection, Packers and Stockyards Administration of the United
States Department of Agriculture. They are accompanied by Mr.
David Shipman, the Deputy Administrator of the Federal Grain
Inspection Program.
Gentlemen, we are very pleased to have you here this
morning. We appreciate the time you have given already in
preparation of testimony, as well as your experience in the
issues before us.
I would like to call first upon Mr. Baker for his
testimony, who will be followed then by comments that Mr. Dunn
may have, and Mr. Shipman is available for questions that may
arise or other expert points that need to be made.
Mr. Baker, would you please proceed?
STATEMENT OF JAMES R. BAKER, ADMINISTRATOR, GRAIN INSPECTION,
PACKERS AND STOCKYARDS ADMINISTRATION, U.S. DEPARTMENT OF
AGRICULTURE, ACCOMPANIED BY DAVID SHIPMAN, DEPUTY
ADMINISTRATOR, FEDERAL GRAIN INSPECTION PROGRAM
Mr. Baker. Thank you, Mr. Chairman and members of the
Committee. I am proud to come before you today and talk about
the Grain Inspection, Packers and Stockyards programs. A
complete written statement will be submitted for the record.
GIPSA was established under the authority of the Department
of Agriculture Reorganization Act of 1994. We are probably the
youngest agency in the Department of Agriculture. The agency's
services and programs facilitate the marketing of livestock,
poultry, meat, cereals, oilseeds and related agricultural
products for the overall benefit of consumers of American
agriculture. The agency carries on a tradition of service,
integrity and professionalism and fairness that characterizes
its component programs.
GIPSA's Grain Inspection Program plays a critically
important role in facilitating the marketing of U.S. grain and
related commodities. We provide the U.S. grain market with
Federal quality standards and a uniform system to apply these
standards. We partner with state, private agencies and
laboratories to bring accurate and affordable services to
American agriculture from the producer to the processor and the
exporters.
By serving as an impartial third party, GIPSA assures that
the standards are applied and weights are recorded in a fair
and accurate manner. We bring discipline and integrity to the
marketplace. Our presence, which directs through the use of the
standards methods for the commercial industry, improves the
marketing of U.S. grain and oilseeds from our nation's farms to
the domestic and foreign buyers.
We carry out the important program under the authority of
the Grain Standards Act for most grains and oilseeds and the
Agricultural Marketing Act for rices and processed grain
products. Under separate correspondence, the department will be
submitting for consideration by the Congress a draft bill to
amend the United States Grain Standards Act to reauthorize
Grain Inspection, Packers and Stockyards. The current
authorization expires at the end of this fiscal year.
Today's grain markets handle a greater diversity of grain
quality than ever before. We must be efficient for American
agriculture to remain competitive in the global market. The
service we provide through the grain program helps make this
happen. We are addressing the grain quality concerns of our
international customers. We are establishing a biotech
reference lab to improve the accuracy and consistency of the
biotech detection methods. We are improving the efficiency and
the quality of inspection in our weighing services through
automation. Finally, we are working with our trading partners
around the world as they develop their own grain standards and
grading systems.
Our Packers and Stockyards Program provides financial
protection, promotes a fair business practices and competitive
marketing environment for livestock, meat and poultry. Our
programs guard against deceptive and fraudulent practices
affecting the marketing of meat animals. To carry out this
task, the Packers and Stockyards Program administers the P&S
Act of 1921 and also carries out the Secretary's
responsibilities under the Food Security Act of 1985, which
permits states to establish central filing systems.
Packers and Stockyards personnel work continuously to
respond to the adapting conditions and changes in the dynamic
and complex industry. Our reorganization of P&S programs will
allow us to better address the structural changes in the
industry and the concentration issues with increased expertise.
This will allow us to reduce our Washington staff from 28-
percent of our total personnel down to 18-percent and put those
resources in the field.
Today we have 83 different investigations going on in our
P&S program, plus all of the other requirements we perform.
Since reorganization, we have shifted our focus to procurement,
increasing the frequency and sophistication of our
investigation and surveillance efforts to ensure that
slaughtering packers are actively competing for slaughter
requirements and not engaged in illegal trade practices.
In addition, the Agency is conducting a semi-annual
investigation of hog slaughtering firms that use electronic
evaluation devices as part of their purchasing program to
ensure that these devices are used in a fair and accurate
manner in determining the value for producers.
Over the past 5-years since I have been administrator, we
have conducted over 9,300 investigations. We have found about a
third of those investigations were violations of the P&S Act.
The largest number of these were resolved by our personnel and
formal action was only taken on approximately 200 cases,
resolving these decisions and orders against 290 individuals
and firms for violating the P&S Act, resulting in civil
penalties and cease and desist provisions involving unfair
trade practices and anti-competitive activities. Small and
medium-sized producers have been the big beneficiary of these
actions.
Structural changes in the livestock industry have
challenged the job of the Packers and Stockyards. High
concentration, forward sales agreements, production contracts,
vertical integration have raised major concerns about
competition and trade practices in the livestock and
procurement by meat packers and poultry processors.
Concentration in the meat packing industry is relatively
high and has been growing. The four leading packers in 1978
increased their share to 81-percent of the steer and heifer
slaughter. The hog slaughter in 1998 increased to 56-percent.
In addition, both slaughter and production of livestock have
become more concentrated in the geographical regions.
A few of the present initiatives that we are involved in--
this past year we developed a rapid response team. That team
has responded to South Dakota and Missouri in July and
September, to respond to producers' concerns about ensuring
adherence to the P&S Act. A new price discrimination law was
passed in these states. Packers reacted in a manner advised by
their counsels. We were there; we interviewed producers. We
still have some inadequacies we feel that need to be addressed.
Also, a small rapid response team was on the scene last week
handling a poultry trust case in Nebraska and Iowa.
We also have an initiative to develop a hog contract
library through monthly contract use reporting. This library
will be housed in the Des Moines, Iowa office. It is called for
by the Mandatory Livestock Reporting Act of 1999. USDA is
establishing this library of contracts by hog packers to
producers for the purchase of hogs. The department will collect
and summarize information on the number of hogs committed to
the contract, and release this information in a public manner.
USDA filed a formal complaint against Excel, alleging that
the firm violated the Packers and Stockyards Act by failing to
disclose to producers a change in the calculation of the lean
percent for hogs purchased on a carcass merit basis. As a
result of this change in formula, Excel paid producers a lower
price for hogs. The hearing is scheduled for February 29.
USDA also filed a formal complaint against Farmland
National Beef Packing, alleging that the company violated the
P&S Act by failing to make bids or purchase cattle from a small
feedyard in Central Kansas after the feedyard had published an
article critical of marketing alliance procurement procedures
used by Farmland. Farmland, we felt, is subject to unreasonable
prejudice, disadvantage and retaliation against this feedyard.
Now I would like to discuss two legislative initiatives
that would enhance GIPSA's ability to protect producers and
growers. The first legislative initiative would be to amend the
Packers and Stockyards Act to establish a statutory dealer
trust for the benefit of livestock producers. USDA has drafted
and submitted to Congress a bill for review.
As you know, Mr. Chairman, this provision was included in
the 1996 farm bill by your initiative but was blocked in the
House during the conference committee.
Dealer failures represent a significant amount of
unrecovered losses in the livestock marketing chain. For fiscal
years 1994 through 1998, dealer failures averaged fourteen per
year in this country. Amounts owed to livestock sellers
averaged a little over $3 million per year. Of this amount,
only 25-percent was recovered. During the same period under the
packer trust, nine packer failures resulted in a pay-out of
close to $2 million from the packer trust program and
approximately a 95-percent recovery rate. A dealer trust for
cash sellers of livestock would minimize the losses suffered by
livestock producers because of dealer failure to pay.
Our second legislative initiative would be to amend the
Packers and Stockyards Act to grant USDA enforcement authority
over contract poultry production. This proposed legislation was
introduced last year in the House by Representatives Kaptur and
Emerson.
Under Section 202 of the Act, packers and live poultry
dealers are prohibited from various unfair, deceptive and
unjustly discriminatory practices. A live poultry dealer is
defined as a person engaged in the business of obtaining live
poultry by purchase or under a growing agreement for the
purpose of slaughter or for sale to others for slaughter.
Enforcement of Section 202 against a packer is accomplished
through an administrative proceeding before an administrative
law judge. Enforcement against a live poultry dealer can only
be accomplished by referral to the U.S. Attorney's Office and
filing in a Federal court.
Section 203 of the Act, which deals with administrative
enforcement, specifically refers to packers and not live
poultry dealers. We believe this regulation of the activities
of live poultry dealers would be more efficient if the Act was
amended to provide for administrative authority. It is
difficult for us to do the task and have the responsibility
without the authority.
We look at approximately three-hundred poultry complaints a
year.
Thank you, Mr. Chairman, for allowing me to provide this
oral testimony.
[The prepared statement of Mr. Baker can be found in the
appendix on page 80.]
The Chairman. Well, thank you very much, Mr. Baker, and
thank you for your specific legislative suggestions, which are
important and which will certainly be a part of this hearing.
Mr. Dunn, it is good to have you back at the Committee.
Would you please proceed?
STATEMENT OF MICHAEL DUNN, UNDER SECRETARY FOR MARKETING AND
REGULATORY PROGRAMS, U.S. DEPARTMENT OF AGRICULTURE
Mr. Dunn. Thank you, Mr. Chairman. It is good to be here
and I appreciate the opportunity to briefly address you on the
concerns.
I think what Senator Feingold outlined, the dramatic
changes that are taking place in the livestock sector, actually
all of agriculture, the marketing chain, really does put a
tremendous burden on producers, the administration and members
of Congress. I know Senator Grassley and I were in Iowa
listening to concerns of producers on concentration issues.
As Mr. Baker outlined, Packers and Stockyards is designed
to look at unfair trade practices and in some ways a bit of the
concentration area, but we share--the majority of that is in
the Department of Justice. Mr. Joel Klein, who heads up that
division, the Antitrust Division of Justice, has recently named
Mr. Doug Ross as his new assistant for the agricultural sector.
We look forward to working closely with Justice in this
particular area.
Let me outline just two more areas that the department is
working in this arena. Mr. Chairman, Congress passed last year
the Livestock Mandatory Reporting Act and has asked us to
implement that. Under the Agriculture Marketing Service, we
have put together a multi-agency task force to implement that.
We are well on our way to doing that. We hope to have by this
summer operational those price reporting regulations out and
operational that Congress has mandated.
A second area that the Ag Marketing Service is working on,
again working across the board in the department, is putting
together a group to look at contracting because we hear over
and over again concerns by producers about contracts that they
have gotten into and what has happened in those contracts. We
are really calling this a right-to-know initiative and we think
this is extremely important.
Mr. Chairman, we appreciate this Committee taking this
overall look at the tools that the department has and the need
for changes in both legislation and regulation. We look forward
to working with you and the Committee. Thank you.
The Chairman. Thank you very much.
We have been joined by the distinguished senator from
Idaho, Senator Craig.
Let me begin the questioning and then I will ask my
colleagues in turn to join me in that.
Mr. Baker, you have made suggestions for legislation. Tell
me, is this in draft form and what sort of consultation have
you had with staff of either a Senate committee or House
committee with regard to reauthorization or the extended
authorities that you seek?
Mr. Baker. The reauthorization will be coming forward to
you from the department. In other words, it has cleared the
department and is ready to come forward to you.
The two bills are in draft form and they have been
submitted. Livestock dealer trust has been submitted already
this past year to you. Also, the administrative authority over
poultry companies has been submitted; it has been introduced in
the House by Congresswoman Kaptur. So those two bills have
already been submitted. The reauthorization will be forwarded
to you real shortly.
The Chairman. Now, the Congress last year, as you have
cited, the Mandatory Price Reporting. How are the guidelines
for that or the administration of that proceeding at this
point? What can we anticipate as we have oversight of how that
is working out?
Mr. Baker. Let me talk just a minute about our part of it
because I have tried my best to keep our folks out of it. We
have the part about the contract library for hogs and that is
clearing the department as we speak. We want to have a library
of all contracts offered by packers to producers. They will be
on file in Des Moines and it will be open to the public. We
will have confidential restraints that we will hold
confidential in it but we will release those types of contracts
to the public so they can keep better informed, according to
this law. It was mandated under the Mandatory Price Reporting
Law. That is part of it.
We will also secure the numbers of hogs that are under
contract that are expected to be marketed in the next 6-months
and within the next year and we will release those as we get
them to the public. The purpose of this is to keep the public
better informed. I would like to see it and we have an
initiative to try to get it extended into poultry and also into
cattle. If you are going to do contracting, you ought to have
to file it with somebody. There ought to be some checks and
balances about the contracts. I will let Mr. Dunn----
The Chairman. Mr. Dunn, can you give a broader overview of
the rest of the department, how it is proceeding?
Mr. Dunn. Yes, Mr. Chairman. As I said earlier, we have
convened a group down at the department to address the various
provisions and we have broken it out to nine different
sections, in essence, and I will go through quickly for you
where we are on those nine sections.
The Chairman. Very good.
Mr. Dunn. On the Livestock Marketing Report, which is the
major sections, 211 to 256, those are the ones that $4.7
million were appropriated last year from the appropriators most
of the provisions and those are the ones that we will have out
and operational by this summer.
Sections 257, which is the retail purchase price reporting,
the Economic Research Service is working on that. They
unfortunately did not get appropriations and are looking for
appropriations to be able to implement that section.
Section 913(b) is the Export Marketing Report. We are
working with Foreign Agricultural Service on that and they were
appropriated $50,000 to do that this last appropriation period,
so they are working on getting those out. We expect to have
final OMB clearance by mid-April on those.
Section 922, which is the export certification for meat and
food products, food safety and inspection service [FSIS]. They
requested $2 million for appropriations in fiscal 2000 for
that. They did not get that so unfortunately, we do not have
the appropriations to go forward on that.
Section 923, beef and cattle import data, APHIS is working
with FSIS on that. Although we were not budgeted any money, we
think that we can begin to put that together a program with the
current budgets.
Section 932, which is the improvement of the Hogs and Pigs
Inventory Report, National Agricultural Statistics Service
[NASS] is working on that. They requested $500,000 for
appropriation, did not get that, so we will probably be seeking
appropriations on that.
Section 932(a), which is barrow and gilt slaughter, FSIS
again requested a little over a million dollars for fiscal 2000
and was not appropriated that money. They are ready and willing
to get started on that as soon as appropriations are made.
And Section 933--this is number eight of the nine--average
trim loss correlation studies and reports, the Agricultural
Research Service and Animal and Plant Health Inspection Service
[APHIS] are coordinating on that study and will get started on
that.
Then finally, Section 934, Swine Market Contract Library,
the Grain Inspection, Packers and Stockyards is working on that
and Mr. Baker answered where he is on that earlier.
The Chairman. Well, I appreciate your parceling all this
into these parts but obviously, as you have cited, in at least
four instances or maybe five, appropriations did not happen or
they are deficient and as a result, the entire Act situation is
being frustrated, I would guess. We had the best of intentions
here in Congress but, on the other hand, somehow communication
with the appropriators, with the administration, just has not
made it.
I do not want to try to make a broad editorial comment
because I know this has already been a subject of some distress
at the department, as well as with those on this Committee,
including myself, who strongly favor this legislation and
turned heaven and earth to get a consensus to do it and I am
just wondering how much of it is going to get done under what
you are describing.
Mr. Dunn. Mr. Chairman, I thank you and all members of this
Committee that worked very hard assisting the administration on
appropriations in this effort.
This whole aspect of transparency in the price reporting
seems to be one of fundamental need out in the marketplace.
The Chairman. Yes.
Mr. Dunn. The producers' need more price information. We
have zeroed in on the Livestock Marketing Report, what used to
be voluntary market news, making that mandatory so that
producers have the same type of information that packers have.
That, in our consultation with livestock producers, is what
they said was their number one priority.
We did get the $4.7 million for that and we are going
forward with that and we will have that operational this
summer. I believe that will take off a lot of the pressure that
we are getting for information out there. That seems to be the
section that producers have told us that they wanted to get
out.
The Chairman. Well, let me just say I appreciate the
specifics because we are going to ask staff to work with you
and with the department and see if we cannot find where the
money can be found. This has proceeded on for weeks with
reports of lack of appropriation or lack of activity and I
suspect my colleagues on this Committee join me in saying that
one of the values of these oversight hearings is simply to find
out where the chinks in the armor are. I think we have
identified some of them and you have pointed out the priorities
certainly of the Act and that clearly is true, but the
checkerboard pattern of activity is disturbing--to you, as well
as to us. So we really need to zero in on how we can get on
with it and I welcome that opportunity.
Mr. Dunn. What we will do, Mr. Chairman, is proceed on with
drafting of regulations, even though we do not have the
resources to do the implementation.
The Chairman. That would be a good idea. Let's at least get
the department's work in terms of rulemaking, the regulations,
done, quite apart from then the application in the field which,
of course, is increasingly urgent.
When do you suppose that in the case of the $4.7 million,
that area of your activity, there will be some reports that
will be available to producers? The second quarter of this year
or what sort of timetable do you see happening?
Mr. Dunn. On an optimistic schedule, second quarter of this
year we should be able to begin getting some of those reports
out, but I would hope that we would have it fully functional by
this summer.
The Chairman. I see. Let me just ask one final question.
Anticipating the testimony we are about to hear from
Professor Paarlberg and Foster, they have written a paper that
I think is remarkable, trying to take a look at the
concentration that we are all talking about today, but
suggesting a remedy; that is a much larger degree of
cooperation, at least in the hog industry, among producers.
They make a suggestion in their paper that if we had enough
cooperation and a large enough cooperative of 300,000 to
500,000 head of livestock could be aggregated to affect one or
2 days of the market, that this might begin to bring in a
different sort of balance in terms of price-finding in the
situation.
Now that has been hard to come by in the pork industry,
with many independent producers and many not really wishing to
get all that cooperative and, as a matter of fact, wanting to
be very independent.
I come from a tradition--there is no way you would know
this but my dad and my grandfather were livestock commission
people. We were a commission company for 40-years at the
stockyards. It was our bread and butter and that stockyard is
just gone. It is a sort of part of the restructuring and the
evolution we are talking about.
So it is different but the dilemma is also different in
both degree, as well as the intensity, and that is what has
brought a great deal of interest to this issue.
I just wonder if you have any comment generally about the
cooperative movement, at least the extent that the professors
have suggested as one remedy to the bargaining situation. Do
either one of you have a thought about that?
Mr. Baker. I haven't read the paper, so I cannot comment on
it.
The Chairman. Very well.
Mr. Dunn. Certainly, Mr. Chairman, this is an area that the
department has always advocated--Under Secretary Jill Long-
Thompson has worked very hard in this area in developing from
your home state the cooperative group and has worked with the
Small Farms Commission at the department to develop a concept
of cooperative marketing.
Again what we have found is a lot of the producers are
very, very good at production but they seem to begin to need
further information when it comes to the marketing side of it.
That is again why we have put together a task force in the
department to look at contracting and, as I termed it earlier,
a right-to-know initiative so that producers will have the
department or somebody else to fall back on to look at how you
would go about contracting, how they can maximize their return.
And in many cases putting together some type of alliances or
cooperative operation seems to make a lot of sense, to be able
to maximize the return to producers.
The Chairman. The distinguished ranking member has arrived.
While you are sorting through your papers, let me call upon
Senator Baucus.
Senator Harkin. That sounds like a good idea.
The Chairman. Then you will be all ready, up to top speed.
Senator Baucus?
Senator Baucus. Thank you, Mr. Chairman.
Mr. Secretary, the Paarlberg piece--I just glanced at it--
is quite interesting and one cannot leave it without feeling
quite strongly that those authors at least think that there is
a significant problem and that concentration probably is
resulting in downward pressure on prices to producers. I think
this is a hog study but my guess is that it would apply to
other livestock industries. There is not much doubt in their
minds. I do not want to put words in their mouths but I got the
feeling that they think it is significant and it should be
addressed, the problem.
They do say there are two ways to address it, and that is
basic antitrust breaking up and second is, as the Chairman
suggested, a lot more marketing power in the hands of
producers. And we all know both options have unique
difficulties.
I am just trying to get a sense of how much the department
thinks it is the problem and how aggressively the department is
really working on this. Can you give me a feel about first, the
degree to which you think this concentration is a significant
enough problem to warrant significant action? That is,
producers, as a consequence of concentration, are paid lower
prices for their product? Again it is not the sole reason but
do you think it is a major reason, sufficient enough to warrant
doing something significant about it?
