[Senate Hearing 106-874]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 106-874

               AGRICULTURE CONCENTRATION AND COMPETITION

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

                                HEARING

                               before the

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY
                          UNITED STATES SENATE
      SUBCOMMITTEE ON RESEARCH, NUTRITION AND GENERAL LEGISLATION

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                                   ON

               AGRICULTURE CONCENTRATION AND COMPETITION

                               __________

                             APRIL 27, 2000

                               __________

                       Printed for the use of the
           Committee on Agriculture, Nutrition, and Forestry

                                --------
                    U.S. GOVERNMENT PRINTING OFFICE
68-888                     WASHINGTON : 2000

_______________________________________________________________________
            For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 
                                 20402


           COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY



                  RICHARD G. LUGAR, Indiana, Chairman

JESSE HELMS, North Carolina          TOM HARKIN, Iowa
THAD COCHRAN, Mississippi            PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            KENT CONRAD, North Dakota
PAUL COVERDELL, Georgia              THOMAS A. DASCHLE, South Dakota
PAT ROBERTS, Kansas                  MAX BAUCUS, Montana
PETER G. FITZGERALD, Illinois        J. ROBERT KERREY, Nebraska
CHARLES E. GRASSLEY, Iowa            TIM JOHNSON, South Dakota
LARRY E. CRAIG, Idaho                BLANCHE L. LINCOLN, Arkansas
RICK SANTORUM, Pennsylvania

                       Keith Luse, Staff Director

                    David L. Johnson, Chief Counsel

                      Robert E. Sturm, Chief Clerk

            Mark Halverson, Staff Director for the Minority

                                  (ii)

  
                            C O N T E N T S

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                                                                   Page

Hearing:

Thursday, April 27, 2000, Agriculture Concentration and 
  Competition....................................................     1

Appendix:
Thursday, April 27, 2000.........................................    63
Document(s) submitted for the record:
Thursday, April 27, 2000.........................................   171
Questions and answers:
Thursday, April 27, 2000.........................................   239

                              ----------                              

                        Thursday, April 27, 2000
                    STATEMENTS PRESENTED BY SENATORS

Lugar, Hon. Richard G., a U.S. Senator from Indiana, Chairman, 
  Committee on Agriculture, Nutrition and Forestry...............     1
Roberts, Hon. Pat, a U.S. Senator from Kansas....................     7
Fitzgerald, Hon. Peter G., a U.S. Senator from Illinois..........    14
Grassley, Hon. Charles E., a U.S. Senator from Iowa..............     4
Harkin, Hon. Tom, a U.S. Senator from Iowa, Ranking Member, 
  Committee on Agriculture, Nutrition and Forestry...............     2
Leahy, Hon. Patrick J., a U.S. Senator from Vermont..............     6
Conrad, Hon. Kent, a U.S. Senator from North Dakota..............    10
Daschle, Hon. Tom, a U.S. Senator from South Dakota..............    11
Baucus, Hon. Max, a U.S. Senator from Montana....................    26
Kerrey, J. Robert, a U.S. Senator from Nebraska..................    14
Johnson, Tim, a U.S. Senator from South Dakota...................    12
                              ----------                              

                               WITNESSES
                                PANEL I

Nannes, John, Deputy Assistant Attorney General, Department of 
  Justice, Washington, DC........................................    14

                                PANEL II

Carstensen, Peter, Young-Bascom Professor of Law, University of 
  Wisconsin Law School, Madison, Wisconsin.......................    37
Koontz, Dr. Steven, Department of Agriculture and Resource 
  Economics, Colorado State University, Fort Collins, Colorado...    39
Nelson, David, Director, Equities Division, CS First Boston, New 
  York, New York.................................................    34
Rill, James, Howrey, Simon, Arnold, and White, Attorneys at Law, 
  Washington, DC.................................................    32

                               PANEL III

Caspers, John, National Pork Producers Council, Swaledale, Iowa..    50
Greig, John, National Cattlemen's Beef Association, Estherville, 
  Iowa...........................................................    48
Swenson, Leland, President, National Farmers Union, Aurora, 
  Colorado.......................................................    52
Warfield, President, Illinois Farm Bureau, on behalf of the 
  American Farm Bureau Federation, Gibson City, Illinois.........    53
                              ----------                              

                                APPENDIX

Prepared Statements:
    Lugar, Hon. Richard G........................................    64
    Grassley, Hon. Charles E.....................................    66
    Daschle, Hon. Tom............................................    70
    Johnson, Hon. Tim............................................    73
    Kerrey, Hon. J. Robert.......................................    78
    Carstensen, Peter............................................   120
    Caspers, John................................................   152
    Greig, John..................................................   144
    Koontz, Steven...............................................   139
    Nannes, John.................................................    79
    Nelson, David................................................   118
    Rill, James..................................................    98
    Swenson, Leland..............................................   158
    Warfield, Ron................................................   164
Document(s) submitted for the record:
    Position statement submitted by, Hon. Gordon H. Smith, a U.S. 
      Senator from Oregon........................................   172
    Position statement submitted by, Hon. Rod Grams, a U.S. 
      Senator from Minnesota.....................................   175
    Position statement (with attachments) of the National 
      Association of Manufacturers, submitted by Michael Elias 
      Baroody, Senior Vice President, Policy, Communications and 
      Public Affairs,............................................   176
    Credit Suisse First Boston Corporation, submitted by David C. 
      Nelson,....................................................   185
    Letter (with attachments) to Vice President Al Gore, Jr., 
      from Dan Glickman..........................................   207
    Position statement submitted by, Wayne D. Purcell, Alumni 
      Distinguished Professor and Director, Research Institute on 
      Livestock Pricing Agricultural and Applied Economics 
      Department, Virginia Tech..................................   211
    Position statement of the National Meat Association..........   220
    Position statement of Merlyn Carlson, Director, Nebraska 
      Department of Agriculture..................................   223
    Position statement submitted by Neal P. Gillen, Executive 
      Vice President & General Counsel, on behalf of the American 
      Cotton Shippers Association................................   227
    Position statement of Ted Seger, Farbest Foods, on behalf of 
      the National Turkey Federation.............................   230
    Position statement of Eugene Paul, on behalf of the National 
      Farmers Organization.......................................   235

 
               AGRICULTURE CONCENTRATION AND COMPETITION

                              ----------                              


                        THURSDAY, APRIL 27, 2000

                                       U.S. Senate,
         Committee on Agriculture, Nutrition, and Forestry,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:30 a.m., in 
room SD-106, Dirksen Senate Office Building, Hon. Richard G. 
Lugar, (Chairman of the Committee,) presiding.
    Present or submitting a statement: Senators Lugar, Roberts, 
Fitzgerald, Grassley, Harkin, Leahy, Conrad, Daschle, Baucus, 
Kerrey, Johnson, and Burns.

OPENING STATEMENT OF HON. RICHARD G. LUGAR, A U.S. SENATOR FROM 
  INDIANA, CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND 
                            FORESTRY

    The Chairman. Let me now proceed to our second item of 
business and a very important one. Today, the Senate 
Agriculture Committee will conduct the fourth in a series of 
hearings in this Congress addressing Concentration and 
Competition in Agriculture.
    The Committee has previously heard testimony outlining the 
potential costs and benefits accompanying consolidation and 
coordination in agriculture. Witnesses have told us that the 
benefits include higher quality products available at lower 
consumer prices and more efficient use of production resources, 
enabling those resources to move production of other products, 
thus increasing the national living standard. On the cost side, 
witnesses have testified that consolidation has negative 
impacts on environmental quality, on economic viability of 
small farm and firm operations and rural communities dependent 
on agriculture.
    The Committee has received testimony from Joel Klein, the 
Assistant Attorney General for Antitrust at the Department of 
Justice. Mr. Klein has told the Committee that the Department 
of Justice possesses adequate authority to execute antitrust 
laws. The question is using them properly. However, recent 
consolidations continue to raise questions about concentration 
and antitrust enforcement.
    Today's hearing will explore what tools are necessary to 
facilitate the enforcement of laws prohibiting unfair business 
practices and which Federal agency is best suited to execute 
these laws. The Committee will also consider what role the 
United States Department of Agriculture should play in the 
agribusiness merger review process.
    Currently, reviews of mergers and acquisitions within the 
agribusiness sector occurs with the Federal Trade Commission 
and the Department of Justice. These agencies often call upon 
USDA to provide expertise and data on pending reviews. There 
are proposals before the Committee which formalize USDA's role 
in the merger review process. These proposals do other things, 
such as establishing a commission to review claims of family 
farmers and ranchers who have suffered financial damages due to 
unfair business practices. Also, these proposals require large 
agribusiness to report on their corporate structure describing 
the domestic and foreign activities of these firms.
    [The prepared statement of Senator Lugar can be found in 
the appendix on page 64.]
    Mr. John Nannes, the Deputy Assistant Attorney General of 
the Department of Justice, will provide the Committee with a 
progress report on the newly created position of Special 
Counsel for Agriculture within the Department of Justice.
    I will welcome in due course also Mr. James Rill, formerly 
the Assistant Attorney General for Antitrust, and who more 
recently was appointed by the Attorney General as chair of the 
International Competition Policy Advisory Committee, whose 
final report was completed in February.
    We welcome Mr. David Nelson from Credit Suisse First 
Boston. Mr. Nelson will provide the Committee with an analysis 
of the performance of agribusiness on Wall Street.
    Also presenting testimony are Dr. Stephen Koontz from 
Colorado State University and Mr. Peter Carstensen from the 
University of Wisconsin. Both have done extensive research on 
the issues of agricultural concentration and antitrust law.
    A third panel today will contain Mr. Ron Warfield from 
Gibson City, Illinois, representing the American Farm Bureau 
Federation; Mr. Leland Swenson from Aurora, Colorado, President 
of the National Farmers Union; Mr. John Greig from Estherville, 
Iowa, representing the National Cattlemen's Beef Association; 
and Mr. Jon Caspers from Swaledale, Iowa, representing the 
National Pork Producers Council.
    It is a privilege to have you, Mr. Nannes, and before I ask 
you for your testimony, I would like to recognize the 
distinguished Ranking Member of the Committee for an opening 
statement.

STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR FROM IOWA, RANKING 
   MEMBER, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

    Senator Harkin. Thank you very much, Mr. Chairman. There 
certainly is no issue raising more concerns in agriculture 
today than the topic of this hearing. The structure of 
agriculture and the entire agribusiness and food sector is 
being massively transformed and the pace is accelerating. So I 
commend you, Mr. Chairman, for holding today's hearing. I look 
forward to working with you to shape effective policies to deal 
with the consolidation and economic concentration in 
agriculture.
    But we are quickly running out of time. Unless we change 
course, the independent family farm is on the path to 
extinction. Independent farmers can compete and thrive if--if 
the competition is based on productive efficiency and 
delivering abundant supplies of quality products at reasonable 
prices. But no matter how efficient farmers are, they cannot 
survive a contest based on who wields the most economic power. 
Farmers suffer from a gross inequality in economic strength, 
and as a consequence, they receive lower returns than they 
would if the markets were truly fair, open, and competitive.
    While the market basket of food has only increased by three 
percent since 1984--think about that, the market basket of food 
has only increased by three percent since 1984--the farm value 
of that market basket has plummeted 38-percent. The farmers' 
share of the retail food dollar has dropped from 47-percent in 
1950 to 21-percent last year.
    Consumers are also at the mercy of a few large firms 
situated between them and farmers. I have always likened the 
arrangement to an hourglass. You have got a lot of producers on 
one side, a lot of consumers on the other side, and then you 
have got a choke point right in the middle, a few large 
agribusiness firms. Well, I believe we have to stop this trend 
now before it builds up more momentum and heads further down 
the slippery slope towards consolidation and integration where 
independent farmers become a footnote in history.
    I think there are three things that must be done. First, we 
must start with strong enforcement of existing laws to protect 
fair, open, and competitive markets.
    Second, Congress must enact legislation to provide 
authority to ensure these fair and open and competitive markets 
in our food and agriculture industry, and I do commend this 
administration for breathing new life into antitrust 
enforcement in recent years. However, we are still suffering 
the fallout from years of lax antitrust enforcement and 
misguided court decisions that have sapped the strength of the 
Sherman and Clayton Acts as they were originally intended. We 
must correct this situation with new legislation.
    Several of us have introduced the Farmers and Ranchers Fair 
Competition Act of 2000 to expand the Secretary of 
Agriculture's authority to prohibit anti-competitive practices 
and mergers by agribusinesses that damage small and medium-
sized farms.
    Third, we must also help farmers improve their position 
relative to the powerful firms they deal with in the evolving 
agricultural markets. That includes assisting them in gaining a 
share of the profits made from processing and adding value to 
crops and livestock after they leave the farm. Farmers ought to 
get a share of those profits, also.
    But lastly, we must deal with these issues in a 
comprehensive way to ensure that independent farmers are not 
harmed by the practices of large agribusinesses and that market 
concentration does not undermine the ability of farmers to 
compete in the marketplace.
    Mr. Chairman, again, I commend you for holding these 
hearings and hopefully we can move ahead this year yet with 
some legislation to address this problem.
    The Chairman. Thank you very much, Senator Harkin.
    The Chair will recognize each Senator for hopefully a short 
opening statement. It has always been our policy that Senators 
want to be heard on these issues, but hopefully they can be 
heard fairly briefly because we have a number of panels. So I 
will recognize now Senator Grassley.

STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM IOWA

    Senator Grassley. Mr. Chairman, your admonition, it was my 
understanding that Senator Leahy and Senator Daschle and myself 
would have an opportunity to present some points of view on our 
bill, or is that not the way you had intended?
    The Chairman. No, I think you ought to do that. That is 
really a part of our hearing.
    Senator Grassley. As we all know, attention on agricultural 
concentration has become especially focused within the last 18-
months to 2-years. Record low prices for many agricultural 
commodities and a wave of agribusiness mergers have led anyone 
who is deeply involved in agriculture to take a serious look at 
infrastructure of agriculture and whether it is conducive to 
the survival of small independent producers.
    My bill would require the Department of Agriculture to do a 
review of proposed agriculture mergers. The U.S. Department of 
Agriculture would have the mission of assessing whether a 
proposed merger would have a substantial detrimental effect on 
producers' access to the marketplace. This review would be 
conducted simultaneously with the review done by the Department 
of Justice.
    Furthermore, my bill makes no changes in the antitrust 
review process or the standard that is presently conducted by 
the Department of Justice. If the USDA believes the merger 
would have a substantial detrimental impact on farmers' access 
to the marketplace, then the USDA would be able to enter into 
discussions with the merging parties to address those concerns. 
If those discussions are not successful, my bill gives the USDA 
a very narrow time frame in which to decide whether or not to 
pursue a challenge to the merger, even if the Department of 
Justice has approved the merger. If USDA does go forward with a 
challenge, then the Department must make its case in Federal 
court. If the Department wins the impartial forum of the 
Federal court, then the merger is stopped or conditions are 
imposed on the transaction.
    My bill also calls for the appointment of a special counsel 
for competition matters at the USDA and an assistant Attorney 
General for agricultural antitrust matters at the Department of 
Justice.
    The legislation also expands the authority of the USDA's 
packers and stockyards division to investigate anti-
competitive, unfair, or monopolistic practices in all 
commodities, because currently the packers and stockyards 
authority pertains only to the livestock industry.
    My bill has been quite controversial. Some believe that my 
bill is anti-agribusiness. However, I have worked on a farm 
practically all my life. I made my living as a farmer before I 
came to the Congress and no one knows better than I do that a 
farmer cannot do his job without the agribusiness that produces 
the seed, fertilizer, pesticides, and equipment necessary to 
produce a crop. A livestock producer cannot get his product to 
consumers without the agribusiness that processes those animals 
into cuts of meat to be sold at the retail level. I know as 
well as anyone that agriculture cannot survive without 
agribusiness. I do not believe that my bill imposes an undue 
burden on this agribusiness.
    I have heard it said that allowing USDA into the merger 
review process, as my bill does, politicizes the process. But 
my legislation does not give USDA a rubber stamp to stop 
mergers. The only requirements that my bill places on USDA is 
for them to do a merger assessment based upon farmer impact 
standard. My bill encourages the U.S. Department of Agriculture 
to work with merging parties to work out any concerns. It would 
do so without disrupting or displacing the process currently 
used by Justice and the FTC. I emphasize, no merger can be 
stopped without a determination of an impartial Federal court 
that the USDA has met the standards set by my legislation.
    Bringing the Department of Agriculture into the merger 
review process is not unprecedented, because currently, under a 
memo of understanding, the U.S. Department of Agriculture and 
Justice consult and discuss with respect to agriculture 
mergers. My bill would formalize this process, make it more 
open and consistent. Furthermore, other agencies such as the 
FCC and the Surface Transportation Board play integral roles in 
communication and railroad mergers, respectfully, giving the 
USDA a prominent role in these reviews and it is not 
unprecedented.
    It has also been implied that the bill would affect all 
businesses. I want to make it clear that my bill pertains only 
to agriculture. Agriculture concentration is one of the top 
issues that I hear about from producers in my State and 
agriculture is vital to my State's economy.
    The bill would not drag the merger review process out. It 
requires USDA to conduct its farmer impact assessment within 
the same time period as Justice merger review. Because USDA 
represents farmers, my legislation guarantees farmers a place 
at the table when mergers in their industry are considered 
without making the process intolerably burdened.
    I want to reiterate my belief, Mr. Chairman, that the bill 
makes the agriculture merger review process more open and 
consistent in a way that is fair both to producers and 
agribusiness. I have said many times that I want to see a 
meaningful action on agriculture concentration taken in this 
Congress and I am committed to that goal.
    Certainly, I believe there are ways in which my bill can be 
improved, and I am willing to listen to others' concerns and 
suggestions. But I will continue to push for Congressional 
action on agriculture concentration so long as this Congress is 
in session. The issue is too important to so many producers for 
it to be dropped. I know that many in the agribusiness 
community have been advocating a ``just say no'' approach to 
agriculture concentration merger. For me and, I believe, other 
members, this do nothing approach is not acceptable. So I urge 
the agribusiness community who have worked with me on many 
occasions to come to Congress with constructive proposals on 
how to guarantee agriculture mergers that their concerns are 
heard when agriculture mergers are considered.
    I want to commend Senator Daschle and Senator Leahy for 
their hard work and for bringing forward a substantive 
initiative, as well, and would relish the opportunity to visit 
with them about ways in which our legislation could be worked 
out.
    Lastly, as strictly a Republican member of this committee, 
I would like to suggest that my bill is offered in the 
tradition of our party's feeling that the Government should be 
a referee in our economy, and that philosophy has been a part 
of our party's position since Teddy Roosevelt.
    [The prepared statement of Senator Grassley can be found in 
the appendix on page 66.]
    The Chairman. Thank you very much, Senator Grassley.
    Senator Leahy.

STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM VERMONT

    Senator Leahy. Mr. Chairman, I am glad you are having this 
hearing. I think it is an extremely important one. As Senator 
Grassley has pointed out, you have two members of the Judiciary 
Committee here, both Senator Grassley and myself. His bill is 
an excellent one. It is before the Judiciary Committee. I am 
hoping that we are going to have hearings that might move 
forward on that as I do here. The bipartisan bill that I worked 
on with the Democratic leader, Senator Daschle, and other 
members of the Committee, we were helped by the American Farm 
Bureau Federation and the National Farmers Union in this.
    Basically, what we were saying is that family farmers and 
ranchers should be the key focus of our competition, our 
agricultural competition policies, because there is really not 
a level playing field in American agriculture today. Give us a 
level playing field and I will stack up American agriculture 
against anywhere in the world. But on one side, we have got the 
agribusinesses that can raise billions of dollars on Wall 
Street by a click of a computer by issuing stock, whether 
valued at what you paid for it or not. On the other side, you 
have got family farmers and ranchers. They have little or no 
bargaining power and they cannot issue stock.
    I just do not want agri-corporate giants hitting farmers 
over the head with unfair and discriminatory and deceptive 
practices. I am fed up with the ``sign here or you lose your 
farm'' contracts. I am fed up with the ``take my price or lose 
your ranch'' deals. I am fed up with deceptive practices by 
processors to cheat farmers out of a fair chance to compete. I 
look at the editorials which we will have in the record.
    One of our papers wrote about Suisse, which controls 70-
percent of the milk market in New England. I look at what the 
Commissioner of Agriculture of Massachusetts wrote. He said in 
a recent letter that Suisse Foods' milk processing capacity 
approaches 80-percent of the Massachusetts market, and they may 
have entered into an exclusive agreement with a major 
supermarket to exclude a competitor's milk from its shelves. 
Well, that does not help consumers, and it certainly does not 
help producers and somebody has to say, enough is enough. So we 
have asked to enhance competition in rural America by 
increasing the bargaining power of family-sized farmers and 
ranchers, giving the Secretary of Agriculture the power to move 
more quickly.
    I will put my whole statement in the record, Mr. Chairman, 
but I think this hearing is extremely important, and ironically 
enough, I and, I assume, Senator Grassley will have to leave to 
go to that same Judiciary Committee. But I intend to continue 
to work with Senator Grassley and the Judiciary Committee on 
that and with Senator Daschle and the others on the Committee 
here, and with you, of course.
    The Chairman. Thank you very much, Senator Leahy.
    Senator Grassley. Mr. Chairman, could I tell Senator Leahy 
that I am going to send a letter today to Senator Hatch, 
Chairman of the full Committee, Senator Mike DeWine, Chairman 
of the Antitrust Subcommittee, requesting such a hearing.
    Senator Leahy. I will join you on that, if you would like.
    Senator Grassley. If we have not sent it, I will have you 
join me on it.
    Senator Leahy. Thank you.
    Senator Grassley. It is good to facilitate communication 
here in the Judiciary Committee.
    Senator Leahy. We come to the Agriculture Committee to 
facilitate the Judiciary Committee.
    The Chairman. Exactly. Senator Roberts.

