[Senate Hearing 106-663]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 106-663
 
   GRAIN INSPECTION, PACKERS AND STOCKYARDS ADMINISTRATION OVERSIGHT

=======================================================================

                                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



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           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

                              ----------                              

                       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
                              ----------                              

                               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
                              ----------                              

                                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

                              ----------                              


                       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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                            A P P E N D I X

                            February 1, 2000



      
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                            February 1, 2000



      
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