My concern, Mr. Secretary, is that this issue has been
around a while and here it is, several years since it has been
around. I know a lot of producers are getting kind of
frustrated. It's the old thing, a lot of talk. And I must be
candid with you in saying that so far, I hear a lot of talk
from all the way around, both Congress, frankly, and the
administration, but I do not see a lot of action. Do you think
the problem is great enough to warrant action, significant
action?
Mr. Dunn. Senator, any time we get down to $8 hogs, we have
a significant problem in rural America. And yes, we need to
take action.
Now when Senator Feingold was up here, I think he outlined
the problem that you have in determining what caused that low
price. Is concentration the major cause or is it a consequence?
The whole aspect of causality is something that we have got to
have empirical data on.
Senator Baucus. But we have had 3-years on this. You have
been looking at this question for 3-years. What is your gut
guess?
Mr. Dunn. My gut guess?
Senator Baucus. Your gut guess.
Mr. Dunn. As Mike Dunn?
Senator Baucus. Mike Dunn.
Mr. Dunn. I think it contributes to it.
Senator Baucus. But is it a significant contribution,
significant enough to warrant significant action?
Mr. Dunn. I think it is significant enough that the
Congress and the administration need to work together to find
out how can we address this problem. So yes, it is significant.
Senator Baucus. Now, what about this study I just learned
of? It is by the Western Organization of Resource Councils.
They submitted a petition asking GIPSA to participate in a
rulemaking. The comment period has run. As you know, the
comments were fifteen to one in favor of a petition for
rulemaking to the Secretary, asking that USDA use its authority
under GIPSA to restrict the way packers use captive supplies.
You know this is also peer-reviewed and my understanding is the
peer review agreed with the conclusion.
Now I hear that attorneys and economists at USDA are not
convinced yet that the cause has been established. To be quite
candid, it sounds to me like a lot of timid, tepid, fearful
people are afraid they might make a decision, might be held
accountable.
What standard of causality is the department asking for? Is
it the criminal standard of beyond a reasonable doubt? Is it
the civil standard of the preponderance of evidence? And I must
ask a deeper question: why do you even have to prove cause? If
it is your judgment, as you just said, that it is a factor and
it is a significant factor, why not just proceed and perhaps
proceed on a pilot basis project if you are a little nervous
about this. See what works; see what does not work.
We have to do something here. When I saw this hearing
scheduled I almost decided not to come. I thought it would be a
waste of time because there has been so much talk on this
issue. But I have a responsibility to keep on plugging away,
keep trying. We have two choices in life: try or do nothing,
and I am still going to keep trying to do something about this
responsibly.
I did mean what I said about unintended consequences, but
we have to move, Mr. Secretary. We have to move and I am just
asking you what we are going to do to move.
Mr. Dunn. Senator, let me address the Western Organization
of Research Council's petition. What they have petitioned us to
do is change the way people can do marketing. It is a
fundamental change, saying that certain people would not have
marketing rights that they had before.
So this is really a major step and something that we felt
we needed to get a lot of comments on, we had to have good,
strong and careful data before we could go forward with that.
We published that proposed regulation, that request for
proposed regulation, and got comments on it. We had a peer
review on a study and the Secretary pledged to the Western
Organization of Research Council that he would not make a
decision on that until he had that peer review and then he had
an opportunity to sit down with them and go over that peer
review.
We have contacted them even this last week to try to set up
that meeting, to sit down with them so that the Secretary can
go over that peer review with them and see what direction to
go.
Senator Baucus. But do you feel you have enough authority
through the department to take sufficient action currently?
Mr. Dunn. With respect to----
Senator Baucus. With respect to the general question of
concentration.
Mr. Dunn. On the area of concentration, Packers and
Stockyards is a very, very powerful law but it is not the
Clayton Act and it is not the Sherman Act.
Senator Baucus. We are told that neither the Clayton Act
nor the Sherman Act, as currently written, allow Justice to
take any action.
Mr. Dunn. I would have to defer to Justice.
Senator Baucus. No, they cannot prove collusion. Bigness
itself is not a sufficient reason for action under either act,
according to Justice. So they say they do not have the
authority. And you are saying what?
Mr. Dunn. We do not have the authority to act on
concentration issues. Justice has that authority.
Senator Baucus. They say they do not have it. Current law
does not allow them to proceed because they cannot ``prove
collusion.'' They have not investigated as to whether they can
prove it or not but on surface examination, they feel they
cannot prove it.
Mr. Dunn. I think that is one of the reasons why Mr. Klein
proceeded the way he has, appointing an Assistant Attorney
General to assist him in that arena. We do have--we have signed
just this last year a memorandum of understanding with Justice
so that we can bring to bear all the resources that we have at
the department to assist them on doing that investigation. But
at this time, if you cannot prove the collusion is there, they
cannot go forward.
If the Congress feels that we need to do some type of
breaking up, certainly you can mandate that we do that.
Senator Baucus. All I am saying is there has been a lot of
talk all the way around this thing and my gut feeling is that
concentration is a very significant reason why, at least in
some industries, say in livestock, prices are low to
producers--not the sole reason, but a significant reason, and
significant enough to warrant very definite action. I just want
you to keep working on this until we find a way to do this in a
fair way, responsibly.
There are a lot of values here, too. It is not just
economics. It is the values of open space, keeping farms in the
family, the values of small farms. And I think, frankly, it is
in the interest of a lot of packers to want to make sure that
more producers are around, ultimately. Maybe at this point,
2000, February 1, it might make sense for them to keep
squeezing more out of the producers but pretty soon there is
not going to be much left and I would urge packers to work with
producers to find some ultimate way to help producers get more
out of their efforts.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Baucus.
Let me just say I did not want to interrupt----
Senator Baucus. I apologize for taking so long.
The Chairman. Well, they were good questions.
Let me say in fairness now to all senators, we have a five-
minute limit on the question round and that is going to be true
for witnesses, so that we are able to hear from everybody and
have the proper questioning.
I am going to call now on Senator Craig, who arrived a
while back and has not had an opportunity to speak. Senator
Craig?
STATEMENT OF HON. LARRY E. CRAIG, A U.S. SENATOR FROM IDAHO
Senator Craig. Mr. Chairman, I was here to listen and not
to speak. I think this is an issue that all of us are growing
increasingly concerned about. I have been frustrated, as I
think Senator Baucus has expressed his opinions.
I come from a ranching background and when you see numbers
drop, historically you see the pattern of prices increase, and
that simply has not occurred out there, while it appears that
packers have made exceptionally large profits.
There is a concentration. I am not quite sure that the
models that we are using to look at the concentration give us a
fair image of what is current in the market. Those are old
models and the market is a new market. And that is going to be
some of the responsibility of Congress, Mr. Chairman, and I
must say I appreciate these kinds of hearings. I hope that they
become increasingly probative.
While certainly the marketplace can respond and I am going
to read the effort of these professors that are before us who
analyze and are making recommendations, that there are ways
that the market can respond, but they may need some assistance,
and that assistance probably has to come from the Congress of
the United States. So I thank you very much.
The Chairman. I thank the senator.
I will call now on Senator Harkin for his comments and
questions.
STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR FROM IOWA, RANKING
MEMBER, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
Senator Harkin. Thank you, Mr. Chairman.
Well, count me among the previous two that are frustrated.
I must say, Mr. Chairman, I commend you for holding this
hearing, these comprehensive hearings on the Packers and
Stockyards Administration and on GIPSA.
I sense the same kind of frustration among Iowa farmers,
that Senator Baucus and Senator Craig have just related. During
the recess period I spent a lot of time obviously out in Iowa,
in the Midwest, and this is an issue of tremendous concern.
That is all I hear, about the concentration that is happening
in the livestock industry.
Now having said that, I would say to my friend Senator
Baucus, George Bernard Shaw once left England and he spent the
better part of a year in New Zealand. He came back to England
and someone asked the great playwright, ``How did you like New
Zealand?'' He thought for a second and he said, ``Well, all
together, too many sheep.''
Senator Baucus. Why are you asking me that?
Senator Harkin. The reason I say it is because----
Senator Leahy. We are all waiting, Tom. We are all waiting.
Senator Harkin. We just had too much of a supply, too many
hogs, and we had too many cattle and stuff like that. But the
point is we expect that to happen but while it is happening,
when the supply as big and the packers had the contracts out
there, you see this big shift in the structure.
So when we get back to a more even keel, we are going to
find ourselves in a whole different lay of the land than we
ever had before, and that is what really bothers me, is that
during a period of time when we had low prices because of
oversupply, we found the industry moving to consolidate very
rapidly in all parts of the country.
I was just looking at some of the data there about how much
we have concentrated just since 1981. I think you find, I think
in cattle it has gone up to about 80- some percent now and I
think in hogs it is about 56- or 60-percent, somewhere in that
range right now. It is not quite as bad in hogs as in cattle.
I guess you have to ask the question: is that per se bad?
Well, I think economic concentration per se is bad. It is just
bad for the economy. It is bad for any kind of competitive
structures out there. And it destroys any kind of initiative
out there for younger people to perhaps try innovation and try
to do different things to become even more efficient.
Again we have been talking about this. I have been on the
Ag Committee for twenty some years. We have been talking about
this--we talked about this in the 1980s and talked about it in
the early 1990s and we just keep talking about it, as Senator
Baucus said. We just keep talking about it and I just wonder if
we are not at a point here where it will be too late to do
anything about it. It will be a fact, a fait accompli, it will
be done and there is not anything that we are going to be able
to do about restructuring at that point in time.
Change is inevitable, in all facets of life and certainly
in agriculture, and I do not mind changes, but changes that
lead to lack of competition and a structure of monopoly
practices is not change for the better. I just do not see in
any that is going to be any kind of change that helps our
farmers and ranchers at all and helps us in any way to be even
competitive overseas.
So again, I am hopeful that we can think about changes that
we might make in the Packers and Stockyards Act, for example,
to define what anti-competitive practices are under Packers and
Stockyards. Do we know? Jim, I do not know. I understand that
we do not really have rules that really define what anti-
competitive practices are under Packers and Stockyards Act.
Mr. Baker. The way we define it is when it brings harm to
other people. In other words, when people have been harmed, it
is anti-competitive. In other words, it has harm, a direct
effect in the marketplace. That is how we define it.
Now I think most of the talk has been on antitrust up till
now and P&S--we yield to Justice on antitrust matters. We look
at the anti-competitive measures and Senator Harkin, we bring
several cases on anti-competitive matters. You know, turn-
taking, this type of thing is a violation that we bring.
Failure to compete.
Senator Harkin. Well, I will say one thing has happened. I
guess Mr. Klein has put someone in the Department of Justice
that is focussed just on agriculture. Is that person in place
yet?
Mr. Baker. Yes. He is here now.
Senator Harkin. That is good. Is he coming up here?
The Chairman. Not today.
Senator Harkin. We have to ask him what he is doing.
Lastly, I understand that there was a proposal put forward,
shifting from livestock now to grain, there was a proposal put
forward last year by USDA that would offer interest subsidies
to export elevators desiring to install cleaning equipment as
an effort to encourage shipment of cleaner grain overseas.
I want to know more about that proposal. Mr. Chairman, I
think that is something we ought to look at. Obviously, one of
the things that can affect the price of an export is to
convince buyers that our product is higher in quality than our
competition. So I think we ought to look at this very carefully
and I think it has a lot of merit to it. Are you still pushing
that idea?
Mr. Baker. Yes, Sir, but Dave Shipman is with me and he
addressed the industry last week. Let him tell you where the
industry is coming from and a little bit about the grain
cleaning, what our update is briefly.
Mr. Shipman. On November 29 the department published in the
Federal Register a proposal to use some Commodity Credit
Corporation [CCC] funds to help fund cleaning at export
facilities. And just last Friday, on January 28, we had a
public hearing at the department where we had importers from
Latin America and Africa come and talk to us. We had producer
groups come and talk and present their opinions on it and we
also had a number of exporters, those from the Pacific
Northwest that have already invested in cleaners and some
representing the Gulf Coast area where they have not.
There was really a great deal of contradiction in the
statements that were made and we are now kind of filtering
through all of that. We will be meeting with Tim Galvin in
Foreign Agricultural Service [FAS] later this week to further
talk about the issue.
In general, I think the exporters and the grain industry at
large expressed concern about government intervention, that the
market economics should drive the installation of cleaners.
That is what occurred out in the Pacific Northwest. There was a
large enough demand coming from the Pacific Rim for cleaner
product and the market responded and made those investments.
They do not feel they have seen that large enough demand
yet in the Gulf Coast, so there was concern expressed about
letting the market----
Senator Harkin. I see that they do not complain when we
promote Public Law 480. They do not complain about that. They
do not complain about the Market Assistance Program. I mean why
would they be complaining about this as some interference in
the market? That went right by me. I do not understand that one
at all.
Mr. Shipman. And then the producer groups expressed other
concerns.
Senator Harkin. If they do not want to install the cleaning
devices, the heck with them. We ought to look at offering them
some interest subsidies or something and if they want to do it,
fine. If they do not, let them go.
Mr. Shipman. There is going to be further discussion in the
department on it. One suggestion was made that we should be
looking at changing the standards rather than offering
financial incentives to make the change. So there is going to
be further discussion in the department later this week.
Senator Harkin. Well, I do not know enough about it to
comment on that. I mean maybe that is the better way to go. I
do not know, but I think it is something we ought to take a
look at.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Harkin.
Mr. Shipman, I read some of the testimony of that hearing
and you are correct that people were all over the place.
Although I would suggest Tim Galvin and others, I thought,
conducted the hearing in a very civil and temperate way, as is
their custom, but to say the least, that is one that will
require a lot of resolution of very interesting points of view.
Let me call now upon Senator Roberts, who has patiently
waited for an opportunity to intervene this morning.
STATEMENT OF HON. PAT ROBERTS, A U.S. SENATOR FROM KANSAS
Senator Roberts. I do not know about intervening, Mr.
Chairman. I want to thank you again for your leadership in
holding this hearing. We have heard a great deal of
frustration. This might be described, as opposed to an Ag
Committee hearing, as a Frustration Caucus on this issue.
I apologize for being late. I apologize to the witnesses.
As a matter of fact, I was meeting with the Kansas Hospital
Association and one of their comments was that we have to
really worry about the issue of concentration and closing down
rural hospitals in regard to regional hospitals. I said, ``It
is really ironic; I am going to a hearing on concentration on
agriculture and we have it all across the economy in our
society.''
And thank you for holding the hearing, Mr. Chairman. You
are right on top of it, as usual.
I think rather than simply read my statement, there are
just a couple of highlights here.
Obviously people are extremely fearful and very frustrated.
We have extremely low prices, a strong dollar, a collapsed
foreign market due to what we call the Asian flu, but that is
true in a lot of areas of the country. So we should expect,
when we are going through this, that this long-time problem
that has been described by Senator Harkin would become a matter
of real concern and fear.
I know the Clinton administration has announced that a
special position has been created within the Department of
Justice to deal with mergers and anti-trust issues. I apologize
for not doing my homework. Who is that?
Mr. Dunn. Doug Ross is his name.
Senator Roberts. I am sorry?
Mr. Dunn. Mr. Ross.
Senator Roberts. Is Mr. Ross here?
Mr. Ross. Yes, Senator. I am Douglas Ross.
Senator Roberts. So you are the guy. Welcome.
Mr. Ross. Thank you, Sir.
Senator Roberts. I guess condolences or something. I think
that is a very important move and we look forward to working
with you.
I would like to make just a couple of points, Mr. Chairman,
and that is that we are going to have to work with the
Judiciary Committee. The Ag Committee really does not have the
primary jurisdiction but we have the keen interest, it is our
people involved, but it seems to me we have a lot of
frustration but not much expertise. We all know we want to do
something but we are not quite sure what it is and you do not
want to make it counterproductive. You know, beware of the law
of unintended effects. I am sure that Senator Baucus did
address that.
Just a couple of questions. Do mergers actually reduce the
producers' marketing options and reduce their ability to obtain
a fair price? You ask that question out in Kansas and the
answer is going to be what--80, 85, 90, maybe 100-percent yes.
If we block or place a moratorium on mergers, will it
hinder or eliminate, however, the ability of U.S. companies to
compete in the world marketplace? Is this beneficial to our
producers? If we block all mergers, are we actually limiting
the producers' ability to compete in the marketplace?
Everybody on this Committee as long as I can remember has
told producers they need to participate in value-added
agriculture. Will moratoriums keep this from taking place? Or
can you devise a law that would exempt those kinds of things? I
do not know.
Four Western Kansas farmer-owned cooperatives joined with
Cargill late last week to announce they have come together to
form a joint company that would allow them to ship their grain
more efficiently and return higher profits to producers. How
will legislation affect that?
Same thing in regard to livestock with U.S. premium beef in
Kansas.
You know, these are questions that we should not take
lightly.
And then this is not only in agriculture. We have it in
banking, energy, and technology, as well, so I think we have to
take that into consideration.
Now I have publicly stated several times that if the
administration, the Department of Justice and the Department of
Agriculture and the Congress really believe that new
legislation is needed or certain areas need to be addressed,
that the administration and the Department of Justice and the
USDA should put us on notice and provide us with the necessary
input and guidance, put something on the table, and I know you
are trying to do that and I know you discussed that with your
testimony.
But Mr. Chairman, like Senator Harkin has indicated, this
is a very big problem and if we do not act, states will. The
state legislature of Kansas is considering a package of bills
determined as a result of independent and bipartisan hearings
of people who went around themselves, members of the state
legislature, on the merger question and the concentration
question. And Kansas could act. I am not sure what they are
going to do.
But we have a lot of laws on the books here that deal with
national issues and state issues and I remember all of our
efforts to provide uniform tolerance in the food safety arena.
Otherwise, you end up with a hodgepodge. You know, Iowa is
going to pass a bill and Kansas is going to pass a bill, South
Dakota is going to pass a bill. Illinois may not pass a bill.
That is going to be terribly counterproductive.
So it seems to me that we ought to get some degree of
cooperation and understanding on where we are going to go. And
with all due respect, I do think that first starts with the
administration in regard to what you would like to see in terms
of legislation, and I will stop at that point. My time has run
out. Thank you for the hearing. I am interested in the
testimony.
The Chairman. Thank you very much, Senator Roberts. You
make a good point with regard to state activity. Kansas is not
unique in that respect and clearly our need for a colloquy with
the administration on its organizational attempts is
imperative.
Do you have a further comment on that?
Mr. Dunn. Yes, Mr. Chairman, because I, too, am concerned
about this hodgepodge that is going on. We at the department
have contacted the National Association of State Directors of
Agriculture and have talked to attorneys general and we are
going to commence having a series of meetings with them. These
will be working sessions designed to discuss what state
legislation exists versus Federal legislation--where we are,
where we see cracks and where is the safety net not buoyed up.
So I think you have hit on a major concern of ours, that we
are getting these hodgepodges of state legislation and it is
going to be very, very hard to coordinate commerce with that
type of quilt blanket throughout the Nation. So we will be
working very closely on that, Senator Roberts. That is a good
something.
The Chairman. Thank you very much.
Introducing our next questioner I would comment, as a point
of history, this is the first hearing of the Committee in the
year 2000 and it is appropriate that the gentleman whose
picture appears on the wall in the corner is here. Many of you
have not attended a hearing before should note that this is one
and the same with the senator who is here. It is, in fact,
still a very good likeness, Senator Leahy. It is intimidating.
Senators should look at that portrait. We are grateful you are
here, as always, Pat.
Senator Conrad. Mr. Chairman, might I just inquire, is
there any chance we could have a vote in the Committee on
whether that picture continues to hang there?
Senator Leahy. No, no, no. It would require unanimous
consent.
The Chairman. No vote.
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM VERMONT
Senator Leahy. That is called the Dorian Gray memorial
picture.
Mr. Chairman, I want to thank you. I have said before that
one of the great joys of being in the Senate is the friendship
you have always shown me from the day you came here to the
Senate and working together with you. The greatest honor I got
was when you took over as Chairman of the Committee and rammed
through the resolution to put that picture up there and to fend
off the amendment to put numbers or a ``Wanted'' sign across
the front.
When my daughter saw it she said, ``Dad, looks good; who is
it?'' I said this is something that Senator Roberts and I were
so happy to finally have a portrait of somebody who knew how to
comb their hair around this place.
Senator Roberts. If the senator would yield----
Senator Leahy. I knew that was a mistake right there when I
said it.
Senator Roberts. All of us in the follically challenged
caucus do appreciate the honor that has been bestowed upon you
and if you would care to go over to 1302 in the sometimes
powerful House Agriculture Committee, you will see that they
hang people over there, as well.