   STATEMENT OF HON. PAT ROBERTS, A U.S. SENATOR FROM KANSAS

    Senator Roberts. Mr. Chairman, first, I want to thank you 
for arranging this room. I hope this is the new home of the 
Agriculture Committee. It is certainly befitting your stature 
and I think Senator Leahy's portrait would go fine right up on 
that wall.
    [Laughter.]
    Senator Conrad. We have got a spot for his portrait over on 
the House side. We are working very hard on it.
    Senator Leahy. It is an elevator shaft.
    [Laughter.]
    Senator Roberts. Mine has already been taken down. That is 
how that works.
    Mr. Chairman, if I could reserve my time, as I indicated to 
you, there is an Emerging Threat Subcommittee of the Armed 
Services Committee of which I am privileged to chair with a 
markup at 10:00, but I could probably go about 10:10 and we 
could put that off. I see that the distinguished Democratic 
leader is here and I know his schedule is extremely busy. If he 
would like to go at this particular time, if I could reserve my 
time to follow him, I would be more than happy to do so.
    The Chairman. Very well. The Democratic leader.
    Senator Daschle. I am very grateful to you. I can wait my 
turn. You have a schedule, too, and I am planning to be here 
for a little while, but I very much appreciate your 
graciousness.
    Senator Roberts. Thank you, Mr. Chairman. Mr. Chairman, 
thank you for holding this hearing today. I have a short 
statement and a few questions to read because I have to leave, 
and I will try to do that as quickly as I can.
    In regard to the issues involving debate on concentration 
in agriculture and agribusiness, this is a most important and 
very crucial debate. During the past few years, as has been 
said by my colleagues, the general economy and the stock market 
have been booming while the agriculture economy has gone 
through some very, very difficult times. At the same time we 
have experienced this downturn in the agriculture economy, we 
have seen mergers or proposed mergers in the grain business and 
the hog business, in regards to railroads and the biotech 
sector. It is imperative that we take a much closer look on 
these issues.
    The purpose of today's hearing is to discuss several bills 
introduced by members of this committee to address the merger 
issue and the business practice in this business. These bills 
include those introduced by Senator Daschle and Leahy, Senator 
Grassley, and a ban on packer ownership of livestock offered by 
Senator Johnson. Obviously, these bills would greatly expand 
the antitrust powers related to agriculture and would expand 
the USDA oversight.
    Now, Mr. Chairman, 3-months ago, you held a hearing on this 
same issue, and at that time we asked the Department of Justice 
and the Department of Agriculture and the administration to 
provide us with their ``official positions'' on proposals to 
ban packer ownership of livestock and to expand the antitrust 
powers related to agriculture. I am not sure about this, Mr. 
Chairman, but I do not believe any ``official position'' has 
been put forth by the administration at this point. However, 
now that we have the formal proposals introduced on each of 
these issues, I look forward to, or we should look forward to 
asking Mr. Nannes with the Department of Justice to provide us 
with the official administration position on these pieces of 
legislation. I think that would be helpful.
    Also during the hearing in February, I discussed with 
several of the producer and the farm organization witnesses the 
current statutory and regulatory powers that the Department of 
Justice and the USDA have at their disposal. We were in virtual 
unanimous agreement, Mr. Chairman, that they are not currently 
using all the powers available to them. I also want to know why 
this is the case. Do we need more tools in this area? If so, 
what are they? Are they commensurate with the bills that have 
been introduced?
    Now, going back to last year, we have asked the 
administration for recommendations in this area as well as 
their position. Have we received any yet? I will also, and we 
should also, if I am not present, ask Mr. Nannes for the 
administration's positions and the recommendations in this 
area.
    Mr. Chairman, I believe the discussion we will have here 
today is an important discussion that those of us in the 
agriculture community need to have, make no mistake about that. 
But again, I want to stress there are several things the 
members of this committee need to carefully consider when we 
discuss these issues. We know the problem, but there are some 
concerns, as well.
    We as a committee, with all due respect, have very little 
expertise in antitrust law. Are we really the ones to be 
rewriting the books on this issue? I want to applaud Senator 
Grassley for getting in touch with the distinguished Chairman 
of the Judiciary Committee in an effort to hold a hearing 
there.
    Is there really a lack of enforcement in the area of 
mergers in agribusiness? Mr. Nannes' testimony cites several 
very high-profile cases involving agribusiness where the 
Department of Justice did take action. But he also points out 
that the two highest fines ever levied by the Department of 
Justice for anti-competitive practices and pricing were levied 
on two firms involved in agribusiness.
    What will a virtual absolute halt to agribusiness mergers 
do to our producers and agribusinesses' ability to compete in 
the world marketplace? The Senate has already spoken on that 
issue. What will these proposals do to producers' ability to 
create new arrangements and to expand their profitability? In 
Kansas, several cooperatives have joined with Cargill to 
announce they have come together to form a joint company that 
would allow them to ship grain more efficiently and to return, 
hopefully, the higher profits to producers.
    The testimony of the National Cattlemen's Beef Association 
today also mentions the success of an outfit called U.S. 
Premium Beef in Kansas and mentions a new alliance that is 
being started in Kansas called Quality Beef. Mr. Chairman, this 
is an alliance of producers and a major retail firm to control 
everything in the process from the DNA to the dinner table to 
provide consumers with a high-quality product.
    Does this committee want to stop these forms of producer 
activities from taking place? Obviously not, but this is the 
kind of concern that I think we have to take into account. More 
importantly, why is the USDA not using all the tools it has 
currently at its disposal in the area of anti-competitive 
practices?
    Mr. Chairman, we are experiencing mergers in all areas of 
our economy. Do I like all these mergers? No. Do I like some? 
Yes. But I question the wisdom of some proposals to address 
these concerns legislatively. I also want to assure that in the 
zeal of some to ensure some competition in the marketplace, we 
do not take away the ability of our producers and agribusiness 
to compete in the domestic and the world markets.
    I look forward to working with my colleagues, and again, 
Mr. Chairman, I will submit these questions for the record. But 
what is the administration's position on the Daschle-Leahy 
bill? What is the administration's position on the Grassley 
bill? What is the position on proposals to ban packer ownership 
of livestock? What is that position if it is a producer-owned 
business, even if it is not a cooperative? What are the 
administration's recommendations, if any, for additional tools 
that you need in this area?
    And one other situation. Your testimony mentions in 
particular the Cargill-Continental case and several 
divestitures that you forced to allow the merger to go through. 
I am not trying to perjure them one way or the other. One of 
these facilities was in Kansas. I am wondering how the 
Department of Justice did determine which facilities to divest. 
Where did the expertise come from to allow you to make those 
decisions? Hopefully, it is in consultation with the USDA.
    We also need to know how Mr. Doug Ross is getting along 
over in your shop, if he has enough pencils and papers and 
telephones and money to do the job and to peer over your 
shoulder to make sure you are doing the job right.
    I apologize to my colleagues for the length of the 
statement and I thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Roberts.
    Let me identify the distinguished gentleman to your left. 
Senator Conrad Burns is not a member of the Committee, but he 
is a good friend of the Committee and he has asked to be able 
to observe the hearing from the podium and we are delighted 
that he is here and want to extend that courtesy to the 
Senator.
    Senator Conrad.

STATEMENT OF HON. KENT CONRAD, A U.S. SENATOR FROM NORTH DAKOTA

    Senator Conrad. Thank you, Mr. Chairman. I think we all 
know that concentration is a significant problem. This chart, I 
think, sums it up. It shows the concentration, the market share 
by the top four firms in corn wet milling, wheat flour milling, 
and soybean crushing, and you can see in corn wet milling, the 
top four firms control 74-percent, in wheat flour milling, 62-
percent, in soybean crushing, now 80-percent.
    These are levels of concentration that do threaten those 
who are sellers. Normally, we think of the problem of antitrust 
as a question of monopoly. That is a question of where there 
are few sellers. Monopsony, which is really the problem we are 
facing here, is a problem of a few buyers, and that is the 
problem that farmers confront all across America. We have a 
small number of buyers and the indications are, if you look at 
the farmers' share of the retail dollar, it is shrinking and 
shrinking dramatically.
    When I went to business school to get a master's in 
business administration, one of the things they taught us is 
you get return based on the power you have in the marketing 
chain, and if there are few buyers and many sellers, the 
sellers have very little leverage. The buyers have the leverage 
to control the price. That, I think, is what we are seeing.
    It is even more pronounced in the control of regional 
export markets, where we have 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 
ports and 81-percent through the Great Lakes.
    Mr. Chairman and members of the Committee, we have an 
obligation to act. The current laws are not working. I think we 
could do a better job of enforcing those laws, but clearly, 
that is not enough. We held a meeting in my office with the 
Attorney General on a bipartisan basis. I think there were 12-
Senators there. Senator Harkin was there. Senator Grassley was 
there and others. And we made the point to her that there needs 
to be greater enforcement.
    But it also became clear as we met with the top leadership 
of Justice that we need to do more than that. We need to 
legislate. That is what the Farmers and Ranchers Fair 
Competition Act of 2000 does. It is written by Senator Daschle, 
Senator Leahy, Senator Harkin, and others of us. Senator 
Grassley also has an excellent bill. Hopefully, we can come 
together and legislate.
    The Chairman. Thank you very much.
    Senator Daschle.

  STATEMENT OF HON. THOMAS DASCHLE, A U.S. SENATOR FROM SOUTH 
                             DAKOTA

    Senator Daschle. Mr. Chairman, I want to add my voice to 
those who have already thanked you for holding this important 
hearing. I appreciate very much your leadership and your 
willingness to stay with this issue as you have done over the 
course of this Congress.
    I also have a very lengthy statement that I would ask 
consent that it be inserted in the record------
    The Chairman. It will be inserted.
    Senator Daschle.--as well as a point-by-point summary of 
the bill that has been referred to that we have now introduced. 
With your willingness to do that, I will just summarize briefly 
a few points.
    I believe that in our lifetimes, we have seen the 
industrialization of agriculture to the extent that nobody 
could have forecast. Part of that industrialization can be 
truly viewed as progress. Part of it, in my view, has been 
extraordinarily positive for rural communities. But a large 
part of it also has been very, very detrimental and 
disconcerting and that is what brings us to this hearing today, 
in my view.
    I think as we look to the industrialization, we see this 
growing concentration and we recognize that, that is the trend 
in just about every industry, but it does not have to be 
inevitable. As we travel to other countries, especially in 
Europe and Asia, we find that small producers still are viable 
and are very much a part of the economy. That economy is 
thriving in agriculture in many parts of the world outside of 
the United States in rural areas.
    I think as we look to the consequences of industrialization 
in agriculture today, we see many practices within the industry 
that are very fair and understandable. But as we look closer, 
we see many which are not fair, and as we look at those which 
are not fair, we are more and more of a realization that many 
of those unfair practices are taking place in large measure 
because we have not created the tools within the Government to 
assure that this new industrialization in agriculture can be 
addressed through sound public policy, and that is the essence 
of the legislation that we have introduced and I think Senator 
Grassley, as well.
    No one should be mislead, and I do not think anyone in this 
room certainly is. What is happening in agriculture today will 
have irreparable effect on virtually every entity within rural 
America today. On farmers and ranchers, when they have the 
inability to trade fairly their products, whether it is 
livestock or grain. On the markets themselves and the effect of 
that concentration. And certainly on communities, when one 
plant will pull out, leaving a large percentage of any 
community completely unemployed, as has happened in South 
Dakota. So those profound consequences are ones that we simply 
cannot ignore.
    Do we have the infrastructure in place to be able to deal 
with the industrialized agriculture as it exists today? Our 
view is that we do not. So, in essence, we try to do three 
things.
    First, we strengthen USDA's power to protect all producers 
from anti-competitive practices. second, we require that the 
potential impact of proposed mergers on rural communities be 
considered during the process of reviewing these mergers. And 
then, finally, we begin to restore the fairness that we all 
hope we can see in the marketplace by increasing the bargaining 
power of small producers.
    But we do so not by taking anything away from the Justice 
Department. We do so by empowering the Agriculture Department. 
I think both branches of government, the legislative and 
executive, need to be involved, and both agencies within the 
executive branch charged with overseeing this change in our 
industry ought to be fully empowered, the Justice Department 
and the Department of Agriculture. This bill addresses what I 
think is a very serious deficiency in the Department of 
Agriculture today, and I again thank the Chairman.
    [The prepared statement of Senator Daschle can be found in 
the appendix on page 70.]
    The Chairman. I thank you, Senator Daschle, for your 
leadership.
    Senator Johnson

STATEMENT OF HON. TIM JOHNSON, A U.S. SENATOR FROM SOUTH DAKOTA

    Senator Johnson. Thank you, Mr. Chairman, for holding this 
hearing. I appreciate that there are some time concerns and we 
need to move on to the panel. I think that I will submit a 
statement relative to my general observations about 
concentration in the agricultural industry and focus simply in 
an expeditious fashion on some legislation that I have 
sponsored which is relevant to the discussions today.
    Mr. Chairman, the Rancher Act, S. 1738, is legislation that 
I have introduced that is bipartisan in nature to prohibit meat 
packers from owning livestock prior to slaughter. My bill would 
reign in the meatpackers' leverage over the livestock market 
and reestablish a free, fair, and competitive atmosphere for 
independent livestock producers. I have been joined by Senators 
Kerrey, Grassley, Thomas, Daschle, Harkin, Dorgan, Wellstone, 
Conrad, and Bingaman in this effort. Representatives Minge and 
Leach have introduced similar legislation in the other body.
    This legislation is endorsed by the National Farmers Union, 
the South Dakota Farmers Union, the South Dakota Cattlemen, the 
Center for Rural Affairs, the Organization for Competitive 
Markets, RCAF, Iowa Pork Producers Association, and the 
Illinois Farm Bureau.
    This legislation recognizes the need for value-added 
opportunities and exempts producer owned and controlled 
cooperatives and small producer owned meatpackers from the 
ownership prohibition.
    The legislation is also retroactive, requiring meatpackers 
to divest of ownership interest in livestock which directly 
takes on the potential as the Smithfield situation. A recent 
survey of over 1,000 farmer members of the Iowa Pork Producers 
Association found that 88-percent support a Federal-level ban 
on packer ownership of hogs. In South Dakota, our Governor 
Janklow, a Republican governor, has signed a resolution adopted 
by the legislature calling for a Federal-level prohibition of 
packer ownership of livestock. And in Iowa, legislation has 
passed to strengthen their existing law on packer ownership and 
Governor Vilsack there has signed this provision into law 
recently.
    A ban on packer ownership of livestock would not drive 
packers out of business because most of their earnings are, in 
fact, generated from branded products and companies marketing 
directly to consumers. It boils down, Mr. Chairman, to whether 
we want independent producers in agriculture or if we are going 
to yield to concentration and see farmers and ranchers become 
low-wage employees on their own land.
    Second, I would observe just quickly that I am very pleased 
to join Senator Daschle in cosponsorship of S. 2411 that takes 
on anti-competitive issues in agriculture today. This 
legislation compliments, I believe, my legislation to ban 
packer ownership. S. 2411 seeks better cooperation and 
communication between the Department of Justice and the 
Department of Agriculture and the bill clarifies that meat 
packers and others engaged in unjustifiable price 
discrimination and preferential purchasing are violating the 
law.
    Too many farmers and ranchers feel agribusiness buyers have 
discriminated against them based on the size of their 
operations, and so our bill clearly prohibits these practices. 
In addition, the farmers and ranchers are economically harmed 
by anti-competitive behavior. This bill establishes a family 
farmer and rancher claims commission authorizing direct 
compensation to them. The bill also requires a new USDA 
analysis of proposed agribusiness mergers to determine if a 
given merger will have a negative effect on family farmers, 
market prices, and rural communities.
    Since many producers are either coerced or attracted into 
contract production scenarios, I am pleased that the bill 
requires basic public disclosure standards for these contracts. 
A producer needs to know if the contract he or she is signing 
is worth the paper it is written on. Poultry producers learned 
the hard way that some contracts are recipes for disaster to 
the independent farmer.
    Finally, in regards to livestock markets, I would like to 
mention three legislative initiatives related to fair and free 
competition in the marketplace that I support and encourage 
Congress to act upon this year. One would be the country origin 
of meat labeling legislation, which now has 15-bipartisan 
Senate cosponsors, S. 242, the Meat Labeling Act of 1999, 
including Senators Baucus, Daschle, Grassley, Harkin, Kerrey, 
Conrad, Bingaman, Bond, Campbell, Durban, Enzi, Feingold, 
Graham, Reed, and Thomas. This bill will require a country of 
origin labeling for muscle cuts and ground products of beef, 
lamb, and pork.
    And then finally, Mr. Chairman, USDA quality grade reform, 
as S. 241, the Truth in Quality Grading Act of 1999. This bill 
prohibits imported beef and lamb from displaying USDA quality 
grade stamps. USDA recently solicited public opinion concerning 
whether the Secretary should use administrative authority to 
discontinue using USDA quality grades on imported beef and lamb 
meat carcasses. This is consistent with the direction of this 
legislation, and again, I think, is part and parcel of our 
overall legislative strategy to deal constructively with the 
problem of concentration, lack of competition, lack of price 
leverage for independent livestock producers in America.
    I think that consideration of these pieces of legislation 
would be consistent with that more comprehensive strategy. I 
thank you, Mr. Chairman, for holding this hearing today.
    [The prepared statement of Senator Johnson can be found in 
the appendix on page 73.]
    The Chairman. Thank you, Senator Johnson.
    Senator Kerrey.

 STATEMENT OF HON. ROBERT KERREY, A U.S. SENATOR FROM NEBRASKA

    Senator Kerrey. Mr. Chairman, I will just submit a 
statement for the record and thank you for holding this hearing 
and hope that the exchange I have heard earlier between Senator 
Leahy and Senator Grassley is an indication that this Congress 
will be able to mark up a bill and move a bill this year. I get 
asked over and over and over at the local and at the State 
level, why is Congress unable to respond to what the people 
themselves are saying need to be done in this area, and I am 
hopeful that we can pass good legislation this year.
    [The prepared statement of Senator Kerrey can be found in 
the appendix on page 78.]
    The Chairman. I thank the Senator. His statement and that 
of Senator Johnson will be published in full in the record.
    Senator Fitzgerald.

  STATEMENT OF HON. PETER G. FITZGERALD, A U.S. SENATOR FROM 
                            ILLINOIS

    Senator Fitzgerald. Thank you, Mr. Chairman. I am not going 
to have an opening statement and I just want to use this time 
to welcome a constituent of mine who is going to be on the 
third panel, Ron Warfield, who is the President of the Illinois 
Farm Bureau from Gibson City, Illinois. I just want to welcome 
Ron to the Committee, thank the Chairman for holding these 
hearings, and I think it is a very important issue and getting 
more of the details of the two competing bills in this 
important area should be very beneficial to all the Committee 
members. Thank you.
    The Chairman. I thank the Senator.
    Mr. Nannes, you are recognized.

STATEMENT OF JOHN M. NANNES, DEPUTY ASSISTANT ATTORNEY GENERAL, 
   ANTITRUST DIVISION, DEPARTMENT OF JUSTICE, WASHINGTON, DC.

    Mr. Nannes. Thank you, Mr. Chairman and other members of 
the Committee. I am pleased to have the opportunity this 
morning to discuss issues related to antitrust enforcement in 
the agricultural marketplace.
    We at the Antitrust Division know that the agricultural 
marketplace is undergoing significant change. Farmers are 
adjusting to the challenges in international markets, to major 
biological changes in the products they buy and sell, and to 
new forms of business relationships between producers and 
processors.
    In the midst of these changes, farmers have expressed 
concern about the levels of competitiveness in agricultural 
markets. Farmers know that competition at all levels in the 
production process leads to better quality, more innovation, 
and competitive prices. They know, too, how important antitrust 
enforcement is to assuring competitive markets. Enforcement of 
the antitrust laws can benefit farmers in their capacity as 
purchasers of goods and services that allow them to grow crops 
and to raise livestock, and also in their capacity as sellers 
of crops and livestock to feed people, not only in our country 
but throughout the world.
    The Antitrust Division takes these concerns seriously and 
has been very active in enforcing the antitrust laws in the 
agricultural sector. In conversations with farm groups, we have 
found that farmers are especially concerned, as some of you 
have indicated already this morning, about the potential impact 
of mergers. Farmers are concerned that mergers will limit the 
number of sellers from whom they buy and will limit the number 
of customers for crops and livestock to whom they sell. For 
this reason, I think it may be helpful to start out with a 
brief review of recent merger enforcement actions that the 
Antitrust Division has taken in this very important sector of 
our economy.
    In just the last 17-months, the Antitrust Division has 
challenged four significant mergers that have affected 
agricultural markets: The proposed acquisition by Monsanto of 
DeKalb Genetics Corporation, which would have significantly 
reduced competition in corn seed biotechnology innovation to 
the detriment of farmers; the proposed acquisition by Cargill 
of Continental's grain business, which would have significantly 
reduced competition in the purchase of grain and soybeans from 
farmers in various local and regional markets; the proposed 
acquisition by New Holland of Case, which would have 
significantly reduced competition in the sale of tractors and 
hay tools to farmers; and the proposed acquisition by Monsanto 
of Delta and Pine Lane, which would have significantly reduced 
competition in cottonseed biotechnology to the detriment of 
farmers.
    Certain aspects of these enforcement actions warrant 
particular attention. In most merger investigations, the 
Antitrust Division is concerned about the ability of the 
merging companies to raise above the competitive level the 
price of products or services they sell.
    Of course, it is also possible that a merger will 
substantially lessen competition with respect to the price that 
the merging companies pay to purchase products. This latter 
matter is a particular concern to farmers, who often sell their 
products to large agribusinesses. For a while, there seems to 
have been some uncertainty about whether the antitrust 
enforcement agencies take this possibility into account when 
analyzing mergers. In fact, our merger guidelines specifically 
provide that the Antitrust Division will review mergers to 
determine whether they pose a competitive threat to persons 
buying goods or services from the merged entity and whether 
they pose a competitive threat to persons selling goods or 
services to the merged entity.
    This distinction is illustrated by our challenge to the 
Cargill-Continental transaction last year. The merger affected 
a number of markets. The parties were sellers of grain and 
soybeans in the United States and abroad, but they were also 
buyers of grain and soybeans in various local and regional 
domestic markets. We looked at all of the potentially affected 
markets. We concluded ultimately that the transaction was not 
problematic on the sell side. The companies did not account for 
a substantial share of grain or soybean sales in either a 
national or international market.
    However, we concluded that the proposed merger could have 
depressed prices received by farmers for grain and soybeans in 
certain regions of the country and we determined that the 
transaction as proposed should be challenged. It was only after 
the parties agreed to restructure the transaction with 
significant divestitures of port, rail, and river facilities 
that we permitted it to proceed.
    Taken as a whole, these four major merger enforcement 
actions establish certain important propositions. First, the 
Antitrust Division carefully reviews agricultural mergers for 
their competitive implications.
    Second, if a merger is likely to lead to anti-competitive 
prices for products purchased by farmers, the Antitrust 
Division will file suit.
    Third, if a merger is likely to lead to anti-competitive 
prices for products sold by farmers, the Antitrust Division 
will file suit.
    Fourth, the Antitrust Division's concerns are not limited 
to traditional agricultural products but extend also to 
biotechnology innovation.
    And fifth, while the Antitrust Division will consider 
proposed divestitures and other forms of relief that permit a 
merger to proceed as restructured, the Division will not shrink 
from challenging a merger outright if it concludes that lesser 
forms of relief are not likely to address fully the competitive 
problems raised by the merger.
    The Division's agriculture enforcement actions have not 
been limited to mergers. During the same period, the division 
also criminally prosecuted companies that had fixed prices for 
products purchased by farmers, and secured numerous criminal 
convictions and the highest fines in antitrust history.
    Beginning in 1996, the Division prosecuted Archer Daniels 
Midland and others for participating in an international cartel 
organized to suppress competition for lysine, an important 
livestock and poultry feed additive. The cartel had inflated 
the price of this important agricultural input by tens of 
millions of dollars during the course of the conspiracy. ADM 
plead guilty and was fined $100 million--at the time, the 
largest criminal fine in history. Two Japanese and two Korean 
firms were also prosecuted for their participation in the 
cartel, and individual corporate employees were prosecuted and 
received substantial jail sentences.
    Last year, the Division prosecuted the Swiss pharmaceutical 
giant F. Hoffman-LaRoche and a German firm, BASF, for their 
roles in a decade-long worldwide conspiracy to fix prices and 
allocate sales with respect to vitamins used as food and animal 
feed additives and nutritional supplements. The vitamin 
conspiracy affected billions of dollars of U.S. commerce. 
Hoffman-LaRoche and BASF pled guilty and were fined $500 
million and $200 million, respectively. These are the largest 
and second-largest fines in history. In fact, the $500 million 
fine is the largest criminal fine ever imposed in any Justice 
Department proceeding under any statute. Six executives from 
Switzerland and Germany pled guilty and will serve substantial 
jail sentences in the United States.
    The Antitrust Division will prosecute companies for price 
fixing whenever and however we learn of it. The lysine and 
vitamin cases get publicity because of the prominence of the 
companies involved and the amount of commerce at stake, but we 
also successfully prosecuted two cattle buyers in Nebraska a 
few years ago for bid rigging in connection with procurement of 
cattle for a meat packer after an investigation was conducted 
with the valuable assistance of the Department of Agriculture, 
which was looking at the same conduct under its statute.
    In short, we have brought and will continue to bring 
charges against companies that engage in criminal behavior that 
adversely affects farmers.
    The Division also investigates other forms of business 
behavior that may have anti competitive effects. Such conduct 
may constitute an illegal restraint of trade or, in some 
circumstances, monopolization or attempted monopolization. The 
Division is, in fact, conducting a number of civil 
investigations right now in which we are considering whether 
conduct of this sort is having an anti-competitive effect on 
farmers. If we determine that such is the case, we can and will 
seek appropriate relief under the antitrust laws.
    Finally, the Division has taken two additional steps to 
assure that it is receiving the information necessary to make 
the best informed judgments with respect to agricultural 
antitrust issues. Last year, as some of you have already noted, 
the Division and the Federal Trade Commission entered into a 
memorandum of understanding with the Department of Agriculture 
to assure that the agencies would continue to work together and 
exchange information relating to competitive developments in 
the agricultural marketplace. USDA has provided us with 
substantial information and assistance in the past and we look 
forward to a continuation of that good relationship.
    Of course, the Antitrust Division also works with other 
relevant Federal agencies on specific matters of common 
interest. For example, in the Cargill-Continental transaction, 
we worked very closely with the Commodities Futures Trading 
Commission because of certain aspects of that transaction that 
we thought might adversely impact the futures markets.
    Second, earlier this year, Assistant Attorney General. Joel 
Klein appointed Doug Ross as Special Counsel for Agriculture. 
This is a newly-created position that reports directly to the 
Assistant Attorney General. The Special Counsel works 
exclusively on agricultural issues. Mr. Ross has over 25-years 
of law enforcement experience, both in and outside of the 
Antitrust Division, and has already begun to meet and speak 
with farm groups both here in Washington and in farm States. 
One of his particular qualifications is that he has a long-time 
relationship with the National Association of Attorneys 
General, and his relationship with them ensures that we will 
continue to have a good working relationship with the States in 
this vital sector of our economy.
    In conclusion, Mr. Chairman and other members of the 
Committee, the Antitrust Division understands the concerns that 
have been expressed today and previously about competition in 
agricultural markets. We take very seriously our responsibility 
to assure that the antitrust laws are appropriately applied. We 
believe that our record of antitrust enforcement in this 
important sector of the economy demonstrates our effort to 
fulfill that commitment.
    Thank you for your time and attention. I would be happy to 
respond to whatever questions the Committee may have.
    [The prepared statement of Mr. Nannes can be found in the 
appendix on page 79.]
    The Chairman. Thank you very much, Mr. Nannes.
     As you will recall, when the Assistant Attorney General, 
Joel Klein, was before the Committee earlier this year, he was 
asked whether the Department of Justice needed new laws to 
protect farmers and Mr. Klein responded that Justice does have 
the tools to address concentration. The question is using them 
properly. Is it your testimony today, and I gather it is from 
the summary of actions which you have taken, that new laws are 
not required, that the Justice Department is active?
    I do not want to phrase your answer for you, but at the 
same time, if that is not the case, what do you have to say 
with regard to a number of suggestions of legislation that have 
been proposed by Senators, and they have described the details 
of those in your presence? There is an obvious feeling that 
something more is required, including more intrusion by the 
Department of Agriculture as a part of this entire antitrust 
activity.
    Mr. Nannes. Senator, let me try to address both aspects of 
that question. Certainly, as a general proposition, we believe 
that the antitrust laws are the appropriate laws by which 
expression is given to the public policies of this country 
favoring competition. I know that in various eras and at other 
times, there may have been a question about the resolve of the 
antitrust enforcement agencies to enforce those laws fully and 
vigorously. We believe that the record, certainly in the last 
17 months in particular, in the matters that I have described 
to you today, is a demonstration of this administration's 
commitment to full and vigorous enforcement of the antitrust 
laws.
    With respect to the specific questions that have been 
raised about the pending legislative proposals, the 
administration is carefully reviewing those proposals right 
now, almost literally as we speak, and has not developed a 
formal position with respect to them. So I am not in a position 
where I can comment on the specifics of those proposals, but I 
certainly can assure you that based on the comments that I have 
heard here today, I will be able to relay to the people who are 
doing that review, and I expect to be participating in it 
myself, the specific concerns and the proffered solutions that 
have been tendered.
    The Chairman. I know all Senators will appreciate your 
conveying the gist of the hearing toady, and, in fact, the 
actual record as it is produced, to your colleagues. Likewise, 
we would appreciate your formal comments, or the formal 
comments of the group that is considering these bills, so that 
we can make that available to all members of the Committee and 
the staff. Obviously, that question will be raised with you and 
other witnesses throughout the hearing. So if, in fact, you are 
in study, obviously you do not have the formal comments, but we 
ask for you to proceed with that as rapidly as you can so that 
we can continue with our business.
    Mr. Nannes. Yes, Sir. We certainly understand the 
importance of the issue to you and other members of the 
Committee and will endeavor to move forward promptly.
    The Chairman. Last November, the distinguished Ranking 
Member, Senator Harkin, and I introduced legislation to create 
a position within the Antitrust Division of the Department of 
Justice to enforce U.S. antitrust laws with respect to the food 
and agricultural sector. In fact, as you have pointed out, Mr. 
Klein has appointed Mr. Ross to take on these activities.
    Let me ask two parts to the question. First of all, how far 
along has Mr. Ross progressed in his work? Has he seized the 
issues and what is he doing? This is a question that was raised 
really 3-months ago and we are still curious about it.
    And second, should this special counsel position that 
Senator Harkin and I were advocating be made permanent and 
subject to Senate confirmation? Is the creation of the position 
worthwhile? Is it okay with regard to the way that it has been 
handled or should we have a more permanent, formal status for 
this position?
    Mr. Nannes. Senator, I think we are very pleased, not only 
with the position as it has evolved but with Mr. Ross as the 
person to fill that position for the first time. I have known 
Doug now going back almost 20-years and was directly involved 
in our decision to appoint him to that post.
    I think the post is working out very well for a number of 
different reasons. First, it is just very helpful to have 
someone who is focusing exclusively on a particularly important 
segment of our economy. Doug spends full time on agricultural 
antitrust issues, so there are no other issues competing for 
his attention.
    Second, he is available and has met with a number of farm 
groups here. He has been also out on the road. I think he has 
met with the staffs of a number of members of this committee, 
so that people are beginning to understand that he is a 
particular focal point for people with concerns about 
agricultural issues. In many respects, as you know, as an 
enforcement agency, we are dependent upon people bringing to 
our attention circumstances in which they believe there may be 
violations of the antitrust laws occurring. So it is very 
important for us to, in essence, get the word out that we are 
anxious to have that information brought to our attention and 
there is someone paying attention to that on a full-time basis.
    Substantively, Doug has participated in a number of 
activities with the U.S. Department of Agriculture. He brought 
some experience generally in the field to him when he arrived 
in January, and so I think he is very much up to speed and 
doing very well.
    With respect to the position, it is not a political 
position, it is a career position. It is one that we would have 
every expectation would be continued, and we think at its 
present level and in its present form it is doing what you and 
others hoped that it would.
    The Chairman. Senator Harkin.
    Senator Harkin. Thank you very much, Mr. Chairman.
    I must say, I was reading ahead. I had read last night and 
I wanted to go over it again, the testimony that will be given 
on the next panel by Professor Carstensen of the University of 
Wisconsin, because a lot of the things he was saying in his 
testimony--I hope you will read it, Mr. Nannes. I hope you will 
get his testimony and take a look at it. I do not know if you 
can stick around for it.
    While on the one hand I applaud the Department of Justice 
for being more proactive in the area of antitrust enforcement 
overall, witness the Microsoft case, and in agriculture in 
specifics, looking at Continental and Cargill and the other 
ones that you mentioned in your testimony, I must also say that 
I am somewhat concerned about the narrow focus of the antitrust 
actions that are being taken.
    You said in your testimony, at the beginning, if I can find 
it here again, that the antitrust laws prohibit the acquisition 
of stock or assets if ``the effect of such acquisition may be 
substantially to lessen competition or to tend to create a 
monopoly.'' This enables us to arrest anti-competitive mergers 
in their incipiency, etc., etc., and on and on.
    With regard to the Continental-Cargill merger, Mr. 
Carstensen points out a couple of things. First of all, he 
pointed out in the beef packing industry, he said that, as 
Senator Conrad, I think, was pointing out and has always 
pointed out, the four largest firms control 78-percent of the 
slaughter. But there were 22-plants with the highest level of 
production accounting for 80-percent of all production. Okay, 
you understand there were the four largest firms that 
controlled 78-percent of the slaughter, but there were 22-
plants under that, that did 80-percent of the production. 
Assuming that such plants reflected the greatest scale 
economies and operations, achieving such scale economies would 
require less than 3.7-percent of the market.
    Do you see how he figured that, 22-plants, 80-percent, 3.7. 
In pork, the 31 largest plants yield 88-percent of the 
production, which means that each plant requires less than 
three percent of the market, yet they are all owned by a few 
people. But each plant on economies of scale are doing less 
than three percent.
    OK. Then I want to leap from that to the Continental-
Cargill merger. The government, as Mr. Carstensen--I am just 
going to read from his testimony because it reflects my 
concerns. The government insisted only on isolated 
divestitures--you mentioned those--isolated divestitures where 
it identified specific quantitatively substantial overlaps 
between the merging firms, i.e., the Coast elevators, a few 
elevators on the Coast, one on the Mississippi, that type of 
thing. In many instances, including key export facilities, not 
surprisingly, the prospective buyer of those assets is another 
of the few major global grain traders.
    Thus, global market leaders are cannibalizing a third firm. 
The Antitrust Division in its justification for the settlement 
recognized that pervasive competition between Cargill and 
Continental, but its proposed relief ignored the overall 
operation of grain trading in which large integrated firms have 
come to dominate it. By allowing the dismemberment of one of 
the leaders, the Government has effectively reduced the number 
of real competitors in a significant way. This is a failure to 
consider the overall context because of blinders, of a theory 
of competitive effect that ignores the larger and longer-run 
implications of these complications.
    Well, that sort of gets to the heart of my problem with 
some of this. Sure, you go in and you say, well, okay, you can 
go ahead and merge, Continental and Cargill. You can go ahead 
and do that, but we are going to pick off a few of these 
elevators here and there, and who buys them? Another large 
grain trading company. It does not mean a darn thing. I do not 
think it is going to mean one lick of difference to my farmers 
in Iowa whether or not those elevators are owned by 
Continental-Cargill or Bunge or one of the other large trading 
companies. It is not going to mean a thing.
    It would mean something, however, if they were, in fact, 
divested and not put out to be picked up by another global 
company, but were, in fact, put on the market to be picked up 
by smaller entrepreneurs out there who could effectively bid in 
an open and competitive way for grain. Do you understand my 
point?
    Mr. Nannes. I do, Sir.
    Senator Harkin. Well, I guess, then, my question is, is the 
Justice Department looking at the broader overall implications 
of this rather than just going at a few isolated little grain 
elevators, saying, well, if Continental owns an elevator in 
East Dubuque and so does Cargill and they combine, then there 
is nobody else there. We have got to make them divest of that. 
But if it is picked up by Bunge, where does that leave my 
farmers?
    Mr. Nannes. Senator, let me tell you what we did in that 
case, because I think if you understand the process that we 
went through, you may take greater comfort from the fact that 
even though the relief that we ultimately sought has been 
characterized as individualized, in fact, it represents the 
areas of competitive concern that we identified.
    We did a very comprehensive review of Cargill-Continental. 
We literally looked at every facility that Continental was 
selling to Cargill and plotted on maps the proximity of 
facilities to one another and then ascertained what farmers 
were, as a practical matter, dependent upon those facilities, 
and if farmers were dependent on those facilities, we looked to 
see the other options to which farmers could turn if the 
operator of the Cargill-Continental facility sought to depress 
price arbitrarily. And where we believed that the number of 
options would be diminished substantially to farmers, we sought 
relief.
    Now, in a couple of the instances, what we wound up getting 
were divestitures of, say, river elevator facilities. But in 
other instances, we got divestitures of port facilities, and in 
particular, with respect to the relief we got in the Pacific 
Northwest, that was based on our assessment of actual patterns 
of travel and traffic because of farmers in the Dakotas who 
were, as a practical matter, dependent during most seasons of 
the year on access to a competitive port structure in the 
Pacific Northwest in order to get a fair price for their grain 
and their soybeans.
    So we did look at it very broadly and we looked at it very 
thoroughly, and it may be that in this particular case, the 
nature of the relief that we sought and were able to obtain has 
to be defined ultimately in terms of the specific facilities, 
but our focus on it was indeed very broad.
    Now, we also have the authority under our final judgments 
that are entered in these matters to determine in our 
unilateral discretion whether the proposed purchaser of a 
divested facility is a purchaser that we regard as pro-
competitive or anti competitive. So if we have circumstances 
where a party that proposes to make an acquisition of a 
divested facility in fact intensifies or complicates or 
exacerbates the competitive situation, then we have the right 
to just say no, and we have in various cases over time rejected 
proposed purchasers because of the concerns that you 
articulated, that it is simply substituting one fox for another 
fox in the chicken coop. So we take those very much into 
consideration and we try to review it broadly enough to 
understand what is the essence of the transaction we are 
reviewing.
    Senator Harkin. Would you provide for the Committee who 
some of the prospective purchasers of these port facilities and 
elevators are?
    Mr. Nannes. We will be happy to provide the Committee with 
information about the case, Sir.
    Senator Harkin. I do not know the answer to that. I would 
just like to know if there are other prospective buyers out 
there, if there are different buyers out there that do 
represent a competitive force. I do not know if you are allowed 
to do that. Can you supply that to us or not?
    Mr. Nannes. We will endeavor to do so, Sir.
    Senator Harkin. I do not know if that is allowed or not, 
but if it is.
    The second part of my question has to do with, we are 
talking about all these horizontal mergers, but another thing 
that is affecting us is the vertical integration, and I want to 
know, again, what your authority is. I am not really clear. I 
have looked at the law. I have tried to understand this. But 
what is your authority under vertical?
    We just had last fall Smithfield, the largest pork packer, 
bought Murphy Farms, which is the largest pork producer. So 
again, I think that seems to me to be some kind of a vertical. 
You have got the producer and then you have got the packer.
    As I understand it, the Antitrust Division and FTC give a 
lot less attention to vertical alignments, but I think this 
Smithfield-Murphy combination, merger, acquisition, I guess it 
is called--I do not know what it is called--may have had a more 
massive effect on the competitive element in the pork industry 
than any other kind of horizontal thing that could have 
happened, and yet, what have you done about it? I mean, as far 
as I see, nothing is happening on the Smithfield-Murphy 
acquisition, vertical alignment.
    Mr. Nannes. Senator, let me try to respond to your question 
this way. Certainly, the antitrust laws do allow us to take a 
look at the competitive implications of transactions that are 
basically vertical in nature, where firms at different levels 
in the production or marketing process are aligning. And 
indeed, we do so.
    It is probably fair to say that, more so than with respect 
to horizontal transactions, the vertical transactions also have 
significant pro competitive features. If you take it out of the 
agricultural context for a second and just consider the matter 
more broadly, there are circumstances in which a manufacturer 
by acquiring an input supplier gets a more certain, regular 
supply of inputs. It can tailor the inputs to fit more 
efficiently into the manufacturing process that it pursues, so 
that vertical transactions often have pro competitive features 
which are, indeed, what motivates them.
    Now, there certainly can be circumstances in which vertical 
acquisitions can be competitively problematic. If the result of 
a vertical acquisition is to create competitive problems at 
either level of the transaction of a sort that is going to 
diminish ultimate supply by foreclosing people from the market, 
then, indeed, there can well be circumstances in which there 
would be a proper case for antitrust intervention.
    Senator Harkin. My question was Smithfield-Murphy. Are you 
doing anything on it?
    Mr. Nannes. Smithfield-Murphy was a transaction that we 
looked at very carefully, in part because the companies were 
large relative to other participants in their lines of 
business, even though they did not have particularly high 
market shares in either of those lines of business. We talked 
to a number of persons potentially affected by that transaction 
in the markets where the companies operated, and by and large, 
Sir, we were told that people there were not concerned.
    Senator Harkin. Who? What people were not? You did not talk 
to any of my hog farmers.
    Mr. Nannes. We would talk to farm groups who either had--
farm interests who either had sold hogs to Smithfield or were 
looking to buy and assure that there would be a source of 
supply for their processing plants, and what we were told was, 
generally, they believed that they had sufficient alternatives 
to which they could turn so that they were not concerned about 
the competitive implications of this particular transaction.
    Senator Harkin. I do not know. I do not find that response 
very responsive. There are a lot of independent producers out 
there who are going to be drastically affected by what happened 
with Smithfield and Murphy. They are already being affected by 
it. You say you contacted farm groups and people like that, 
but, I mean, is this just sort of a weighing thing? You sort of 
look at it and you sort of say, well, we sort of asked a few 
people. I mean, the law is the law. I just read to you what you 
said here, that you have--if the effect of such acquisition may 
be substantially to lessen competition or tend to create a 
monopoly. If Smithfield and Murphy does not do that, and I do 
not know what does.
    And I am sorry, there are independent producers out there 
that are going to be drastically affected by this Smithfield-
Murphy because they are going to lock up the contracts. You are 
not going to have a lot of producers or even processors out 
there, small processors, that will be able to compete against 
this. And yet you are telling me that you talked to a few farm 
groups and they said it was okay? That is what I heard. Maybe I 
did not hear it right.
    Mr. Nannes. Senator, here is what we do. If we have a 
situation where we are looking at a proposed merger, we try to 
ascertain the impact that the merger is going to have in the 
particular markets where the companies operate. I know as a 
general matter there is an apprehension and a concern about the 
trend toward vertical integration, but when it comes time to 
look at whether we can enjoin a transaction for violating the 
antitrust laws, we have to develop evidence based on the likely 
impact of the transaction in the markets where the companies 
operate, and we endeavor on those occasions to reach out to 
potentially affected persons.
    When we do merger reviews, for example, we get information 
generally about customers in the geographic area so we can 
reach out to the customers. We can reach out to State 
officials. We can consult with the U.S. Department of 
Agriculture to try to get a handle on what the impact of a 
particular transaction is likely to be.
    Senator Harkin. I did not hear one word that you just 
mentioned about pork producers, about hog farmers. You talked 
about customers, the people that may be buying from Smithfield 
and Murphy, but how about the people that are selling to them?
    Mr. Nannes. In the context of a particular transaction, 
such as Smithfield-Murphy, the people with whom we were 
speaking were farmers.
    Senator Harkin. And you are saying that the farmers you 
spoke to just seemed to think this was just fine?
    Mr. Nannes. They were not concerned that as a result of 
this transaction they would be unable to get their hogs to 
processors.
    Senator Harkin. Well, I will ask the Iowa Pork Producers 
and I will ask some more pork farmers. That is not what I am 
hearing, but I do not know. I find that just amazing to me. But 
we will ask the pork producers and see if they think this is a 
good deal for their pork farmers.
    Thank you very much, Mr. Chairman.
    The Chairman. I thank the Senator.
    Senator Grassley.
    Senator Grassley. Thank you, Mr. Chairman.
    I want to say something and then I have got kind of an 
unrelated question that I want to ask, unrelated to my remarks. 
What I am saying is meant to supplement what Senator Harkin 
said and not detract from it.
    First of all, in the abstract, hearing about the evidence 
of challenges that you have made and things of that nature, I 
think would be impressive in isolation, but maybe in the 
overall concern that farmers in my State have about 
concentration, it does not seem like much because, quite 
frankly, things have been worked out and settled and there has 
not been very dramatic impact made of just exactly what is a 
guideline of response to the concern for the mergers that have 
been presented to us as members of Congress.
    Now, again, to emphasize, not to detract from what Senator 
Harkin said, I think when I introduce legislation as I have 
described it, I have to be somewhat appreciative of Assistant 
Attorney General Klein, other people that work for him, about 
their listening to our concerns and attempting to respond to 
our concerns, and I think you have attempted to give some good 
evidence of that, and in both public and private conversations, 
I think I sense within your Department the concerns that you 
are trying to present to us here today. I do not think, though, 
at the grassroots of America that they would be seen as being 
enough, and maybe you could say, well, that is the usual 
criticism of ``what have you done for me lately'' that maybe we 
get hit with too often as political leaders or even as 
administrators, as you might get.
    But I do want to acknowledge that I think there has been a 
good faith effort by your Department to take into concerns, and 
I am not sure that I felt that before we started expressing 
those. Now, there may have been an understanding, and hence, 
then, my legislation, and probably to some degree the 
legislation that others have put in, although maybe the other 
legislation does not impact upon the Department of Justice as 
mine does in the sense that the Department of Agriculture has 
kind of a shotgun behind the door that it can use in case that 
there is some disagreement with whether or not the Department 
of Justice has done enough to take the position of the family 
farmer into concern.
    So I just say those things, maybe a little bit apologetic 
about introducing a bill that you might see as an outright 
statement of resentment that the Department of Justice has not 
done enough at the same time when I have probably told some of 
you privately that I appreciate some of the things you have 
done. At least you are listening to our concerns and responding 
to them, and I guess to some extent the Cargill-Continental 
arrangement is part of that.
    But let me suggest to you that the bill should not be 
seen--my legislation should not be seen as doing anything more 
than supplementing a case that you have tried to make here that 
the Justice Department is taking our concerns to heart and have 
acted upon those. I think the extension is that I would see the 
Department of Justice more at the table in a more specific way 
than your memorandum of understanding would have it, and then 
have the ultimate power if the Justice Department saw fit not 
to challenge a merger, of the Department of Agriculture doing 
that on their own under a separate standard than as what is in 
the present antitrust laws.
    I have tried not to deal with the antitrust laws in a 
direct way because I think we have had evidence from people 
both in the Justice Department and people outside the Justice 
Department, including my own distinguished professor Neil Haral 
at Iowa State University, who said that the antitrust laws did 
not need to be changed. But giving a role to the Department of 
Agriculture more specific with the Justice Department and then 
a separate role as kind of a shotgun behind the door approach. 
Now, I have said that all to caution you that I am not out just 
to find fault with the Department of Justice.
    Now, a question a little bit unrelated to what I have just 
said, and only one question, when the Department of Justice has 
concerns about a merger, how often, and maybe a general 
statement but maybe with some sort of quantifiable response, 
how often are you able to work out those concerns with the 
merging parties without litigation?
    Mr. Nannes. That is a fair question, Senator. Generally 
speaking, if we are able to work out our issues with parties, 
that workout can occur one of two ways. We conduct our 
investigation and assume that we come upon a transaction that 
we believe is competitively problematic. We will identify our 
areas of concern for the parties and give them opportunity to 
try to address them. Sometimes they address them, in a sense 
voluntarily, by restructuring the transaction and divesting the 
asset before we complete our investigation, in which case there 
may not be even an occasion for us to sue them.
    On the other hand, it more generally happens that they 
agree to make certain divestitures as a condition of proceeding 
with the deal and then we will file a complaint and there will 
be a competitive impact statement and a final judgment and the 
decree will embody the relief to which the parties have agreed 
at our insistence.
    Alternatively, there are situations where we believe that a 
transaction simply cannot be restructured, that the competitive 
problems with it are so deep that they cannot reasonably be 
remedied. There are occasions, then, when a party will simply 
voluntarily abandon the transaction and not force us to file a 
lawsuit, and so there are circumstances where I talk about 
merger challenges where you will not find that we filed the 
case because we advised somebody of our intent to sue and they 
said in those circumstances they would simply not go forward. 
But where, in fact, they are not prepared to abandon the 
transaction, then we have to litigate.
    Of the total number of cases that we find to be 
competitively problematic, the vast majority of them, probably 
well over 90-percent, are resolved through final judgments and 
restructurings that are negotiated between us and the parties, 
and a much smaller number of those actually go through the 
litigation process. But when we do settle with them, we have to 
file that settlement with the court, and as I think many of you 
know, under the Tunney Act, the district court then reviews the 
settlement to determine whether it is in the public interest.
    Senator Grassley. Thank you, Mr. Nannes, and I am done.
    The Chairman. Senator Baucus.

   STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM MONTANA

    Senator Baucus. Thank you, Mr. Chairman.
    Mr. Secretary, I just would like to change gears here to go 
into deeper thoughts as a consequence of globalization and 
advances in technologies. It is clear that the United States 
economy is doing well in part because there is more mobility, 
opportunity, and competition. There is a little less regulation 
and more of a culture and atmosphere of individuals attempting 
to pursue and new opportunities and increase their incomes.
    We have now come into something called the new economy. I 
am not sure what that is, but it has something to do with high 
tech and the Internet. Where our new opportunities are 
tremendous and where the rewards often go to the most educated 
or the more highly skilled Now, we cannot turn the clock back. 
We can only go forward. That is, we cannot go back to the horse 
and buggy days, and nobody would argue on that. Times do 
change. Technologies change. Competition changes.
    We all know that the free market is a very powerful engine. 
It has done a lot for America and a lot of people. We also know 
that this free market has its limits. That is, when people 
pursue a free market philosophy, they buy, sell, merge, and 
acquire. That is the American way. But often, or at least 
sometimes, it has a pernicious effect on others. People talk 
about the digital divide and people also, I think, note there 
is now, as a consequence of globalism, an economic divide.
    The basic question is, how do we deal with this situation? 
We have the Sherman antitrust laws and the Department of 
Justice is, pursuant to them, pursuing Microsoft. They think 
Microsoft is monopolistic, and anti-competitive in a certain 
sense. That is the view of the Justice Department.
    So my question concerns your thoughts in general on how we 
draw the line, concerning antitrust issues. Without getting too 
much into horizontal and vertical and too much into the 
intricacies of antitrust law, but just generally, because, 
after all, we are all here to try to figure out how to best 
arrange ourselves as a society and times are changing so 
quickly. We certainly want to protect shareholder value, 
protect investors. There are provisions in corporate law which 
require that. Maybe corporate law needs to be changed, I do not 
know. I am curious.
    Mr. Nannes. Senator, I------
    Senator Baucus. Clearly, in the subject of this hearing, 
there are a lot of farmers and a lot of livestock producers who 
are really hurting as a consequence of all this, of 
globalization and mergers and concentration, whether it is the 
packing industry or in the retail industry or what not, and 
there is not a doggone thing they can do. That is about it in 
most cases. They are just stuck. They are falling farther and 
farther behind.
    Now, one can say in some other industries, say in 
telecommunications, that when market forces cause changes, 
well, you can always either merge or be acquired or do 
something, and generally your income does not fall. Your ego 
may be bruised, but your income does not fall. That is not true 
in agriculture for the most part.
    How far should the free market go in driving farmers and 
ranchers out of business? Do you feel that the line should be 
drawn somewhere so that the average farmer or rancher is not 
wiped out? Where do you drawn the line to prevent that and how 
far do you prevent it?
    Mr. Nannes. Senator, generally speaking------
    Senator Baucus. If you could wave the magic wand, 
forgetting all our laws, if you could say, I am king for a day 
where would you draw the line?
    Mr. Nannes. It is difficult to know exactly where to begin 
to get into that arena, Senator. Stepping back very far and 
looking broadly at world trends, I think I believe, and I know 
Mr. Klein believes that the direction favors the American way. 
To the extent that, over time, there has been a competition 
between having open economies and controlled economies, 
differences as to whether private people ought to be able to 
make the decisions about the lines of business they pursue or 
whether government is going to tell them what they can or 
cannot do, it appears now that the American way has prevailed 
over the controlled economy way.
    And generally speaking, part of our current prosperity is 
probably attributable to the fact that we have been a leader 
along that paradigm and an increasingly large portion of the 
world seems to be concluding that, that is the direction and 
the way to go.
    A corollary of that is less direct government intervention, 
but it is important that something fill the void to make sure 
that these free-market decisions that are being made by people 
are not being done in a collusive or otherwise anti competitive 
way that are, in fact, expropriating to private parties the 
gains that should flow to the economy as a whole.
    So it seems to us that appropriate antitrust enforcement is 
the key to an open market economy, because if antitrust laws 
are not appropriately enforced and citizens of a country or the 
world conclude over time that they are being abused by private 
anti competitive conduct, they will turn, as people have at 
various stages of our history, back to the Government and ask 
for there to be direct regulatory controls imposed as the way 
of reigning in those excesses.
    So those of us who champion the free market system, I 
think, have a similar obligation to champion appropriately 
aggressive antitrust enforcement to prevent excesses of the 
market from overwhelming what otherwise ought to be a freely 
competitive process that best allocates resources, that leads 
to more innovation, and that results ultimately in appropriate 
prices.
    Senator Baucus. I understand that, but in all due respect, 
you did not answer the question. You stated general principles. 
Where do you draw the line?
    Mr. Nannes. Well, I think the line is appropriately drawn 
if antitrust laws are appropriately enforced. I think that is 
the appropriate line. Our antitrust laws in this country have 
stood the test of time.
    Senator Baucus. Do you think they are appropriately 
enforced today with respect to this issue?
    Mr. Nannes. I think they are appropriately enforced today.
    Senator Baucus. Which is to say they are basically not 
enforced, or there is no action taken?
    Mr. Nannes. I do not agree with the perspective that they 
are not being adequately enforced. What I think is going on 
here------
    Senator Baucus. What actions are being taken pursuant to 
American antitrust laws to address concentration by the 
Department?
    Mr. Nannes. The most direct way in which the antitrust laws 
address concentration is by preventing its accumulation through 
a merger, and we have a very aggressive merger enforcement 
program. But one of the ways, it seems to me, to respond to 
some of the concerns that you have expressed about family 
farmers--and I do not presume to say I know them anywhere near 
as well as you do, but I have met with enough farmers and farm 
groups to know that the pain you articulated on their behalf is 
real and genuine--is that there has to be an array of policy 
responses to address the concerns that farmers currently have.
    Senator Baucus. What is this thing called oligopoly I 
remember reading about when I was in college taking economics 
courses? Does that apply here?
    Mr. Nannes. Well, you certainly have some industries that 
are highly concentrated and that is generally associated with 
an oligopoly structure, and there are circumstances in an 
oligopoly structure in which companies can act anti 
competitively. But under our antitrust------
    Senator Baucus. Why today is the oligopolic structure of 
the concentration of the beef-packing industry not actionable?
    Mr. Nannes. Well, under the antitrust laws, unless we have 
a situation where a single company has a monopoly, companies 
are generally free to set their own prices.
    Senator Baucus. What about oligopolies? We are talking 
about oligopolies, not monopolies.
    Mr. Nannes. I understand, but the point I am getting to is 
that on those occasions where we have cause to believe that 
companies in an oligopolistic industry are explicitly or 
impliedly agreeing upon price and terms and other conditions of 
doing business, we can and have sued them under the antitrust 
laws. Indeed, we will prosecute them criminally.
    Senator Baucus. To what degree does the Department look to 
see whether there is implicit, indirect implicit, not explicit, 
but implicit or indirect, if not collusion, at least 
coordination?
    Mr. Nannes. Well, under the antitrust laws, the Sherman 
Act, we have to be able to prove that there is an agreement.
    Senator Baucus. That is not the question I asked. It has to 
be an agreement.
    Mr. Nannes. I am trying to get to the point to tell you 
that to prosecute under the antitrust laws, we have to be able 
to prove an agreement.
    Senator Baucus. OK.
    Mr. Nannes. Now, the question is, how do you get proof of 
that agreement, and you can get proof of that agreement, as we 
do often in price fixing cases, by getting someone to come 
forward to the Government because they believe they have 
observed unlawful behavior and give us a key to get in the door 
to uncover------
    Senator Baucus. We are not talking about explicit 
agreements here. We are talking about implicit coordination. Is 
that not actionable?
    Mr. Nannes. The antitrust laws draw a very clear 
distinction between two different propositions, so if you do 
not mind, let me set them out. If you have a situation where 
one company is setting its own prices or its output or its 
marketing decisions based upon its perception of what its 
competitors are going to do in response to conduct that it may 
take, that, in a sense, is interdependent behavior because they 
are looking at what to expect from the competitor and taking 
that into account before they act. But that would not 
ordinarily be regarded as an agreement which would be 
actionable under the antitrust laws.
    If instead they are communicating directly with one 
another, or even indirectly through intermediaries with respect 
to that kind of business behavior, then we may have the basis 
for finding that there is an agreement that is prosecutable 
under the antitrust laws.
    Senator Baucus. Do you think laws are needed?
    Mr. Nannes. I think that distinction is an appropriate 
distinction. I think there would be enormous difficulties in a 
regime that tried to prohibit one company from taking into 
account its competitor's likely responses in deciding what it 
was going to do.
    Senator Baucus. What if it is clear that they are all 
working together, they kind of know what each other is doing 
and it is kind of a wink and a nod situation?
    Mr. Nannes. There are some cases that teeter on one side of 
that line or the other. We are aggressive in trying to 
ascertain the essence of what is really going on in those 
circumstances. If we find a basis for believing that an 
agreement is what explains their behavior, then we will move 
very aggressively with respect to that.
    Senator Baucus. Another aspect of this is just a lot of 
these outfits requiring competitors overseas. I am not very 
knowledgeable on what I am about to say, but I would not be 
surprised if, say, Brazil, for example, a huge potential 
increase in beef exports from Brazil to the United States in 
the next several years, and I have got a strong suspicion that 
a lot of American companies, the two or three, the ones we all 
know we are talking about, have acquired or have interests in 
Brazil and in other countries, Australia, for example, and that 
just has, again, more anti-competitive effect, or it tends to 
have the effect of blocking out the producer.
    Have you spent much time on a farm or ranch?
    Mr. Nannes. I have not.
    Senator Baucus. I think you should.
    Mr. Nannes. I would like to.
    Senator Baucus. Is there any department that really knows 
much about this, about farming or ranching?
    Mr. Nannes. We work extremely closely with the U.S. 
Department of Agriculture, and so------
    Senator Baucus. You know a lot about the high-tech 
industry.
    Mr. Nannes. I am sorry, Sir?
    Senator Baucus. You know a lot about the software industry 
and operating systems.
    Mr. Nannes. That is correct, Sir. I mean, we have to become 
fully informed and advised with respect to any transaction that 
we are reviewing.
    Senator Baucus. How much time has the Department spent 
looking into this question, this concentration in the beef-
packing industry? How much time has the Department spent 
looking at it?
    Mr. Nannes. I do not know specifically with respect to the 
beef industry. I think we recently responded to a letter that 
the Chairman had sent us trying to detail for him the people 
who work in the Division on a regular basis on agricultural 
matters.
    Senator Baucus. So you do not know? You do not know how 
much time the Department has looked into this?
    Mr. Nannes. Senator, I can tell you that with respect to a 
particular transaction, we devote not insubstantial time to 
examining the industry that is involved in the transaction.
    Senator Baucus. Mr. Chairman, there is clearly a problem 
here and it is clear that nobody has come up with the right 
solution that I am aware of. I am on legislation that tries to 
get at this problem, and I think anybody who knows much about 
this subject knows that there is a problem, and I am a little 
bit distressed, frankly, that the Department does not seem to 
be undertaking efforts commensurate with the problem to try to 
solve it.
    I do not know why, but my sense is, just talking to you and 
what is going on around here, the Department is not and I very 
much hope that it does, because you are there to serve farmers 
and ranchers just as much as you are there to serve the 
American public on the Internet and who buys computers. That is 
your job, right?
    Mr. Nannes. Yes, Sir.
    Senator Baucus. Are you going to be spending more time?
    Mr. Nannes. Senator, we spend very substantial resources 
and time on agricultural antitrust issues.
    Senator Baucus. It does not sound like it if you do not 
know what you are doing. You just said--I do not mean to badger 
you. Just a few minutes ago, you said you do not know how much 
time and effort the Department is spending on this.
    Mr. Nannes. Senator, I cannot quantify it for you. That is 
different in implication and import from suggesting that we do 
not spend substantial time on agricultural matters.
    Senator Baucus. Well, if you do not know, I have a hard 
time concluding that you are spending a substantial amount of 
time.
    My time is up, Mr. Chairman. Thank you.
    The Chairman. Thank you very much.
    Senator Fitzgerald
    Senator Fitzgerald. Thank you, Mr. Chairman.
    I want to focus a little bit specifically on the two bills 
the Committee is considering, Senator Daschle's bill and 
Senator Grassley's bill, and I am wondering, you have said that 
the DOJ does currently consult with the USDA and you have 
talked about spending a lot of time with farmers and farm 
groups, and I am wondering, do you have a formal process inside 
the DOJ to consult with the USDA on agricultural mergers?
    Mr. Nannes. Yes, Senator. We have a memorandum of 
understanding with the Department of Agriculture that provides 
a framework within which we will consult one another with 
respect to agricultural issues with competitive implications. 
If we are reviewing a merger of some significance with respect 
to the agricultural sector of the economy, it would be a 
regular process for us to reach out to the U.S. Department of 
Agriculture, although frankly, if the truth be told, they often 
reach out to us first and we have opportunities to share 
thoughts, concerns, theories, sources of information, sometimes 
even information itself.
    Senator Fitzgerald. Would these two bills, would either of 
them change your relationship with the USDA, then? I do not 
know if you have looked at the bills specifically, but how 
would they change how you currently work with the USDA?
    Mr. Nannes. Senator, you are correct that I have not 
reviewed the bills line item by line item, and that is 
something that we will be doing in the near term through the 
administration process of developing a position with respect to 
the bills. We have cooperated with the Department of 
Agriculture in the past, and I would expect that no matter what 
happens, we would continue to cooperate with them in the future 
because they provide us with valuable input as we hope we 
provide them, as well.
    Senator Fitzgerald. Will you eventually be coming out with 
an official position on these bills?
    Mr. Nannes. It would be my expectation that we would, 
because I understand we have been asked for one, Sir.
    Senator Fitzgerald. OK. One final question. I guess 
opponents of both of these bills argue that providing the Hart-
Scott-Rodino filing information to the USDA would potentially 
jeopardize confidentiality of proprietary information. Do you 
see this as a problem or do you already share this information 
with the USDA Secretary?
    Mr. Nannes. No. At the present time, Sir, under the Hart-
Scott-Rodino statute, the information that we receive must be 
treated confidentially within the antitrust enforcement agency. 
Over time, we think that has worked extremely well because 
companies provide us with information that is extraordinarily 
sensitive from a competitive point of view and they often 
contrast what they do with us with what they have to do in 
other regulatory proceedings, where sometimes information that 
they submit becomes available to their competitors and thus has 
a counterproductive impact.
    Senator Fitzgerald. But there are areas where this 
information is shared. Say if there is a banking merger, the 
Federal Reserve is in on the information, I would imagine, 
along with potentially the DOJ.
    Mr. Nannes. I think what generally happens there is that 
the confidentiality restrictions that apply to Hart-Scott-
Rodino apply even in those circumstances, though it may be that 
in those particular banking instances to which you refer the 
parties are submitting different information to the banking 
agencies.
    Senator Fitzgerald. OK. Thank you very much for your time.
    The Chairman. Thank you very much, Mr. Fitzgerald.
    Mr. Nannes, we thank you for your testimony, for being very 
forthcoming in your responses. The Chair has had a liberal 
policy with regard to Senators' questions because clearly the 
antitrust issues that you are dealing with are at the heart of 
the legislative proposals that many Senators have made and the 
questions that the Committee has been raising in these four 
hearings we have had on consolidation. We thank you for working 
closely in your answers with the Senators and their questions.
    Mr. Nannes. Thank you, Senator.
    The Chairman. The Chair would like to call now a panel 
composed of Mr. James Rill with Howrey, Simon, Arnold, and 
White. Attorneys at Law, of Washington, DC.; Mr. David Nelson, 
Director of the Equities Division, CS First Boston, New York, 
New York; Mr. Peter Carstensen, Professor of Law at the 
University of Wisconsin Law School in Madison, Wisconsin; and 
Dr. Stephen Koontz of the Department of Agriculture and 
Resource Economics, Colorado State University in Fort Collins, 
Colorado.
    Gentlemen, I ask you if you can to summarize your 
statements. They will all be made a part of the record in full. 
We will ask that you summarize in as close to 5-minutes as 
possible, but within 10-minutes as absolute, and then this will 
offer opportunities for Senators to raise questions of you.
    Mr. Rill.