Senator Leahy. Not only have I been there but I have a copy
of a beautiful program they had of that in my daily journal
archives, with your portrait.
Senator Roberts. Bless your heart, Sir.
Senator Leahy. I could use it.
I will just be very brief, Mr. Chairman. I said last year
that I worry that our farmers and ranchers are too often at the
mercy of a new kind of robber baron, the agricultural
conglomerates who can do a sort of take-it-or-leave it offer to
most producers. I said I really want to have more competition
or the ability of more competition if we are going to have a
healthy farm economy.
And I want to work with you, Mr. Chairman, and with Senator
Harkin to see if we can get a comprehensive bill to increase
competition to protect these family-sized farmers and ranchers
from unfair competition from conglomerates.
I am sorry that another committee takes me out of here but
not only will my staff be here but I will be looking at this
transcript and I will submit questions for the record because
we have this case where the agribusinesses are enjoying record
profits as they become more concentrated, but agricultural
producers in most states are suffering severe economic
depression with no end in sight.
When we met last year I said it was the agricultural
movement in the late 1800s that played a pivotal role in the
passage of the Sherman Anti-Trust Act and many farmers today
face the problems of these gigantic conglomerates.
I remember reading in law school when I went back what
Judge Learned Hand said in the Alcoa case. ``It is possible
because of its indirect social and moral effect to prefer a
system of small producers, each dependent for success upon his
own skill and character, to one in which a great mass of those
engaged must accept the direction of the few.''
So Mr. Secretary, we may want to be looking at ways to get
more power to you to act against unfair or unjust or deceptive
business practices.
We have had agricultural trusts before. In the 1800s
American Sugar controlled 85-percent of America's sugar
refinery. Standard Oil, of course, had 90-percent of our oil
production. There were cotton oil trusts, sugar trusts, linseed
oil trusts. There was even a whiskey trust. I am not sure, but
then the Irish showed they could produce better whiskey in
Ireland.
And I would leave this question for you, Secretary Dunn.
Suissa Foods of Texas, I understand, has bought about 70-
percent of the formerly independent dairies in New England and
had a buying spree in other parts of the country. And I know
that the Justice Department was worried about the problem that
might cause, especially such things as the School Lunch
Program, which affects us in all parts of the country.
Would you have your office put together a report on the
Suissa acquisitions in the last 5-years, the markets affected,
the volume of milk affected? I am concerned about what that
might do to school lunches and just regular consumer costs, and
if you could do that, Mr. Dunn, and get it to me, I would
appreciate it.
Mr. Dunn. Yes, Senator, we will do that for you.
Senator Leahy. And thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Leahy.
Senator Fitzgerald.
STATEMENT OF HON. PETER G. FITZGERALD, A U.S. SENATOR FROM
ILLINOIS
Senator Fitzgerald. Thank you, Mr. Chairman. If I could ask
for unanimous consent to submit my statement for the record, I
would appreciate it.
The Chairman. So ordered.
Senator Fitzgerald. Thank you.
I have long felt that cooperatives were a great way for
farmers to try and retain more of the value of their products
at the farm level. I am wondering, do you have any statistics
on, say, what percentage of farmers in this country would be
involved in a cooperative? Would anybody on the panel know
that?
Mr. Dunn. Earlier Senator Feingold talked a little bit
about the number that the Dairy Farmers of America dairy coop
had, but we can get that for you, Senator Fitzgerald, and we
will supply that information of how much goes through coops.
Senator Fitzgerald. I would be interested in that.
The other question I guess I would have is does the USDA
have programs in place that would foster more use of the
cooperatives or help cooperatives along? Are there any policies
in place along that line?
Mr. Dunn. Yes, Senator. Under rural development, Under
Secretary Jill-Long Thompson has a division, Cooperative
Development Division, that works in that arena. It works very
closely with the rural business development group and they work
very closely throughout the department with Ag Marketing
Service that is under marketing and regulatory programs, as
well.
Senator Fitzgerald. On a slightly different topic, has the
department undertaken any activities to prepare for the
challenges that are going to be arising with the new biotech
crop marketing now that the farmers are being called in some
cases to separate their crops and the like?
Mr. Dunn. Yes, Sir. We had requested in our appropriation
this year appropriations to set up a reference lab in both Ag
Marketing Service and a reference lab in Grain Inspection,
Packers and Stockyards, and I will ask Mr. Shipman to answer
specifically. We did get the funding for Grain Inspection,
Packers and Stockyards; we did not get it for Ag Marketing
Service, which would primarily look at fruits, vegetables,
tomatoes and those things. But we did get it in the grain
sector and I will ask Mr. Shipman to address that for you.
Mr. Shipman. What we see in the marketplace is that we are
starting to see more and more testing occurring to
differentiate between conventional crop and biotechnology crop.
So there was concerns about the accuracy and consistency of
some of those results.
We have decided that we are going to establish a reference
lab at our Kansas City facility. We are in the process of doing
that right now. We hope to have that operational--our plans are
to have it operational before the next corn and soybean crop.
So we hope to have it operational in July-August time frame.
The idea there is to be able to verify and validate the
testing technologies that are being used in the commercial
market right now to distinguish conventional from biotech
crops.
That is our initial phase. We are working very closely with
the life science companies. We actually have a workshop
February 24 in Kansas City where we have folks from Europe
coming over, as well as all the life science companies and the
producer groups, to talk about how we will go about actually
verifying the performance of these technologies and how best
that we do it so that there is confidence in that lab.
Senator Fitzgerald. Thank you.
Thank you, Mr. Chairman.
[The prepared statement of Senator Fitzgerald can be found
in the appendix on page 92.]
The Chairman. Thank you very much, Senator Fitzgerald.
Let me just follow up quickly on that. Does GIPSA have
enough authority to handle the standards problems here? You may
and you are obviously heading into laboratories that are very
constructive but as we are thinking through the authority
problem and authorization, is this a new ball game and is there
some additional authority that is required? Does anybody have a
feeling about that?
Mr. Shipman. We currently have the authority to do what we
believe is necessary at this time. One of the biggest
challenges we see facing us is that through biotechnology, you
are going to see so many more crops with high value attributes
and we need to be ready to prepare and provide the testing and
standardization for those new attributes, so when farmers bring
them to market, they can have true transparent value assessed
on that.
So yes, we have the current authority to carry out what we
think is needed.
The Chairman. Is there some likewise cooperation, say with
the Food and Drug Administration and maybe others? For example,
claims are going to be made that certain products have Vitamin
A or Vitamin C or various other vitamins. In other words, up to
this point, as we have heard in testimony, we have been looking
at it from the producer's standpoint, whether the genetic
change killed the weeds and not the corn. But now, in a
confirmative way, a consumer product offensive is moving that
way.
Now obviously your tests are not in that area, I suspect,
as to the efficacy of whether the claims are true or whether
the genetic change led to the additional nutrients, for
example, but how does this work with what you are taking a look
at in your laboratories, as opposed to what FDA or someone else
may day?
Mr. Shipman. We have not been talking directly with FDA on
that, where that goes, but in terms of whether it is a certain
type of oil product, oil constituent within the soybeans, or
whether it is the Vitamin A in the rice or something of that
nature, we do expect to be moving down the road where we would
be able to identify whether that particular attribute exists in
the product.
The Chairman. You would be able to do that?
Mr. Shipman. Yes.
The Chairman. I see. Well, that is very important.
Mr. Dunn. Mr. Chairman, I think in the future the
nutriceutical and pharmaceutical properties of these events
that take place are going to become more and more important. As
you are aware, the Secretary is just in the process of naming
an advisory committee, Biotech Advisory Committee, to assist
him to look at all of these questions and try to crystal ball-
gaze a little bit to see what is coming down the road and how
do we have prepare for that for the future because frankly, we
are not there yet.
The Chairman. No, and we are being overwhelmed. The war is
on and we are just gearing up for it. So I stress the urgency
and applaud what the Secretary is doing.
Senator Conrad?
STATEMENT OF HON. KENT CONRAD, A U.S. SENATOR FROM NORTH DAKOTA
Senator Conrad. Thank you, Mr. Chairman, and thank you for
having this hearing and thanks to the witnesses.
Sunday afternoon I was in Manville, North Dakota for a
meeting with farm families and I think it is fair to describe
them as dispirited, disheartened, very anxious about what the
future holds, and wondering when there is going to be a
response to change long-term farm policy because I can tell
you, they believe that this policy is not working.
We continue to be hit by what I call the triple whammy of
bad prices, bad weather and bad policy. We cannot do much about
the weather but we can sure do something about the policy.
I notice this morning, Chairman Lugar, that you urged
President Clinton to push Europe on agricultural products in
the National Journal's Congress Daily and that you had
mentioned my bill and indicated that I had introduced a bill to
require the United States to match EU agricultural export
subsidies. It says here ``Lugar said he thinks the issue of
U.S.-European agricultural relations should be dealt with 'more
in terms of NATO.''' I think that is pretty close to an
endorsement of my bill.
The Chairman. Not necessarily. That may be a little bit of
a stretch.
Senator Conrad. That is the way I read it.
Senator Roberts. Senator, does that mean we bomb Brussels?
Senator Conrad. I do not know exactly what Senator Lugar
had in mind.
The Chairman. We'll have another hearing on that.
Senator Conrad. I tell you, my own conclusion, after being
in Seattle, is that it is very clear to me we have to have
leverage to be successful in negotiations. We do not have any
leverage with our current farm program.
I asked this group yesterday if the Russians had fifty-
thousand tanks and we had ten-thousand tanks, would the first
move of the United States Congress be to cut our tanks in half?
Would we go to five-thousand tanks? Because that is exactly
what we did in agriculture policy in the last farm bill. They
are spending $50 billion a year to support their producers; we
are spending $10 billion. And under that budget part of the
farm bill, we cut our support in half on the interesting notion
that if we just set a good example, the Europeans would follow
suit.
Well, they have not followed suit. They are not going to
follow suit. And I believe it is time for a vigorous response
by the United States. I think we have to rearm if we expect to
be successful.
So I wanted to say that to you and this whole question that
is before us in this hearing on concentration is very much on
the minds of the people that I represent in this meeting
yesterday.
We have talked before about concentration in the livestock
sector, that under the HHI index, which rates concentration, in
livestock in 1996, the last year that we have full figures, was
one-thousand-nine-hundred-thirty-five on the HHI index and
eighteen-thousand is highly concentrated. So we see very
serious concentration in the livestock industry.
But we do not only see it in livestock. We also see it in
grains, and I want to just bring to the attention of my
colleagues this chart that looks at flour milling. This goes
from 1973 to 1990 and you can see the red represents the four
largest companies and their share. We have gone from the four
companies, the four largest companies controlling 33-percent of
the market to 58-percent in 1998, and that is doing nothing but
increase.
On this note I would like to say that from the viewpoint of
agricultural producers, we are talking about the problem of
monopsony, in which there are few buyers, rather than
monopolies, in which there are few sellers, and we see a very
clear and disturbing example of monopsony power in the grain
industry from the testimony of the chief economist of USDA last
year. And this chart shows what he reported to us, that farm
exports controlled by four firms--we see in corn, 70-percent is
controlled by the top four; in soybeans, 62-percent; in wheat,
47-percent.
And control of regional export markets is even more
concentrated, with these same four firms controlling 100-
percent of some commodities through specific ports. In the case
of wheat, the level is 86-percent through the Pacific Northwest
and 81-percent through the Great Lakes.
That leads me to my question very quickly. My understanding
is that the Secretary, the mandate in this area can be
interpreted as proactive, even preemptive, that the USDA has
the power to intercede before damage occurs. I would be
interested if you agree with that interpretation and second, if
you do, if you could describe for the Committee any recent
examples of this type of proactive and preemptive action on the
part of the Secretary and USDA.
Mr. Baker. I am not aware of that with the P&S Act. We have
to prove--we have to have the fact that a harm was committed
before we can take action. Now we guard against it and all but
as far as taking an action ahead of time, I am not aware of
that.
Mr. Dunn. Senator, I think as you read Section 202 of
Packers and Stockyards, it does allude to any potential
problems. However, there has not been any case built up over
the years, the 75-years plus of this Act, where USDA has gone
to court and said, ``We are going to take that proactive
strike.''
And, as a result of that, it is extremely difficult--it is
impossible for us to be able to go in and make a case that we
are going to do this because we think this is going to happen
and we think that this is going to be the result. There is no
case study to be built upon there.
In fact, we have had rulings from the court saying that we
have to show causality on things.
Let me just say that as I read the language, it does have a
broad mandate to the Secretary to take action. And I can
understand when it has not been done before, but I will tell
you, as I look at the concentration that is occurring, it is
very clear to me that harmful effects flow from this kind of
concentration, that when you have many sellers and few buyers,
the ability to affect markets grows exponentially with greater
and greater concentration.
And I would just say I hope it is communicated back to the
Secretary that I think you have a situation in which we ought
to test the envelope. We ought to go out there and take
preemptive action and let courts wrestle with this question as
to whether or not there has been this kind of grant of
authority by the Congress of the United States through the
Secretary.
Obviously you would want to have very carefully made the
case that there is danger developing and that is occurring, but
I really think the Secretary, and I know that you do not have
precedent for this, but that the Secretary has substantial
authority here that has not been exercised.
The Chairman. Thank you very much, Senator Conrad.
Senator Roberts, I understand you have a couple of
questions.
Senator Roberts. Yes. And if these questions have been
asked before, I apologize. I was late for the hearing.
Mike, can you tell me? We had an 18-month moratorium
amendment introduced by Senator Wellstone in this session, or
in the last session. Did the administration take a position on
that?
Mr. Dunn. No, we did not take a position. I do not believe
we were asked to.
Senator Roberts. Does the administration have a position on
a moratorium of that nature?
Mr. Dunn. Not at this time.
Senator Roberts. Do you plan to have one?
Mr. Dunn. If we are requested, we will.
Senator Roberts. Why don't you do that? I am not sure that
I have the authority to request it but I think it would be
helpful. That amendment was defeated by a large margin but did
not--I do not mean to portend that, that would be the case if
people could be convinced that we would have the answer to the
problem. That is what I am saying.
What about the administration's position?
Senator Daschle has a packer ownership bill and we have
several bills introduced on both sides of the aisle in regard
to packer ownership. Has the administration taken a position on
that?
Mr. Dunn. Not at this time. We have not.
Senator Roberts. I think that would be helpful if you could
address--I am not saying you have to address that specific bill
but at least I think generically it would be helpful.
Are you thinking of proposing legislation in regard to
mergers and ownership from the standpoint of the
administration, so we would have something to work with, as
well as some funding?
Mr. Dunn. That would be something that would come under the
jurisdiction of Justice. We would have to consult with them on
that.
Senator Roberts. And then with Doug, you are going to be
doing that?
Mr. Dunn. That is correct.
Senator Roberts. OK, thank you, Mr. Chairman.
The Chairman. Let me just underline and ask on behalf of
the Committee, Secretary Dunn, that the administration give us
a formal viewpoint on Senator Wellstone's legislation and on
Senator Daschle's legislation. These are both fairly well known
legislative vehicles and they have been mentioned in our
hearing this morning and it would be very helpful to have
informed comment from the administration on both of those
bills.
I thank all three of you for helping us this morning,
coming in with your testimony and your responses.
The Chairman. At this point I would like to call upon our
next panel to come to the desk. That would include Dr. Philip
Paarlberg of Purdue University, West Lafayette, and Dr. Kenneth
Foster of Purdue University, West Lafayette, Indiana.
Would the Committee come to order so that we will all be
able to hear clearly the next witnesses?
Dr. Paarlberg and Dr. Foster, it is a personal privilege to
have both of you here. You know of my admiration for your work.
We have cited it on other occasions prior to today. We are
looking forward to hearing from you directly. Please proceed.
STATEMENT OF PHILIP PAARLBERG, PURDUE UNIVERSITY, WEST
LAFAYETTE, INDIANA
Dr. Paarlberg. Thank you, Senator Lugar, members of the
Committee. I would like to report with Dr. Foster, my
colleague, on the results of the staff paper done at Purdue
University by a number of us and I will report on the part that
I did and Dr. Foster will cover his area.
We have already heard this morning about the level of
concentration in the industry, so I will not go back through
that material. You have heard the numbers. We mentioned the
Herfindahl Index. One of the advantages of a Herfindahl Index
is that it can be used to estimate the number of symmetric
firms in an industry, and what I mean by that is if all the
firms are the same size, how many would there be in that
industry?
In the case of the hog slaughter industry, the symmetric
firm number for 1985 would be twenty-two, which is sufficiently
large to avoid distortions in pricing. By 1997, the last data
that I have for the hog packing industry, that had fallen to
ten. Now, there is no specific value with this index that says
okay, now we have serious pricing problems, but once an
industry gets down to about ten, you begin to become concerned.
So what we did is we tried to construct a model that would
illustrate how concentration might affect the hog price as the
number of packing firms increases and decreases, starting at
the base value of ten.
Now, because so much information that we needed to
construct this thing accurately was not available, we made a
number of assumptions. What we did is we assumed that we had
identical packing firms and varied these from one to twenty.
The model then calculates how the markdown or price gap from a
perfectly competitive hog price changes in response to changes
in firm numbers. This markdown represents the potential market
power of packers to pay less for the hog input than would have
been the case under perfect competition.
If there are twenty firms, which is a situation similar to
the late 1980s, the price paid to producers for hogs is 95-
percent of the perfectly competitive level. As the number of
packers falls, the gap on the price to farmers increases. At
first that gap will remain small. Starting from twenty firms,
this firm number does not initially lead to much larger
markdowns. When you start at twenty and go to fourteen instead,
then the hog price is 90-percent of the competitive level,
instead of ninety-five at twenty.
When you go from fourteen to eight firms, the markdown goes
from 10-percent to 18-percent. Once the firm numbers drop below
about 5 in this type of model, the markdown increases sharply.
Now, as I said, the 1997 Herfindahl Index indicates an
industry of about 10 symmetric firms. The illustrative results
show that in a range of 8 to 10 equal sized firms, a critical
transition between the magnitude of the markdowns occurs. Below
8 firms, the markdowns accelerate. Above 10 firms, the change
in firm numbers does not really affect the markdown very much.
In the case of the model used here, if the industry is
presently at eight to 10 firms, a policy designed to increase
firm numbers may be less critical than a policy designed to
maintain firm numbers. In other words, it may be the
concentration which has already occurred has not pushed us very
far below the competitive price, but further concentration
could have serious adverse consequences for producers.
Now, one of the things that you need in this is to know the
precise shape and location of this relationship. Unfortunately,
the one we have can only serve as an illustration because
critical pieces of the puzzle are missing. We made assumptions
which may incompletely reflect the hog and pork sector, and
these pieces have to be inserted into the analysis to
accurately analyze the consequences of increased or decreased
packer concentration. With additional data, it will be possible
to narrow the uncertainty of what is occurring and providing
that analysis should be a high priority.
In summary, we are witnessing the industrialization of
agriculture. These structural changes have been pronounced in
the pork sector and raise important questions about the
competitiveness of both the product and input markets.
There is evidence of increased concentration to the point
where public vigilance is warranted. Concentration indexes are
high and may be reaching a point where markdown pricing on hogs
could be significant. It is important for us to have the
required information to do this analysis as soon as possible to
properly assess where we are in this respect. Thank you.
[The prepared statement of Dr. Paarlberg can be found in
the appendix on page 94.]
The Chairman. Thank you very much, Dr. Paarlberg.
Dr. Foster?
STATEMENT OF KENNETH FOSTER, PURDUE UNIVERSITY, WEST LAFAYETTE,
INDIANA
Dr. Foster. Chairman Lugar and members of the Committee,
Dr. Paarlberg has shown that greater consolidation in the
meatpacking industry could lead to lower live animal prices
paid to farmers. Likewise, increased captured supplies, via
vertical integration and/or contracting, have the potential to
lower prices on average and increase the variability of prices.
This is especially true for those producers who are not a
part of the captured supply chain.
Packers are motivated to coordinate their supply of live
animals by the large fixed costs associated with slaughter
plants and the large transactions cost of purchasing large
numbers of animals on a daily basis. In order to reduce their
cost per unit of wholesale meat, packers need to slaughter as
many animals as possible. For modern plants, this means
thousands of animals each day. The risk of coming up short
motivates the use of company-owned animals and contracted
purchases to ensure that the appropriate quantity and quality
of animals arrive as needed. With captured supplies,
transaction costs are also reduced by not having to haggle over
the price of each individual load of animals.