   STATEMENT OF JAMES F. RILL, HOWREY SIMON ARNOLD & WHITE, 
               ATTORNEYS AT LAW, WASHINGTON, DC.

    Mr. Rill. Thank you, Mr. Chairman, Senator Grassley. My 
name is Jim Rill and I am testifying today on behalf of an 
industry structure coalition, a large number of food and 
agricultural trade associations and groups which oppose S. 2252 
and S. 2411. The identity of these groups is listed in my 
prepared statement, which you kindly indicated will be made 
part of the public record.
    I want to focus my testimony today on the portions of this 
legislation dealing with mergers and acquisitions in the 
agricultural arena. The proposed legislation would give the 
Department of Agriculture overlapping authority with the 
antitrust enforcement agencies, the Department of Justice and 
the Federal Trade Commission, to review and challenge 
competition-related aspects of certain mergers and acquisitions 
in the agribusiness industry.
    During my, I hate to admit it, more than 40-years of 
practicing antitrust law, and more recently in my capacity as 
co-chair of the International Competition Policy Advisory 
Committee, appointed to that role by Attorney General Reno and 
Assistant Attorney General Klein, I have had the opportunity to 
witness firsthand and review the competition aspects of mergers 
involving a variety of agencies.
    As a general matter, dual jurisdiction, jurisdiction of the 
general enforcement agencies and of the sectoral agencies, to 
challenge mergers on competition grounds is costly and 
undesirable for several reasons which I want to discuss. The 
issue of overlapping jurisdiction was one of the issues 
addressed by the International Competition Policy Advisory 
Committee [ICPAC], which I will refer to as ICPAC, if I may.
    We were appointed to provide recommendations on the future 
direction of international antitrust policy within the 
framework of evolving markets and rapidly increasing 
globalization. In the final report issued on February 28, the 
majority of the Committee concluded that the oversight 
authority for competition-related aspects of merger review 
should be removed from sectoral agencies, such as the FCC and 
the Surface Transportation Board. This conclusion was based on 
the belief that overlapping jurisdiction is costly for both 
business and the enforcement agencies, promotes a lack of 
transparency and consistency in the enforcement process and 
possibly in the enforcement result, and may produce results 
that deviate from widely accepted standards of competition 
policy, consumer welfare, and welfare for the economy in 
general.
    Under the ICPAC recommendations, however, sectoral agencies 
would retain the authority over all non-competition-related 
aspects of merger review as they may be authorized to do so by 
statute, for example, the effect of a telecommunications merger 
on security or on universal access, which are not so much 
competition-related issues.
    The Committee's recommendations in this regard have 
actually been cited favorably by some of the sectoral 
regulators themselves--Commissioner Powell at the FCC, 
Commissioner Furchtgott-Roth at the FCC, and FERC Commissioner 
Hebert, all of whom seem to at least be inclined favorably to 
consider the proposals of the ICPAC.
    Over the past almost 100-year history of U.S. merger law, 
merger review standards have been relatively transparent, 
relatively well understood, and generally accepted. These 
standards cover most consumer welfare and the threat of 
monopsony power. The proposed legislation threatens to undercut 
this clear and articulated approach and impose new competition 
standards on mergers in the agribusiness industry and authorize 
the USDA to impose challenges based on these standards.
    These standards may or may not be consistent with 
antitrust-based standards as articulated in the Clayton Act, 
and at the very least, I think we would have to agree, not 
supported by the coral reefs of litigation that have developed 
standards under the Clayton Act. Such standards would be 
ambiguous and would add time and cost and uncertainty to their 
implementation.
    In view of the yellow light, I do not want to get into any 
great detail to repeat the testimony that was given by Deputy 
Assistant Attorney General Nannes, but the fact is, when one 
asks how many of the resources of the Antitrust Division have 
been devoted to mergers and other activities in the 
agribusiness field, I think the record of challenges to four 
mergers in a relatively short time period, the record of 
criminal fines of record proportions in that same time period, 
would suggest that the aggressiveness and vitality of antitrust 
enforcement in the agribusiness field would compare--I am sure 
the defendants would not agree with this, but would compare 
favorably with the activity of the Department in any other 
sector of the economy.
    In the Cargill-Continental grain matter alone, 20 staff 
individuals, staff attorneys of the Antitrust Division, I am 
informed, were devoted to the review and challenge and 
resolution of that merger proceeding. I would simply 
incorporate in my prepared statement these cases and also to 
cite the statement of Deputy Assistant Attorney General Nannes 
as a very strong record of Department of Justice enforcement in 
this area in the merger and actually in the criminal 
enforcement field, as well.
    This testimony should not be taken as any lack of concern 
with the economic condition of the agricultural sector of the 
economy or family farmers, but based on these examples and 
based on our review of merger law, there does not appear to be 
any evidence that would suggest that mergers in the 
agribusiness sector have been cleared without appropriate 
remedies so as to restore or preserve competition. I do not 
think, then, the case has been made for a separate merger law 
to be enforced by the Department of Agriculture apart from, or 
in addition to, the merger law actively enforced by the U.S. 
Department of Justice.
    Thank you, Mr. Chairman and Senator Grassley.
    [The prepared statement of Mr. Rill can be found in the 
appendix on page 98.]
    The Chairman. Thank you very much, Mr. Rill.
    Mr. Nelson.

 STATEMENT OF DAVID C. NELSON, DIRECTOR, EQUITIES DIVISION, CS 
                FIRST BOSTON, NEW YORK, NEW YORK

    Mr. Nelson. Thank you for inviting me here today to share 
my perspectives regarding some of the dynamics currently 
affecting agribusiness and the food industry.
    First of all, from a financial perspective, performance of 
agribusiness companies and agribusiness stocks has been quite 
dismal. Since January 1997, agribusiness stocks on average are 
down by one-third. Farmland actually has been a better 
investment over that time frame. This poor agricultural stock 
performance has been during one of the greatest bull markets in 
history, where the S&P 500 has doubled over that time frame.
    The key drivers here are poor returns on capital, slow and 
volatile earnings growth, and an implied unattractive outlook 
for future returns in this sector. Highlighting the obvious, 
stock prices reflect investors' expectations of future returns, 
not necessarily current or past performance. It is clear from 
the voting booth of the stock market, investors are voting to 
disinvest in agribusiness.
    Why have returns been so poor? A few thoughts. The value 
chain across the entire food industry is contracting. There is 
a power shift taking place from food companies to retailers, 
but also from retailers to consumers. The profit challenge 
being faced by farmers is not unique across the food chain. 
These shifts happen. Consumer needs are changing at an 
increasing rate. Corn movement, for instance, has gone from 
being export-oriented to domestic processed-oriented. So if you 
had a grain elevator in a position for the exports and now that 
movement has shifted, that elevator is now of little to no 
value. This is natural in our market economy of creative 
destruction.
    Another challenging factor to food companies is what I call 
commotidization. The bar to acceptable quality and convenience 
is constantly rising. For instance, when Tyson took the breast 
off the chicken bone, that was value added. Then everyone else 
did it. The value and the margins came down. They marinated. 
Margins went up. Then everyone else did it and margins came 
down, and so on and so forth. Innovations are rapidly 
duplicated and the ability to capture value, even when 
successful, is relatively short-lived.
    New competition is also presenting new challenges. Earlier, 
we cited new competition from soybean acreage in Brazil, new 
processing plants and soy processing plants in China. Also, 
domestically, cooperatives have been building new soy plants, 
new corn processing plants, and these players have different 
economics and different return objectives that make competition 
difficult for profit-oriented companies, especially those with 
public shareholders. Essentially, we have too many companies 
with too much capacity fighting for too few profits.
    Why do we see consolidation and integration? Industry 
consolidation and integration occur really for two reasons. 
One, companies and individuals often need to sell their 
business because they are unprofitable or unviable in their 
current structure or configuration given that conditions in the 
marketplace do change quite rapidly. It is really a natural 
selection process at work. This is the reason why we do have 
the most productive and efficient food system in the world. As 
Darwin said, adapt or die.
    The other primary reason we are seeing integration is 
really to meet the demands of consumers. We are hearing a lot 
of objections today, for instance, about packer ownership of 
livestock in the pork sector, but this is not because raising 
hogs is sexy or glamorous and something packers want to do. It 
is because they have to do it. The consumer today wants a 
quality and consistent product. You cannot do that unless you 
have an integrated and coordinated supply chain. I would 
rather, as an analyst, see these companies investing forward 
into further processing or branding than moving backward. They 
are moving backward because they have to.
    I think it is important to note that not only are the 
customers of food manufacturers more demanding, they, too, are 
consolidating. The market share of the top five retailers, 
supermarkets, has gone from 25-percent to 40-percent in the 
last 4-years. Supermarkets are trying to consolidate the number 
of their suppliers just like every other industry that is out 
there. They need big companies that have made the investment in 
information technology. Information technology increasingly is 
becoming that bar or barrier to entry across all industries, 
including food, and that requires a higher level of investment.
    Now, these food companies are much smaller than the 
companies they are selling to. IBP has a market capitalization 
of $1.4 billion, Smithfield at $1.2, Hormel and Tyson at $2.3. 
In contrast, Kroger, Albertson, and Safeway are all at about 
$15 billion in market capital, and Wal-Mart is $264 billion. So 
they are selling to supermarkets that are much bigger, that can 
bring a lot more pressure to bear.
    These are capital-intensive industries that require 
substantial reinvestment merely to stay in the game. For 
instance, IBP now plans to double their capital expenditures 
over the next year to $400 million, in large part on new 
equipment and technology for case-ready meat to become more 
competitive, to make beef and pork more competitive with 
chicken. In addition, the meat industry has invested over $300 
million to comply with new food safety regulations, 
particularly the new Hazard analysis and critical control point 
[HACCP] requirements. Expenditures are also rising to meet 
rising environmental standards.
    Now, this high degree of capital intensity is an 
unattractive feature to investors, those that allocate capital, 
and that is why meat packers like IBP and Smithfield, for 
instance, trade at price-to-earnings ratios, if you will, at 
five times versus the overall market at 27 times. It obviously 
reflects that capital as a whole is much more expensive for 
meat packers, for instance, than for industry or the market as 
a whole.
    Let me just conclude in closing that investors can invest 
in any industry. When I go and visit portfolio managers, there 
is someone talking about Microsoft or Amazon before me and GE 
after me and just empirically they are investing away from 
agribusiness. This does not just affect agribusiness 
negatively, it impacts farmers. So I encourage you to think 
about the impacts that reflect to farmers with new controls and 
regulation on agribusiness.
    [The prepared statement of Mr. Nelson can be found in the 
appendix on page 118.]
    The Chairman. Thank you very much, Mr. Nelson. The Chair 
would acknowledge that you present, as a part of your testimony 
charts that indicated the S&P 500 and agribusiness, and 
specifically meat and processed, packaged foods. In essence, 
the charts show the S&P rising dramatically, as you pointed 
out, from the beginning of 1997 to the present, but in every 
instance, agribusiness or any part of it in decline during that 
same period of time as an illustration of, I suppose, the point 
that you are making. Investors have not been interested. They 
have evaluated all of these stocks and enterprises as not 
necessarily losers, but comparatively, relatively, very sad.
     Mr. Carstensen.

 STATEMENT OF PETER C. CARSTENSEN, YOUNG-BASCOM, PROFESSOR OF 
  LAW, UNIVERSITY OF WISCONSIN LAW SCHOOL, MADISON, WISCONSIN

    Mr. Carstensen. Thank you, Mr. Chairman. It is a pleasure 
to be here and with such a distinguished panel of presenters. 
I, for the last quarter century, have been teaching and writing 
about economic regulation and competition policy, and before 
that I was actually a staff attorney at the Antitrust Division 
and so I have some nostalgia for my old home.
    I am a generalist in terms of antitrust policy and 
competition issues, although I have had various encounters with 
the agricultural issues over the years and certainly have done 
a lot more in the last year or so, compliments of some of my 
former students who have gotten me into various efforts in the 
area.
    I want to start off by emphasizing that the goals of 
antitrust extend beyond economic efficiency, especially short-
run economic efficiency, and I have quoted in my presentation 
Senator Sherman's statement about not wanting economic kings 
just as we did not want political kings. I am also very fond of 
Justice Peckham's decision in the very first substantive 
antitrust case in which he recognizes the kinds of harms that 
the dynamics of markets bring about but warns that we should 
avoid other kinds of concentration of markets that reduce 
individual independent business people to mere economic serfs, 
and I think that is an important value that we have all too 
much lost sight of in our preoccupation recently in antitrust 
with economic theory.
    The other point that needs to be emphasized about antitrust 
is the long-run concern with dynamics of markets. It is not the 
short-run efficiency that we need to be concerned with; it is 
how we maintain that kind of dynamic that has made our economy 
so successful over so many years, and antitrust needs to be 
focused on that.
    Dr. Koontz has made some very good points in his paper 
about the kinds of things that can be done not just 
regulatorily in character, but in terms of other forms of 
market facilitation to facilitate those kinds of market 
dynamics.
    Two points, then, about competition analysis that are 
important. The first, efficiency does not require any specific 
market structure. Senator Harkin quoted a little bit of my 
argument on that point, and again, Dr. Koontz's suggestions 
about ways to facilitate smaller-level producers is another 
example of the way in which we can facilitate market dynamics 
without having to go to behemoth-type industry. I would say the 
same thing about vertical merger as not being necessary to 
achieve some of the desirable effects of better integration 
between producers and processors.
    The other point, and it is more directly responsive to Mr. 
Nelson, is that the prediction of economic theory about 
oligopoly is that there are going to be higher prices to 
buyers, lower prices to sellers, not that there is going to be 
higher profit. And when my late colleague, Len Weiss, went out 
and looked at the data on oligopolies, and I have cited his 
work on page nine of my presentation, he found overwhelmingly 
when you compared competitive markets to oligopolistic markets, 
what you found, higher prices, and mostly he was looking at 
selling markets, higher prices, not higher profits, so that 
there is no inconsistency between the problems that we are 
seeing and a low level of profitability at the end of the 
accounting process.
    We have stressed some of the changes in the market today. I 
want to reemphasize that in 18-years, we went from a beef 
market with four firms having only 36-percent to a market in 
which we now have four firms with 81 percent. So a clear 
failure of antitrust enforcement back in the 1980s which has 
resulted in that kind of structural change.
    We have talked about other aspects of that change in terms 
of other parts of agriculture, and I want to emphasize the 
supply side, whether it is seeds--68 mergers in the seed 
industry in the last 5-years, or agricultural equipment, other 
kinds of supply.
    Consequences, price margins are moving up, exactly as we 
would predict. Professor Taylor's work that I cite on page 
eight shows the most meaningful measure here is the difference 
between what the farmer gets and what the beef packer sells the 
meat for at wholesale, and those margins have gone up both in 
beef and in pork.
    Growth in strategic behavior, and I describe a variety of 
the strategic behaviors that are going on in the markets today 
because of those high levels of concentration.
    So it seems to me that we really do need to initiate some 
different kinds of policy responses, and I have outlined in my 
presentation three of those. The first is to enhance the 
enforcement of antitrust law, especially in the merger area, 
and proceedings like this that delicately prod the Antitrust 
Division to be more active are extremely helpful. When they 
know people are looking at what they are doing, they are, in 
fact, more likely to be active.
    If you had this hearing 17-months ago, they would not have 
had a thing to talk about in terms of their enforcement 
efforts. They need to keep being prodded. And part of that, I 
think, is the kind of suggestion of bringing the Department of 
Agriculture officially to the table with some authority of its 
own to intervene in mergers when there is not an effective 
response from the Justice Department.
    I did a lot of bank merger work when I was back in the 
Government and it was a useful interactive process between the 
banking agencies and the antitrust enforcers. I do not share 
the concerns that Mr. Rill has raised about dual enforcement in 
these areas. I think it actually can be a very effective tool. 
It is the competitive market in some sense being brought to 
bear on these problems.
    I would also suggest, although the Senate is not the place 
to do it, that it might be useful to go back and take a look at 
some of those mergers that were allowed through in the 1980s. 
There is no statute of limitations under the Clayton Act and, 
therefore, it is possible to reopen those cases. There are good 
reasons why the Justice Department itself probably should not 
do that, but I think State attorneys general or others might 
give serious consideration.
    Lastly, with the change in the market, and we are not going 
to restore the kind of competitive structure that would be 
optimal any time soon, it is important to bring, and it hurts 
me as a longtime antitruster to say this, but it is important 
now to bring more formal regulation to these business 
arrangements, and that is where, again, the proposals that are 
before you to expand the authority of the Secretary of 
Agriculture to develop market facilitating regulation that will 
provide full information to buyers and sellers, that will 
facilitate the better functioning of the market, that are going 
to exist that are going to be increasingly contractual, is, I 
think, a very, very important step to be taken in this process. 
I would urge that there be a delegation, again, to an 
administrative agency. With all respect, I do not think the 
floor of the Senate or of the House is an appropriate place to 
write detailed regulation about how to contract for beef or 
pork or whatever.
    I would, I guess, mention to you a very interesting 
experience I had a few years ago in Wisconsin serving on a 
committee of farmers and processors in the vegetable industry 
to develop the rules under which the contracting process would 
go forward. I think the end result of that were rules that 
structured that contractual arrangement in ways that were 
acceptable. I will not say everybody got what they wanted, but 
they were acceptable to both parties, and again, an 
administrative process is the way to get the actual 
participants together to develop workable regulation of the 
contracting structure.
    One other point on the supply side, and it is a point I 
have been hitting away at. As we get more concentration in the 
supply side markets, especially the biotech ones, I urge you to 
take real care in looking at the kinds of uses that are being 
made of intellectual property rights in agriculture. Some of 
those strike me as being highly anti-competitive, highly 
undesirable, even if authorized by existing law. I have a 
student who comes from a farm in Iowa who brings me these 
contracts for soybeans and I look at them and I am wondering 
whether this is not an antitrust exam question that has 
escaped.
    Let me conclude. We need robust competitive markets. They 
have been and must remain the centerpiece of our economy. 
Failure to preserve and protect them will result in serious 
economic and social cost. This is true in general and it is 
true with special emphasis in agriculture.
    [The prepared statement of Mr. Carstensen can be found in 
the appendix on page 120.]
    The Chairman. Thank you very much, as always, Mr. 
Carstensen.
    Dr. Koontz.

 STATEMENT OF STEPHEN R. KOONTZ, DEPARTMENT OF AGRICULTURE AND 
 RESOURCE ECONOMICS, COLORADO STATE UNIVERSITY, FORT COLLINS, 
                            COLORADO

    Dr. Koontz. Thank you, Sir. It is a pleasure to be asked to 
offer testimony on concentration in competition and the 
changing structure of agriculture, also to participate in this 
panel. Concentration and competition are an area that I focused 
most of my thoughts and research program on, and I have done 
this because I believe it is probably the most important 
economic and public policy issue that faces U.S. agriculture.
    However, it has also been quite interesting to me to look 
at the interest with which producer groups and government 
associations, government bodies place on this issue over time. 
The public interest in this topic certainly waxes and wanes 
with profitability of various sectors. It is my perception, 
though, that the underlying economic forces at work are pretty 
much--they pretty much remain constant over time.
    The process of industrialization has ebbed and flowed with 
scientific and technological advancement, but the course has 
been quite steady. It basically started in pretty much the 
1840s with international trade and has been on a slow, steady 
pace since then.
    My view of how the different groups look at antitrust 
questions and concentration questions really highlights the 
need for an impartial observation where you back up a little 
bit. It is not my intent, certainly not my intent to make light 
of income problems that the farm sector is facing. We have had 
some pretty serious problems since the peaks of 1996 and 
thereabouts. Furthermore, these declines have been very 
widespread through a large number of commodities. The bottom 
line, though, is that these appear to be supply and demand 
related and not much related to industry structure.
    So concentration, I do not see as the cause of the low 
prices and profitabilities, but I think there are certainly 
some issues that have cropped up that deserve some serious 
attention, in particular, market access by independent 
producers, market entry of firms with innovative ideas and 
addressing some of the policy possible inconsistencies that 
have contributed to this process over time.
    So what are the economics at play and what does the 
published research have to say? It has been talked about here 
so far. You have basically two things to consider in a 
tradeoff. You have large firms that have demonstrated that they 
operate at low costs. However, the tradeoff in that case is 
those folks may have the ability to exercise market power and 
then that having a detrimental impact both on consumers and 
then downstream into the agriculture production sector.
    That same question can be asked of the production sector 
itself, however. I think this is one of the key things that you 
get out of the 1997 census of agriculture. The graphs that we 
were shown with concentration in various processing sectors can 
be drawn for almost every production sector itself, including 
livestock, poultry, vegetables, grain crops. For example, if 
you draw that graph for fed cattle marketing, you get almost 
the exact same thing.
    The research community has recognized this tradeoff and has 
spent a considerable amount of time trying to address it. There 
are a large number of research programs, academic programs, 
different groups that are devoted to discovery and 
communication on this topic. My take on it, what does the 
bottom line say? Basically, the cost efficiencies are orders of 
magnitude larger than the pricing problems that come along with 
the exercise of market power.
    A lot of hay is made out of the increasing marketing bill, 
that gap between retail prices and farm-level prices. My take 
on that is that widening gap is almost entirely due to the cost 
of marketing services. Consumers are looking for more service, 
more quality and variety, more convenience. All of the declines 
in the farmers' share of the consumers' dollar are largely due 
to them producing a product that is pretty far from what the 
consumer is ultimately interested in.
    Profitability, if you take a look at some of the base 
numbers on profitability in the agricultural processing sector, 
they are roughly 4, 4 \1/2\-percent of net margins. That is the 
consumer dollar less the prices that are paid for the farm 
input. So we are talking about very low rates of return on 
these businesses. This was discussed earlier. Again, the proof 
in the pudding really comes out when you take a look at the 
stock market. These firms are definitely priced as slow growth, 
low-profit businesses.
    Popular press has also made much hay out of high levels of 
concentration. Again, the bottom line there is that 
concentration translates into cost efficiencies, and that is 
largely what the research says is driving concentration. It is 
not the exercise of power. It is the capturing of cost and 
efficiencies, incorporating them and addressing them.
    Some of the inconsistencies I have seen in economic policy 
perhaps are that we are targeting a lot of things towards 
dealing with economic viability of the family farm. As somebody 
who is probably going to be sitting on a tractor planting corn 
come Saturday, provided we get a little breeze blowing up 
through Virginia to dry out our sand hills, that is a real 
issue. But the legislation that is under consideration seems to 
be targeted at processors and market power, and from what I 
know of the research, there seems to be very little here to go 
after.
    What about attempts to limit unfair trade practices? I 
think this is one of the precise problems with the P&S Act. It 
is just that defining unfair trade practice is a very expensive 
exercise.
    I do not think the proposed legislation will have very much 
of an impact on margins, the marketing bill, or the farmers' 
share of the consumer dollar.
    So what can we do? I just think antitrust legislation is 
not necessarily the right way to go with targeting this 
problem. One of the main things I see is providing some 
resources for price reporting, targeting improvements in price 
reporting. There is some support now for mandatory price 
reporting and getting the livestock and grain market news to do 
some of those things. That is not too consistent with what we 
were trying to do in the 1980s, which was get that function 
away from government services and into the private sector. The 
problem there is that price reporting, in my mind, is a public 
good and the private sector is not going to take it over very 
well, and I think that is coming home to roost some 10-years 
later.
    Likewise, I think we need to do some serious looking at the 
market institutions that have to be in place that help markets 
work, and my prime example here are grading standards and the 
technologies that go along with that. I think a large part of 
contract production is simply due to the fact that quality 
control is impossible without it. You have to have quality 
control to make those things work. So the contract production 
is not so much to exercise power, it is to get the producer to 
grow a product that is more consistent with low-cost processing 
and more consistent with what the consumer is looking for.
    Now, things are not all rosy at this level. I also see some 
problems in the beef industry in particular. Beef demand has 
declined since the early 1980s. It is a well-known fact. It is 
only recently that the beef packers have decided to do anything 
about this. Up until this date, they have been trying to do the 
same thing they have usually done, only at a bigger scale and 
at lower cost. We have not had anybody that has come into this 
business and try to be innovative and provide some products 
that the consumers would find more acceptable.
    So there is a problem that does come along with 
concentration, but I do think we can address some of these 
things by addressing the need to support public goods and the 
need to help with the public institutions that make trade work.
    I think we are currently in the middle of a pretty big 
market failure, and that is indicative of increased 
concentration, more contracting, more vertical integration, but 
I do not think it is because of power. I think it is because of 
collective failure to protect innovation, to invest in these 
public goods, and to make the market institutions--to improve 
them such that they work so that you can have a competitive 
marketplace populated by independent producers. Thank you.
    [The prepared statement of Dr. Koontz can be found in the 
appendix on page 139.]
    The Chairman. Thank you very much, Dr. Koontz.
    Mr. Rill, your commission to examine these competitive 
situations with regard to international trade was commissioned, 
as I understand, by the Attorney General.
    Mr. Rill. That is correct, Mr. Chairman.
    The Chairman. And the Attorney General was apparently 
interested in our competitive situation with regard to other 
nations, vis-a-vis our export policies. Frequently in this 
committee, we talk about the salvation of American agriculture 
as the expansion of markets and the ability to knock down 
barriers, but at the same time to be competitive in terms of 
low cost and best quality.
    I am curious as to what so-called anti-consolidation 
efforts that we have been discussing today here in agribusiness 
do with regard to the long-term export growth for farmers.
    Mr. Rill. Mr. Chairman, two answers to that. First, the 
issue of market access was one of the three major areas of 
focus for the Committee. The report has been made available to 
the staff, and I do not think you want to go into the detail of 
that at this time.
    With respect to the position of the United States in global 
marketplaces, our committee focused on antitrust enforcement. 
Our role was to advise the Department of Justice regarding 
antitrust enforcement in an increasing global economy.
    One of the concerns that came up frequently, and we had a 
great deal of testimony on this, was that multiplicity of 
review of mergers and acquisitions, review overseas of U.S. 
transactions, review in the U.S. of overseas transactions, 
seemed to frustrate to a great extent mergers and acquisitions 
that might not have any anti-competitive consequence at the end 
of the day.
    One of the issues that was raised as a matter of concern 
was the extent to which multiple agency review, review by 
sectoral agencies as well as by the antitrust agencies, 
inhibited mergers that would not necessarily have any antitrust 
consequence at all, could be approved by the antitrust agency 
and delayed on competition grounds by another sectoral agency, 
and that brought us to recommend that the antitrust agencies in 
the United States should have the authority to review the 
competition consequences of a merger or acquisition. The 
majority would put it on a presumptive basis, or a preclusive 
basis. The rest would say, well, it should be at least 
presumptively binding on the sectoral agencies.
    The interest in doing that was to clarify standards, reduce 
time, and not put friction in the system of the review of what 
would otherwise be considered to be pro-competitive mergers. 
The antitrust agencies, of course, would retain the full 
authority, as they have under current law, to prohibit anti-
competitive mergers.
    The Chairman. Mr. Carstensen has brought forward the 
general principle of antitrust that is important to consider in 
which he says, leaving aside efficiency for a moment, you do 
not want a king, you do not want a situation of tyranny or 
dominance in markets.
    My question really goes more to Mr. Nelson and Dr. Koontz 
from just an observation in previous hearings that, 
unfortunately, agriculture does not have a very high rate of 
return on invested capital. As someone, as I point out 
anecdotally from time to time, who has 604-acres, I am worried 
about this because the rate of return on my farm has been 
perennially low for the last 40-years. This raises the 
question, why do you persist in this? There are other reasons 
other than the economic return. There have to be. There is not 
that much return even in a well-managed farm, but even then, we 
keep trying.
    This is what Dr. Koontz is trying to point out, that even 
if you have something that has a very low rate of return, you 
keep trying to figure out new marketing strategies, mixture of 
things that you do on the farm, all sorts of new research that 
may lead to better seeds, better plants, or some breakthrough 
in procedure, because you have to do that in order to keep the 
thing alive unless you want to have a deficit situation.
    But even after all of this, consulting with the Purdue 
people and having people combing the premise all the time, if 
you get to a four percent rate of return on invested capital, 
that, at least in my State, is pretty good. Even the very best 
of farmers would indicate that they tell the country banker or 
sometimes the regional banker 5 \1/2\ and they impute capital 
gains over a 20-year period of time, three percent operational 
and maybe two-and-a-half percent capital gains. Now, clearly, 
that return is exceeded by Treasury bonds in almost any year 
without difficulties of international trade or anything else.
    What we have heard from Mr. Nelson is that, unfortunately, 
this is not just a problem for producers, like me or Senator 
Grassley. It is a problem for everybody in the food chain. As a 
matter of fact, nobody is making money. This will come as a sad 
surprise to everybody who approaches the hearing looking for 
something else, but as a matter of fact, the markets have 
pretty well evaluated this year after year. The charge that Mr. 
Nelson has did not start in this year, and perennially, we are 
well below the S&P, we are well below the rest of almost any 
industry in terms of attracting new capital into our situation.
    One of you made the point that your best bet was to invest 
in farmland, and some have observed before this committee that 
one reason why that works is because of Federal Government 
subsidies that bring rents higher. Through Federal policy, we 
have managed to keep one asset, namely farmland, at a point at 
which we have some increase. Thus, my friends who go to the 
banker with imputed capital gains which are not obtained by the 
operation of that farmland, whatever may be its value.
    This is a serious problem and it leads to cycles in terms 
of our hearings. For example, when we began the first of the 
four hearings, this being the fourth, during this Congress, I 
note from the Wall Street Journal this morning that pork 
bellies were below 40 cents in July of 1999. That is just 10 
months ago. Now, I make that point because yesterday they 
spurted past $1 a pound, and this is within a ten-month period, 
a rather dynamic change in pork bellies. They settled a bit 
less than $1, but they had not been close to that point since 
1996, which is often cited as a very good year for most prices, 
pork bellies included.
    To what extent is this a problem of simply low returns, 
lack of innovation, lack of marketing skill, lack of the 
changes that need to be competitive, or is it antitrust. That 
is consolidation, because some of you are testifying, for 
example, on the issue specifically that one of our Senators has 
raised that you ought not to let packers own livestock, but one 
of you has said, well, if you do not, the quality control 
situation may suffer or supply chain or various other problems 
they have, they lose even more money if they do not have that 
control. Yet, this is very controversial up and down the road 
between farmers who have contracts and those who do not.
    We have tried to attack the price transparency issue so 
there is a glimmering, as Dr. Koontz said, in terms of the 
public good. We got consensus, essentially, in a bipartisan way 
to do that. But we are still very deeply divided on this whole 
issue of contracting, on packers owning, on the idea that even 
failing businesses who consolidate because people sell out, 
losing farms sell to other farms. Now, this is concentration 
and it gets bigger all the time because people are losing 
money, and the failure to make money leads them to be 
vulnerable and to either sell or to abandon the whole process.
    I was trying to raise with any of you philosophically what 
is our quest here? Is it a question of declining return and 
sort of no return really from that decline that seems to be 
persistent, or is it the consolidation situation, or how do you 
treat both in order to take Mr. Carstensen's point, no kings, 
no tyranny?
    Mr. Carstensen, would you address this first of all since 
you have been quoted, and I hope accurately?
    Mr. Carstensen. Well, I think you have got hold of a very 
tough problem here because it is an interaction of market 
structures--and here I think is probably where I have got the 
biggest disagreement with others on this panel--structure does 
make a difference. Highly concentrated structures do create 
adverse consequences. I am not saying it is profitable for the 
dominant firm. In fact, if they do the same old, same old, 
because that is the way they think they can retain their 
position in the market, they may make matters even worse 
without enriching themselves. So that is where I think we need 
to be concerned with structure.
    I am not saying to you that particular kinds of contracting 
should necessarily be illegal. What I want to point out is that 
contracting, as you get into concentrated markets, has a number 
of non-efficiency, non-quality objectives. They call them 
strategic objectives: exclusion of new entry, bettering your 
competitors, dominating your local region. Again, the end 
result may be that we all wind up as losers and that there are 
no winners.
    So this is why, as I said, a little bit against my grain as 
a former Antitrust Division lawyer and longtime opponent of 
government regulation, I come here saying, we need better 
regulation to facilitate market relationships. And again, I 
think Dr. Koontz, who has focused much more of his attention on 
some of the details, has made some important suggestions that 
go beyond simply saying no, which is a little more where my 
mind was at, saying here is how you say yes. Here is how you 
facilitate useful contracting, useful new arrangements that 
will enhance the efficiency of agriculture.
    At the end of the day, Senator, it may be that we have just 
got awfully good farmers who are very productive, a food 
processing system that is very efficient and carries it all 
through to the consumer at a good price, and there is going to 
be complaining because you are not making as much money as 
certain individuals, who I will not name, who happen to own 
monopolies. I think maybe the goal ought to be to look a little 
bit more at why some other industries are making high profits, 
is that really because they are so much more efficient or 
whatever, or is it because of market failure in other markets? 
That may be a more useful place to focus some of that 
attention.
    The Chairman. Dr. Koontz, do you have any comment on this 
subject?
    Mr. Koontz. Certainly. With respect to the legislation in 
particular, I really think that in reading it, not completely 
but trying to get the gist of it, it seems to me to be focused 
on prohibiting market power and motivated by that large margin 
between the consumer and the farm level, and I see that as a 
bit misguided, especially when you go in and look at the 
details. If you look at the details of returns to food 
processors, to the retail side, to the whole sector, you do not 
find a devil somewhere that is creating a problem.
    This is the same problem you get when you start looking at 
structural linkages, levels of concentration and trying to link 
that to market performance. You get into trouble. Those links 
are pretty weak. What you really need to do is look at conduct, 
look at business behavior. I think this is why folks get so 
frustrated with the Department of Justice, that is what they 
try to do. They are in there looking at the details. What are 
people actually doing? The structure performance linkages just 
do not stand up in court because they do not identify who is 
doing what.
    And to back up a little bit from a big picture, the 
corporate bashing that is going on, the big business bashing 
that is going on, I still believe that producers have a good 
bit of freedom to do what they want to do. As somebody who 
comes from a farm background, I know that is the case. As 
somebody who has an appointment in cooperative extension, works 
with producers extensively, I know that is the case. If you 
want to grow corn, beans, or cattle, you can do that. If you 
want to grow elk, buffalo, ostriches, emu, you can do that. You 
may have trouble finding somebody that is going to buy it, 
though, and I think that is what we have dealt with.
    I mean, that is the real issue, is not that you do not have 
the freedom to do what you want to do. It is difficult to get 
it into a marketplace, and it may be difficult to get it in for 
good reason. For example, the contract limitations on the hog 
side are used as a lot of example. Those things are very well 
justified in some cases when you look at the inconsistencies in 
animals that can show up if you do not have some sort of 
arrangement outside of the marketplace, if you do not have some 
sort of contracting arrangement. And this gets into the grading 
system better and make the price reporting system better.
    The Chairman. Yes, Mr. Rill?
    Mr. Rill. If I may, Mr. Chairman, just very briefly, the 
focus of the legislation is in large part on mergers and 
acquisitions and to give another agency authority over 
challenging mergers and acquisitions. I do not think there is a 
case to be made that mergers and acquisitions have been 
permitted to go through that are anti-competitive in this 
sector. Structure is not to be ignored. I think the testimony 
of Mr. Carstensen that structure is being ignored is contrary 
to the guidelines set out in the merger review principles 
followed by the Department of Justice and the Federal Trade 
Commission. The fact is that structure is a starting point and 
only a starting point of analysis.
    First of all, one has to define a market. Just take, for 
example, the metaphor that was used earlier, the four firms, 
let us say, assuming the accuracy, 80-percent in meat packing. 
First of all, is meat packing a market? It is affected by other 
markets, of course, so question whether that is a pure market. 
Even if it were a pure market, I just did some number 
calculation while I was listening to that testimony and I find 
that meat packing falls below the highly-concentrated level 
based on the numbers that were being used by some of your 
colleagues.
    Under the Department of Justice and Federal Trade 
Commission merger guidelines, even assuming that markets were 
vacuum packed and not affected by other markets, then once one 
gets past structure under the guidelines, one has to look at 
other market conditions that permit the measure of vitality of 
that market such as competitive forces that are in play in the 
market, not only in the static but also in a dynamic way.
    I think, over time, those guidelines have become accepted 
in the courts and understood by people that have to live with 
them and have to comply with them. To superimpose another set 
of standards in the merger area, it seems to me, is unjustified 
by the record and could be very injurious to the growth and 
productivity in this particular industry. But to suggest that 
structure is ignored or that dynamic analysis of competition is 
ignored ignores the dynamics of antitrust enforcement today 
and, I would say, in the 1980s. Thank you.
    The Chairman. Mr. Nelson, do you have------
    Mr. Nelson. If I may respond?
    The Chairman. Yes, please.
    Mr. Nelson. We are seeing integration across all industries 
because companies and industries are trying to take costs out 
of the supply chain. It is certainly not unique to the food 
industry. But companies are linking together much more closely 
and some of that is being made possible because of information 
agriculture.
    When Dell Computer gets an order for a computer, there is 
immediately an electronic impulse for the parts for that 
computer to all its suppliers. Dell actually never owns any 
inventory, but tele-set up a system which you either buy into 
as a supplier or you do not.
    Now, this is not irrelevant to the food industry. Wal-Mart 
has a system. You as a food company can play that game or not. 
A little more than a year ago, you would never see any 
Kellogg's cereal in Wal-Mart because they could not get their 
systems working with Wal-Mart's system. Wal-Mart is going to 
sell a lot of cereal whether Kellogg's is there or not. 
Kellogg's made sure they found a way to do that. That is what 
these companies are doing and information agriculture is making 
a lot of that progress possible. So much of this is an effort 
to take costs out of the supply chain which is inefficient. 
Thank you.
    The Chairman. That is a remarkable analogy, that an order 
to a computer company that has no inventory triggers orders to 
all the suppliers simultaneously. Obviously, this is a good bit 
further than we are along in agriculture or in the food 
business, but as you are pointing out, Wal-Mart really dictated 
this with regard to cereal. Apparently to make the sale, you 
finally integrate with the system.
    Mr. Nelson. All food retailers are trying to improve what 
they call their working capital efficiency. They are trying to 
sell a product before they have to pay for it, maybe several 
times. Pepsico likes to brag that a retailer can sell their 
Pepsi or their Frito corn chips several times before they have 
to pay for it, and that is a good deal for the retailer. So 
retailers are focused on this and you are buying into that 
system or you are not.
    The Chairman. Gentlemen, we thank you very, very much for 
the outstanding papers that you have produced, all of which 
will be a part of the record as well as your testimony. Thank 
you for coming.
    The Chair would like to recognize now a panel composed of 
Mr. John Greig, National Cattlemen's Beef Association of 
Estherville, Iowa; Mr. Jon Caspers, National Pork Producers 
Council of Swaledale, Iowa; Mr. Leland Swenson, President of 
the National Farmers Union, Aurora, Colorado; and Mr. Ron 
Warfield, President of the Illinois Farm Bureau, representing 
the American Farm Bureau Federation, from Gibson City, 
Illinois.
    Gentlemen, having gotten you seated finally, it is my duty 
to say that a roll call vote just commenced on the floor. I, 
obviously, being the only Senator present, will ask your 
indulgence if I may to go vote, and that will take probably 
about 10-minutes in round trip. But having achieved that, then 
we will be back and look forward to your testimony in full. I 
apologize for this intrusion, but we will proceed as rapidly as 
we can.
    [Recess.]
    Mr. Greig, would you proceed with your testimony?