Logically, packers attempt to capture the highest quality
animals via contracts and vertical integration. This leaves the
lower-quality animals to establish prices in the open market.
Because payment schemes for most of the packer contracted
animals are based either on a market price, a spot market
price, or the Chicago Mercantile Futures price, substantial
vertical coordination may create a downward bias in the prices
received by many livestock producers.
Mitigating these downward biases in live animal prices will
not be an easy task. The strongest public policy instrument is
antitrust. Clearly, breaking up the larger packers would help
mitigate markdown pricing due to concentration if it exists.
However, sound economic rationale, unassociated with market
power, could be motivating contracting, vertical integration,
and concentration. If the societal benefits of these rationale
exceed the costs of markdown pricing, then the antitrust
approach would not be justified.
It is my opinion that alternative public policies do exist
that could offset the price impacts of these business
structures without completely foregoing their benefits. The
focus of these policies would be on increasing the bargaining
power of pork producers. Unfortunately, the livestock producing
community has little experience and expertise in using these
alternatives and will likely need public policies and
assistance to get them functioning.
Cooperative production and marketing appear to be possible
ways to offset the impacts of consolidation and integration in
today's pork industry. Any strategy that places livestock
producers in a more symmetric bargaining position with packers
will make it more difficult for packers to exploit prices or
contract terms. It should be also more difficult for a packer
to terminate a contract or to force less favorable terms on the
producer community. The packer, in need of animals to fill a
daily kill, will be compelled to negotiate a more competitive
price if producer power is increased.
A competitive cooperative scheme would require a sizable
network of today's large, independent producers. Forming such
networks or cooperatives must be nurtured by public policy. Our
research at Purdue has demonstrated that there are a variety of
ways to structure these entities that may also allow the
producers to capture cost reductions and gain access to new and
possibly proprietary technologies.
Tax incentives or deductions for members of these
production and marketing networks could provide incentives not
only for producers to enter such arrangements, but such
policies could also be fashioned to provide disincentives for
producers to break away from the group in an effort to capture
short-term gains. Current exemption from antitrust constraints
provides some benefit for cooperative formation. However,
undercapitalization is the most common cause of failure among
new cooperative ventures.
The approach needed by such groups is fundamentally
different from the traditional livestock marketing cooperatives
of the past. In the past, farmers independently produced the
animal type of their choice and marketed them on the day of
their choice to various markets.
If the cooperative alliances of the future are to increase
the bargaining power of producers, then the production systems
of the cooperating farmers must be coordinated. Coordinated
production will allow the group to provide a steady supply of
hogs of a uniform quality to a single packer. This supply chain
must be closely managed to deliver a large number of animals on
a daily basis because fluctuation in supply is not attractive
to packers and reduces producer leverage.
Marketing orders provide another possible avenue. I will
not go into great detail about those. In my written testimony
there is some more detail. Marketing orders have been used in
several agricultural commodities where producer bargaining
power is or has been a concern.
In summary, two major policy options are antitrust activity
on the one hand and nurturing increased market power of pork
producers on the other hand. With current knowledge, we cannot
recommend breaking up existing packer concentration. Such
actions can be extremely contentious and may be contrary to
society's best interest. However, public policy can assist
producers in gaining countervailing market power.
Finally, caution should be exercised against blanket
condemnation of strategies adopted by packers or producers that
enable them to compete successfully in an increasingly
international marketplace.
I would like to thank the Chairman and the Committee for
inviting us here to give our opinion.
[The prepared statement of Dr. Foster can be found in the
appendix on page 99.]
The Chairman. Well, we thank both of you for your paper and
for your testimony.
First of all, Dr. Paarlberg, in the model you have
established, you pointed out that you had a lot of data, but
some information was not available to you. Is this still a work
in process? In other words, as you take a look at this
concentration, what you are saying is very specific, as I
understand it. If you get to fourteen symmetric firms, the
producer might get 90-percent of the price that he would have
gotten in the old days when you had a whole galaxy of them.
So already you have some reduction of the prospect for
producers, even at the level of fourteen, but now you are
pointing out that we have progressed to a level roughly of 10
on your model, which is above 8, where the discount is 18-
percent and falls abruptly after that. But, of course, although
it is lower than ninety, somewhere between an eighty-two and a
90-percent of the regular price or what it used to be may be a
10 to 15-percent discount or so already.
This is the first time that I have heard theoretical
economics try to quantify this. In other words, in the past,
people have come to our Committee and they talk justifiably
about the hurt that is involved, but the ability to put a
percentage on it and to identify this with a specific amount of
concentration is quite a contribution. This is why I am
wondering whether your model continues to grow with more
nourishment of fact and data or how would you describe this
process?
Dr. Paarlberg. This was just an early, a first, quick pass
at the question. What we have done now is to go back and do a
number of things. One is we have tried to--this held the price
of pork constant. So it implicitly assumed there was no cost to
consumers one way or the other. So we have now introduced some
price responsiveness.
We have tried to look at the economies of scale question.
Someone says you know, you could benefit because as these
packers get large, they are able to drive unit costs down, so
that could be a positive sign, and we are attempting to
integrate that into the process.
This simple little model did not look at the contracting
issue, vertical linkages, so consequently, we have tried to
introduce to markets two types of hogs. Basically, one would be
an integrated hog, coordinated hog, and one would be an
independent. We are also trying to do this over time and look
at a sequence of twenty quarters and how the model evolves.
So it is an ongoing process and at this point it just needs
more validation to make sure that it is reasonable.
But again what I find is we do not really know a whole lot
about economies of scale for the packing industry. We suspect
they are there, but we do not have a lot of hard information.
The computer requires a number, so that is where we are going
with this.
The Chairman. Will you be making periodic reports to the
rest of the world to bring us up to speed?
Dr. Paarlberg. I think our department has that plan, yes.
The Chairman. Great. Well now, you have demonstrated, even
if inexactly, that concentration probably has an effect upon
producers. As you say, in one new recent part of the model, you
hold the consumer situation constant.
Dr. Paarlberg. Right.
The Chairman. So that implies that you are now talking
about how the pie is divided between, say, the packers and the
hog farmer out there if the consumer is sort of held harmless
in this process and you are finding that the returns for the
producer are lower.
Dr. Paarlberg. Yes.
The Chairman. Now then the question that Dr. Foster
addresses--well, both of you do in your paper--is what do you
do about it? You know, the data that you are presenting are
very important so that this idea of unintended consequences
does not jeopardize the exercise. This is why, as I gather, you
say if you come to a certain point, antitrust may not be the
best tool. You do not rule it out but given the level of
concentration in the hog industry, at least, it may be more of
a bargaining position by these producers if they could
cooperate with each other.
And, as you have pointed out in your paper, in the past
they have not cooperated all that well, so you are suggesting
maybe public policy, tax incentives to get people together, or
even disincentives if they fall apart, which is another
question altogether, I suspect. But if they do get together,
then somehow they enter into this arena of bargaining with the
packers and they do better on behalf of hog farmers generally
because they have that much control over supply and so forth.
What sort of reaction have you had from hog farmers to
that? Have you tested this out with people who are in the field
and what do they think about it? Do they want to cooperate? Do
they understand why they might be advantaged by doing that?
What sort of feedback do you have?
Dr. Foster. I guess that is pretty much directed at myself.
Frankly, my interest in this arose from the pork producers, not
from myself. I was motivated by individuals calling me,
requesting what sort of information that Purdue University or
the land grant universities might have about developing
cooperative structures for production systems and marketing.
We got involved in this originally a number of years ago
when we were examining the effects of various new technologies
that were arising in the pork industry and looking at efforts
for small, independent farms to gain access to those
technologies from the production point of view.
That work we have finished. It sat on the shelf for a
number of years and a year ago or so when prices became so low,
the interested farmers and this sort of thing, from a marketing
perspective, started to creep back up, so we began to get
interest.
I have worked with two different groups of producers in
Indiana. We are already forming cooperatives or limited
liability corporations for group marketing and they seem to
have very strong groups, a large number of producers, what we
would consider in Indiana medium to large-size operations,
traditionally family farms.
So the mentality of the producer is changing a bit, or at
least it was changing. Now perhaps with higher prices, the
concern will go away and we will go back to the status quo.
That is yet to be seen. And that is one of the concerns that we
tried to address in the paper, is that there has to be some
mechanism, when prices do rise and individuals might be able,
for the short term, to gain higher prices marketing
independently, that they do not abandon the network because the
ability of the network to supply on a regular basis is the crux
of the matter. If they cannot do that, then their bargaining
power is limited.
The Chairman. Senator Roberts?
Senator Roberts. Pill, are you any relation to Don?
Dr. Paarlberg. Yes, that is my uncle.
Senator Roberts. I could see some of the expertise that the
family seems to have in giving us advice and counsel as we wade
through all of the challenges that we have.
Well, thank you for coming and thank you, Ken, as well.
Mr. Chairman, I feel compelled to say that if Dishot Carter
had not turned the wrong way, that Drew Breese would not have
completed the pass on behalf of Purdue in the Alamo Bowl, but
then that is past history.
Dr. Paarlberg. It was a good game, though.
Senator Roberts. It was a good game. We look forward to a
rematch one of these days.
I think the Chairman has indicated something very
important. If you can somehow quantify the hurt or give us--I
do not know if it is possible to give us a formula or a set of
figures that would help trigger some alternatives, but you are
certainly on the right track and I give you a lot of credit in
that regard.
Let me just ask you some pointed questions. If Indiana, and
I am not sure that this is the case but we have different farm
groups in Kansas and, for that matter, all around the country
discussing the possibility of both moratoriums on mergers and a
ban on packer ownership.
What would you advise if the Indiana legislature were to
suggest that or, for that matter, what would you advise the
Congress? First on the moratorium, on an 18-month moratorium on
mergers, what would be your response?
Dr. Paarlberg. I think to some extent I would first want to
know what we mean by the merger. There is a difference here.
What we are talking about is horizontal, packers buying
packers, not necessarily packers vertically integrating,
because that is not in the paper.
So what I would say is our work is suggesting that you are
at a critical point here where if you go down and have fewer
and fewer firms, fewer and fewer packers, that markdown is
going to increase and it is going to do so at an increasing
rate.
So what we are saying in the paper is we think it is
prudent to evaluate where we are on holding the line at
existing numbers.
Dr. Foster. Can I just interject?
Senator Roberts. You certainly can.
Dr. Foster. From the point of view of Indiana, we just
finished a statewide committee that looked into contracting
issues for the state. Basically our recommendation was for
continued diligence and education.
I think what we discovered was that anything that was done
on a state level could only harm our industry for the state,
and experience in other states has borne that out. South Dakota
implemented a mandatory price reporting act. The day after that
went into effect, essentially the spot market for cattle in the
State of South Dakota disappeared because it required things
like objective pricing mechanisms.
So the individual who came to a fellow's farm and evaluated
on visual appraisal the quality of a set of cattle and quoted a
price, that was no longer allowed. So at that point,
individuals had to load their animals up on trucks, haul them
to market with basically no price discovery.
Senator Roberts. I think that is extremely important, Mr.
Chairman.
You mentioned tax incentives. I will find the paragraph
here. ``Tax incentives or deductions for members of production
and marketing networks, corporations, cooperatives and
alliances could provide incentives not only for producers to
enter such arrangements, but such policies could also be
fashioned to provide disincentives for producers to break away
from the group in an effort to capture short-term gains as a
''free rider,`` etc., etc..''
We have an outfit in Kansas called U.S. Premium Beef. Your
comments in regard to group marketing I think were especially
pertinent.
I am not sure if I understand how these tax incentives
would work. I am not asking for a complete report here but
could you sort of help me out in this regard?
Dr. Foster. I am not sure I know exactly how they would
work either, Senator, but what we do know is that
undercapitalization is a primary problem that faces
cooperatives approaches.
Senator Roberts. That is the key that I was getting at. But
you say that we should be considering some form of tax
incentives to answer that kind of a serious problem?
Dr. Foster. Ideally, that capitalization would come from
producers. We might consider outside investors but after the
past 24-months in the hog industry, there are not many outside
investors interested in investing there.
So we have to do something to encourage--if, in fact, this
is the solution, somehow we have to encourage a large number of
members because we are talking about huge numbers of animals
really to be able to affect any sort of symmetric bargaining
power for producers. And to get those large numbers of
individuals to align with one another and stay aligned, it will
probably take some sort of economic incentive up front.
Senator Roberts. The other thing that you suggested was
marketing orders, and I must say, Mr. Chairman, these are some
innovative suggestions, as opposed to the ban on mergers and
the ban on owning livestock.
You say marketing orders are used in several agriculture
markets where lack of producer bargaining power is a concern.
We are all familiar with out West in regard to the fruits and
the vegetables and, more especially, with dairy. I am not too
sure I want to go down that road in regard to following the
example of dairy.
Dr. Foster. I am not sure that I would, either. And realize
that when we put this paper together, we were trying to cover
the bases of policy alternatives, and that is why I think if
you read the paper, substantially less time and space is
devoted to marketing orders.
Clearly there are some serious problems with marketing
orders----
Senator Roberts. Yes, there are 11 lines here. There are a
number of lines more in your other suggestions.
Dr. Foster. That's right.
Also realize that the Ag Marketing Act that allows for
marketing orders does not include pork, so it would take some
significant legislation----
Senator Roberts. Mr. Chairman, my time has expired. I
really want to thank these witnesses for maybe getting us
beyond some of the easier things to say in regard to this
issue. And the thing that I would like to underscore in regard
to Ken's testimony is he says, ``However, public policy can
assist the producer in gaining countervailing market power,''
and that is a whole area that I think we should explore as best
we can and I thank the witnesses.
The Chairman. Well, I agree with the senator and that is
why I have encouraged updates as the model rolls on because
more data, more information may be available to us.
Senator Fitzgerald?
Senator Fitzgerald. Thank you, Mr. Chairman.
Dr. Foster, I was intrigued by what you said about
encouraging cooperatives, too, and I did want to follow up with
some of the questions Senator Roberts had. You said that
undercapitalization is the biggest problem for new coops.
Were you thinking when you mentioned the possibility of tax
incentives to encourage the participation in coops, were you
thinking perhaps of somehow providing a tax deduction for the
capital contribution?
Dr. Foster. Ideally, some sort of tax deduction or credit,
yes, for these individuals. We really had not thought that
through in any sort of detail, but some sort of economic
incentive.
Senator Fitzgerald. It seems to me that there must be some
barrier that farmers are deterred by the large capital
contribution they have to make to join the coop, to buy their
membership in the coop. They may make it up in a few years but
it is that up-front cost that is deterring them.
Are there studies that show that after they are members of
the coop, that they are liable to do better, to get better
prices and to retain more of the value at their farm level?
Dr. Foster. I am not aware of any specific studies, but I
think in terms of individuals' willingness to invest in these
ventures, there is a fair amount of uncertainty in terms of the
success of those ventures. So it becomes a capital investment
decision under uncertainty, which gets us into the issue that
we do have the option to wait and invest later, and that option
becomes quite valuable when there is significant uncertainty.
So I think basically we could price the option to invest in
the coop and that would give us some idea of what sort of tax
incentive would be required to get the typical individual to do
that.
Senator Fitzgerald. What about the potential for maybe a
loan program to help people make their capital contribution to
a coop? Are there any such loan programs available now?
Dr. Foster. I would have to defer to the people from the
Department of Agriculture.
Senator Fitzgerald. It was mentioned earlier, the
Cooperative Extension Service that the previous panel
mentioned. What role do you think that Cooperative Extension
Service could play in providing technical assistance to farmers
who are involved in cooperatives?
Dr. Foster. Let me clarify. I think what the previous
witnesses were referring to was the Coop Service within USDA,
not the Cooperative Extension Service. So let me address both
of those because I think both play a role.
Senator Fitzgerald. OK.
Dr. Foster. The Coop Service at USDA currently is funding a
cooperative agreement with myself and Dr. Joan Fulton at Purdue
to do research on the effectiveness or potential effectiveness
of pork producer coops, both from the production and the
marketing perspective. So I think that they have a role in
regard to funding research.
They have some excellent people in the field. I was at a
meeting with one of the groups that I have been working with in
Indiana and one of the field staff from USDA Coop Service was
at that meeting he is anincredibly skilled, experience
individual with a lot of potential to provide assistance,
technical assistance to people who are developing cooperatives.
Not all of those groups are interested in developing as
cooperatives and I am not sure when we go beyond that business
structure that the Government provides sufficient assistance.
The Cooperative Extension Service, of course, is there but
extremely overworked at the local level, so whether or not they
have the individual time to devote to this, I have my doubts.
Senator Fitzgerald. You are already researching this area.
Have you come across any statistics on what percentage of, say,
livestock producers would be involved in coops nationwide?
Dr. Foster. I do not have those statistics with me. Of
course, it varies greatly by industry. If you went to the dairy
industry, it is much higher.
Senator Fitzgerald. Eighty-four, 85-percent.
Dr. Foster. That is right. And if you go to the pork or
beef industry, it is very near zero.
Senator Fitzgerald. Well, what has encouraged the formation
of the cooperatives in the dairy industry?
Dr. Foster. Well, quite a bit of it was favored by the
marketing order.
Senator Fitzgerald. Back in the 1930s.
Dr. Foster. Yes.
Senator Fitzgerald. OK. Well, that is very interesting.
And I am going to have another commitment shortly and Mr.
Chairman, I just wanted to welcome, at this opportunity, to
welcome a couple of my constituents who are going to be on
subsequent panels.
The Chairman. Great.
Senator Fitzgerald. Ron Warfield, the president and
recently reelected president of the Illinois Farm Bureau from
Gibson City, Illinois is here. And on the panel after him, on
the fourth panel, Mike Clark from the National Corn Growers
Association. Mike, welcome. Mike is from Homer, Illinois and
also involved with the American Soybean Association, as well as
the National Association of Wheat Growers. Is that correct? All
those organizations. I want to welcome you here to Washington.
Thank you for coming.
And thank you to the panel here. Thank you.
The Chairman. Well, thank you very much, Senator
Fitzgerald. Let me mention that supporting the Purdue
professors here today are Mayor Bill Graham from Scottsburg,
Indiana, who is here, and out in the audience, Mr. and Mrs.
Robert Fear of Montpelier. We appreciate their coming very
much. Let me thank both of you.
And welcome, then, our third panel. Senator Fitzgerald has
mentioned we will be hearing additional witnesses and that
moment has come. Those witnesses include Mr. John McNutt,
president of the National Pork Producers Council from Iowa
City, Iowa; Mrs. Rita Sharma, National Cattlemen's Beef
Association from Williamsport, Indiana; Mr. William Roenigk,
Senior Vice President of the National Chicken Council of
Washington, D.C.; Mr. Ron Warfield, President of the Illinois
Farm Bureau, representing the American Farm Bureau Federation,
from Gibson City, Illinois; Mr. Michael Stumo, Organization for
Competitive Markets, Winsted, Connecticut; and Mr. John
Crabtree, Center for Rural Affairs, Walthill, Nebraska.
I will ask each of you to limit your testimony to 5
minutes, if that is possible, and the Committee will then
conduct a round of questioning following the presentations of
the panel.
I will call upon you in the order I introduced you, which,
first of all, would be Mr. McNutt. And Mr. McNutt, Senator
Grassley has been called to the floor to manage the Bankruptcy
Bill and before he left, he asked me to greet you, which I will
do. It is good to have you again. You are a regular here in our
Committee and we appreciate your lead-off today. If you would
testify, we would appreciate it.
STATEMENT OF JOHN McNUTT, PRESIDENT, NATIONAL PORK PRODUCERS
COUNCIL, IOWA CITY, IOWA
Mr. McNutt. Thank you, Chairman Lugar.
As you said, my name is John McNutt. I am president of the
National Pork Producers Council. I am a pork producer from Iowa
City, Iowa.
Let me be perfectly clear that America's pork producers
expect nothing less than a fair, transparent and competitive
marketplace. Nothing less will suffice to provide us and those
who follow an opportunity to earn a livelihood.
For pork producers, GIPSA is the only policeman on the beat
and we are determined to give this policeman the resources it
needs. We would not be here today if there were not some who
have strong sentiments that GIPSA has not met all of its
responsibilities.
The pork industry is changing at a very accelerated pace.
These changes raise some serious questions about the
effectiveness and efficiency of price discovery and the
potential for manipulation of markets.
NPPC is dedicated to enhancing market competitiveness for
pork producers. In the past few years we have launched a number
of new initiatives toward this goal. They include the passage
of the Mandatory Livestock Price Reporting Act. We got that
legislation and we have to make sure it is funded sufficiently
so it can get its job done.
I have named a Price Discovery Task Force that is surfacing
issues of concern for pork producers and possible solutions.
One of those solutions is what we call negotiating report,
producers reporting prices to the Agricultural Marketing
Service [AMS] so that they get part of the mix.
We also have the publication of a guide to marketing
contracts to help producers in the negotiation between
producers and packers, and I would like to submit that for the
record.
And we have created, following some conversations here, a
new producer-owned cooperative called Pork America, which has
been incorporated here in January. It is designed to give
producers a tool to change their position in the marketplace.
NPPC realizes that guaranteeing U.S. agricultural markets
are competitive and fair is a huge challenge. We believe the
attention of both Congress and the administration should focus
on four general areas.
GIPSA and the USDA must do a better job of educating the
public about the provisions of the Packers and Stockyards Act
and what it empowers GIPSA to do. Furthermore, they must help
delineate GIPSA's market and regulatory responsibility from the
market concentration responsibility of the Department of
Justice.
Also, the Federal Government must develop a comprehensive
strategy to address the problems of agricultural markets in
general and livestock markets in particular.
Today's hog market is enormously complex and technical.
Information and data that were once easily gathered is now
proprietary and frequently only available upon subpoena. Many
hogs are priced beyond the scope of negotiation through
contractual relationships whose effect on the entire market is
not very well understood. GIPSA must be able to recruit, train
and retain people with specialized skills. Given this job
market that we are currently in, this is becoming more and more
difficult. We urge Congress to help GIPSA overcome this problem
immediately and give GIPSA's management the flexibility it
needs to hire the best people.
Remember GIPSA must simultaneously reassure producers and
deter potential opportunists. GIPSA cannot have a constant
presence in the field without an adequate number of personnel.
The analytical tools and economic theories being used
today, many were developed more than 50-years ago and yet the
industries which GIPSA and DOJ regulate have changed
dramatically. Do the four-firm and eight-firm concentration
ratios and the Herfindahl-Hirschman Index mean the same things
that they used to mean? The future of thousands of pork
producers could hinge upon those answers, yet very little
research is ongoing in that area.
We believe a competitive grants and research fellowship
program in industrial organization and antitrust economics
would serve a multitude of purposes and should be established
now. We also need specific research to determine relevant
markets for hogs, determine the effect of contract hogs and
other captive supplies and estimate the impact of vertical
acquisitions.
Also, ongoing research and investigative results should be
delivered in a much more timely manner than in the past. Past
delays of GIPSA investigations and reports have clouded the
results and invited criticism.
There appear to be several areas in which GIPSA and DOJ
have insufficient authority or which current law is unclear.
One example is the focus of antitrust legislation on monopoly
power by sellers and its relative silence regarding monopsony
power by buyers. Aren't there some specific requirements which
GIPSA can employ to clearly delineate what packers must and
must not do on subjects such as lean prediction equations,
payment matrixes and the relationship between the two? Can't
basic requirements be established to ensure that carcass
information or kill sheet information is understandable and
reproducible by a producer with some reasonable level of math
skills?
In closing, National Pork Producers Council [NPPC] is
committed to a fair, transparent and competitive marketplace.
We also recognize that GIPSA must play a significant role in
providing market information and oversight that pork producers
need.
Mr. Chairman, thank you.
[The prepared statement of Mr. McNutt can be found in the
appendix on page 104.]
The Chairman. Thank you very much, Mr. McNutt.
It is a pleasure to have Mrs. Rita Sharma here. She has
been a regular attender of our Agriculture Committee meetings;
likewise, a distinguished citizen of my state and we appreciate
your coming today. We look forward to your testimony.
STATEMENT OF RITA SHARMA, NATIONAL CATTLEMEN'S BEEF
ASSOCIATION, WILLIAMSPORT, INDIANA
Mrs. Sharma. It is always a privilege to be in the same
room with you, Sir.
We thank you, Chairman Lugar and the Committee, for holding
hearings regarding oversight of the Packers and Stockyards
Administration and other market regulatory issues. I am Rita
Sharma, a feedstock producer from Williamsport, Indiana and a
member of the National Cattlemen's Beef Association.
Factors affecting livestock prices are a puzzle to many
outside our industry. Recent structural changes in the beef
industry have unfortunately coincided with various
international economic crises, strengthening of the U.S.
dollar, supply shifts, and weather-induced volatility in costs.
NCBA has long supported strong oversight and enforcement of
existing antitrust and market protection laws. However,
repeated antitrust investigation by Packers and Stockyards and
the Justice Department have not uncovered broad industrywide
illegal activities.
Part of the frustration in the country has been that many
marketing practices and industry concentration levels that are
perceived as illegal are not, in fact, illegal. National
Cattlemen's Beef Association [NCBA] supports timely and
complete USDA implementation of mandatory price reporting
legislation initiated last session by this Committee and
approved and funded by Congress. NCBA urges that USDA be
involved in premerger evaluation of proposed packer mergers, in
coordination with the Justice Department and supports adequate
funding for these agencies to accomplish their investigative
functions.
NCBA further supports a premarket system and we trust the
skills of U.S. cattlemen to allow them to prosper in a
relatively unregulated marketplace. We rely on Federal
regulators to ensure that the marketplace is free from
antitrust collusion, price-fixing and other illegal activities
that interfere with competitive market signals. If allowed to
work, the market will recover with a minimum of government
intervention and regulatory activity. For the U.S. beef
industry to be globally competitive, this is an absolute
necessity.
NCBA is specific regarding emerging business relationships.
NCBA does not support limitation of any method of marketing fed
cattle. NCBA supports a free market system. No action should be
taken to alter or halt private business arrangements among
operators in the beef industry. NCBA encourages producers to
take advantage of opportunities to increase profits through new
marketing strategies, coordination, risk management and
retained ownership.
Many producers are finding innovative ways to compete in
this changing cattle industry. For instance, the Five-State
Beef Initiative was formed in response to strengthen economic
opportunities for Eastern corn belt by providing added value to
the producer and consumer through a responsive production and
marketing system. The five states involved--Illinois, Indiana,
Kentucky, Michigan and Ohio--are hopeful of success. A multi-
state proposal from the group is available upon request.
Funding members and current shareholders of these and many
other beef marketing systems are long-term professional
cattlemen proactively addressing the concerns of the beef
industry through bold new marketing strategies. Their efforts
are focussed on improving beef demand and producing a better
beef product, marketed through their own companies.
The beef industry is in many ways a bright spot among
depressed agricultural commodities. Declining numbers of calves
and feeder cattle, improving beef demand after a 20-year
decline, improvements in Asian financial conditions and growth
of other export markets are all resulting in generally higher
prices. Projections are for these conditions to continue.
In part, the beef industry has recovered from the difficult
times experienced in the mid 1990s because we have never relied
on government to fix industry conditions caused by market
forces.
We believe in free and fair private sector market forces,
not government hand-outs, to manage our industry. Cattlemen
have always had the freedom to farm and the freedom to fail.
The historical information may make it easier for the Committee
to understand why there is a great deal of caution and
reluctance by the beef industry to call for dramatic expansion
of government intervention in the beef marketplace. Yet we
remain committed to strong oversight and enforcement of
existing laws and regulations to keep the field of play level.
Mr. Chairman, the National Cattlemen's Beef Association is
not naive. Its members are fully aware of the dilemmas faced by
hogs, grains and poultry. We empathize, but the National
Cattlemen's Beef Association wishes to deal with these issues
by participating with the Congress and their agencies in
evaluating current market issues and providing input as new
issues arise.
Thank you, Mr. Chairman and the Committee, for the
opportunity to present this information.
[The prepared statement of Mrs. Sharma can be found in the
appendix on page 111.]
The Chairman. Thank you very much, Mrs. Sharma.
Mr. Roenigk?
STATEMENT OF WILLIAM P. ROENIGK, SENIOR VICE PRESIDENT,
NATIONAL CHICKEN COUNCIL, WASHINGTON, D.C.
Mr. Roenigk. Good morning and thank you, Mr. Chairman, for
the opportunity to present our views on this important topic.
My name is Bill Roenigk. I am senior vice president with
the National Chicken Council. We used to be called the National
Broiler Council but we changed our name because chicken has
taken over the world, so we want to let people know what a
broiler is, so we finally have told them.
The Chairman. Good.
Mr. Roenigk. In the interest of time, I will be very brief
but I request that my written statement be entered in the
record.
The Chairman. It will be placed in full.
Mr. Roenigk. Thank you.
The National Chicken Council, as we are now called,
represents companies that produce and process about 95-percent
of the young meat chicken or broilers in the United States.
These vertically integrated firms contract with growers to
raise live birds for processing and contract with breeder farms
to produce a supply of fertile eggs for hatching.
The system of production, processing and marketing is
highly coordinated and operates very much in a just-in-time
method. Contract growers and processors are mutually dependent
upon each other. It is in neither party's interest to
jeopardize the economic viability of the other party. Most
growers have a relatively long and stable relationship with
their processor.
With respect to one of the specific issues being addressed
today, the National Chicken Council is opposed to USDA having
expanded regulatory authority over poultry production because
such power is unnecessary. Adequate authority and remedies
already exist. In 1987 Congress fully and carefully considered
the proper scope of GIPSA's administrative enforcement
authority, including civil money penalty authority, with
respect to the transactions involving live poultry and poultry
products. Congress at that time declined to provide such
authority to GIPSA for any violations of the Packers and
Stockyards Act other than those related to prompt payment and
the statutory trust for live poultry dealers. The National
Chicken Council is not aware of any conditions that have
changed nor developments that would require Congress to reverse
its decision that it made in 1987.
As I noted, GIPSA does have the authority to issue cease
and desist orders, level civil penalties for violations of the
Packers and Stockyards Act, protections regarding prompt
payment and statutory trust. Further, GIPSA can investigate and
refer to the Department of Justice for enforcement to Federal
courts other violations of the Packers and Stockyards Act
involving live poultry; for example, weighing practices and
contract compliance.
And two, Packers and Stockyards gives the Federal Trade
Commission jurisdiction over our marketing practices involving
poultry products. As you can see, there exists ample oversight
and authority for poultry.
One other important point that should be made is unlike the
red meat industry, private actions for breach of contract under
common law contract principles, as well as under statutory
provisions protecting growers, are available to police the
relationships among poultry growers, dealers and processors,
thereby going a long way to ensure fair dealing for all. This
legal point about contractual obligations is very important but
often overlooked in the discussion of a broader issue.
Poultry is produced, processed and marketed in a very
coordinated, vertically integrated system. This business
model's structure is distinctly different from the methods used
in red meat. For the reasons presented here and because chicken
is produced, processed and marketed in a distinctly different
system and because the vertically integrated firms have
successful ongoing contractual relationships with the growers,
it is unnecessary to burden the poultry industry with
additional government regulations.
Mr. Chairman, we appreciate the opportunity to share our
views with the Committee.
[The prepared statement of Mr. Roenigk can be found in the
appendix on page 116.]
The Chairman. Thank you very much, Mr. Roenigk.
Mr. Warfield?
STATEMENT OF RON WARFIELD, PRESIDENT, ILLINOIS FARM BUREAU,
REPRESENTING THE AMERICAN FARM BUREAU FEDERATION, GIBSON CITY,
ILLINOIS
Mr. Warfield. Thank you, Mr. Chairman and members of the
Senate Ag Committee and thank you for holding this hearing.
My name is Ron Warfield. I am president of the Illinois
Farm Bureau and member of the Executive Committee of the
American Farm Bureau. I am a corn and soybean farmer in Gibson
City, Illinois and previously, for about 25-years, fed cattle,
so I am interested in that, as well.
Today I am testifying on behalf of the American Farm Bureau
Federation, which is the largest general farm organization in
the U.S., representing farmers in all fifty states and Puerto
Rico.
We appreciate the opportunity to testify at this hearing on
concentration and consolidation in agriculture. Obviously the
structure of agriculture is changing rapidly. The accelerated
pace of consolidations, mergers and acquisitions is one of the
most hotly debated issues among farmers across the country, and
I am sure you have heard that, as well.
Today I would like to reveiw the basis for the concern
farmers have over concentration and consolidation in
agriculture, actions that we can take to address our concerns,
and improvements to policies to assist farmers in dealing with
the rapidly changing agriculture.
Farm Bureau has a long history of supporting market-
oriented agriculture, but farmers and ranchers need assurance
that markets are free and open, that they are competitive, that
they are transparent, that they send clear price signals and
they are based on good information. Particularly when I hear
the last panel, good information is necessary for markets to
work but good information is also necessary to know that they
are free and open and how do we determine if there are really
monopolistic opportunities that exist? And I think there is
certainly a void in information in a lot of areas.
Are markets really working the way they are supposed to?
Among farmers, the frequent perception is they are not. For
instance, is there competition when mergers and acquisitions
have reduced the number of companies selling production inputs,
causing farmers to frequently ask are the prices they pay for
these inputs based upon good competition?
Is there competition when the growing use of patents on
biotech seeds means private companies own and have tight
control over specific seeds?
Is there competition when railroad mergers have disrupted
the orderly flow of crops to export because there are fewer
cars to haul corn and soybeans across the country?
Is there competition when live hog prices fall to
Depression-era levels and retail prices are not similarly
reduced? Researchers find it impossible to explain the spread
between live hog prices and retail pork prices over the last 3-
years.
Much of farmers' concerns stem from the farm-to-retail
price spread I just mentioned and other events which have
transpired in the meatpacking industry. Farmers and ranchers
have also questioned why some packers have purchased plants,
only to seemingly shut them down.
This information is provided to paint a picture of the
rapid consolidation of the ag industry. Farmers and ranchers
realize that the world is changing and the market system is
evolving, but that said, we must also ask, is it time for our
market rules and policies to evolve, as well?
Last year Farm Bureau worked with Congress to address some
of these concerns. Farm Bureau has worked diligently to seek
additional appropriations for GIPSA so that it may fully
enforce the Packers and Stockyards Act. Also a step in the
right direction was the passage of the Mandatory Price
Reporting legislation last year. This legislation is designed
to provide producers more market information on livestock
transactions, including contractual arrangements.
Farm Bureau has assembled an action plan designed to ensure
competition in agriculture and 10 specific points of that could
be taken by Congress and the administration are included in the
written testimony. We would hope that members of this Committee
will find that these are worthy of pursuit. We would also be
interested in pursuing the private sector because we are
interested in pursuing that, as well, if we would want to
discuss that in the question period.
The actions suggested in our written testimony address just
a few of the pieces of the concentration puzzle. Farm Bureau
delegates just last month approved new policy on an expanded
and more active USDA role in mergers and acquisitions. They
would broaden the USDA responsibility in official consultation
with the Department of Justice and should bolster farmers'
confidence that a thorough review of concentration of
agribusiness is taking place before it is approved.
This USDA review would take into account such factors as
the effect of the acquisitions and mergers on prices paid to
producers who sell to or buy from or bargain with one or more
of the parties involved in the merger; the likelihood that the
acquisition or merger would result in significantly increased
market power for the new or surviving entity, and obviously in
the pork industry, as we just heard, more concentration would
be extremely detrimental; the likelihood that the acquisition
or merger will increase the potential for anti-competitive or
predatory conduct by the new or surviving entity; whether the
acquisition or merger will adversely affect producers in a
particular regional area, which could be an area as small as a
single state.
We have outlined a number of requests today. We hope these
comments will be viewed as an indication of the degree of
thought that farmers have put forward on how concentration is
impacting their farming operations. Thank you for the
opportunity to testify.
[The prepared statement of Mr. Warfield can be found in the
appendix on page 119.]
The Chairman. Well, thank you, Mr. Warfield.
Congratulations on your reelection in Illinois and your service
on the Executive Council here in Washington.
Mr. Stumo?
STATEMENT OF MICHAEL STUMO, ORGANIZATION FOR COMPETITIVE
MARKETS, WINSTED, CONNECTICUT
Mr. Stumo. Thank you, Chairman Lugar and the rest of the
Committee on Agriculture, Nutrition and Forestry for the
opportunity to speak here today.
My name is Michael Stumo. I am general counsel for the
Organization for Competitive Markets. The Organization for
Competitive Markets is a multi-disciplinary group of farmers,
ranchers, academic, attorneys and businessmen who focus
exclusively on competition policy in agriculture. I am also a
hog farmer from Massachusetts and I am formerly an Iowa hog and
cattle buyer and I work with farmers, also, to set up
cooperatives.
I come before you today with a sense of urgency, Chairman
Lugar. This is not just another farm crisis. This is the end
game of independent family farm agriculture. The crux of the
issue is industry structure. There are tremendous amounts of
money being made in the food industry, but the farm sector, the
farm production sector, does not receive that money because the
oligopsonistic meatpackers and the oligopsonistic retailers
have positioned themselves to capture the bulk of that profit.
Thus, high packer margins, high retail food margins and the end
of the family farm. This is not a future. This is very quick.
Five-years, we will not have an open spot market in hogs.
Feedstuffs Magazine, the number one agribusiness weekly in
the country, editorialized last September that, and I quote,
``American agriculture must now quickly consolidate all farmers
and livestock producers into about 50 production systems.''
This is not just an editorial; it reflects the long-range
strategy of agribusiness. It cuts through the euphemistically
rhetoric of alliances and coordinated system. It is
mercantilistic win-lose. Agribusiness wins; farmers lose.
How did we get here? First in the livestock sector,
meatpackers consolidated horizontally; now they are
appropriating the food chain vertically. For the farm
production sector, that means that IBP, ConAgra's Monford,
Cargill's Excel and Smithfield Foods are soaking up the
productive assets of family farmers either through contracts or
outright ownership.
If packers own or control the livestock, there is no
independent livestock agriculture, period. Thus we have not
only the open market problems of the oligopsony on the general
market level and the competition, specific competition
practices; we have the closure of the market through
contracting. Why is contracting bad at the macro level? Why is
it not merely free enterprise working at the macro level?
First, the contracts take the production off the open
market, pricing becomes secret, and the open markets wither
away.
Second, packers can more consciously than ever before pick
the winners and the losers. In October 1998 the buyers for
Hormel and Excel were talking to veterinarians in a conference
call and they were talking about the production contracts that
they use. The Excel buyer--they both admitted that they pick
the producers that they feel will succeed to contract with.
That leaves everyone else out. The Excel buyer admitted that he
had zero people, zero small producers under contract.
Third, a long-term contract fundamentally transforms a
farmer from a profit center into a cost center. The producer
becomes a locked-in cost from the perspective of the packer,
which the packer now has not only the incentives but the
control necessary to reduce that cost with unilateral will.
Once under contract, the packer imposes terms and conditions
which reduce producer profit and management discretion and, in
some cases under some contracts, increases the producer debt to
the packer. It is the company store problem.
With widespread contracting, the open market withers away
and producers increasingly have no choice at the micro level
but to contract, because of the open market problems.
The Packers and Stockyards Act is the strongest trade
regulation statute in the country. It was designed to prevent
problems in their incipiency, and this is a very important
distinction, Mr. Chairman, the incipiency theory rather than
the past proof of harm theory. The Office of General Counsel
and Mike Dunn, as you heard today, have taken the latter
position--proof of harm. Thus, we have all the Economic
Research Service [ERS] studies trying to analyze whether there
has been harm in the past, three, four, 5-years ago or not.
They use voluntarily disclosed packer data. The packers do not
disclose the stuff, if it exists, that may be incriminating. It
is voluntary. And they do not use the proper models, as Mr.
McNutt mentioned earlier. And Mr. Dunn and Mr. Baker fail to do
anything to correct these problems. It is a legal standard
problem. It is a big problem.
So the Office of General Counsel [OGC], when GIPSA comes to
OGC, the Office of General Counsel, with their investigation,
OGC says it is not enough. Or if private parties come, OGC says
it is not enough. But they have never said what is enough.
Now, we also have to distinguish between regulation and
enforcement. Regulation has the whole formal process of proving
and establishing a substantial basis for whether this
particular practice is an unfair trade practice under the Act.
And the regulator has much more power to, in fact, define that
and much more discretion to do so.
In 70- or 80-years they have failed to do it. There is
nothing. Nobody knows what this thing means. They just keep
saying that it is very powerful authority. They have not
regulated. So then they go to enforce on a case-by-case basis.
They are another plaintiff in Federal court. They are trying to
create meaning out of the law and then the defendants are
defending with much more resources, much more expertise than
OGC has, and they end up with unhelpful court dicta, without
the back-up of regulatory definitions of what unfair practices
are in the packing industry. So there has been failure on that
end of it. And the current administration and past ones have
done nothing to do anything about that.