STATEMENT OF JOHN GREIG, NATIONAL CATTLEMEN'S BEEF ASSOCIATION, 
                       ESTHERVILLE, IOWA

    Mr. Greig. Thank you, Senator Lugar, for holding this 
hearing to discuss pending legislation on agricultural 
concentration and related issues concerned to cattle producers. 
I am John Greig, President of Greig and Company, a diversified 
family farming and cattle feeding operation in Estherville, 
Iowa. I am the past president of the Iowa Cattlemen's 
Association, and I should say that is very past president, and 
a member of the National Cattlemen's Beef Association [NCBA].
    As with your oversight hearing in February, today's hearing 
offers another chance to closely examine the marketing 
structure changes occurring in the livestock industry and the 
concerns of the livestock producers seeking to maximize their 
returns in a very competitive marketplace. A growing number of 
cattle producers are finding innovative ways to compete in the 
changing beef industry while gaining a greater share of the 
marketing dollar. There are several examples of how this is 
going on and I would give you a few.
    U.S. Premium Beef Limited in Kansas, Western Beef Alliance, 
the Iowa Cattlemen's Excel joint venture is a very exciting 
thing we will talk about a little bit, the Angus Alliance, 
Harris Ranch, just to name a few. There are several more.
    I am a participating member and on the steering committee 
of the Iowa Cattlemen's-Excel joint venture. Six-months ago, a 
joint venture feasibility study was initiated between the Iowa 
Cattlemen's Association, Excel, and the State of Iowa to 
construct a new state-of-the-art beef packing plant in Iowa. 
Under the agreement, the Iowa Cattlemen's Association will be 
responsible for securing commitments from cattle producers for 
about 300,000 head of committed cattle required for this 
facility. These producers, who will be members of the Iowa 
Quality Beef Supply Network, and we currently have 
approximately 925-members from 98 of Iowa's 99 counties and 
from 12 other States, representing more than 330,000-head-of-
cattle committed to this project.
    Excel's responsibility includes estimation of staffing 
needs, engineering specifications, water supply, wastewater 
management, project development costs, as well as cattle 
purchasing and beef marketing strategies, and, of course, they 
will be the operating managers of the plant.
    The State of Iowa, through the Iowa Economic Development 
people, will work closely with us, providing labor availability 
assessments, coordinated community involvement in working with 
other State and local government entities in site selection and 
other related issues.
    The $100 million plant will focus on processing high 
quality, high-yielding cattle that perform well under the beef 
quality assurance and the beef safety concerns programs. The 
plant will utilize the latest in cattle carcass tracking and 
other technologies to provide valuable feedback to our 
producers. The plant will have 1,100 employees in a single 
shift, with a potential to expand to a double shift. 
Approximately 600,000 animals will be processed annually, and 
with a potential to increase that number as the plant size 
increases.
    The Iowa Quality Beef Supply Network is the producer 
investment arm of the facility, created to secure annual 
commitments of approximately 50-percent of the plant's capacity 
for 5-years. In order to become a member, the producers had to 
pay a registration fee of $500, pay a $2 delivery fee up front, 
and commit themselves to between $50 and $100 a head for 
further capital investment as we begin to build the plant. 
Membership opportunities are still open and the network is 
accepting increases in cattle commitments from our current 
members, and I would say that what I personally thought might 
take 6-months to do, we accomplished in about 6-weeks. It was 
unbelievable, the interest we had in the project.
    Some members are already benefitting from this 
participation through an interim grid available for those 
cattle that are tagged through the Iowa Quality Beef Program, 
and this grid works through the Excel Schuyler, Nebraska, 
plant, and during the month of February, 1,500 cattle were 
started in that process and we yielded about $24 a head more 
income off of that particular project. Again, we are picking up 
more and more cattle in that area as we go along and the 
producers seem to be very happy with it.
    In all of these ventures, the participants are professional 
cattlemen and women who have come together in a proactive way 
to address their desire for growing a viable beef industry 
through bold new marketing strategies that enable them to 
capture a larger share of the retail beef dollar. Our efforts 
are focused on producing a better beef product marketed through 
our own beef companies and under our direction. We found that 
by working with one of the major packers, we thought we had a 
partner that could give us the expertise we needed in those 
areas of marketing, etc.
    As part owners, we not only benefit from the rewards of the 
value-based pricing system, we also will be receiving earnings 
from the company. In addition, the data received by cattle 
producers from these efforts will assist our effort to 
continuously improve the quality of our livestock, which in 
turn can lead to additional market returns, and I think also 
very important, a better, safer project for consumers.
    In conclusion, I think we all recognize the concerns that 
have led to the development of proposals regarding industry 
structure and competition. NCBA remains concerned about 
unintended consequences and urges a thorough analysis of the 
potential impact of these proposals. For example, the joint 
ventures mentioned earlier under a number of different business 
structures, and during my tenure as a State legislator and vice 
chairman of the Iowa Ways and Means Committee, I was 
particularly concerned about the tax implication that changes 
in laws and regulations can bring.
    Let me give you a case in point using the ICA Excel joint 
venture. The firm of McGladrey, etc., in Des Moines, Iowa, one 
of our major accounting firms, did an accounting analysis of 
our project with Excel and we found that an LLC structure would 
provide a 14-percent return on our investment, where using an 
Iowa closed co-op structure, our return would only be 13-
percent. The higher LLC return will be further amplified for 
producers because all of the income from a closed co-op is 
subject to self-employment tax, and under an LLC, only the 
income from cattle sales is subject to that tax. So we must 
look carefully at how those issues interact with our business 
facilities.
    NCBA and the beef industry support the Justice Department 
and the USDA enforcement of the Packers and Stockyards Act, as 
amended, and other antitrust laws and regulations. We urge that 
USDA be involved in premerger evaluation of proposed packer 
mergers in coordination with the evaluation by the Justice 
Department. NCBA supports a free market system and we trust in 
the ability and adaptability and innovating skills of U.S. 
cattlemen to prosper us in a relatively unregulated 
marketplace.
    We do rely on Federal regulators to keep the playing field 
level by ensuring the marketplace is free from antitrust, 
collusion, price fixing, and other illegal activities that 
damage the viability of the market and interfere with market 
signals. If allowed to work, the market will recover with a 
minimum of government intervention.
    We think that cattlemen, through very good innovative new 
joint ventures and other networking facilities, that what we 
need to do is to work in those areas and make sure that we do 
not confuse the issue by adding too many more regulations. 
Thank you.
    [The prepared statement of Mr. Greig can be found in the 
appendix on page 144.]
    The Chairman. Thank you very much, Mr. Greig.
    Mr. Caspers.

  STATEMENT OF JON CASPERS, NATIONAL PORK PRODUCERS COUNCIL, 
                        SWALEDALE, IOWA

    Mr. Caspers. Thank you, Mr. Chairman. I am a pork producer 
from Swaledale, Iowa, and serve on the Board of Directors of 
the National Pork Producers Council. Today, I am representing 
America's pork producers as we discuss the critical issue of 
agriculture concentration and its impact on pork producers and 
consumers.
    Global competition, new technologies, and consumer demands 
are but a few of the factors that are rapidly changing the U.S. 
pork industry. However, while the pork industry is becoming 
more concentrated at every level, we continue to be less 
concentrated in the poultry industry or other livestock 
sectors. Concentration in the pork packing sector has grown 
from 32.2-percent in 1985 to over 56-percent in 1998, while 
concentration in the production segment has grown from 
negligible levels in the early 1980s to about 18-percent today. 
Vertical integration, or the percentage of hogs owned by 
packers has gone from an estimated 6.4-percent in 1994 to 
roughly 24-percent today.
    NPPC has launched a number of new initiatives to help 
ensure that producers have a fair, transparent, and competitive 
market. We firmly believe that access to information and 
knowledge will form the foundation for guaranteeing long-term 
market competition. That is why the National Pork Producers 
Council [ NPPC] has focused so much effort in the areas of 
information dissemination and in helping producers understand 
and make use of that information to make knowledge-based 
business decisions.
    A large number of these initiatives were designed and 
implemented by NPPC's price discovery task force, which I 
currently chair. These initiatives include development of a 
packer price reporting system that focuses on actual 
procurement costs, also a passage of the Mandatory Price 
Reporting Act of 1999, the NPPC producer price reporting 
initiative, which encourages producers to negotiate with more 
than one packer and to report the price to USDA. Our recent 
publication of our guide to marketing contracts, whose goal is 
to help producers make more informed decisions about marketing 
contracts and their terms, and also NPPC has conducted with the 
University of Missouri live hog marketing studies in both 1999 
and 2000. And all of these actions potentially have increased 
the information for and the knowledge of producers.
    In addition, NPPC facilitated the creation of a national 
producer co-op called Pork America. Pork America's goal is to 
find new marketing and other value added opportunities for 
producers.
    Concerns over the possible market distorting effects of 
concentration led to a number of resolutions being considered 
and passed during the recent 2000 National Pork Industry Forum. 
Delegates supported a study of the structure and 
competitiveness of the present hog market by USDA. They also 
supported a review of the definition of price discrimination 
and the Secretary of Agriculture's authority to challenge price 
discrimination. They supported a USDA study of justifiable 
price differentials, a study of the Department of Justice 
concentration threshold levels to determine whether they should 
be revised.
    They also supported continued scrutiny of the packing and 
processing industry to assure adherence to relevant Federal 
antitrust laws and the passage of new laws, if necessary, new 
authority for USDA to review and make recommendations to the 
Department of Justice regarding approval or disapproval of 
agricultural mergers, acquisitions, and consolidation of 
agricultural input suppliers. They supported the USDA authority 
to require agribusinesses with more than $100 million in sales 
annually to file information related to corporate structure, 
strategic alliances, joint ventures, etc. Also, the 
establishment of a Deputy Attorney General for Agriculture, 
which has been accomplished. And also, they support new 
legislation that requires processors to bargain with producer 
cooperatives.
    In summary, Mr. Chairman, concentration is a complex issue. 
We hope that the Committee will approach it in a cooperative 
manner, similar to issues like the mandatory price reporting 
and interstate shipment of State-inspected meat.
    I must express our concern, however, that neither Congress 
nor the administration has yet to provide the remaining $1.35 
million for the Mandatory Livestock Price Reporting Act to 
ensure that USDA can carry out its full legislative mandate in 
a timely manner, and this must be done soon.
    Mr. Chairman, cooperation driven by information and 
knowledge rather than confrontation is the key to finding 
reasonable long-term solutions to the complex issues impacting 
American agriculture. Such cooperation can help the industry 
avoid the negative unintended consequences of legislative and 
regulatory actions that in the long term could harm producers 
and, in particular, the agricultural industry in general.
    That concludes my comments, and thank you for the 
opportunity to share the pork producers' views on this issue.
    [The prepared statement of Mr. Caspers can be found in the 
appendix on page 152.]
    The Chairman. Thank you very much, Mr. Caspers. Let me just 
interject parenthetically, the Chair and the Committee share 
your frustration over the inability of USDA to move on to our 
information legislation. There are good reasons for that often 
expressed, because we raise the question with the Secretary and 
with others whenever they come, but we will be persistent and 
we appreciate your raising the issue again.
    Mr. Swenson.

STATEMENT OF LELAND SWENSON, PRESIDENT, NATIONAL FARMERS UNION, 
                        AURORA, COLORADO

    Mr. Swenson. Thank you, Mr. Chairman. I appreciate the 
opportunity to appear before you and the Committee to address 
this very important issue.
    As I travel the country, outside of price, concentration 
probably rates second to the issue of concern to farmers and 
ranchers throughout the country. It rates higher than the 
concern right now of rules and regulations, trade, or bigger 
than taxes. I just want to emphasize that because that is where 
farmers and ranchers are putting the issue of concentration.
    I want to say that I believe we can address this issue, and 
I will say that I think your leadership and efforts you showed 
last year in bringing together a bipartisan effort on mandatory 
price reporting can be an example that you can use, Mr. 
Chairman, in leadership in addressing the issue of 
concentration.
    A year ago, the National Farmers Union commissioned the 
Heffernan report on concentration and I would like to enter it 
as part of the record so that it can be there to be the example 
of what is unfolding.
    The Chairman. It will be placed in the record in full.
    Mr. Swenson. I think you shared with the previous panel 
examples of what has unfolded in the structure of agriculture 
from that of the changes that have occurred in production 
agriculture to the changes that are occurring from input 
supplies for producers to that of market opportunity. The 
industry is becoming very concentrated. A number of things 
unfold in this. We see the control from gene to fork and the 
impact that it has on farmers. It is not only domestically, but 
it is internationally.
    You said, Mr. Chairman, that we are dependent on exports, 
and when we take a look at history, about 30-percent of our 
production needs to go to the export market. But what we have 
seen happen over the last 30-years is that percentage has 
stayed stagnant. We have not had a growth over the last 30-
years, since back in 1975-79 annual average. But what we have 
seen happen is that on the competitive commodities which we 
produce here, a significant increase in imports, so that the 
real reality of what our export percentage is down to about 10-
percent. What we see happen on the nature of concentration is 
that we see more firm-to-firm trading occur rather than a true 
competitive export situation that is in place and the 
competition under the structure of trade agreements.
    I want to highlight a couple of things in relation to some 
previous testimony. First of all, for the record, is a copy of 
a letter written by myself on September 7, 1999, and again on 
October 14, 1999, to Joel Klein at the Department of Justice 
expressing our opposition to the Smithfield/Murphy merger. If 
there was any consultation with farm groups, we had a clear 
written position in opposition to that proposed acquisition.
    Mr. Swenson. The second thing I would point out is that 
does DOJ review in its divestiture process the fact that if a 
local elevator is sold, does that sale, if it is sold to a 
private individual or to a co-op or to any entity, does it 
include a marketing agreement which requires that cooperative 
to market all the product they procure back to the seller, in 
other words, back to a Continental or a Cargill or Bunge or 
whoever it may be, because then we have not created, even 
through divestiture, real competition for the marketing of 
agricultural products for the farmers in that community.
    The other thing I want to point out in the area of what we 
see unfolding in the structure of even production agriculture 
under contract is that farmers find little capital on the 
margin of return which you mentioned you get on your farm and I 
have on my farm. There is very little margin. And so we find 
ourselves in a dead obligation to contract for the production 
of grains or livestock, and what we have happen is that there 
is very little risk in speaking out against ramifications of 
that contract, number one, afraid of losing that contract and 
not having anywhere else to either procure the commodities with 
which to produce and/or market the commodities if you can 
produce it.
    So as we take a look at what can be done, I urge, Mr. 
Chairman, your leadership in combining the Grassley bill with 
the Daschle-Leahy bill to bring forward a bill to pass out that 
begins to address whistleblower, compensation, USDA oversight 
with enforcement opportunities.
    I also urge you, Mr. Chairman, to pass Senator Johnson's 
bill to ban packer ownership of livestock. If we truly want to 
have a free market, it has to be a competitive market. It has 
to be a competitive market, and the right for producers to own 
the livestock to market into the processing sector.
    Third, we need to pass the interstate shipment of State-
inspected meat and the poultry bill that has been introduced by 
Senator Hatch and Senator Daschle. You set the example last 
year in bringing forward a bipartisan effort on mandatory price 
reporting. It was appreciated by those of us in production 
agriculture. We look for your leadership in addressing the 
issue of concentration. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Swenson can be found in the 
appendix on page 158.]
    The Chairman. Thank you, Mr. Swenson. You are very generous 
in your recollections of our work. Nevertheless, I appreciate 
the point you are making.
    Mr. Warfield.

STATEMENT OF RON WARFIELD, PRESIDENT, ILLINOIS FARM BUREAU, ON 
  BEHALf OF THE AMERICAN FARM BUREAU FEDERATION, GIBSON CITY, 
                            ILLINOIS

    Mr. Warfield. Thank you, Mr. Chairman. My name is Ron 
Warfield. I am the President of Illinois Farm Bureau, a member 
of the Executive Committee of the American Farm Bureau 
Federation. I have a farming operation in Gibson City, 
Illinois. I am a corn and soybean farmer, but used to be a 
cattle feeder like John Greig in my previous life, I guess.
    I am testifying on behalf of the American Farm Bureau 
Federation today, and as you know, we work very hard to grow 
the marketplace and we have two very, very important issues 
that are coming to bear immediately ahead of us, what we are 
going to do with PNTR to expand the marketplace and what we are 
going to do with ethanol to expand the marketplace. We are very 
much for expanding the markets, growing the markets and saying 
that is where our increase has to come from.
    At the same time, producers must have confidence that once 
we have those expanded markets, that markets still work. And 
the question that many of our producers are asking today is, is 
price discovery there? Is there competition? And is the 
marketplace working, not just at low prices, but also at high 
prices?
    Farm Bureau believes that consolidation and subsequent 
concentration with the agricultural sector is having adverse 
economic impact on U.S. farmers. We believe Congress must 
review existing statutes, develop legislation where necessary, 
and strengthen enforcement activities.
    Since last fall, we have worked to develop legislation 
which would reduce the adverse impact of concentration on 
agriculture. We have worked very closely with staff members 
from Senator Leahy, Senator Daschle, and Senator Grassley's 
offices, and we sincerely appreciate your leadership and 
interest in holding these hearings and this issue and we are 
extremely grateful for the untiring efforts of the Senators in 
crafting legislation to address our concerns. Today, Farm 
Bureau asks members of the Committee to continue to make this 
issue a priority and to reach a bipartisan solution to address 
concentration in agriculture this year.
    Many of the concepts proposed by Farm Bureau have been 
included in either the Daschle-Leahy bill or the Grassley bill. 
Our priorities are for legislation to move this year and for 
increased involvement in the consolidation issue by the USDA. 
Farm Bureau would like to see an expanded role for USDA in 
evaluating agribusiness mergers and acquisitions, which 
currently are under the jurisdiction of the Department of 
Justice. We believe broadened USDA responsibility and official 
consultation with DOJ will ease much of the concern regarding 
the concentration of agribusiness.
    And I must say, in the last year, we have had numerous 
groups to visit with both the Department of Justice and the 
USDA. I have done it personally and I have had our board 
members out here to do it, and our concern is, even though it 
is expressed that there is that interaction, we found in direct 
meetings, one following another, an official from USDA would 
point the figure and say, oh, that is over in the Department of 
Justice, and then we talk to the Department of Justice and they 
said, oh, that is over in USDA, and the finger pointing went on 
all day. We believe we need legislation because it is not 
happening administratively.
    USDA is uniquely positioned and qualified to offer a 
thorough economic analysis of any proposed merger or 
acquisition, and this analysis should be made available to the 
public and other government agencies. We are very interested in 
the model currently being used by the Surface Transportation 
Board and we will look at that model as one that we could use 
in saying how we would interact.
    We would like to see the following additional actions 
considered in the concentration debate. The Grain Inspection, 
Packers, and Stockyards Administration may need additional 
resources to investigate anti-competitive pricing. Farm Bureau 
members would like to see better publicizing of these 
investigations, the results of the findings, and whether civil 
penalties were imposed. And when we were here visiting with 
them, they indicated they had two litigators, two junior 
litigators, on staff and certainly were not able to handle the 
load that they had.
    GIPSA should be able to evaluate actions taken by packers 
who purchase plants and then shut them down. In the last month, 
we have heard from our Northwestern Illinois hog producers when 
Smithfield announced that it should shut down the hog 
processing line once it purchased Farmland's Dubuque, Iowa, 
pork plant--a good example. This action may result in 
substantially lower prices for producers of the 7,800 hogs that 
are processed or slaughtered each day at that plant. Recall at 
your February hearing that a Purdue agricultural economist 
indicated any further reduction in the numbers of packers could 
certainly have a negative impact on hog prices and the 
competitive nature of our marketplace.
    GIPSA should be allowed to ask for reparations for 
producers who can show damage as well as civil penalties when a 
packer is found to be engaged in predatory or unfair practices. 
Contract poultry growers should be provided the same 
protections as livestock producers by extending the powers of 
Grain Inspection, Packers & Stockyards Administration [GIPSA] 
to cover live poultry dealers in the same fashions as packers 
of cattle and swine are covered. Farm Bureau has long supported 
authorization for a statutory trust for the protection of cash 
sellers to livestock dealers.
    We need more transparency. Farmers need more information 
about mergers, acquisitions, and anti-competitive activities, 
and of prices, and of prices at all levels.
    Farm Bureau supports appointing an Assistant Attorney 
General at the Department of Justice with the sole 
responsibility of handling agricultural mergers and 
acquisitions. We support an increase in the staff of the 
Transportation, Energy, and Agriculture Section of the 
Department of Justice. The enforcement of confidentiality 
clauses in livestock and grain production contracts should be 
prohibited except to the extent that a legitimate trade secret 
is being protected.
    USDA should be required to assimilate, maintain, and 
disseminate upon request detailed information relative to 
corporate structure, strategic alliances, and joint ventures 
for all agribusiness entities with annual sales in excess of 
$100 million.
    And lastly, producers may need government assistance to 
develop co-ops that will add value to their product and legal 
structures that will help them develop relationships with other 
producers to pool resources to compete in today's economy. We 
started privately a producers' alliance in Illinois to 
facilitate producers performing such activities, like John 
Greig mentioned on the beef initiative, or what was mentioned 
in terms of happening in pork.
    Thank you for the opportunity to provide this information 
on this important issue, and let me say again, we appreciate 
your efforts to address these issues and look forward to 
working with you in the future to obtain a bipartisan solution.
    [The prepared statement of Mr. Warfield can be found in the 
appendix on page 164.]
    The Chairman. Thank you very much, Mr. Warfield. It is good 
to have you, as always.
    Let me just say that when we had this hearing or a similar 
one a while back, we had testimony from Professor Parlberg at 
Purdue, who was suggesting that there had been more 
concentration in the pork industry--I think that was the model 
he was centering on that day--and that one of the ways in which 
producers might gain more bargaining power and change price 
would be through very large co-ops. He also suggested, if I 
remember correctly, as many as 300,000 head of hogs would be 
required to command maybe one or 2-days in the marketplace 
sufficient to make that kind of a change.
    That has not come to pass in my home State of Indiana, but 
nevertheless, his model is not unique and each of you in a way 
are reflecting the fact that, pragmatically, producers in Iowa, 
for example, both in cattle and hogs, are trying to think of 
how you can get greater marketing power in different ways. You 
suggested, Mr. Greig, through working with this company in 
which you are now part owners and, therefore, having a share of 
the flow of revenue, hopefully profits, that come from that 
situation in addition to what, as I heard you, about $24 a head 
better in terms of your pricing. But this is a very complex 
arrangement as you have described it, not easily come by and 
not altogether readily accepted by everybody who is a cattle 
producer or a hog producer. There are many farmers, and you 
have to respect this point of view, who say, we do not want to 
be a part of a large cooperative, or we just really want to 
have an independent view of the market and handle our situation 
as we always have.
    How all that will be compatible with life in the times, I 
do not know. This is what we are trying to sort out, because 
many producers are making arrangements in cooperatives or in 
combines or cooperation of some sort, however it is described.
    Mr. Warfield has given a set of principles from the Farm 
Bureau, many of which, I think, are shared by most members of 
the Committee in a bipartisan way that would filter through 
legislation to get regulations if we are unable to get 
legislation, or influence the departments.
    Can any of you give sort of an overall perspective of where 
we are headed in the markets with respect to not consolidation 
of producers but cooperation of producers as a counter to 
perceived consolidation of packers or agribusiness firms, 
because Professor Parlberg, and he may be incorrect, said 
probably we will not turn the clock back. A suggestion was made 
by Dr. Carstensen that conceivably there is no statute of 
limitation on these things. The Department of Justice could 
take a look at something that occurred in the 1980s or early 
1990s or what have you, when the allegation is that perhaps 
antitrust enforcement was less vigorous, and that might occur.
    But then there are unintended consequences and 
dislocations. Mr. Greig has said from his own experience as a 
legislator trying to take a look at these things, you have to 
walk around it as to what kind of harm is done, what sort of 
damage occurs even while you are trying to get absolute 
justice.
    So if we accept the fact that probably we have a fair 
degree of concentration, is this an appropriate way to go? Is 
this likely to occur with regard to cattle and hogs? The 
chicken and poultry people usually come in with different kinds 
of testimony on these issues. If they were here, I suspect 
there would be some variation from what we have heard. But do 
any of you want to forecast? Yes, Sir?
    Mr. Greig. Yes, I would like to make a comment that even 
though we are looking at a joint venture with a major packer, 
there are some side issues that help those that do not want to 
join us, and that is that, number one, only half of our 
facility will be used for our own cattle. The rest will be bid 
onto it in the open market. And as a result of that, we have 
brought a second packer into the major Iowa-Illinois market. So 
there is a competitive thing that has come up in this issue.
    The case in point would be that IBP was our only market in 
my area and a lot of people east of me, and as soon as we 
started to bring this together, those bids changed and their 
attitudes changed. So competition was immediately thrown into 
it.
    The second thing that I think is very important, half of 
that company will be owned by us. It is a 50-50 operation. 
There will be, of course, cattlemen members on that thing and 
we will have to answer to the Iowa Cattlemen's Association and 
the rest of the producers in the State and we feel that as we 
look at the board, that those board actions will be pretty well 
publicly known and I think that information will be free 
flowing, and that is one of the objectives we wanted, is the 
free flow of information, so that we hope that we can take some 
of those iffy issues out and they will become knowledge at 
least to the professional cattlemen in the State of Iowa and 
our surrounding States.
    The Chairman. Mr. Caspers, you are representing obviously 
the national group today, but you are sort of side by side with 
your colleague out there in Iowa. Are things working along for 
the pork producers in a similar way, or how would you describe 
your situation?
    Mr. Caspers. Well, with the last 2-years, the economics we 
went through in the pork industry, there is a lot of interest 
amongst producers in that kind of activity, and as I mentioned 
in my testimony, the National Pork Producers facilitated the 
formation of Pork America, the pork co-op, if you will, that is 
currently going through a producer signup membership process, 
so I do not have a lot to report there at this time. It has 
taken a lot longer than they had hoped because of the 
registration requirements all across the country.
    The Chairman. How readily is it being accepted? Are people 
going to sign up in this, or------
    Mr. Caspers. I can report, I guess, a little more currently 
on the local level. In Iowa, we also have a pork co-op effort 
of which I am a member, and recently, the Iowa Premium Pork 
Company completed their membership drive and signed up over 
1,400 producers as of the end of March and representing several 
million pigs of production. So there is a lot of effort in 
there. Their intent initially will be to do some group 
marketing from the standpoint of having a larger volume and the 
ability, hopefully, to garner a better price, but in the long 
term to sign and make some agreements with the existing packers 
to provide particular products for particular markets.
    The Chairman. Mr. Swenson?
    Mr. Swenson. Thank you, Mr. Chairman. I think the critical 
thing is that there is probably not one option or one idea that 
has to be looked at. I think it is going to take cooperatives, 
it is going to take lender liability corporations, it is going 
to take LLPs, it is going to take a whole different structure 
of which to truly create what I would like to call a 
competitive marketplace, where an opportunity for independent 
producers of which to market livestock or grains through.
    I think the challenge facing many of the producers to 
create alternatives is access to capital and the cost of the 
capital. It is more available to Excels and Iowa Beef and those 
types of entities than it is in the cost of capital for 
individual farmers to go and try to form a new cooperative or a 
new limited liability corporation.
    So one of the biggest hurdles to deal with is the cost of 
the capital and the access to the capital. The other is the 
access to the market for the finished product, because we are 
seeing in our analysis and our study of the retail market, the 
retail market is becoming as concentrated as the processing 
sector. And so there are now agreements that are being signed 
between Excel and Wal-Mart, for example, that they will agree 
only to accept certain products from certain companies for 
shelf space and then denies the access for new ventures that 
wish to have access to the public market. So that is an issue 
that also is associated with the investment that you create 
within that processing structure.
    So one of the things I will commend the Department of 
Agriculture in establishing, and that is for low-equity 
producers out there. They will borrow money for stock 
investments in some of these new cooperative venture 
opportunities, and I think that is a positive step for 
producers to be able to help themselves.
    The Chairman. Mr. Warfield, do you have a further comment 
on this?
    Mr. Warfield. As I said in my testimony, I see a lot of 
interest among producers in terms of the value added and very 
interested in terms of participating in that. Certainly in the 
hog sector, they have lost a lot of equity in the last 2-years 
and so some of the enthusiasm for investing is there but the 
dollars are not.
    The other point that I would like to make in that regard is 
that when Professor Parlberg testified, he said we also cannot 
allow further concentration in the packing industry on the hog 
side without deterioration in terms of competition for live 
hogs, and certainly as we look at that, we are going to have a 
time period in here for this competition to take place, and so 
I am very concerned about what would happen in the interim 
relative to further concentrations, and I mentioned the one 
with Smithfield.
    The other point I would like to add, if I may, is the fact 
that, as you mentioned the poultry industry, and the one thing 
that happened when we had the poultry industry consolidating 
was we had price discovery taking place at the retail level and 
we knew what the nine city weighted retail price of broilers 
was. Today, try to get that same information for pork or beef 
and it is not available. And if price discovery is going to 
take place at the retail level, as we move more and more in 
that direction, if markets are to work, I think we need that 
kind of information available so that we can be producing for 
that marketplace.
    The Chairman. That was a point made also by Dr. Koontz in 
our previous panel, this public good that this committee, the 
Congress, and hopefully the administration will try to help 
provide, which we are still striving to get from even the 
legislation that we passed last year that you have commended.
    Let me just make a sort of a short report to this panel, 
but likewise to the press and other observers because the 
question will obviously arise after all of you have labored for 
4-hours this morning on this issue and wonder what is going to 
happen.
    Essentially, on Tuesday, the majority leader, Senator Lott, 
had a meeting of committee chairmen in which I participated 
representing this committee and indicated that, by and large, 
that the remainder of the session will be spent attempting to 
pass 13 appropriation bills so the Congress does not come to 
September 30 with some unpassed and some sort in sort of 
triangular negotiation with the White House during October and 
the preelection period. But this means an acceleration of 
activity with regard to both the Appropriations Committee and 
floor activity.
    So the quest was, what is your must legislation, because 
there will be very few slots available and in most cases only 
for bills that are almost a lay-down hand in which you get 
unanimous consent or certainly no threat of filibuster or 
extended debate or difficulty.
    Ahead of us right now as a priority, of course, is the 
conference on crop insurance risk management in which staff had 
been working throughout recesses that the Senators and members 
of the House have had. We are making good headway and I predict 
success, but we are not there and there are a lot of issues in 
risk management and crop insurance and some even being added as 
we speak. So that, really, we will need to get done, and we 
have to reserve some time to do that.
    Likewise, we have this very serious issue of MTBE and 
ethanol that was a part of our hearing a week or so ago, how 
that is to work out both with regard to the environmental 
community and committees that are involved in energy and the 
environment and us is difficult to tell, but important. There 
are time frames here involved, not only with the California 
MTBE but with other States that have something beyond 
agriculture. But we have quite a stake in that with the ethanol 
quest, both from corn farmers or maybe ethanol from other 
sources. So whether that is a go or a no go, I do not know, but 
it is very important and we are trying to work on it.
    We have this CFTC authorization, and the draft of that 
legislation will be apparent next week. Large issues of 
contract certainty with regard to certain markets, the Shad-
Johnson accord, a number of decontrol aspects. I have worked 
now closely with the Chairman of the Banking Committee, Senator 
Gramm, who has great interest. This has been historically where 
things came to a stop in the past, the Banking Committee with 
its interest in the SEC and this committee with interest in the 
CFTC got crosswise and no one moved. So we have gone through 
several Congresses on occasion without reform and kicked the 
can on reauthorization without much change, but we cannot do 
that anymore because our markets are going to Europe. The 
effectiveness, at least, of the price discovery that we take 
for granted in agriculture, quite apart from other markets, may 
be happening elsewhere, as we saw displayed electronically at 
one of our hearings.
    So we need to move on that, and that is a big bill. 
Attempting to get all the parties on board on that so we do not 
have a large floor fight will take some doing, but it is 
conceivable.
    Now, in addition, we have had earlier the problem of 
agricultural sanctions. We passed a bill out of this committee 
that would exempt food and medicine. That is still out there on 
the floor. The leader thought he was going to give me an 
opportunity to deal with that even this week, but events in 
Cuba, essentially, have postponed that temporarily, so we shall 
see whether it can reemerge. But in one form or another, the 
sanctions issue is a very big one in terms of our exports as 
well as American trade generally.
    We had 2-days that were promised to Senator Kohl, Senator 
Grams, Senator Wellstone, and others on dairy policy. Now, 
essentially, we have been busy with the Committee, trying to 
come to some consensus. It is not a supreme court in which we 
all offer our opinions, but it comes much like that with regard 
to dairy policy, in which the Chair is not aware of any 
majority on any policy, although some members are asserting 
that they are sure they have the votes if we actually had a 
meeting and everybody had to vote. But in any event, it is 
there and it is an important issue on which many members feel 
very, very strongly we ought to move forward.
    The possibilities of passing a two-house dairy bill and a 
Presidential signature, I think, are not great, but that is not 
my judgment, and my style has not been to make these judgments 
and to say simply we will not discuss it. We will discuss it, 
but it is not apparent we have consensus.
    That is true, likewise, with regard to sugar loans and 
other things that now are bedeviling the Secretary as he tries 
to decide what to do in that area, not necessarily a 
legislative proposal at this point, but nevertheless I visited 
with the Secretary now at some length about this. He has gone 
to China and is mulling it over while he is there, I suppose. 
He will come back and it will still be here and we will be 
thinking about that.
    In addition to that, we have, obviously, the concentration 
bills that have been discussed today and the need to coordinate 
with the Judiciary Committee. We had some communication, as you 
noted, in the first panel, as members were exchanging papers 
and some heading off to Judiciary even as we were dealing with 
that here, and it is a serious issue there. We will have to 
visit with Senator Hatch, who is the Chairman. Senator Leahy, 
of course, our member, is the Ranking Member of the Committee. 
Senator Grassley is involved in that venue, as well as this 
one. Senator Daschle and Senator Johnson have been active in 
this committee in addition to that.
    I am just trying to sort of sort out for all of us where 
all that stands, and I do not know for the moment, but we will 
certainly be assiduous in attempting to move ahead on all of 
these as to that which is possible. At the end of the day, we 
will get some floor time, I hope. If we do not, some of this 
may appear as amendments on appropriations bills, which will be 
test votes for members but probably not legislation. This is 
why we have tried very hard to keep the integrity of these 
bills as we have them so they can be considered on their merits 
as opposed to test votes of finding out where people are. But 
the Senate is a free-wheeling situation. There are no germane 
situations ultimately with regard to amendments, so some of 
this may appear in that form if it does not come through the 
regular sources.
    I thank you for indulging me in giving this summary because 
some of you might ask whether concentration or other things on 
which you have testified--many of you have been before this 
committee on several occasions this year offering testimony for 
your organizations. We thank you very much for your patience 
and your endurance, and the hearing is adjourned.
    [Whereupon, at 1:09 p.m., the Committee was adjourned.]
      
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                            A P P E N D I X

                             April 27, 2000



      
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                   DOCUMENTS SUBMITTED FOR THE RECORD

                             April 27, 2000



      
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                         QUESTIONS AND ANSWERS

                             April 27, 2000



      
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