So OGC's enforcement expertise--not only have they barred
regulation but their enforcement expertise is lacking. They
bring ERS into the picture with old data and old methodology.
And then GIPSA just does not have the enforcement tradition,
the professional tradition, the expertise that Justice has in
going in and analyzing an industry. Justice has much more of
all those factors--tradition, professionalism--to do that and I
am very pessimistic that GIPSA will ever get up to that speed,
and this Committee may want to seriously consider transferring
anti-competitive practices authority over to Justice.
Thus, I propose and the Organization for Competitive
Markets proposes a few things Congress may want to look at.
Number one is making clear legislatively that incipiency theory
is the proper standard to view harm rather than past proof of
harm.
Second, ban packer ownership of livestock. If the packers
own it, independent producers are gone, period. It is not going
any further. Iowa lost one out of five hog farmers last year.
Next, open the contract packer market to the open market
process, not secret negotiations, limit how much they can
procure under the contracts and those contracts require to be
open bidding; anybody can bid.
And lastly, enable the private sector to enforce the Act,
as well, with attorneys' fees for lawyers because farmers
cannot get lawyers if they want to get enforcement under the
Act. They cannot afford lawyers. Attorneys' fees would go a
long way.
And I apologize for going over but I appreciate the
opportunity of being here, my first time ever at a hearing.
[The prepared statement of Mr. Stumo can be found in the
appendix on page 127.]
The Chairman. Well, thank you very much for your analysis
and for your very constructive suggestions.
Mr. Crabtree?
STATEMENT OF JOHN CRABTREE, CENTER FOR RURAL AFFAIRS, WALTHILL,
NEBRASKA
Mr. Crabtree. Mr. Chairman, senators, thank you for
inviting me here today. My name is John Crabtree and I lead the
Market Structure Project at the Center for Rural Affairs in
Walthill, Nebraska.
In December 1998 and January 1999 prices paid to farmers
for their market hogs dropped to unprecedented lows, something
we all remember very well. Over the last year prices have risen
to barely profitable levels and family farmers have left or
been forced out of hog production in droves.
Livestock production in the Midwest and Great Plains has
always been a family farm and ranch enterprise. Today we are
replacing those sustainable and efficient--yes, efficient--
family farms with a virtual handful of industrial, vertically
integrated operations. We are only at the beginning of the
economic debacle that we face if we allow family farm livestock
production to become a thing of the past. In a recent Des
Moines Register editorial, Chris Petersen, a pork producers
from Clear Lake, Iowa and a personal friend of mine, lamented
that ``You'll miss us when we're gone.'' He was, of course,
right in more ways than most of us care to imagine.
Why should we accept the destruction of family farm
livestock production? Many tell us that it is inevitable. The
truth is another matter. We have been told time and again that
large-scale vertically integrated livestock production
facilities can do a better, more efficient job of raising
livestock, but research tells us a different story. Iowa State
University economist Mike Duffy's research analysis of Iowa
farm records demonstrates that economies of size run out at
about one-hundred-fifty sows farrow-to-finish. The most
efficient one-third of hog producers in the University of
Nebraska Swine Records Program sold two-thousand-six-hundred-
seventy-eight pigs and as pork producer friends will tell you,
that is not a very large hog farmer anymore.
The destruction of family farm livestock production is not
inevitable. It is the result of choices--policy choices,
administrative choices, and enforcement choices, choices made
by people, and we can choose another path. Farmers and ranchers
over the last year have fought furiously to create the kind of
future in livestock production that they want. They ask for
nothing more than access to a marketplace and the chance to
compete on a level playing field, something that has been
consistently denied them of late.
For years, the Center for Rural Affairs, other farm
organizations and the farmers and ranchers who support our work
were told that mandatory price reporting legislation was out of
the political reality. Then, in 1999, something rather amazing
happened. Farmers and ranchers from throughout rural America
started coming together to change that political reality. They
found some state legislators who agreed with them and they
passed price reporting legislation in five states.
And they did not stop there. They changed long and closely
held positions of key commodity groups, they lobbied Congress
and they kept the pressure on until mandatory price reporting
had changed from the impossible to a political imperative. And
then this Committee responded by working diligently to create
good, sound, strong price reporting legislation, which became
the law of the land. That is how things are supposed to happen
in this society, thankfully.
However, the same farmers and ranchers that challenged the
status quo and won note the job is not done. If we are to
create a future for family farm and ranch livestock production,
there are more issues that need to be addressed, that must be
addressed, and two needed reforms stand out.
The first, which is the focus of my testimony today, is
prohibiting price discrimination in the livestock markets. When
family farmers sell hogs, they get significantly less than
large-scale pork production companies just because they lack
the economic power to demand volume premiums. USDA's 1996
Western Corn Belt Procurement Investigation demonstrated that
prices paid to producers clearly increased with seller size.
That was in 1996 when the negotiated spot market demand for
hogs was about triple what it is today. Volume-based premiums
are undoubtedly far more prevalent today than they were 4-years
ago.
Now an effective price reporting program will provide
important information for the Packers and Stockyards
Administration to spot this routine price discrimination that
occurs in livestock markets today. However, the information
alone will not suffice.
The Packers and Stockyards Act prohibits undue price
preferences and grants USDA broad authority to stop unfair
trade practices in their incipiency. That authority is unused.
Secretary of Agriculture Dan Glickman recently that USDA would
``not allow farmers to become serfs on their own land'' in
reference to concerns about concentration and consolidation in
the seed industry. This statement rings hollow when one
considers that the Secretary and Packers and Stockyards have
done little to stop the same thing from happening with pork
producers in this country.
The Secretary should start to rectify this inaction by
issuing administrative rules that clearly define and
aggressively prohibit undue price preferences in livestock
markets. The reasons for USDA's inaction on this issue are
unknown to me and that inaction is, to say the least,
confounding.
I have attached to my testimony language that the Center
for Rural Affairs has proposed as a starting point this
afternoon. In this proposal we recognize that packers should be
able to pay premiums for measurable and definable differences
in carcass quality and transactional costs but that volume-
based premiums that simply reward economic power over hard work
and efficiency reduce competition and diminish the marketplace
and should be prohibited. Every farmer that I know would be
more than happy to put their hard work and skilled management
up against the largest corporate hog producer in the country if
they knew that they had a marketplace that would judge their
livestock on a level playing field and price them accordingly.
Issuing rules on undue price preferences is not only
something USDA can do but must do if they are serious about
restoring competition in the livestock markets. USDA officials
in the Office of General Counsel have argued to me and others
that by defining undue price preferences, the authority under
the Packers and Stockyards Act will be narrowed and therefore
diminished. However, since that authority is virtually unused
currently, what we have today is a livestock market that has
essentially no rules whatsoever regarding price discrimination.
The Center for Rural Affairs sought the legal opinion of
Professor Neil Harl of Iowa State University in this regard. I
have attached to my testimony his letter in response and I hope
that will be put into the record. In this letter Professor Harl
clearly points out that USDA has not fully exercised the
authority granted under the Packers and Stockyards Act to
promulgate rules, especially in the area of price
discrimination in livestock pricing.
USDA seems to have adopted the stance that volume premiums
that reward economic power over hard work and efficiency are
``the American way.'' But in truth, the American way has always
been the belief that hard work and efficiency should be
rewarded and that competition enhances the marketplace.
Finally, the second much-needed livestock market reform is
a prohibition on packer ownership of livestock. Senators
Grassley, Kerrey, Johnson, Senator Daschle and a number of
other people have introduced legislation or will introduce
legislation to ban packer ownership of livestock. I would like
to take this opportunity to thank these senators and others who
have voiced support for it. Clearly, the transparency that we
will achieve through mandatory price reporting and a
prohibition of price discrimination will not alone create a
future for family farmers in livestock production if the doors
to the marketplace are barred to them because meatpackers own
all the livestock that they kill from birth to slaughter, as is
rapidly becoming the case in the pork sector.
Legislation that prohibits or dramatically limits packer
ownership of livestock is needed to keep the door to the
marketplace open for family farmers and ranches.
Thank you for your time and consideration. I would be more
than happy to answer any questions.
[The prepared statement of Mr. Crabtree can be found in the
appendix on page 137.]
The Chairman. Let me start the questions picking up where
you left off, Mr. Crabtree.
Mrs. Sharma and Mr. Roenigk, in the cattle and in the
poultry industries you take the position that the packers or
producers at the packer level in your industries ought not to
own birds in one case or cattle in another. In other words, is
the situation as you perceive it identical as that which is
being described in the hog market?
Mrs. Sharma. NCBA does not oppose captive supplies of
livestock for packers. They have no prohibition against any
type of ownership or any type of contractual agreement wherever
it is in the cow production chain. Our belief is that part of
what insulates us is our basic structure.
If you take the cow calf, the large amount of capital
input, the low amount of return and the long return on capital
is something that does not interest the packer. Couple that
with the fact that the majority of cattle producers across the
United States still are in the range of twenty, twenty-five
head of brood cows. The average size brood cow herd in the
State of Texas is fifteen brood cows. So we are still primarily
composed of small producers who control the beginning product.
The beginning product is not suited to ownership by a packer
and we believe will help to insulate us from other actions.
The Chairman. How about the chicken industry?
Mr. Roenigk. In the chicken market, the market requirements
and specifications often are very, very precise. They may say
2-pounds, twelve-ounces, plus or minus two ounces. So 1-day or
even a half a day on feed longer or shorter would affect that
bell curve and how many would be there.
At the same time, we are seeing a growth in very specific
niche markets and the barriers to entry for those companies are
very small. We are talking organic, free-range, those types of
chickens. And, of course, those chickens have to be very, very
specifically grown to meet the market demands.
So unless you own those chickens or have a contract to
produce that specific type of bird requirements, you are not
going to get exactly what the market wants and therefore, you
are not going to be able to participate in the market.
The Chairman. So you have contracts to specify this,
essentially?
Mr. Roenigk. Exactly, and we have in the contract rewards
for doing a better job.
Mrs. Sharma. Mr. Chairman, if I may add, the basic control
we have over what type of livestock we raise is the spot market
and such, as well as the packer market and what they are
willing to pay for specific types of livestock. They are moving
very rapidly to control the type of livestock that are raised
and offered for sale by oftentimes reducing prices by 50- or
60-percent if those livestock do not meet their requirements.
The Chairman. Mr. McNutt, what is the position of the pork
producers on this packer ownership of livestock?
Mr. McNutt. We went through an extensive process last year
after delegate action to look at this whole issue and at that
time, the producers decided through our Federation Council that
we were not in favor of moving against packer ownership
restrictions last fall, but a lot has happened since last fall.
We are listening to what our delegates have to say. We have an
annual meeting coming up here in March.
Our sense, though--is as an individual producer, my sense
is with what has happened to my industry, yes, it sounds like a
very appealing thought to have packer ownership restriction but
when I have to put the hat on that I wear here and have to look
at what is the effect on the industry at large, what are those
unintended consequences that are out there, are there better
ways to do things to address this issue other than that very
heavy hand of a complete ownership restriction? I am not very
comfortable with a social control of that measure.
I think that if we are smart about looking at things that
we are talking about today, fixing Packers and Stockyards,
making sure that it has the authority and the responsibilities
and the funding that it needs, looking for the creation and the
development of new methodology for producers to empower
themselves in the system through the use of cooperatives, that
there might be able to be other ways to address this.
The Chairman. Well, while you have the floor, Mr. McNutt,
let me just follow up because the question has been raised or
at least this sort of theme floats through that these very
severe conditions with regard to hog prices last year, the
predictions then were that thousands of hog farmers all over
the country would clearly be out of the business.
Now the census figures always follow and trail, so they are
more than anecdotal but not precise. But at least as I recall,
the number of hog farmers in the country is somewhere around
106,000 and perhaps five-thousand or six-thousand had been lost
during the course of the year. In Indiana it was something like
six-thousand-two-hundred that we used to have and six-thousand
that we still have, which is still two-hundred farmers fewer,
but remarkable resiliency, given the hit.
Now, what happened? Was there enough reserve or did things
turn around sufficiently? Are people still hopeful? If you take
a look at the time line of normal attrition of hog farmers over
the course of this century, we have been losing many more than
that in most years that were not visited with such a
devastating price.
Mr. McNutt. Mr. Chairman, we have taken in excess of $4
billion out of our industry. What has probably sustained the
numbers to some degree is the sense that even with that huge
loss, the U.S. pork industry has still been the most profitable
sector of U.S. agriculture in the last 14-years.
So bankers and so forth know that they have had a very
strong track record. What it has done, though, is that now
producers that are still remaining--and we have lost quite a
number--their amount of options available to them are less and
less. When the bank tells them, ``You must contract or you
don't have another line of credit,'' they do not have the
choice that they had a few years ago when they said, ``No, I
want to stay on the open market.''
So there has been a profound effect, even though we have
not seen quite as many losses of people.
The Chairman. Let me ask briefly for Mr. Warfield, Mr.
Stumo and Mr. Crabtree to add whatever they want to this
dialogue and then I will turn to my colleague Senator Roberts
for his questions. Mr. Warfield?
Mr. Warfield. I would just comment that in Illinois, of
course we do not have the up-to-date numbers but we probably
did lose close to 25-percent of our producers.
The Chairman. Twenty-five percent?
Mr. Warfield. Yes. Now, that is based on looking at
numbers. We do not have exact numbers. That is just looking at
the sow numbers relative to extrapolate what happened to the
numbers of producers. So we did take a significant hit and, as
it was indicated, they certainly have had a lot less
opportunities in terms of--and there could be some other
factors----
Senator Roberts. Is that all producers or just hog
producers?
Mr. McNutt. Hog producers.
The Chairman. Does it mean that farmers who had hogs as a
part of their program dropped the hogs but maybe stayed with
corn and beans?
Mr. McNutt. Yes, yes, absolutely.
The Chairman. So they are still in the market, although
maybe not in the hog market.
Mr. McNutt. That is correct. And what we are seeing is an
acceleration, a dramatic acceleration in the change that is
taking place. Illinois has gone from the number two hog-
producing state in the country down to number four and we have
been under a very dramatic decline during this hardship time.
The Chairman. Mr. Stumo?
Mr. Stumo. Thank you, Chairman Lugar. I would like to bring
your focus to the perspective of a packer buyer in a
competitive market or a closed market. Imagine being a buyer
that has to fill up a 10,000-head kill line every day and
imagine being that buyer 20-years ago and you have to go out
and compete with more firms and you have to bid openly and
negotiate to fill every one of those shackles.
With the advent of concentration horizontally, you take the
factor out that you are actually competing with more firms. You
have less firms. In fact, I would argue that national
concentration levels are irrelevant because transportation
makes it unfeasible, of course, to send an Iowa pig to
Washington. So I do not think we should even maybe talk about
the national, look at the geographic, and that has never been
done within USDA.
So we have less firms to compete against and then you take
the next step of the packer owning hogs or cattle. So you see
in the Northwest where there is between 60- and 80-percent
captive supply and part of that is packer ownership or in other
parts of the country where maybe it is thirty to fifty in beef.
So you take three-thousand to five-thousand hogs or cattle,
whichever way you want to look at it; those shackles are
clearly going to be filled because you have that under control.
Thus, you only have to bid for maybe five-thousand to eight-
thousand, but you have part of those under contract for your
best guys and picked out who you think is going to succeed or
who you like or for whatever reason, you have picked those. So
maybe you have another three-thousand to five-thousand or
three-thousand that are filled. So you only have, say, two-
thousand or three-thousand left to bid on the open market.
So number one, you have those three steps: less competition
with other packers; you have locked up through packer ownership
and you have locked up through contracting. Thus you only have
two-thousand head to procure, going out in the market and
bidding and negotiating with people every time. So those three
steps.
And that is what I think this Committee maybe should look
at, is how do we look at the buyer mentality here and require
more competition, and part of that is to limit--to ban the
packer ownership or severely reduce it. And the contracting--
allow contracting and allow the benefits of contracting but
open it up to bidding so there is less potential for
intentional exclusion, especially of small producers or
unfavored producers. And limit that security on the buyer side,
not eliminate it but limit it in the interest of preserving
family farm agriculture and competition. Thank you.
The Chairman. Thank you. Mr. Crabtree?
Mr. Crabtree. Thank you, Mr. Chairman. Just a couple of
things on your questions.
If my memory serves me, Iowa lost, I think, 17- or 18-
percent of their pork producers last year. Nebraska, my state,
about 15-percent.
The Chairman. Well, how does that reconcile with the
overall figure of 5 or 6 in the Nation, with these huge losses?
The counting must be very different in some areas.
Mr. Crabtree. I think the thing that is interesting is when
you look at the census, the numbers that were lost were, of
course, not lost across the board but typically from the
smaller producers, the numbers of smaller producers, where
there still are a lot more. These are producers that simply
have not had access to contracts, that bore the brunt of that
$8 hog market.
The reality was when hogs were $8 on the spot market, the
average hog was not on the kill floor at $8. It was probably
hitting the kill floor at more like $25 a hundredweight for
procurement. There was an extraordinary level of price spread
in production that point in time. So certain producers got the
worst witness on them and I think certain areas that have more
of those smaller producers took a bigger hit.
I just wanted to mention support for packer ownership. I
believe the Iowa Pork Producers Association just recently voted
their support to ban packer ownership of livestock and Nebraska
has continued their support for that. The Iowa Farm Bureau had
a heated debate about it and I believe put some rather forceful
language forward on it, as well. This is a debate that is
really ongoing in a lot of farm organizations and commodity
groups.
The last thing, just to mention rulemaking on
discriminatory practices as it applies to contracting and
captive supplies, once again those producers that were
destroyed last year, or at least had their hog operations
destroyed last year, one of the most significant things that
they faced was not only an inability to get a fair price in the
spot market but also an inability to get access to contracts.
That is a discriminatory practice just as much as paying less
for a hog, paying less just because you are small.
In the absence of the Packers and Stockyards Administration
promulgating rules which define what these discriminatory
practices are, including the extension of contracts, we are
simply never going to have family farm producers, whether it be
through contracting measures or through an open market, that
will be able to survive.
And once again, to go back to USDA has simply been
unwilling to do that rulemaking and needs to step up to the
plate and do it.
The Chairman. Fine. Mr. Warfield, quickly, because I need
to let Senator Roberts have a chance.
Mr. Warfield. The one comment on packer ownership of
livestock, I should say that at the American Farm Bureau
Federation (Farm Bureau) [AFBF] level, we do not oppose packer
ownership of livestock but it does indicate a lot of
differences among states and I have to say in Illinois, our
delegates in December did pass a provision saying we would ban
ownership of livestock by packers.
And I think this is indicative of the atmosphere we are in
and I think it exhibits a frustration. And by states, we are
doing what I think Senator Roberts said earlier. State by
state, we are doing different things because of the concern
that the action is not being taken at the national level.
The Chairman. I think your testimony helps us a lot. And
just to complete the record, I am going to ask our staffs to
first of all, try to give us an up-to-date census on who is
still in the business, state by state and generally, so we
agree on that and likewise, how many packers there are out
there. There is pretty good information today about the
percentage of capturing of these markets but we need to get up
to date as to where the mergers are, who the people are and so
forth.
Finally, we need a pretty good inventory of state action--
legislative proposals, but also action by our major farm
groups. As you say, a significant debate is going on in Iowa
and Nebraska and elsewhere and as Senator Roberts commented
earlier, this is important and some of our testimony is because
if we have a checkerboard pattern ultimately, not just of
opinions but actually of laws, sometimes that may opt against
states that are passing these laws. We heard that a little bit
with regard to price reporting in South Dakota, that the market
dried up for a while, whatever may have been the merits of this
in terms of a general policy.
Senator Roberts, will you please proceed?
Senator Roberts. Thank you, Mr. Chairman.
I want to thank all the witnesses for their excellent
testimony. I think we are getting into this debate to the level
that we should, as opposed to maybe the capsule comments that
we see all the time in the press about this issue. I think all
the witnesses have been very helpful.
I think the thing that is obvious to me is that as we go
through this debate with our farm organizations and state by
state, you have very strong opinions about this--it is the
what-if--and I am really interested to see what could be done
administratively, if it possibly can. You know, we are a very
reactionary outfit back here and to propose legislation is
certainly salutary but it takes a long time. You go through all
the debates and then you have to dot all the i's and cross the
t's and hope that the administrative implementation works and
it goes on and on and on.
I would really like to see what we could do from an
administrative standpoint, so that is my two cents worth on
that score.
John--pardon me--Mr. McNutt, you had indicated, I think on
page 7 of your testimony, ``Might there be a way of spelling
out a few acts which constitute per se violations of the Act
and thus save time and money and ensuring fair and competitive
markets?'' And you refer to a GAO study of the Secretary's
authorities, duties and responsibilities which will address
this topic.
I am aware of that study. I lost track of it. Where is that
right now? What is the timing of it?
Mr. McNutt. September.
Senator Roberts. September. Is it going to be a one-armed
GAO study so they cannot say, ``On the other hand,'' like they
normally do?
Mr. McNutt. Well, we will see, I guess.
Senator Roberts. That is a facetious question. I should not
even have asked that. Thank you for your testimony.
Let me move on. Mrs. Sharma, I think your statement is
very, very clear and it indicates the tremendous--what?--I
guess the parameters of the debate. Do you think you and John
Crabtree could sit down with a cup of coffee and figure this
out? I think it does have some application here and I am not
trying to perjure either one of you in terms of your statement.
I think they are both very helpful.
But in Kansas we have the Kansas Livestock Association who
has one position and the Farm Bureau is evolving. We have all
sorts of other groups who recommend what John wants and then
obviously you have some strong opinions, and that is why I
think as we go through this debate if we could find out what we
could do administratively, again, Mr. Chairman, from the
standpoint of the administration, where they are and how we can
help them, that would be better.
I do not have any specific questions, other than to thank
you for your longstanding partnership in government.
Let me go to Mr. Roenigk and the chicken folks. You say on
page 2, ``With respect to one of the specific issues being
addressed today, the National Chicken Council is opposed to the
U.S. Department of Agriculture having expanded regulatory
authority over poultry production because such additional power
is unnecessary.''
So red meat one way and leave our chickens alone? Is that
about where you are on that?
Mr. Roenigk. Thank you, Senator. As I noted in my
testimony, there are a number of authorities that Packers and
Stockyards has--the statutory trust, prompt payment provisions.
Also, other government agencies such as the Federal Trade
Commission and Justice Department have interest in our
industry. And I also pointed out that our industry is somewhat
different in structure with the contracts and there is
contractual law that governs that.
So we believe we are somewhat different and we believe that
our performance does not require additional regulatory
authority.
Senator Roberts. Well, here we go again, Mr. Chairman. We
have an all-encompassing problem and we have different segments
of agriculture saying, ``Thanks but no thanks; we are getting
along at least to the extent that we should.'' I think that is
very noteworthy.
Let me go on to Ron, if I might, and I am going to try to
hurry up because I know my time is fleeting.
You mention, Ron, in regard to page 2, ``The Packers and
Stockyards Act should be amended to'' and you list five things
that you think we should be doing. Oh, here is my answer. I was
going to ask if that is the American Farm Bureau's position and
you indicate that is the case.
Mr. Warfield. That is correct.
Senator Roberts. OK, thank you.
On page 4 you have indicated here that the ``Farm Bureau
would like to see an expanded role for the Department of
Agriculture in evaluating agribusiness mergers and acquisitions
currently required to be evaluated by the Justice Department.
Broadened USDA responsibility and official consultation with
the Department of Justice will ease much of the concern.''
Mr. Stumo, on the other hand, has indicated in his
testimony, if I can find it here real quick--I think it is on
the last page of Mike's testimony, on page 9, I think; I
numbered your pages for you, Mike--that you indicate we should
transfer the anti-competitive--not should but could; I am
misspeaking. What can Congress do? Congress could modify the
Act to transfer the anti-competitive practices enforcement
jurisdiction under the Act from the Department to the
Department of Justice; consider the transfer of regulatory
jurisdiction under the Act to another agency, such as the
Federal Trade Commission.
Would both of you comment on that?
Mr. Warfield. I think I can comment. We had a meeting with
the Department of Justice, Packers and Stockyards and USDA
people back in September and what I saw reflected was when the
specific concerns were presented by producers, we had a
producer there who said, ``I have a quality of hogs that meet
the genetic requirement of a packer; the volume is not
sufficient. I tried pooling with others, tried the pooling and
networking concept and the packer would not accept it.''
When we met with these groups, the Packers and Stockyards
said, ``That is Justice Department's problem.'' We went to the
Justice Department and they said, ``Well, that is over here.''
And we went on a ring-around all day, never knowing where we
went for an answer.
So part of it comes back to a comfort zone of saying at
least the USDA, we can go in and--and we want somebody we can
point to and say, ``OK, you are the ones responsible, you are
the one that is accountable, we want an answer.'' And we feel
like because of an understanding of the agricultural industry
that the USDA having that involvement would be very, very
helpful.
And I think that we are encouraged by the fact that the
Justice Department now has put somebody that has dealing with
agriculture, but on that day, as we went around, we could not
find the person who we needed to talk to say, ``Where do we get
an answer?'' And all they did was point to another agency, and
the Federal Trade Commission was one of them that we got to.
And we, today, do not know--when we tried to evaluate what a
live hog is worth and the retail pork prices and trying to say
what is going on here, we cannot find out information to get
the answers; we cannot find the Agency that is supposed to be
responsible to get it done.
So if I had to come back and answer most simply, let's very
clearly identify authority and responsibility, where we go to,
and say we have to have the answer, and quit the finger-
pointing between the different agencies.
Senator Roberts. Michael?
Mr. Stumo. Senator Roberts, Mr. Warfield and I start in the
same place and the reason I think we go in different places is
my view of the issue is that who does what best. USDA has, as a
cultural matter, they have a conflict of interest in that they
promote agriculture and they regulate it.
Now, let's look at the specific task at hand, which is
anti-competitive practices, which is not necessarily antitrust.
It is rules of competition. And we have, as we saw today and as
Mr. Warfield said, we have Justice and USDA pointing their
fingers at each other. So what do we do?
Justice works with anti-competitive practices cases or
antitrust cases all the time. They have a methodology. They
have developed internal guidelines to determine when they
collect information. They know what a dog is when they see it.
They have the guidelines to do that. P&S does not. OGC does
not.
This Committee has been frustrated by inaction. The
producers in the field have been frustrated by inaction. Mr.
Dunn has mentioned the rapid reaction team that runs around in
pursuit of rapid responses to problems identified. I have
talked to the producers who talk to these rapid reaction folks.
The message they get is we cannot do anything. We do not know
whether this is a violation. It is too big. Just do something
else. It will take years to do something about.
They are met with obstruction at every step of the way and
the fact is that GIPSA cannot handle it. The people in
government who are good at this sort of thing do not go to
GIPSA. They go to FTC or they go to Justice. And the legal
counsel that are good at this sort of thing do not go to USDA
OGC. Other people go to USDA OGC. But for competition policy,
the good people go to Justice, and that is why I would
consolidate this type of authority in Justice. Thank you.
Senator Roberts. Mr. Chairman, I am going to ask John my
last question here and then we can--I know we are running out
of time.
Mr. Crabtree has indicated a vision of the future of rural
America dotted only with packer-owned industrial hog operations
is untenable and I certainly agree with that. He cites the work
of the Center for Rural Affairs in the past, being a catalyst
for legislation in states, and this gets back to the original
statement that I made when the hearing started that if the
Federal Government does not respond, states do. Then you get
into a situation, as described by the previous witness, I think
from Indiana, that if you get an isolated situation, you do not
know what is going to happen in regard to the next state over
and it gets to be a real hodgepodge.
John also pointed out, and I am not trying to give your
testimony again here, John, but he cites the letter from
Professor Neil Harl of Iowa State, who is a renowned authority
on agriculture policy, that ``The USDA has not fully exercised
the authority granted under the Packers and Stockyards Act to
promulgate rules, especially in the area of discrimination in
livestock pricing. Professor Harl has also pointed out in the
past that courts will give an administrative agency leeway in
enforcing market regulations if they promulgate the rules.''
And I think Mr. Crabtree is pointing out once again that if
we can get some action here, I know the GAO report is due in
September and I know that the gentleman who came down from the
department will respond back to the Chairman but in the
meantime, if we can get some kind of a policy here where we can
take action from an administrative standpoint, that might
relieve the pressure just a bit.
I have made a speech, John. I do not know if you want to
respond to that or not but I will certainly give you the
opportunity.
Mr. Crabtree. I think that is absolutely right. Two years
ago Secretary Glickman's own Commission on Small Farms asked
him to take action on price discrimination. We put the same
issue before him last year, in August. We talked about this
time and again and I think you are absolutely right. This is
something the administration can do now, the Secretary should
do now. They can issue these rules and move, move forward to
making this market more competitive.
I want to say one thing about the unintended consequences
of states versus states. Nebraska has had probably the toughest
prohibition on packer ownership of livestock in corporate form
for 17-years. We are also still the number one producer and
processor of red meat in this country.
So I think the connection of losing packing or losing
production does not always have to follow on with where
vertical integration goes. I think you can prohibit packer
ownership and still have a healthy livestock industry, as we do
in Nebraska.
Senator Roberts. I would like to compliment Mr. Stumo. This
is his first opportunity to testify, as he has indicated. He
was very specific, Mr. Chairman. He lists probably 10 or
fifteen things that we could do. Most witnesses will testify
and offer some very important information but he actually gets
very specific. I am not saying I am for each and everything
that he is recommending but I want to thank him for that.
And the only thing that I would warn is that I have a bias,
Mr. Chairman. Obviously, I think I am biased, since I am a
piece of old furniture around here, but I would like for the
Department of Agriculture, once you give up jurisdiction in
behalf of agriculture and farmers and ranchers to other
agencies, I think you leave the dock and you are into uncharted
water.
And whether it is global warming and EPA and the USDA,
where we are trying to get the USDA to step up to the issue or
whether it is trade that the distinguished Chairman is such an
eloquent spokesman of and a leader for in regard to the
National Security Council and the State Department making
decisions on so-called sanctions reform that are not sanction
reforms because we cannot use the export programs that we need
to use, or whether it is this issue, it seems to me that the
department should take a much more aggressive role and get that
jurisdiction within the Department of Agriculture so it would
not be necessary to follow the advice that Mr. Stumo feels is
necessary.
I thank you for your leadership again, Mr. Chairman. It has
been an excellent hearing.
The Chairman. Well, I second the motion, Senator Roberts. I
just seems to me clear that so much could be done through
administrative action and we know whatever our role as
legislators may be, it is a two-house procedure, signature by
the president, endless amendment.
To the extent that we really are able to do some rule-
making to move ahead, I voiced at least some of my frustration
over that we have been commended for our Price Reporting Act
last year but we find that all sorts of pieces are not
happening because an appropriation did not occur here, $500,000
missing here.
In essence, this is a frustrating business. You can pass an
act. You can get bipartisan support. You can work it all out
and it does not necessarily happen.
So it has to happen. I feel very strongly about that. I
want USDA to find out why it is not happening and where the
money can come from. We may have to mandate a transfer within
USDA to get it done but we really are determined finally, that
the people's will be heard.
Now, you have been most constructive and helpful and I
commend you for your patience; likewise the audience, who has
stayed with you and are deeply interested. But at this point I
will ask you to retire and we will have the fourth panel, who
are Mr. Bert Farrish representing the North American Export
Grain Association from Portland, Oregon; Mr. Robert Smigelski
representing the National Grain and Feed Association from
Maumee, Ohio; Mr. Mike Clark, National Corn Growers
Association; and Mr. Dennis Wiese, National Farmers Union.
May we have order in the Committee room so that we can
proceed with these witnesses?
I will ask that each of you limit your testimony, if
possible, to 5 minutes so that we can proceed with a colloquy
with the Committee and everyone can be heard. I will ask you to
testify in the order that I introduced you; first of all, Mr.
Farrish.
STATEMENT OF HUBERT FARRISH, PRESIDENT, COLUMBIA GRAIN,
PORTLAND, OREGON, REPRESENTING THE NORTH AMERICAN EXPORT GRAIN
ASSOCIATION
Mr. Farrish. Thank you, Mr. Chairman and members of the
Committee.
The export grain industry appreciates the opportunity to
present its views on the role, function and performance of the
Federal Grain Inspection Service. This hearing is timely, since
five sections of the Act that authorize FGIS expire September
30 of this year.
I am Bert Farrish. I am president of Columbia Grain, Inc.
headquartered in Portland, Oregon. Columbia is an exporter of
grain primarily to Asia and the Middle East and we are one of
the largest users of the services provided by Federal Grain
Inspection Service in the United States. Today I am testifying
on behalf of the North American Export Grain Association, an
industry group that represents U.S. grain exporters and
associate members.
In my testimony today I will discuss what I think this
agency is doing well, how the Agency could improve, and the
challenges for the future. I will present an abbreviated
version of the written testimony and would ask that the written
testimony be entered into the record.
A little background. The Federal Grain Inspection Service
was created in 1976 to administer a uniform national grain
inspection and weighing program, as required by the U.S. Grain
Standards Act. The Act provides that official inspections of
grain are mandatory at export and voluntary for domestic
shipments.
I would like to make a few remarks regarding FGIS
operations. In the view of exporters, the Federal Grain
Inspection Service has two broad missions. The first is to
directly provide the service of inspecting and weighing grain
for export or to supervise delegated state agencies that
provide this service; and second, to provide the structure and
administration of the Grain Standards Act, which benefits all
producers, processors and consumers. So my remarks will be made
in the context of those two broad missions.
First, what are some of the successes of the Federal Grain
Inspection Service? The FGIS weight and grade certificate has
great credibility and integrity with importers worldwide. U.S.
exporters want to protect this integrity. The Federal Grain
Inspection Service has responded to industry cost concerns by
reducing total staff and lowering the cost per ton for
providing service. Number three, FGIS is working with industry
on a broad range of important issues. And fourth, FGIS has
communicated well with the grain trade through its advisory
committee and various industry committees.
Second, what are some of the areas of concern or need for
improvement with the Agency? First, the struggle for cost
control and improvement will never end. As long as the industry
perceives itself paying excessive fees for export service,
there will be pressure to reduce costs. We need cost control,
but not at a loss of certificate integrity. And I would commend
the Agency for absorbing part of a recently proposed fee
increase through improved efficiencies, but we look for more
improvement.
As a government agency, FGIS operates by a different set of
rules than the private sector does. Operating costs for this
agency are far higher than would be the case for a similar
private sector provider.
Also, FGIS needs more freedom to develop operating
flexibility. The grain trade, particularly at export, is ever-
changing and needs flexibility to adapt and compete.
Third, we can improve communication through existing
formats, particularly concerning research that the Agency is
contemplating conducting.
And fourth, we need to better address the funding that
supports what we see as FGIS's dual functions. Those functions
are to, first, act as a direct service provider at export, and
second, to provide broad regulatory oversight of the grain
industry.
The agency is funded by two methods. The first is user
fees; the second, appropriated funds. In our view, it is
critical that appropriated funds are readily available for the
support of standardization and methods development activities.
The U.S. exporter, who is a mandated user, cannot continue to
shoulder more in user fees than its fair share.
And lastly, the time required for changing procedures and
regulations needs to shrink to accommodate the faster pace of
change in business.
And lastly, I would like to talk about the future a little
bit. This is an exciting and challenging time for both U.S.
producers and exporters. In the future, GIPSA should work
closely with all segments of the grain industry to, first, be
prepared to provide GMO trait testing as the market may
require; second, to identify and provide the testing of end use
value characteristics of U.S. grains; third, to continue
developing technology that lowers costs and improves delivery
of services and data; fourth, to identify e-commerce
opportunities; continue to identify and conduct research that
benefits the grain industry; and last, to continue to improve
contacts with grain importers worldwide.
I would conclude by saying that the export industry needs
GIPSA-FGIS to be a cost-effective, forward-looking business
partner that assists U.S. producers and exporters in expanding
our world market share. We think that FGIS is a critical link
in the success of the U.S. export grain trade. That concludes
my testimony, Mr. Chairman.
[The prepared statement of Mr. Farrish can be found in the
appendix on page 141.]
The Chairman. Thank you very much, Mr. Farrish.
Mr. Smigelski?
STATEMENT OF ROBERT SMIGELSKI, THE ANDERSON, INCORPORATED,
REPRESENTING THE NATIONAL GRAIN AND FEED ASSOCIATION, MAUMEE,
OHIO
Mr. Smigelski. Mr. Chairman, my name is Robert Smigelski. I
am Agriculture Group Operations Manager for the Andersons in
Maumee, Ohio. I am representing the National Grain and Feed
Association and serve as that organization's chairman of the
Grades and Weights Committee. We appreciate the opportunity to
provide input on the Grain Inspection, Packers and Stockyards
Administration and will focus our comments on the Federal Grain
Inspection Service, a program within GIPSA that administers the
U.S. Grain Standards Act.
The NGFA has a strong and long experience with FGIS
operations, including its official standards and grades.
Furthermore, NGFA members operate both interior and export
facilities. These factors provide us with a broad and deep
perspective on FGIS services in both the domestic and the
export markets.
We support the Agency's efforts to maintain accuracy and
consistency in the official inspection and weighing system. The
credibility and integrity that FGIS strives to maintain in the
official system is very important to grain handlers and very
beneficial to the exporters in the United States.
FGIS and industry maintain a positive working relationship.
Agency management routinely meets with us to discuss issues
affecting the official system.
We appreciate agency efforts to increase the efficiency of
U.S. grain marketing, streamline grain inspection and weighing,
and provide cost-effective grain inspection and weighing
services. In this regard, the Agency has been working with
industry to improve automation at export facilities, an effort
we applaud.
Recently FGIS announced plans to establish a reference
laboratory in its Technical Service Center in Kansas City,
Missouri to verify the accuracy and repeatability of test kits
used to detect biotechnology-enhanced crops. We believe this
service will be beneficial to industry and we support this
effort to increase the kind and the amount of service the
Agency provides.
While the Agency is working in a positive way to meet its
mandate under the U.S. Grain Standards Act, we think that the
2000 agency reauthorization provides an opportunity for
industry and Congress to consider some potential changes in the
official inspection system that could be beneficial. Let me
share with the Committee our thoughts on several of these
issues.
The cost and efficiency of official service in domestic
markets has been a concern to NGFA members. To determine if
market forces could be successfully used to address this issue,
the Agency began a serious series of pilot programs in 1995 to
open selected interior official territories to competitive
bidding for service. We support these pilot programs and
believe the results justify granting FGIS permanent authority
to allow increased competition within the domestic official
system.
The cost of official services is also a concern at export
elevators. Since FGIS must provide personnel for the bulk of
official services at export facilities, a series of fee
increases instituted by FGIS over the last several years has
impacted more directly on the exporters. In fact, one of the
top expense items of the export elevators is the cost of
inspections. While the Agency reported improved financial
performance in the fiscal year 1999, the cost of official
inspections at export locations and future management of those
costs remain a concern.
To address this situation, one option under serious
consideration by the National Grain and Feed Association would
be to shift FGIS from a more traditional government agency
model to a performance-based organization, PBO, within the
Government. The PBO concept was designed as a business model
for government agencies heavily focussed on service to the
private sector, a description that fits much of FGIS
operations, as well.
While several questions remain, we believe the PBO concept
could offer FGIS greater flexibility in the way it manages its
operation while retaining strong Federal Government oversight
on the inspection functions.
Another policy option to consider is reducing the 40-
percent cap on administrative and supervisory fees to a 20-
percent cap. Reducing the mandated cap on overhead costs would
be consistent with trends within private industry and may also
be consistent with trends within the Agency itself.
Lastly, given today's rapidly changing global business
environment, we think that the seven-year period incorporated
in the 1993 reauthorization was simply too long. Rather, we
recommend that Congress consider reauthorizing the Agency for
no more than 5-years.
Thank you, Mr. Chairman, for the opportunity to testify. I
will be available to answer questions.
[The prepared statement of Mr. Smigelski can be found in
the appendix on page 151.]
The Chairman. Thank you, Sir.
Mr. Clark?
STATEMENT OF MIKE CLARK, VICE PRESIDENT, ILLINOIS CORN GROWERS
ASSOCIATION, REPRESENTING AMERICAN SOYBEAN ASSOCIATION NATIONAL
ASSOCIATION OF WHEAT GROWERS NATIONAL CORN GROWERS ASSOCIATION,
HOMER ILLINOIS
Mr. Clark. Thank you, Mr. Chairman. I am Mike Clark and I
currently serve as vice president of the Illinois Corn Growers
Association. I raise corn, soybeans and wheat near Homer,
Illinois and Vedersburg, Indiana.
It is my honor today to appear before you on behalf of the
American Soybean Association, the National Association of Wheat
Growers and the National Corn Growers Association.
As a farmer, my operation is directly impacted by the work
of GIPSA and the grain standards it enforces. As we enter the
new century, we should take the time to review how our
government operates and ask ourselves: is there a better way?
This certainly applies to GIPSA and the standards it enforces.
Indeed, many of the grain standards are nearly a century old
themselves, having been created by the Grain Standards Act of
1916.
While GIPSA is to be commended for its efforts in
modernizing its operation, little has been done to bring grain
standards into the 21st century. As you well know, U.S.
producers must export a significant portion of their crop each
year to remain solvent. This requires us to compete in a world
market against well-positioned competitors. Across the globe,
world grain buyers have grown more sophisticated in their
buying requirements, yet we continue to rely on standards that
largely only describe external characteristics.
Current U.S. grain standards measure only volume and
outward appearance. Very few inspection standards exist to give
grain buyers the information they really want: the end-use
characteristics of the crop. Farm groups, this Committee and
the Agency need to engage in open dialogue to determine if
these needs are to be met by the public or private sector.
Take, for example, how we measure protein in wheat. While
wheat is graded by the amount of protein it contains, no
standards are available to measure the quality of the protein
or the gluten content. Tests and standards need to be developed
to identify the inherent traits that bring about the highest
end-use value and help identify and preserves true wheat
quality.
Millers and bakers want to know how the wheat they purchase
will grind into flour, how it will bake into bread, and how it
will affect the quality of their product. Without making
changes which reflect end-use quality, U.S. grain producers
will be left flat-footed on the world market, unable to capture
the true value of their product.
To its credit, GIPSA has made some advances in this area.
However, much remains to be done. We need to harness the
continued advances being made in technology to bring about a
reliable and quick test that will predict the intrinsic
qualities desired by the end user. In addition, we must retain
the flexibility to adapt such standards as new technologies are
developed.
These issues are made even more complex when we consider
the growth of biotechnology. For example, consider for a moment
how biotechnology is currently affecting the corn industry.
Biotechnology is clearly the single largest driver of
change for the corn industry. As such, it will be important for
all segments of the industry--producer, processor and
regulator--to define their new and different role in this era.
The rate of change spurred by biotechnology is so rapid that we
cannot rely upon the time-tested practice of defining policies
based on the experience of the past but rather, by anticipating
the needs of the future.
We are still defining the regulatory expectations of GIPSA
and other government agencies in that future. We do anticipate
that in the future the opportunities for corn farmers to
extract additional value from the drop will arise from being
able to move up and down the value chain. This means we will
need to better know and identify the intrinsic qualities of an
increasingly segmented corn market--a marketplace where
farmers, handlers, processors and customers will be tracking,
testing and identity-preserving individual loads of grain.
In this new arena, standardization of tests and testing
equipment will be vital. GIPSA can play an important role in
making sure that tests for intrinsic qualities are timely,
repeatable, verifiable and of a nature that can be used by
commerce in our country elevator system.
Likewise, the soybean industry is actively considering the
development of testing and analytical procedures for a variety
of traits derived through both commercial breeding and
biotechnology. These traits include high content levels of
oleic and stearate fatty acids, low linolenic acid content, low
phytate content, and high sucrose content. Soybean growers are
working with other industry partners to develop standards for
these characteristics for recommendation to GIPSA.
The impact of biotechnology on the grain trade and, in
turn, our expectations of GIPSA is currently evolving. We are
still exploring our expectations of contracts, grades and
standards in the future. While we cannot say today with
certainty our expectations for GIPSA in the future, we look
forward to dialogue with the Agency and this Committee to
clarify that role.
Meanwhile, we must continue to monitor and improve GIPSA's
everyday operations and the grain standards we currently have.
It is vitally important that, in addition to the current user
fee system, GIPSA continue to also be funded by appropriated
Federal funds. The standardization and development of tests, as
well as other related GIPSA activities, benefit society at
large and should be funded by society rather than through user
fees.
Just this year, GIPSA developed standards for a new class
of wheat--hard white. It is to be commended for working with
wheat producers and commissions from across the country to
develop reliable, workable standards that will help guide the
development of this class of wheat across the Midwest.
While not all producer groups are in agreement, the
National Association of Wheat Growers commends GIPSA and its
partners at the Foreign Agricultural Service for their efforts
in advancing USDA's grain cleaning initiative.
Again, Mr. Chairman, let me thank you and the Committee for
the opportunity to appear before you today. I appreciate your
timely evaluation of these concerns.
[The prepared statement of Mr. Clark can be found in the
appendix on page 154.]
The Chairman. Well, thank you, Mr. Clark.
STATEMENT OF DENNIS WIESE, NATIONAL FARMERS UNION, FLANDREAU,
SOUTH DAKOTA
Mr. Wiese. Thank you, Mr. Chairman. My name is Dennis Wiese
and I am president of the South Dakota Farmers Union and I also
represent the National Farmers Union today.
First, let me say thank you for last year's price reporting
initiatives. While I want to confine my comments to the FGIS
issues, I think it is worth noting that your efforts here have
made a big difference as to the plight of the farmers in the
countryside.
I testified in South Dakota in Federal court and had to go
through the issues of whether price reporting was important to
producers, and they find it very important. It is only one
piece but it was certainly a huge step, one that yes, the
states had to take initiative. The Federal Government, through
congressional action, did not happen, even though it was in the
body back in 1995 by Senator Daschle, but I do commend you and
this Committee for helping move that forward.
Also, I would like to also refer a little bit to what could
be enhanced on that before I go on. That is that inside of the
price reporting there needs to be an identification of the
differential pricing. Differential pricing is not prohibitive
or wrong necessarily but if it becomes discriminatory in that
process--and that is where I think both USDA and our own
attorney general in South Dakota have identified some needs to
determine whether or not there is actual inappropriate
practices being applied there.
Now to the Federal Grain Inspection Service, which grades--
they become the basis for determining our adjustments to the
final settlement of sales agreements between the farmers and
the merchandisers and in transaction between the merchandising
sector and domestic processors and our overseas customers.
In order to ensure objectivity and accuracy in fulfilling
this mission, FGIS engages in research and development
activities to review and test new procedures, standards and
technology, provides ongoing education for inspectors, and
engages in monitoring its performance and output against other
grain inspection systems.
A user fee system that is periodically modified has been
established to recover a significant portion of the cost of the
services provided by FGIS. However, as with the majority of the
marketing expenses associated with the grain sector, the
producer, directly or indirectly, pays the cost of those
inspection services through adjustments to the price received
at the farm-gate. The farmer thus has a strong vested interest
in the efficiently run agency that adopts, consistently applies
and enforces standards that enhance the marketability and the
competitiveness of U.S. grains to achieve the highest level of
consumer satisfaction.
In the new decade, significant economic challenges confront
grain producers that are related to the mission of FGIS. These
challenges include the traditional issues of agency service
levels, modifications to standards, dispute settlement and user
fees. In addition, FGIS must adapt to emerging considerations
that are the result of increased competition for markets and
market share. These issues include grain cleaning and new
production and product technologies.
The issue of grain cleaning takes on new significance in a
global market where many forms of intervention have been
reduced that, in the past, have been used to offset market
advantages associated with large-scale commodity cleaning
requirements and operations. In addition, the increased market
power associated with highly concentrated and integrated
multinational merchandising and processing sectors allows these
companies to play differing national marketing systems--i.e.,
those that require grain to be cleaned versus those that do
not--against one another to the disadvantage of grain producers
globally.
We believe the U.S. should utilize a portion of the budget
savings associated with those reductions to implement a grain
cleaning pilot program to test the effectiveness of such a
system, including its customer relations impact.
Some may view this approach as unnecessary and undesirable
intervention on the part of government that is not supported by
the marketplace. However, many of those same opponents directly
benefit from the business generated by systems engaged in grain
cleaning and/or creates additional company profits by blending
various grades of U.S. grains that have been purchased from the
producer at a discount already.
New technologies, such as genetic manipulation of grain
crops to achieve specific production or physical attributes,
raise serious grain inspection issues. These include
certification as to the presence or absence of GMOs, product
segregation, and the potential for and vesting of liability in
the event of misidentification of bioengineered crops.
Unless and until all nations reach agreement on the
conditions of acceptance of these crops, and cost-effective,
efficient testing procedures are developed consistent with such
an agreement, regulatory agencies and producers will remain at
risk. The FGIS in its certification role will be challenged in
terms of its credibility. U.S. crop producers will ultimately
bear the market risk of the technology through the imposition
of domestic and international market barriers, price discounts,
and potentially legal liability. The majority of economic
benefits associated with biotech will flow to those with the
greatest level of multinational integration.
We support congressional action to ensure that producers of
genetically enhanced agricultural products are held harmless
from any legal liability that may result from the production or
marketing of these products and that producers should not be
responsible for the cost of any testing requirements that may
be imposed.
In addition, we support cooperative international efforts
to ensure consumer confidence in the ag products they purchase,
including the establishment of a labeling requirement to allow
consumers the ability to make informed purchasing decisions.
Finally, the market for GMO products is likely to require a
much better system product segregation than currently exists in
the U.S. We would encourage on-farm grain storage facility loan
programs to be utilized, as well as a limited farmer-owned
reserve program.
Thank you for your time and I would be happy to answer any
questions.
[The prepared statement of Mr. Wiese can be found in the
appendix on page 159.]
The Chairman. Thank you very much, Mr. Wiese.
I want to take advantage of the expertise of this panel and
the organizations you represent. First of all, clearly you have
all talked about the need for standards that recognize
something beyond external appearance. I suspect that probably
that is understood by FGIS, by USDA, but the usefulness of this
hearing is once again, in a more high-profile way, to indicate
the changing needs of marketing in our country, given the
opposition that we have elsewhere.
Likewise, the grain cleaning situation we heard talked
about a little earlier in the testimony this morning with a lot
of conflicting testimony, as the gentleman said, but that does
not mean it is put to rest. The USDA at least is engaged in
those hearings and coming to some decisions. And, as Senator
Roberts stressed a number of times, some administrative
policies could be adopted here that would be very helpful. Our
Committee is very interested in that, as you are, and I simply
want to acknowledge that interest and follow-through that we
shall try to bring to bear.
I want to ask, however, as a topical situation, yesterday I
had a long press conference and gave a first impression of this
Biosafety Protocol that the United States acceded to the day
before and my feeling about that was very adverse. As I note in
the press today, some of my comments seem to run counter to
others from grain organizations, some of which are quoted as
saying it is really not so bad or it will not have that much
effect.
But I found in the World Perspectives, Incorporated Ag
Report today, in a piece written by Gary Blumenthal, and I give
credit to him; he points out that the United States agreed to
sweeping controls over the movement of these grains. He said,
``Advanced, informed consent will be required before shipping
genetically modified seed and before shipping grains for
consumption in instances where a country lacks its own
regulatory controls. Grains that contain genetically modified
content must be labeled 'May contain' until more detailed
labeling requirements are negotiated within 2-years and the
precautionary principle applies even to countries that do not
have to show scientific certainty before blocking imports of
food they believe could be harmful.''
Specifically, he says, ``Countries may consider adverse
socioeconomic impact in considering whether to block imports of
genetically modified food. The Biosafety Protocol is not
subordinate to any other agreement, since it occurred later in
time than the Uruguay Round and therefore could be considered
superior in international law.''
Now this newsletter says ``The breadth and depth of
capitulation by the United States is shocking. There is even an
exemption for pharmaceuticals for humans, as though the biotech
process is only dangerous in food, as opposed to drugs.'' This
appears to me, as people begin to allow these to seep in,
pretty serious business.
We have talked today prospectively about the need for
standards, the need for the marketability of what we are doing.
We have this pilot project or the beginning of this laboratory
that may give us some idea of to what extent a shipment of
grain has biotechnology or it does not. We have heard testimony
before this Committee that this is difficult to detect with the
precision that some are requiring; namely, 99-percent pure,
less than 1-percent biotech. And, as a matter of fact, that
much grain--some have even said most grain in the United
States--may have a touch of biotech after three or four or 5-
years the fields and pollination and so forth. It raises very
real questions for USDA if there are premiums for the
nonbiotech suddenly and quite a distortion in price.
For example, we still have LDPs, we still have loans. USDA,
the Government could just stuck with a lot of grain sitting
around that suddenly does not have the markets that we
anticipated because countries are saying we have a
socioeconomic bias and we are busy and eager to take any
pharmaceuticals you have because they are life-saving but we
have a protectionist policy with regard to grain. And you have
acceded to this protocol, so you are stuck with it.
Now, this would appear to me to be something that needs
boards of directors meetings pretty generally with people who
are representing grain farmers in the country, to see what is
going on here and what is to be done. Clearly, the obligation
by FGIS is enormous.
If there has to be proof before a country will accept a
grain shipment, who says this is perfectly fine? The country
may not have any grain inspection of its own, so it says to the
United States, ``Prove it.'' Well, somebody has to do the
proving, presumably FGIS or somebody's laboratory back here
that can certify this before the shipment is made. Or at least
it could be challenged if such a shipment is made without that
certification.
So I ask any of you for some general impressions as to
where we are and what additional things we ought to be visiting
with FGIS about, given this enormous change, I think, in the
lay of the land with regard to exports of bulk grain from this
country that are implied by this protocol. Does anyone have a
first impression? Yes, Mr. Wiese?
Mr. Wiese. I have never been short for words, Mr. Chairman.
I guess what we have is massive confusion amongst the farmers.
First of all, their concern is who are the consumers that
they are supposed to be supposedly producing for? They were
told to supply the genetically modified stuff and lo and
behold, we really do not have a market for that. So I think
that is their first concern. There are no premiums paid to any
farmer for any of that stuff; never was. So that never existed.
And I think lastly and probably most importantly is if
there is an identification of that type of commodity
commingled, who is going to be held liable in the cases of the
repercussions, whether they come from domestic or international
partners?
I think those are all very pertinent issues and things that
we believe should be addressed through FGIS so that we have
some standard. Ultimately I assume they will respond with some
state agency being a partner on that, as well.
The Chairman. I think those are very relevant questions, I
suppose some that might have been asked before we acceded to
the protocol, but nevertheless still very relevant now that we
are in this fix.
Yes, Sir?
Mr. Smigelski. We are still struggling with what the market
is. Is it biotech or is it nonbiotech? And very bluntly, in
order to do a good job of testing the grain at the elevator
level and at the export level, we do need an agency such as
Federal Grain Inspection to do that, but they are simply
testing the test. They are making sure that they do measure
what they are measuring.
The industry is providing this from the various sectors,
but what we need is we need a very quick, very reliable means
of testing that will consistently, over a consistent period of
time, measure exactly whether it is biotech or not. The
challenge is to get one that we can depend on and one that will
do it quickly.
The Chairman. Now, we do not have one now?
Mr. Smigelski. Well, we have one--we have several, but they
can be questioned. There are questions. You take a one-minute
or two-minute test and then you take a three-day laboratory
test that is more scientific and has a longer period of time to
come up with the conclusions and it may prove a positive
reading to be negative or vice versa.
The Chairman. Well, as a practical matter, what happens
then if country X says, ``I do not think your test is very
reliable''? In other words, you are asserting that this is pure
of any biotechnology but how do we know?
Mr. Smigelski. Well, we are doing very much the same thing
that we are telling the farmer. We are telling the producer
that before you plant, make sure that you have a market. And
before I contract with a foreign country about whether it is
biotech or not biotech, I want to know what the parameters are
and which test will serve as, let's say, the ruling test. So we
try to do that in a contract.
The Chairman. Now, getting back to Mr. Wiese's question, if
I am a corn farmer in Indiana or he is a corn farmer in South
Dakota or what have you, do we then try to find out the
destination of the corn from our farms? In other words, there
is no way we can do that.
Mr. Smigelski. Right.
The Chairman. So where do we get the signal, then, as to
where there is a market for all this?
Mr. Smigelski. What we are doing is we are advising the
producer to check with his market. He has to check with the
elevators that he plans on delivering the grain and say, ``Are
you taking this commodity and are you paying a premium for it
or aren't you?'' The biggest concern they have today is whether
they will take it.
The Chairman. Yes. But it at the elevator level, then. So
if you are able to make the sale to the elevator, you are home
free as a producer. Then it is his problem.
Mr. Smigelski. Right, but that is the problem. We are
struggling, my company itself, we are struggling with what we
are going to do with all the biotech grain.
The Chairman. Sure. I am worried about my elevator at Beech
Grove as to what sort of a struggle they are going to have.
Mr. Smigelski. I agree. You should worry.
The Chairman. Yes, Sir?
Mr. Farrish. Mr. Chairman, just to speak briefly on the
Biosafety Protocol, initially when I read the article in the
newspaper concerning it, I thought well, this does not look too
bad if all we have is some ``may concern'' language. But I
think the further we get into the agreement and as North
American Export Grain Association [NAEGA], looked at the
agreement, we are not comfortable with this agreement.
The Chairman. No.
Mr. Farrish. We think it presents us some real problems
with exporting grain. Like the others, I would describe the
industry as basically feeling its way through a dark cage on
this and really not knowing where we are headed. My firm is not
engaged currently in the corn and soybean business but trust
me--in the wheat business, we are standing back and watching
what happens here very carefully because we know we are
probably best for the biotech arena.
With regard to FGIS, while they do not do the tests
directly, they are in Kansas City, in the Technical Center
there, developing testing procedures to test the validity, if
you will, of the testing kits that private companies are
providing the industry, but testing at the tailgate, at the
country elevator, will never be the solution to this problem,
not in the near future, because the tests take too long to run
and no farmer or country elevator wants to be subjected to that
type of time.
I would suggest that our organization believes that the
answer to the problem lies in harmonization of the standards,
acceptability standards or standards for accepting these
products worldwide. We need somehow, through our trade
negotiations, to get to some harmonization of the procedures
and the regulations for these crops. Then we think we will have
the problem behind us.
And there are still many who believe that this industry can
successfully segregate Genetically modified organism [GMO] and
non-GMO prompts, and we do not believe that, that is really
feasible. There is too much risk in the transportation and
handling system for contamination back and forth between the
two to really make this possible.
If we did try to make that possible, the expense would be
enormous. It would require building two separate handling
systems and transportation systems for grain products.
The Chairman. Well, that is the testimony we have heard
before here, that ultimately this is a gesture in futility
while we are all busy trying to parcel all this out, and your
point, I think, is the right one. Our trade negotiators have
got to do a better job. You know, we cannot accept one disaster
after another in this area, but that is for another hearing at
another time.
Mr. Wiese, you were trying to----
Mr. Wiese. Well, from the standard for the farmer who
delivers to that small town, who then has that product
delivered to another facility, he may deliver to a coop who has
an alliance with a private institution that then takes it to a
port that neither of them control through a transportation
system that may have different commodities handled in it
previously. I think at some point you have to determine what is
an acceptable level, if any at all, much as we do on other
grain standard issues.
Then I think the other thing is you could do it at the
local level, much as we do protein levels. You could do it also
much like we do in a livestock setting with a grade and yield.
We will pay a certain portion for every bushel out until the
test returns.
The Chairman. Mr. Clark, do you have any comment on all
this?
Mr. Clark. Yes. As a producer, obviously we are in a state
of transition but on the Biosafety Protocol, that will not
deter us from our overall support of biotech. Planning
decisions are unique individual risk management decisions for
the individual producer and the first job should be to get--a
good step would be to get the standardization of tests so that
the results could be acceptable for everyone.
In Illinois, in our corn growers organization, we have put
out booklets to our members that basically say, ``Know before
you grow. Know what your customer wants. Know who your customer
is.'' We have a map of the state and have circles on the
different buyers and users in the state and what they are
wanting to have.
We have Staley's in Decatur and Lafayette, Indiana coming
out and saying they do not want GMOs for fall delivery. ADM,
the question is still out on them on whether they will use
those in their processing plants, whether they will accept them
at the river terminals. Frito-Lay elevator near my home in
Homer came out last week saying they wanted to go non-GMO.
Lalhop in Danville is still on the fence and that is one of my
biggest customers. Then my local elevator in Homer is owned by
them. They do not foresee a problem right now with GMO crops
because their biggest customers are in the Southeast, the
poultry and pork industry.
But the biggest thing for producers is to know who your
customer is; that is who you are producing the product for;
that is who is paying your bills ultimately for you, and to
grow what your customer wants. That decision should be left up
to an individual farmer as far as his risk management program.
The Chairman. Well, I thank each one of you. Let the record
show that you all lasted for 4-hours and were still cogent and
wise even after that period. We look forward to staying in
touch with each of you.
These subjects, we will revisit and I appreciate all
witnesses who have come today.
The hearing is adjourned.
[Whereupon, at 1:03 p.m., the Committee was adjourned.]
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DOCUMENTS SUBMITTED FOR THE RECORD
February 1, 2000
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